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What Is Insurance?

Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate.

Insurance is appropriate when you want to protect against a significant monetary loss. Take life insurance as an example. If the primary breadwinner in the family, the loss of income that the family would experience as a result of premature death is considered a significant loss and hardship that one should protect them against.

It would be very difficult for the family to replace his/her income, so the monthly premiums ensure that if the breadwinner die’s, his/her income will be replaced by the insured amount. The same principle applies to many other forms of insurance. If the potential loss will have a detrimental effect on the person or entity, insurance makes sense.

Everyone who wants to protect themselves or someone else against financial hardship should consider insurance. This may include:

  • Protecting family after one's death from loss of income
  • Ensuring debt repayment after death
  • Covering contingent liabilities
  • Protecting against the death of a key employee or person in your business
  • Buying out a partner or co-shareholder after his or her death
  • Protecting your business from business interruption and loss of income
  • Protecting yourself against unforeseeable health expenses
  • Protecting your home against theft, fire, flood and other hazards
  • Protecting yourself against lawsuits
  • Protecting yourself in the event of disability
  • Protecting your car against theft or losses incurred because of accidents
  • And many more
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