Insurance is a means of protection from financial loss in which a party agrees to compensate another party in the event of a certain loss, damage, or injury in exchange for a fee. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, insurance company, insurance carrier, or underwriter. A person or entity who buys insurance is known as a policyholder, while a person or entity covered under the policy is called an insured.

The core components that make up most insurance policies are the premium, deductible, and policy limits. The premium is the amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy. The deductible is the amount of money that the policyholder must pay out of pocket before the insurance coverage kicks in. Policy limits refer to the maximum amount of money that the insurer will pay out for a particular loss or event.

Insurance involves pooling funds from many insured entities to pay for the losses that only some insureds may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. Insurance policies are often in place for a specific period of time, referred to as the policy term. At the end of that term, the policy needs to be renewed or a new one needs to be purchased.

There are many types of insurance policies, including life, health, homeowners, and auto insurance. Insurance policies will only pay for things that are described in the policy, so it’s important to read a policy carefully before purchasing it to know exactly what’s covered. Insurance helps protect individuals, families, and assets from unexpected financial costs and resulting debts or risks. It can offer peace of mind regarding unforeseen financial risks and provide a financial safety net in times of need.