What is Insurance?

couple discussing paperwork with an agent

Insurance helps make life less risky. Insurance gives people the chance to be free and minimize risks along the way. The basic principle behind insurance is simple, but the inner workings of an insurance policy can get confusing. Here is a basic breakdown of what insurance is, how it works, and its essential parts.


Insurance is a contract between an individual and an insurer where the insurer promises to give the person money if something bad happens. It’s a monetary safety net to catch you if you fall. Similar to a sudden drop, the first moments of an unexpected loss may be harrowing, but as insurance cushions the fall, you quickly find yourself comfortable and back on your feet.

The Different Kinds of Insurance

You can buy insurance for many different situations, but the most common forms of insurance are homeowners, auto, life and health.

Homeowners Insurance

Homeowners insurance policies put you in a position to get reimbursed if something happens to your home or what’s inside it. It can also cover expenses as a result of somebody getting injured on your property or by something that’s part of your property such as a tree branch or a piece of your home that gets blown off during a storm.

Auto Insurance

Auto insurance is similar to home insurance, but it covers you if something happens to your vehicle or as a result of you operating it. Auto insurance can help pay for repairs after an accident or the hospital bills incurred by you or someone else affected by an accident.

Life Insurance

When you buy life insurance, you protect those left behind if you die. Your life insurance policy can give loved ones cash if you pass away and you can also use it to pay for your funeral expenses.

Health Insurance

A health insurance policy helps cover the costs incurred when you get sick or injured. They are designed to pay for your hospital bills, rehabilitation expenses, and other health-related costs.

How Insurance Works

You may have heard about some of the big payouts people get from insurance settlements even though they pay a relatively small amount each month. In some ways, it sounds like a deal that’s too good to be true for the consumer.

In reality, however, most people don’t have accidents on a regular basis, yet most pay insurance every month. For example, only around 6% of homeowners file a claim each year. The money the insurance company has to pay out is offset by the fact that they don’t have to pay anything to the other 94% of their customers.

The Three Key Components of Insurance: Premiums, Policy Limits, and Deductibles

An insurance policy has many small components—all of which are designed to keep the consumer or their investment safer. Each piece can fit into one of three boxes: the premium, the policy’s limits, and the deductible.


An insurance premium is what you pay for coverage. It is typically a set amount each year and gets divided into payments made on a monthly basis. For example, if your annual home insurance premium is $1,200, you would pay $100 each month.

The premium often can increase from year-to-year to compensate for the effects of inflation or the increased risk of accidents resulting in insurance claims.

The insured individual pays one premium that covers all aspects of the insurance policy. For example, if your homeowners insurance covers your house, garage and personal possessions, you pay one premium to cover all those things. The premium goes up or down based on how much coverage you need.

While many insurance plans are similar, you can custom-design your plan to fit your needs. To do this, you can add endorsements. An endorsement gives you the freedom to make changes to your policy. You can inquire about which
endorsements are possible by reaching out to your insurance broker. You can use it to change relatively small things, like the wording, or to add stuff you want covered.

For example, if you have a wedding ring or other valuable jewelry, you can get an endorsement that can help you get reimbursed if they are damaged or stolen. You can do the same for a computer, artwork, silverware or virtually anything else in your home. The amount you get if something is stolen or damaged depends on your policy’s limits.

Policy Limit

Each category of coverage is covered up to a certain dollar amount, known as the policy limit. For example, if your home insurance policy covers your home for up to $300,000 and you suffer a loss in the amount of $250,000, you’re all set. On the other hand, if the loss comes up to $320,000, you are only going to get $300,000 from your insurance company; the rest will have to come out of pocket.

Each category on the policy—dwelling, other structures, personal property or each endorsement—has its own limit. For example, if your jewelry is insured for $10,000, you can get up to $10,000 if it’s stolen. If the loss is bigger than that, you can’t take from your dwelling coverage, for example.


The deductible is what you pay up front before the insurance company gives you any money. For instance, if your deductible is $500, and you get a payout of $20,000, you will only get $19,500. You have to come out of pocket for the other $500. If you agree to pay a higher deductible, you can save on the cost of your premium. By the same token, policies with lower deductibles often have higher premiums. Learn more about deductibles, here.

How Homie Insurance™* Can Help

With insurance, you can mitigate most of the financial risks of life. In a world that sometimes seems full of unpleasant surprises, you don’t have to worry; you’re covered.

When you get insurance through Homie Insurance, you can say goodbye to annoying conflicts of interest and hello to savings. Most insurance companies promote their own products—even if it’s not what’s best for your needs. We recommend the plan that best fits your situation and helps you save some dough along the way. If you want to get more information about insurance through Homie Insurance, check this out.

Read More About Insurance

What is a Deductible?
How to Choose an Insurance Company