An Introduction To Insurance
What is "insurance"?
Insurance is a legal contract between you and a big insurance company. It is a promise that if you pay a certain amount of money every month or every quarter, the insurance company promises to take care of you in case you have an economic loss. So, if you have a house that burns down, they will help to rebuild your house. If you have a life insurance policy, i.e. you've insured yourself for a million dollars, they're going to pay to your beneficiary a million dollars. The way insurance goes is that your premium plus thousand or sometimes even millions of other people's premiums go together in a big pool. The insurance companies use that pool. They invest it, and then they pay it when there's a claim.
What types of insurance are there?
Well there's property and casualty, and life and health. Life and health includes life, disability, health insurance, long term care insurance. Property casualty insurance is a type of insurance that insures your home, your auto, your airplane, your boat, workers compensation, things like that.
Why do I need insurance?
Well, everyone needs insurance if they are worried about economic loss, or if they lose something. The purpose of insurance is to give us peace of mind; that's the real reason why people buy insurance. If you have a home and you spent all your life supporting that house and putting money into the down payment and finally you're paying a mortgage payments on time, the worst thing that could happen would be for it to burn down and not be covered by insurance. If you worked very hard for a living and you earn a very good income and you become disabled and you can't work anymore, disability insurance might pay you a sum of money every month so that you can live a normal lifestyle.
How much insurance do I need?
You need the amount of insurance that's going to do the work that you want it to do. So as an example, if you have two children and your whole goal in life is to make sure that they're educated in college, you figure out how much it's going to cost per child to educate them. Let's say you would like them to go to Yale or Harvard and you figure in 20 years it's going to cost $200,000 per child--that's $400,000. It would be a good idea to have at least $400,000 of life insurance that would fund that particular expense.
