JavaScript must be turned on in order for this site to display properly.
What Can DCU Save You?

What is Insurance?

StreetWise Insurance Guide

Life rings
  • Summary
  • Article

What is Insurance? – A Basic Definition

It sounds depressing, but there are countless bad things that can happen to you, your family, and your property over a lifetime. The risk of car accidents, house fires, lawsuits, long-term illness, or even untimely death are always out there. Insurance cannot prevent bad things from happening. Instead insurance is a way to prevent those bad things from causing a financial loss. In other words, good insurance policies from reputable companies keep the bad stuff from permanently damaging your financial future.

Insurance is a financial instrument by which individuals (or entities) pay a specified amount of money to transfer certain risks to an insurance company. The company commits to pay specific benefits against specific losses as spelled out in a specific policy. An insurance policy is the legal contract between the individual and the insurance company. A premium is the amount of money paid at regular periods (such as monthly, quarterly or annually) for the policy.

Insurance as a financial tool is also a way of sharing risk among a larger group of individuals or entities and thus cutting the costs of a potential loss to an individual member of the group. For any specific type of insurance, the insurance company’s goal is to sell policies to a large enough pool of individuals that the money brought in by the premiums covers the insured losses and leaves money for investment and profit. But whether or not they predict income and payouts accurately, insurance companies are obligated to fulfill the terms of the policies they issue.

As you might think, it is possible within the terms of this definition to insure against almost any risk. And some insurance providers such as the specialist insurance market Lloyd’s of London have made news throughout their history for the unusual or unique risks they’ve insured. Among the more mundane of such unique policies might be insuring a film or celebrity’s legs, insuring a vintage airplane, or insuring a rare wine during transport to an exhibition.

This guide, however, focuses on the more common types of insurance that individuals and families may use to insure against common broad risks in life such as health problems, auto and other accidents, damage or loss to one’s house and/or its contents, liability, disability, and death.