Would you pay someone a little bit of money every month if they promised to replace your bike or cell phone if it broke?
You might have heard your parents or other adults talking about insurance. There are lots of different kinds of insurance—car insurance, house insurance, life insurance, travel insurance, health insurance, pet insurance. But what do they all mean?
Insurance is a way of protecting things you value—your car, your house, your pet—in case something bad happens to them.
Let’s use car insurance as an example. Cars are important to most families—it’s how you get to school, how your parents get to work, how you get to the grocery store and piano lessons. If your family car stopped working, or it was in an accident, it would be hard for your family to do all of the things you need and want to do. It would also be really expensive to completely fix or replace the broken car if your parents had to pay it all at once—like thousands and thousands of dollars kind of expensive!
This is the perfect situation for insurance. If you have a car insurance policy, it means you pay an insurance company a certain amount of money each month to protect your bank account from having to pay all of the money to fix or replace the car if something happens to it. You have to decide what kinds of things you want to protect yourself against in a policy. Do you want to pay a little bit more money each month if the insurance company promises to fix your car if a tree branch falls on it? Do you want to pay more money for the company to give you a fancy, brand-new car if you get into an accident?
It's easy to think of insurance as a promise: for money you pay, the company promises to fix your car, or your house, or pay for the doctor to fix you if something terrible happens. You can also think of it as protection. We know bad things sometimes happen to things we value. Insurance protects you from having to pay tons and tons of money to fix those things or it makes them better if something bad happens.