Looking to Explore Insurance Options?
Learn More

How Does Insurance Work?

Some have it because it’s required, some choose to have it because it provides peace of mind, and most people have it because, well, for both of these reasons! We’re talking about insurance. And to really appreciate insurance for the value it provides, it’s important to understand how it actually works.

We’ve shed some light on the insurance process, why you’re sometimes required to have insurance, and, most importantly, the importance of having insurance as a financial safety net. Let’s take a look.

Insurance: Designed to Protect

Insurance is designed to protect people from financial risk — big or small — that results from certain unexpected incidents. Car accidents, liability risks, damages to your home — all of these could cost a considerable amount of money to pay out of pocket, which could greatly impact your finances and your life.

So how does insurance actually work? Simply put, it’s an exchange of your money (premium) for your insurance company’s agreement that they’ll pay out in the event of an approved claim (subject to terms and conditions). Basically your insurance company is saying, “If you face a covered loss, we’ll pay for it up to your limits, as long as you pay us a smaller amount of money in the meantime.” Make sense?

Where does your premium go? For the most part, your insurance company takes that premium and adds it to the premiums of thousands of other policyholders. They’ll invest the money securely, let it grow into a larger pool of money, and tap into it when they need to pay you a claim. Hopefully you won’t have to file a claim, but if you do, you’ll be glad you have this safety net.

Here’s Why You Need Insurance

Life is full of exciting opportunities — dreams to pursue, people to love, adventures to take — but it’s also full of risks. Insurance is a way to manage these risks.

Though you do what you can to stay safe, accidents happen. And sometimes these accidents can cost you a lot of money! Insurance is designed to protect you and your assets in the event you have to pay for damages to your property, someone else’s property or medical expenses for injuries you cause. It can even help pay for lawsuits and attorney fees if necessary. If you want to dive a little deeper, here’s more about why you need insurance.

Why Is Insurance Required?

Insurance is sometimes required, such as for your car or home. Why? For starters, it’s to protect your lender’s investment. If you lease or have a loan on a vehicle, or if you have a mortgage on your home, your lender wants to make sure that their investment is protected.

Car insurance is also required in order to protect you financially. For example, vehicles are great, but they also cause accidents. And a lot of these accidents can be really expensive for you to pay out of pocket. Even a small ding to your bumper or someone else’s bumper could end up costing you quite a bit. Insurance is a way to give you peace of mind that if you cause an accident, you can pay the other party for the damages and injuries that occur.

With certain types of coverage, like collision or comprehensive, you’ll be required to pay a deductible. You choose your deductible along with your coverage limits, and are expected to pay up to the deductible amount before your company steps in to help. Here’s a better look at how deductibles work.

Do I Need Life Insurance?

Life insurance is a way to provide financial protection to your loved ones if you were to pass away. It can be used to do things like help replace your lost income, pay for day-to-day necessities, or take care of bigger expenses like a mortgage or tuition.

You can choose to apply for life insurance at any point in your life, but keep in mind, the younger you are the more affordable it may be, since life insurance premiums are largely based on age and health. Find out more about when you should get life insurance — this’ll tell you why life insurance is important at all stages of life.

There are two main types of life insurance:

Term life insurance. Term life insurance remains in effect for a specific term or length of time at a set premium. The death benefit is only paid out if you pass away within the term of your policy.

Whole life insurance. On the other hand, whole life insurance, otherwise known as permanent life insurance, offers coverage for your whole life, with premium payments remaining the same regardless of changes in your age or health. The death benefit will be paid out, whenever you pass away, as long as your policy is in effect.

Here’s a great way to look at it: Life insurance is a way to offer your loved ones some financial stability in the future if you were to pass away. Take a more in-depth look at how life insurance works.

Want to Save on Your Insurance?

At American Family Insurance, we offer many different ways for you to save on your insurance. Our discounts range from going paperless to being a safer driver, and we do our best to let you know when you qualify for one of our many ways to save.

Here are just a couple of our customers’ favorite ways to save:

KnowYourDrive. Are you a smart, safe driver? KnowYourDrive lets you take control of your auto insurance premium by offering a discount for your safe driving habits. Depending on your state and on how you drive during your evaluation periods, you can earn a discount of up to 40%* on your car insurance. Not bad!

SmartHome. If your home is equipped with a qualifying smart device, like Ring Video Doorbell or Frontpoint Home Security System, you could earn a discount. It’s a win-win for you — safety and savings!

Want to Learn More?

The thing to remember about insurance is that it’s designed to protect you. Yes, you’re paying your monthly or bi-annual premiums, and sometimes it may seem like you’re throwing money out the window — but that’s not true at all! Insurance is an invisible shield around you and the things you work hard for in life. In fact, having the right coverage in place is probably one of the smartest, most important financial choices you can make.

To learn more, just talk to an American Family Insurance agent. They’re always ready to answer any questions you have. In the meantime, we think it’s important to fully understand the value of insurance, so head to our resource center where you’ll find countless informative articles to get you in-the-know.

*Program discounts will vary based on driving behavior. The KnowYourDrive discount applies only to the following variable coverages, which are typical for most auto policies: bodily injury liability, property damage liability, collision and comprehensive, medical expense, and personal injury protection. To refresh your understanding of coverages visit amfam.com/insurance/car/coverages. Additionally, the discount does not apply to fixed fees that are part of your policy.


How would you rate this article?

Related Topics: Insurance Needs , Insurance Terms , Discounts