Insurance prepares you for the unexpected, protecting you financially against premature death, sickness, accident or natural disaster, and other unfortunate events.
You make relatively small periodic payments to secure coverage against one of these disasters. Those payments, called premiums, are payable monthly, quarterly, semi-annually or annually. (Many people like the ease and convenience of annual premium payments -- plus most insurance companies will give you a slight discount if you pay annually.)
Here is how insurance works: Odds are nothing terrible will happen to your home in the next 12 months. Perhaps one home out of 10,000 like yours can be expected to burn down, for example. Insurance company actuaries figure out all the probabilities, and then set premium rates accordingly. The higher the risk, the higher the premium; that's why older folks pay more for life or health insurance coverage than the young.
Insurance works sort of like a reverse lottery, only with a big loser, rather than a big winner. The premium is a little like a lottery ticket. The big difference is that a lottery is a form of gambling: if you don't play, you'll neither win nor lose. Should you fail to purchase enough insurance, however, you could lose big: The risks you need to insure against are very real, and won't disappear just because you've decided not to "play" the insurance game.
Most people need each of the following policies at some point in their lives:
- Life insurance
- Disability insurance
- Health insurance
- Long Term Care