Most people switch off when they hear financial terms, and ‘insurance’ is no exception. However, insurance is a vital personal finance tool.

From life insurance to government mandated vehicle insurance, it’s unavoidable. However, if you don’t understand it, you could end up missing out or wasting a lot of you money.

Understanding insurance is essential to ensure you’re getting a good deal and have the protection you need. Here are the basic principles you need to know before purchasing insurance:

The Fundamentals

Insurance is essentially financial protection. By insuring something, you will be compensated if something happens to it. For example, you can insure your TV against theft, or your pet against illness.

The contract terms are usually simple. You pay a fixed amount each year, and when the stipulated ‘bad event’ happens, the insurance company pays a large part of the costs.

The amount of this cost will vary depending on which insurance cover you choose. What you are protected against will also vary depending on your choice.

Types of Cover

The most common types of insurance services are health, life, and vehicle. Almost everyone you know has some form of life or vehicle insurance. In America, health insurance is a heated political debate, so you probably know how many people aren’t covered or how expensive it can be – and how important it is.

But these aren’t the only types of insurance policies. In fact, you can insure almost anything of value. Mariah Carey, for example, had her legs and vocal chords insured for $70 million.

You can get insurance for the contents of your house, your business, your financial assets, travel insurance, and even a sudden drop in the stock market.   

Do You Need it?

Of course, you don’t need to insure everything. It’s important to weigh up the value of what you are insuring, the cost of the insurance, and the likelihood of you needing to use the insurance.

For example, if you live in a safe area and are careful with your belongings, you don’t necessarily need to insure all of the items in your house.

However, health insurance, vehicle insurance, and life insurance are particularly important and useful to have. If you’re self employed, it’s also a good idea to get business insurance to protect you against losses.

Buying insurance policies essentially buys you peace of mind. So, consider the premium and think about whether the annual cost is worth protecting something you hold important. 

Final Thoughts

Insurance is a simple financial instrument that can be immensely useful if you understand and use it properly.

Take the time to consider how much you’re willing to pay for your health, your family, and your house. Mitigate the risks that keep you up at night by getting them covered.