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Insurance is a type of protection policy that will ensure that you're no worse off after a disaster or accident than you were beforehand. There are various types of insurance that range from policies that are compulsory and must be taken out by law, such as car insurance, to insurance policies that are simply a good idea to have such as home and contents insurance. There are even insurance policies that you would not consider a necessity, but are simply nice to have.

Whenever you take out an insurance policy you will typically need to pay a premium, usually monthly or annually, to an insurance company. Unfortunately, if you never make a claim on your insurance policy, you will never get any of your money back. This probably doesn't sound like a great deal, although at least an insurance policy can offer you peace of mind as you never know when disaster is likely to strike.

The vast majority of insurance companies will pool together the premiums that all their members have paid to that particular firm. Should any member need to make a claim, such as a washing machine has burst its pipes, flooded the kitchen and damaged the floor, the insurance money will then come from the pool of both yours and other policyholders’ premiums.

It is vitally important that an insurance company calculates their member's premiums so they can create a large enough fund to cover any likely loss payments. However, they are professional risk takers and generally know but this involves. Insurance companies will basically take two factors into consideration when calculating a policyholder’s premium. The first consideration is how likely that someone will need to claim on a particular incident, and secondly, how big or small a risk a particularly policyholder is.

A prime example of this can be seen in a motor insurance policy. Should you have a young driver with an extremely high-powered car, or even a driver who has a long history of accidents, you can guarantee that their insurance premium will be pretty high. In fact, I would hazard a guess that their insurance premium will be far higher than a mature and experienced driver who owns a car with a far smaller engine, who has never been involved in an accident before.

Most insurance policies will also carry a deductible, or an excess. This is the part of an insurance claim that the policyholder will have to pay first prior to an insurance company getting involved. A travel insurance policy may typically have a deductible of $50-$75, whereas a car insurance policy is likely to have a deductible over $150. Therefore, if you were to be involved in a car accident and the total claim for insurance was $200, you would actually only get $50 from your insurance company.

You should always buy insurance to protect yourself against an unexpected financial loss. This will generally include a loss which results from a personal injury, illness, or damage to your property or personal possessions. Amongst the most common types of insurance policy are life insurance, health insurance, buildings insurance, household contents insurance, motor insurance and travel insurance.