Insurance Basics

You don't often hear somebody say that they want insurance. “Boy, I wish I could double up on my homeowner's insurance,” is a phrase that certainly would cause you to look twice at the person speaking. Insurance, unfortunately, is something we buy because we need it—not because we want it.

We need insurance to protect ourselves from the environment, from others, and from ourselves. Insurance is a way to reduce risk by sharing financial losses within a group of people. There are many types of risks, both financial and nonfinancial. These risks include the following:

• Disability or death
• Property loss
• Personal liability
• Risk from failure of others, such as a breach of contract
• Speculative risks, such as the stock market

When considering these risks, you must decide if the protection you receive is worth the cost of the insurance you buy.

Many types of insurance are required. If you have a mortgage, your lender requires you to have homeowner's insurance. Most states require auto insurance.

In addition to these required insurances, you must decide what type of coverage you need for your family, and what you're able to spend on them. Riders, options, and basic insurance all come at a cost so you need to review the price and the coverage as part of your total financial picture.

You may need to provide your own insurance for some risks by putting aside funds on your own. You might want to set aside money for dental bills or a nursing home stay, for instance.

Let's look at some of the kinds of insurance that are important to you and your family.