What is an insurance policy?

An insurance policy is a contract between a policyholder and an insurance company. In the contract, the policyholder agrees to pay a set amount to the insurance company in exchange for financial protection against specified losses, perils, or costs.

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What are the main types of insurance policies?

The main types of insurance you should own typically cover your most valuable assets: your home, car, health, and life. These are the common types of insurance people have:

  • Car insurance

    Car insurance may be the most common type of insurance policy, as a minimum of auto liability coverage is required by law in most states. Depending on your coverages, your auto insurance may pay for non-maintenance vehicle repairs, medical expenses, and damages or injuries you cause to another driver. Learn more about how car insurance works.

  • Homeowners insurance

    Homeowners insurance protects against damage to your home and belongings from covered perils, like theft or hail, and it may pay if you have to live elsewhere while your home is uninhabitable due to a covered loss. It also protects your assets if you're responsible for someone else's injuries or property damage. Find out how home insurance works.

  • Health insurance

    Health insurance covers treatment for injuries, illnesses, and health conditions, often including preventative care like annual checkups. Health care costs can add up quickly, so having health insurance is important for helping you afford the care you or your family members may need. Policies and coverage can differ greatly from one insurer to another, so learn more about how health insurance works.

  • Life insurance

    Life insurance policies provide financial support to your beneficiaries, typically your family or loved ones, if you pass away while the policy is active. Your beneficiaries can use the death benefit payout they receive any way they wish — to cover your funeral or end-of-life costs, to pay off debt, or to pay for education or daily living costs. There are plenty of types of life insurance to fit your budget and needs, so learn more about how life insurance works.

What other types of insurance are there?

With all the insurance policies available, you can protect nearly anything valuable to you. Here are other commons types of insurance:

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Why do I need insurance?

Insurance is a way to protect you and your loved ones from financial distress — and in many cases it's required by law or financial institutions. These situations commonly require insurance:

While not required, health insurance and life insurance are also often considered musts for protecting your family's financial security.

How does insurance work?

Your policy will cover specific people, property or vehicles (if applicable), and circumstances, depending on your coverages. How each insurance policy works will be detailed in the insurance declarations page or the terms and conditions provided when you purchase the policy. You can use this page to learn more about the cost and term length of your policy, the types of coverage you have, and any deductibles, limits, co-pays, and coverage exclusions.

How do I choose a good insurance policy?

A good insurance policy is one that meets your coverage needs, fits in your budget, and is underwritten by a reputable and financially secure insurer.

Start by researching how much insurance you need, compare quotes and customer reviews, and make sure there's a knowledgeable customer service team ready to answer your questions. You can even check an insurer's financial security rating with independent agencies like A.M. Best and Fitch Ratings.

Check out these resources to get started shopping for insurance:

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Please note: The above is meant as general information to help you understand the different aspects of insurance. Read our editorial standards for Answers content. This information is not an insurance policy, does not refer to any specific insurance policy, and does not modify any provisions, limitations, or exclusions expressly stated in any insurance policy. Descriptions of all coverages and other features are necessarily brief; in order to fully understand the coverages and other features of a specific insurance policy, we encourage you to read the applicable policy and/or speak to an insurance representative. Coverages and other features vary between insurers, vary by state, and are not available in all states. Whether an accident or other loss is covered is subject to the terms and conditions of the actual insurance policy or policies involved in the claim. References to average or typical premiums, amounts of losses, deductibles, costs of coverages/repair, etc., are illustrative and may not apply to your situation. We are not responsible for the content of any third-party sites linked from this page.