You’ve probably had insurance policies your whole life. But you may not be fully aware of how each part of the insurance works or why it works the way it does. And more importantly, as you move toward your retirement, insurance may be something that ends up being very important to your financial and physical well-being. So, we’ve put this little article together to help clarify what insurance is and how it works.

The Basics

An insurance contract is an agreement between a policyholder and an insurance company that protects the policyholder from some kind of specified loss.^[1] So, for example, if you have life insurance, the insurance company will pay your beneficiaries a specified amount of money in the event of your death (further specifications dependent on the nature of your contract).

There is inherent risk in an insurance contract for both the policyholder and the insurance company. For the policyholder, there is a chance that they will pay to keep an insurance contract without ever needing it. Of course, the policyholder also receives the benefit of, at any given moment, being able to pay a reduced cost for whatever event they are covering. In addition, the policyholder may suffer the loss specified in the contract very quickly and the policyholder may receive more money than the contract cost them to set up.^[1]

Premiums

Many insurance contracts will require a premium that is paid either monthly or yearly. A premium is the amount the policyholder gives to the insurance company to maintain their contract. The cost of the premium for any given contract depends on the risk present for the insurance company. Generally, the more likely you are to need the insurance, the higher the premium will be.^[1]

Policy Limit

Insurance contract payouts are not unlimited. In each contract there will be a limit to the amount that the insurance company will pay.

Deductibles

Sometimes you will have to pay some amount out of pocket before an insurer will pay for an insurance claim. This is called a deductible, and you’ve probably encountered them with medical insurance. Often, medical insurers will only pay for a medical expense after you’ve paid a certain deductible.^[1]

There are many kinds of insurance and options that you may want to look into when it comes to retirement. For instance, annuities are also a kind of insurance that many people turn to as they are constructing their retirement strategies. If you have questions about retirement topics like the one discussed in this article, consider reaching out to one of our professionals for a complimentary review of your finances today.