Why Is It Important to Have Insurance?

Insurance is available for just about anything you could imagine. From your vehicles to your home and business, and so much more, you can find an insurance policy to protect against losses from associated risks. But if you've never actually bought a policy before, you might understandably be wondering why having insurance is important.

Insurance can be used to prevent potentially devastating financial losses due to covered disasters. Understanding exactly what insurance is used for and how insurance works can help you start to see its importance. 

When you're ready to start shopping for coverage of your own, a local independent insurance agent can help by recommending the right policies for you. But first, here's a guide to what insurance is and why having insurance is important.

What Is Insurance?

Before understanding the importance of having coverage, it can be helpful first to define insurance. Insurance is basically a contract between a policyholder and an insurance company, also called a provider or a carrier, that states the insurer will provide financial reimbursement should a covered loss occur, in exchange for the customer making regular premium payments. Covered losses may be due to incidents or "perils," such as fire damage, theft, vandalism, explosions, and more. 

How Does Insurance Work?

Say you have a homeowners insurance policy that covers your single-family house. As long as you continue to pay your premiums so your coverage stays active, if any of the listed perils on your insurance policy occur that cause a financial loss, you could file a home insurance claim through your home insurance company to get compensation. 

So, if a fire occurred at your house that damaged or destroyed some of your furniture, clothing, and a portion of the home's structure, you could file an insurance claim and potentially receive reimbursement for the extent of the damage up to your policy's limits in each category of coverage. 

However, each time you file an insurance claim, you have to pay your policy's deductible out of pocket first. In the case of the home fire example, you'd first pay your homeowners insurance deductible, which is often an amount ranging from $100 to $1,000, before receiving reimbursement for your claim. 

So, if your deductible was $500 and the total extent of the fire damage to your home that was covered was $10,500, your home insurance company would send you reimbursement for the damage in the amount of $10,000 if your claim was approved. You would cover the $500 deductible amount yourself.

Why Is It Important to Have Insurance?

You might have been asking, "What is the purpose of insurance?" and you're certainly not alone. The basic purpose of insurance is to provide compensation if unexpected losses occur. The cause of the loss must be a listed peril on the insurance policy to qualify for compensation, however. 

Having insurance can help policyholders financially recover after devastating incidents. Without insurance, you could have to pay thousands of dollars or even more for just one disaster that affects your property, business, etc., that could've otherwise been reimbursed if you'd had coverage.  

Here are just a few of the major benefits of having insurance:

1. To help rebuild or repair your home and property: If you have homeowners insurance, your coverage can help provide reimbursement for disasters that damage or destroy your personal property or the structure of your home. Having coverage helps you avoid paying the cost of rebuilding or replacing your property out of your own pocket.
2. To pay for medical emergencies: If you have health insurance, depending on your specific policy, you can use your coverage to pay for medication, hospital stays, doctor visits, and more.
3. To maintain a standard of living: If you have a life insurance policy, the death benefit can be used by your surviving family members, spouse, or beneficiary of your choice to maintain their normal standard of living after you pass away unexpectedly. The life insurance policy's proceeds can be used by surviving family members in place of the income you previously contributed.
4. To comply with laws: If you drive a vehicle, you're required by law in most states to have at least certain types and amounts of car insurance coverage, for example. It's critical to comply with your state-mandated minimum auto insurance coverage laws to avoid penalties like fines and more.
5. To avoid bankruptcy: If you have business insurance, your coverage can potentially help you avoid bankruptcy after a major disaster affects your company. These disasters can range from suspended operations to crime, lawsuits, and beyond.

One of the basic purposes of insurance is to provide a sort of financial safety net over whatever the policy covers (i.e., your home, business, car, etc.). An insurance policy protects against having to incur large financial losses related to the risks associated with driving a vehicle, owning a house or business, etc.

When Is Insurance Required?

Another key factor in the importance of having insurance is that it's sometimes required. As previously mentioned, in the case of car insurance, a certain amount of coverage is legally mandated in most states before drivers are allowed to drive on public roadways without facing potential fines and other penalties. 

If you have a mortgage on your home, your lender will most likely require you to have homeowners insurance, and if you have a business and need a loan, the lender will most likely require you to provide proof of general liability insurance that's part of a standard business insurance policy or business owners policy.

Similarly, if you rent an apartment, townhome, etc., the landlord or property manager most likely will require you to have renters insurance or, in some cases, to pay them a monthly fee if you decline to get your own coverage. 

But even in instances in which having insurance isn't technically required by law or contract, getting coverage is often still a wise investment. Since there's often no telling when a disaster might occur, having insurance as a financial safety net in place can help you avoid unnecessary setbacks or even potential bankruptcy in the event of an extreme loss. 

What Are the Different Kinds of Coverage in Insurance?

Depending on the type of insurance policy, you'll have different kinds of specific coverage. Each policy has different categories of coverage, as well as different listed perils it provides coverage for. 

In the case of homeowners insurance, many standard policies include coverage for the following perils:

• Fire, smoke, or lightning damage
• Windstorms or hail
• Sudden and accidental freezing of pipes
• Theft, vandalism, or malicious mischief
• Aircraft or vehicle damage
• Falling objects and trees
• Damage from the weight of ice, snow, or sleet
• Volcanic eruptions
• Explosions
• Riots or civil commotion

The categories of coverage found in standard home insurance policies include:

• Structural or dwelling: This covers the home's structure, also called the dwelling, including the building itself, its foundation, etc., against listed perils in the policy.
• Personal property or contents: This covers the home's contents, also known as the policyholder's other inhabitants' personal property, like furniture, clothing, etc., against listed perils in the policy.
• Loss of use or additional living expenses: This covers extra expenses incurred if a covered disaster causes the policyholder or the home's other inhabitants to have to temporarily stay somewhere else, if a covered disaster occurs, such as a fire, that requires the home to undergo extensive repairs. Coverage can pay for hotel costs, takeout meals, extra gas mileage to get to work, and more while the home is uninhabitable.
• Personal liability: This covers possible legal expenses, like attorney and court costs, if the policyholder faces a lawsuit related to claims from a third party for personal property damage or bodily injury.

To determine the specific coverage in your personal insurance, you'll need to review your policy carefully. An independent insurance agent can help you with this.

How Does Health Insurance Work?

Health insurance works similarly to many other kinds of insurance in that it's essentially a contract between an individual and a carrier. The contract states that in exchange for the policyholder making regular premium payments, the insurer agrees to cover certain expenses, which, in the case of health insurance, can include things like:

• Prescription drugs
• Mental health services
• Lab tests and screenings
• Pregnancy and childbirth-related services
• Doctors' services
• Inpatient and outpatient hospital care

A healthcare-insured individual can receive financial coverage from their insurance carrier when a doctor bills them for an office visit or when they have to buy medication, for example. Healthcare providers review the policyholder's health insurance card to determine how much coverage is provided for various services, medication, etc., and then charge the appropriate amount to the insurance company. 

The policyholder is typically responsible for paying the remainder of the bill, as well as their deductible or possible copay amount. A copay is the amount the policyholder agrees to pay for covered health services after their deductible amount has been paid off. 

If you've been wondering, "Is medical insurance good to have?" you can answer this question for yourself by weighing the possible costs of medical treatments, medications, etc., you might have to pay out of your own pocket, vs. how much you'd pay for a health insurance policy's premiums. 

If you're a relatively healthy individual who doesn't often need to see the doctor, you might determine that health insurance isn't worth it for you. However, if you're someone with a preexisting condition or who otherwise needs ongoing or regular care, prescriptions, etc., having health insurance could be extremely beneficial to help cover these hefty costs.

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What Is Life Insurance Used for?

You've likely heard of life insurance and have perhaps questioned why life insurance is important or even asked, "Why get life insurance?" Having life insurance can be beneficial for many individuals who want a guarantee that money will be given directly to the person of their choosing after they've passed away. 

The selected individual or individuals, or even an entity like a charity, is known as the life insurance beneficiary. The beneficiary may choose to use the death benefit payout however they please, though the policyholder often has specific intentions for its use after they pass. 

Here are some of the major benefits of life insurance:

1. To establish an educational fund: Many life insurance customers want their death benefit to be used by dependents, such as children, for funding towards college or other educational institutions.
2. To make a charitable contribution: Some life insurance customers don't have any surviving family members, spouses, etc., whom they wish to leave their death benefit to. Instead, they opt to donate a specific amount to the charity of their choice or even their alma mater. 
3. To pay off outstanding debt: The death benefit from a life insurance policy can also be used to pay off the policyholder's outstanding debt, such as credit card debt, mortgages, or loans, after they pass away.
4. To pay for final expenses: Death benefits can also be used to pay for the policyholder's final expenses when they pass away, such as funeral, burial, and memorial costs.

Having a life insurance policy can help protect the policyholder's surviving family members, such as a spouse or dependents, from having to pay expenses they might not otherwise have the funds to cover. 

An Independent Insurance Agent Can Help You Find the Right Insurance

Now that you better understand the importance of having insurance, it can also be helpful to know that finding the right coverage doesn't have to be a difficult process. Local independent insurance agents can easily help locate the appropriate coverage for you, depending on your unique needs and circumstances. 

They'll shop and compare coverage from multiple insurance companies for you to find quotes for policies that only offer the best overall blend of coverage and cost. They can also help file insurance claims for you and update your coverage as necessary down the road.