Q:
Why do I need insurance?
A: Insurance is for the
uncertainties of life. Accidents and catastrophes happen. What can’t
be predicted is when they will occur, and whom they will affect.
Most people understand they’ll get sick at some point in their
lives, but they can’t predict the severity and extent of the illness
nor the cost of the treatment.
Catastrophes strike: In 2005, there were 24
weather-related or other disasters causing a total of $61 billion of
insured losses. Hurricane Katrina alone caused $41 billion in damage
from 1.75 million insurance claims.
Even the safest drivers face the risk of an
accident, and even the safest homes can catch fire. In 2006, about 5
percent of insured homes had a claim, according to the Insurance
Services Office. About 94 percent of these homeowners insurance
claims were for property damage, including theft.
Lawsuits are another uncertainty that
businesses and homeowners face. They’re costly: In the 56-year
period from 1950-2006, the costs of the tort lawsuit system in the
Q:
How do you define what insurance is … or does?
A: Insurance is simply a
vehicle for transferring risk from one party to another. You need
insurance if you have financial risk (and everyone does) and you
want to reduce that risk. To do so, you pay someone else (e.g., the
insurance company) to assume much of the risk for you, in return for
a payment known as a “premium.”
Because American consumers hold a tremendous
amount of wealth in property—ranging from homes and cars to
collections of baseball cards and Christmas ornaments—they have a
basic need to protect themselves from losing that value.
Insurance is designed to “make people whole”
after their property or assets are damaged or stolen, or if they are
responsible for harm caused to another party. An insurance policy is
a contract under which an insurance company agrees to pay a certain
amount of money to the policyholder if certain events happen (and
their property is damaged or they cause harm to someone else or
someone else’s property).