Insurance 101: How to Protect Yourself and Your Stuff

The right insurance policy can save you money and headaches — not to mention financial trouble — in the long run. Looking into insurance for the first time can feel daunting. You might find yourself struggling with the basics of insurance, like what policies you need, what it costs and if it’s even worth it.

Before you go into a policy-and-premium-induced tailspin, know we’ve got you covered.  We’ve broken down the basics of insurance — why it’s important, how it works and what policies you need to consider. That way, you can make an informed decision on how to protect yourself and your belongings.

Why is Insurance Important?

We know you might be thinking, “I’m a safe driver and I never get sick, so do I even need insurance?” Our answer to that is pretty simple: Yes.

Insurance is financial protection against unexpected expenses. Depending on what the insurance policy covers, it might help you replace your roof after a hailstorm or significantly lower hospital bills after you’re hurt in an accident. These events are often completely outside of your control.

You might have enough savings to cover a night or two at the hospital. However, events like these rack up costs quickly and can land you in financial trouble.

What Are the Basics of Insurance?

Insurance is a contract between the insurance company and you. It’s an agreement that you’ll pay a set amount in exchange for financial coverage if the covered item is damaged or ruined.  The amount you pay for this coverage, aka the premium, may be charged monthly, semiannually or annually. It will vary greatly depending on the amount of coverage you decide on and the condition of what you’re trying to cover.

Insurance companies take these premiums and pool the money to cover any losses. They’re playing the risk game, which is why it often costs more to insure something or someone they see as high risk. For example, life insurance premiums will be higher for an older person and home insurance will be more costly if you live in tornado alley. It’s all about probability.

How Do I Get Insurance?

When it comes to signing up for insurance, each type comes from a different place. For example, if you’re fully employed, you might get health insurance through your employer. If not, you can also get a private health insurance plan on the open market at HealthCare.gov.

Private companies on the open market provide most other forms of insurance. You simply research different companies, fill out your information and gather quotes. You can use sites like Insurify and QuoteWizard and to shop around for car insurance quotes. Sites like EverQuote can connect you with various kinds of insurance providers.

You also can work with an insurance broker. An insurance broker is a person who specializes in matching people with insurance policies. They are not employed by the insurance companies and should represent you as the consumer. Nowadays, there are even companies like Policygenius that allow you to fill out your information online and match you with policies that fit.

The Terminology in the Basics of Insurance

Even if you know how insurance works, you may feel lost in the nitty-gritty details of a policy. Understanding the terminology insurance companies throw around is key to feeling confident when reading through a new policy.

Claims

A claim is a report filed by the policyholder asking the insurance company to cover the damage or the loss of a covered item. The insurance company will open an investigation to determine the validity of it. This can sometimes be as simple as you taking photos of damage or them sending out a contractor to evaluate. If the claim is validated, then the insurance company will issue a check to cover the damages.

Coverage Limits

A policy’s coverage limit is the maximum amount the insurance company will pay to replace or fix your insured item. In theory, this limit should be enough money to replace your covered object. Often, a higher coverage limit means higher monthly premiums.

Deductible

A deductible is the amount of money the policyholder pays before the insurance kicks in and covers expenses. It can look like a preset dollar amount or a percentage of the total. For example, if your health insurance has a $1,000 deductible, you’ll be responsible to pay for all health expenses up to $1,000 before your insurance steps in.

Grace Period

This is the period of time after the premium is due that the policyholder can still pay without losing coverage.

Loss

A loss refers to the damage on a piece of property that is insured. A covered loss means damage that is covered by this specific insurance policy. A total loss means the piece of property is completely ruined and must be replaced.

Policy Conditions

The policy conditions are the rules about what is covered under the insurance policy and what is excluded. The conditions also might include requirements that have to be met in order to file a claim. These are important to read carefully before signing up so you’re aware of any gaps in coverage.

Policyholder

The policyholder is the person who owns the insurance policy.

Premiums

A premium is the amount of money you pay the insurance company each month (or year) to keep your policy active. Basically, this is the amount that you pay the insurance company to cover your item in the event of an accident.

Types of Insurance

While the basics of insurance are relatively the same across types, there are special rules and terminology for each. We gathered the most common types of insurance and the basic information on what’s included and excluded.

Homeowners Insurance

Homeowners insurance’s primary purpose is to cover the loss or damage of your home and belongings.

It normally covers damage from wind, fire and snow. However, it does not cover flooding, earthquakes, or any damage that results from neglect.

On your policy, you’ll see this coverage broken down into six categories with individual coverage limits:

This coverage is pretty standard, but the coverage limits may go up or down depending on how much you want to pay each month. Your monthly premium will also depend on the size of your home and where you live.

There are a lot of good companies out there for homeowners insurance. If you’re looking for more advice, our list of best homeowners insurance companies is a great place to start. Or, you can turn to EverQuote for this as well.

Renters Insurance

Renters insurance is similar to homeowners insurance in that it protects your belongings against theft or damage. However, it doesn’t protect the structure of the home — that’s the owner’s responsibility.

Renters insurance has the same exclusions as homeowners insurance in that it doesn’t cover floods or earthquakes. Often, if you’re renting you’ll be required to have renters insurance in order to sign a lease. If you have more questions about renters insurance, check out our guide to renters insurance.

Auto Insurance

Auto insurance financially protects you on the road. There are three main types of car insurance: liability coverage, collision coverage and comprehensive coverage. Liability protects other people and their property from accidents you may cause with your vehicle. This type of insurance is required to own and operate a vehicle in most states (48 to be exact).

Each state mandates a different amount for your liability insurance, but it’s typically expressed as three numbers in a row, such as 50/100/25, representing coverage per person, per incident and for property damage:

• Per person: The maximum amount (in thousands of dollars) your insurance company will pay to a person you’ve injured in an accident. In this example, your insurance would cap individual payouts at $50,000.
• Per incident: The maximum amount the insurance company will pay in total, even if more than one person is injured in the accident — $100,000 in this example.
• Property damage: The maximum your insurance company will pay for any property damaged.

Collision covers damage to your car even if you’re “at fault” in the accident. Normally, it also covers damage to your car if you run into an object or hit a pothole. On the other hand, comprehensive covers other events that may damage your car besides vehicles. This often covers hitting an animal, fire, flooding and the theft of your vehicle. The coverage limits for both depend on the value of your vehicle.

There are many other more specific types of coverage that can be included in your auto insurance policy. This could include underinsured motorist coverage or rental car coverage, but these three types above should be your main focus when determining how much coverage you need.

Health Insurance

Health insurance helps cover your medical expenses if you’re injured or sick. It is often provided by an employer, but you also can buy it on the open market.

Most health insurance policies have a deductible that you must pay before insurance begins covering costs. After you hit your deductible, insurance will begin covering medical costs at a certain percentage until you hit your out-of-pocket max. This max is the total amount that you will be responsible for that year.

Unlike other insurances where you can basically sign up whenever, health insurance has specific sign-up periods called open enrollment. Outside of that designated time, you’ll only be able to change your coverage if you have a qualifying life event like having a baby or getting a new job.

Life Insurance

Life insurance works by providing financial aid to a beneficiary after your death. Because this insurance covers the risk of dying, life insurance often requires a long questionnaire or an in-person evaluation before you can sign up for a policy. The cost of your premium will depend on your overall health and age.

There are two main types of life insurance: term and whole life. Term life insurance covers a set number of years and whole life insurance covers until one dies no matter how long that is (assuming you keep paying the premiums). Because whole life represents more risk for the insurance company, it does cost more than term life insurance. Sometimes, however, you can borrow against the equity of your whole life policy, something that is not offered with term life insurance.

If your main concern is protecting your loved ones in the event of your death while also keeping costs low, check out these nine factors that influence life insurance rates to understand what your rates might look like.

Umbrella Insurance

Umbrella insurance is extra insurance to cover any gaps in your existing policies. It is technically extra liability insurance, which will cover expenses if you’re at fault for injuring someone or their property. It provides extra protection in case you are sued by someone injured on or by your property.

Pet Insurance

Pet insurance helps cover some of a pet’s unexpected health costs. Some types cover broken bones while others specifically cover sickness like cancer. Like all insurance, the premiums go up with risk, so often younger pets are cheaper to insure and older ones are more expensive.

Pet insurance is often considered an extra, but going over the pros and cons of pet insurance might help you decide if it’s worth paying for you.

Ways to Save Money on Insurance

Insurance can be expensive and add up quickly. But there are a couple of ways you can protect your bank account while getting the coverage you need.

1.Check with your Insurance Provider for Discounts

While this seems like a no-brainer, many insurance providers offer special discounts that they don’t mention unless you ask. For example, some companies offer 10% off your policy if you served in the military, and others have special discounts for certain college alumni. These discounts might be small, but it never hurts to ask.

2. Consider Bundling

Many insurance companies will provide you special discounts if you bundle more than one insurance policy with them. Added bonus: bundling often makes keeping track of policies simpler, too.

3. Shop Around

Rather than simply re-upping your insurance policy each year, explore other options. Sometimes companies take advantage of our desire to keep things simple and charge returning customers more than the going rate on the market. You could reach out to an insurance broker to make sure your current company is offering you the best deal.

4. Choose a High Deductible Plan

Choosing a higher deductible plan often will lower your monthly premiums. While this means you’ll be responsible for more if an accident does happen, it can save you money month-to-month.

5. Ask about Paying in Full

Insurance companies will often give you a little off your total premium price if you’re willing to pay the premium in full at the start instead of in monthly installments.

Insurance can be expensive, but hopefully knowing the basics of insurance will help keep your premiums manageable and your stuff protected.

Contributor Whitney Hansen covers banking, credit cards and investing for The Penny Hoarder. She also writes on other personal finance topics.

Frequently Asked Questions (FAQs) about Insurance