What is insurance?

This article will explain the nitty-gritty about insurance, why it matters, and how to use it to protect yourself in case of emergency. Keep reading to learn the four types of insurance and how a savvy grown-up like yourself can benefit from having these policies in your pocket. 

What is insurance? 💁‍♀️

Insurance is a form of financial protection that shields you from costs that come from unexpected events to your car, house, or health. You sign a contract called an insurance policy, which details the exact cost, coverage, and limits. For instance, you may pay $125 monthly for a car insurance policy. The amount you pay (the $125) is called a premium. Coverage defines precisely what is or is not protected by your insurance policy. The limit is the maximum amount you may receive from your insurance company in the event of a loss. So, if you crash into your neighbor's house, your policy has a property damage limit of $100,000, so you're covered up to that amount.

Ready for the worst 

Insurance is designed for big-ticket, unexpected items, so the benefits kick in when you need them most. The twin benefits of insurance are financial protection and peace of mind. 

• Financial Protection: When you carry the right amount of insurance, you are protected from major financial loss. If a sudden accident or illness strikes, it can bring a price tag of thousands of dollars. Almost 4 out of 10 Americans would need to borrow money to cover an unexpected expense of $1,000 or more. Borrowing money this way usually brings high interest rates, meaning you pay more. An insurance policy lets you pay a flat, budgeted rate for your policy, protecting you from significant loss down the road. 

• Peace of Mind: Almost half of Gen Zers say they deal with difficult-to-manage anxiety on a daily basis. Worries about money are at the top of their list. Insurance offers a sliver of reassurance that if you have a car accident, an injury, or damage to your home, you won't bear the financial burden alone. 

Four popular types of insurance

In this section, you'll learn about the four most common types of insurance available to consumers today. Most people hold insurance policies of different types to cover liabilities in different areas of life. 

Health insurance 🤒

Health insurance covers costs related to the health and wellness of your body (usually not including your eyes and teeth). Health insurance helps you save if you go to the doctor with the sniffles or have to be admitted for a more severe accident or serious illness. 

Typically, health insurance has a deductible, which is a varying amount you must pay before insurance kicks in. You should also expect to see some copays, which are payments you make directly to the healthcare provider at the time of appointment. 

Car insurance 🚘

Car insurance protects you from costs related to your vehicle. So, if you're in a car accident because somebody was distracted, car insurance may cover the charge to repair or replace both your car and the other driver's car. Likewise, car insurance covers property damage and bodily injury within policy-detailed limits. If you damage something with your car, it likely falls under your car insurance policy. You may have been paying for your own insurance since you got your license. The good news is car insurance usually gets cheaper after the teenage years.

Homeowners insurance 🏡

Homeowners insurance is your go-to if a tree falls on your kitchen during a storm. It covers costs related to the damage to your home or property, provided you own or hold a mortgage on the place. Homeowners insurance policies usually cover the contents of a home as well up to a specified amount. Deductibles on homeowners insurance can vary. Renter's insurance policies, which cover the contents of rented spaces, are available but fall into a different category. It's important to note that homeowners insurance does not cover all natural disasters, so additional coverage, like flood insurance, may be necessary depending on where you live. 

Life insurance

Life insurance provides a payment (called a benefit) to a person of your choosing when you die. Many people use life insurance policies to protect their families from financial strain in case of their untimely demise. Life insurance policies are unique because certain types of policies can hold and even increase in value for the policyholder over time. When you start a family, you may also consider adding life insurance for kids to your existing policy.

Benefits of having insurance 

While it might feel like a lot of premiums to pay "just in case," insurance offers several positives. This section offers a more in-depth explanation of a few of insurance's biggest benefits: coverage of medical expenses, protection of property, and coverage for financial losses. 

Coverage of medical expenses

If you've ever opened a bill from your doctor or the hospital, you know medical sticker shock. A recent study found that Gen Z is most likely to be surprised by medical expenses. Health insurance makes sure you're not on the hook for expensive sick visits in the short term or crippling medical debt, which can plague your financial health for years. Health insurance is often purchased through your employer, so pay attention to the benefits offered when you're job hunting. 

Protection of property

Insurance protects your property AND protects other people's property from you. Car, home, or renter's insurance all protect your property. On the other hand, your car insurance also offers liability insurance, which offers protection for others since it will pay to repair or replace other people's property if your car does some damage. 

Financial loss covered 

Insurance helps guard your financial future. By paying a monthly premium, you're saved from paying out of pocket for medical expenses, crashed-car repairs, or home damages. The right insurance policy will cover your costs so you don't have to borrow money in the event of the unexpected. 

Examples of how insurance protects you

In this section, you'll find a couple of real-life scenarios to help you better understand insurance in the real world. 

The building bump 🚗

Let's say you're going to pull out of your spot, and you mistakenly put your car in reverse. Before you know it, you've backed into the building. Standard comprehensive car insurance would cover repairs to both your car and the building, protecting you from larger liability. 

The uninvited guest 🌲

You wake up in the middle of the night to a crash, seeing a huge pine tree has now taken up residence in your kitchen. Your homeowner's insurance will pay to repair your home and replace contents damaged by the toppled tree. In most cases, your policy would also pay to put you up in a hotel while the covered loss is repaired. 

Insurance guards your future 🛡️

You've got the insurance terminology and know-how to protect yourself and your loved ones in life's most unexpected moments. You can enjoy the peace of mind that comes with knowing you're protected now and in the future. When you're signing up for insurance, read the fine print closely, so you understand what your coverage includes and what financial responsibilities you may bear. Don't be afraid to ask questions until you're clear on how your policy works. 

Remember, the policy works for you, not the other way around. Make sure you can meet all of the obligations and that you've got enough insurance so you won't suffer needless financial hardship if an emergency happens. Plan ahead and give yourself peace of mind. 

If you want to feel more confident while you navigate financial tools, check out the Greenlight Learning Center. This is a helpful blog where families can learn about money together. It’s there to help you gain greater clarity and confidence related to your cash. And if you like your education gamified, check out our Level Up financial literacy game.