What Is Insurance?
Insurance is a contract – represented by a policy – in which an insurance company issues a financial reimbursement or protects an individual or entity against losses. The company pools clients’ risks to make payments more affordable for the insured.
Insurance policies are used to protect against the risk of financial losses, both big and small, that may result from damage to the insured or their property, or from liability for injury or damage caused to a third party.
How Insurance Works
There are many different types of insurance policies available, and virtually any individual or business can find an insurance company willing to insure them at a fee. The most common types of insurance policies are health, auto, home, and life. Most individuals around the world have at least one of these types of insurance. In Kenya, motor vehicle insurance is required by law.
Components of an Insurance Policy
Before settling for a policy, it is important to understand how insurance works. A good understanding of these basic concepts goes a long way in helping you choose a policy that best suits your needs.
In general, there are three components of any type of insurance (premium, policy limit, and deductible) that are crucial.
Premium
A policy’s premium is its price, usually expressed as a monthly cost. The premium is determined by the insurer based on your personal or business’s risk profile, which may include a credit score.
For example, if you own several luxury vehicles, you will likely pay more for an auto policy than someone with a low-cost car. However, different insurers will charge different premiums for similar policies.
Policy Limit
The policy limit is the maximum amount an insurer will pay under a policy for a covered loss. Maximums may be set per period, per loss or injury, or over the life of the policy, also known as the lifetime maximum.
Deductible
The deductible is a specific amount the policy-holder must pay out-of-pocket before the insurer pays a claim. Deductibles serve as deterrents to large volumes of small and insignificant claims. Deductibles depend entirely on the insurer and the type of policy – policies with very high deductibles are typically less expensive.
Types of insurance policies
- Motor Vehicle Insurance
- Home Insurance
- Life Insurance
- Disability Insurance
- Health Insurance
- Liability Insurance
Most professionals agree that health, life, long-term disability, and motor vehicle insurance are the four types of insurance you should have. If you are employed, always check with your employer first for available coverage. If your employer doesn’t offer the type of insurance you want, you can obtain quotes from several insurance providers. While insurance is expensive, not having it could be far more costly.
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