Why Buy Insurance?
Insurance is a common type of financial product where a consumer pays an insurance company a fee called a premium in exchange for the guarantee that the insurance company will pay for certain unforeseeable losses or expenses. There are many types of insurance available of the average consumer, including auto insurance, homeowners insurance, health insurance and life insurance, which cover different types of losses and expenses. There are several reasons consumers purchase insurance policies.
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Legal Requirements
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One reason people buy insurance policies is that the law sometimes requires them. For instance, when you buy a car, state law requires you to buy a certain minimum level of auto liability insurance. This type of insurance pays for damage that you cause to other drivers and their vehicle in accidents that are your fault. Professionals in certain job fields such as doctors and surgeons may be required to purchase malpractice insurance or other vocational insurance that will pay for liabilities that may arise as a result of performing their duties.
Protecting Assets and Investments
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One of the main reasons people purchase insurance is to protect their investments assets and investments from unforeseeable harm. For instance, if you spend your life savings to buy a home, it may be wise to purchase homeowner's insurance and flood insurance on the home to protect the investment. If a storm, flood, fire or other event destroys your home, insurance can pay you the value of the home so you don't lose your entire investment.
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Protecting Against Lawsuits
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Liability insurance is insurance that protects against legal action taken against the insured party. For instance, if a neighbor is injured in your yard, he may attempt to sue you for health costs related to the injury. Liability insurance can pay for monies awarded to those that bring legal action against you. Liability insurance is especially important for those with significant wealth to protect their assets.
Considerations
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The primary purpose of insurance is to protect against risk. If you could not afford to pay for a certain expense or loss if it happened to occur, it may be wise to purchase insurance to cover that particular expense or loss. For instance, if you buy a $50,000 car, you might not be able to afford a replacement; collision auto insurance would allow you to replace the car if it were destroyed in an accident in this case. On the other hand, if your car is only worth $2,000, you may be able to afford replacing it, in which case you could forgo collision auto insurance and simply accept the risk of possibly having to replace the car.
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