Your insurance needs

When you buy an insurance policy, you are paying some money now to ensure against financial loss and to provide economic stability for your family.

In some cases, you buy insurance hoping that you will never need it. Collision insurance on your new car is one example. No one purchases car insurance with the belief they'll be involved in an accident and have to file a claim. However, the prospect of a bill you would have to pay that could amount to thousands of dollars justifies the cost of the insurance.

In other cases, you buy insurance because you know you will need it — though you don't know when. The best example is life insurance, which is paid to your survivors when you die. While it's perfectly reasonable to expect that you'll be around for a long time, you also realize that sometimes sad events occur unexpectedly which can have a major impact on your loved ones, including a financial impact.

Insurance works because of shared risk. The insurance companies that sell the various policies to you — and other customers — are willing to commit themselves to pay your potential future claims because they are confident, based on past statistics, that they can make wise investments with your premium payments, to offset future claims, and still make a profit.

In part, the premiums you pay are determined based on the level of risk that the insurance company thinks you pose to their having to pay a claim. For example, people with poor driving records tend to be charged more for car insurance than people who have no marks on their records.

Required insurance

Certain kinds of insurance may be required by law or by your lender. State laws usually require liability insurance if you want to register a car, and mortgage lenders require homeowner's insurance if you have a mortgage on your home. Most states require you to have automobile liability insurance so that if a person or property is injured or damaged in an accident for which you're responsible, there will be money available to cover at least some of the damages. Similarly, lenders who provide mortgages want you to have homeowner's insurance that will repay them what you owe if your home, which you are using as collateral on the loan, is destroyed. Most consumers buy additional insurance to cover their own potential losses as well.

Similarly, if you own your own business, you may be required to have workman's compensation insurance to protect your workers or commercial liability insurance to protect the business against claims by clients or customers.

Insurance to consider

Among the kinds of insurance that you might consider purchasing to protect your financial security and the security of your loved ones are life insurance, disability insurance and long-term care insurance.