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Has shopping around for insurance policies got you going cross eyed? If you’re having trouble understanding exactly what you’re paying for, take a look at our guide for the three most basic and vital forms of insurance.

Shopping around for insurance can be confusing, with salesmen throwing terms at you you’ve never heard in another context and a lot of chat about “should the worst happen” overwhelming you. Before you go looking for a policy, take a look at the breakdown of the types of insurance available to you so you can make an informed decision.

Home insurance

Looking after the building you live in, and its contents is the basis of home insurance. It covers three main aspects: damage to the interior or exterior of your house, personal liability for damage or injuries and hotel or house rental while your home is being repaired.

Damage due to fire, hurricanes, lightning, vandalism, and a few other options, are the common causes covered by your home insurance policy. Your insurer will compensate you if you need to repair or rebuild your home after one of these, however some things like flooding, earthquakes and poor home maintenance aren’t covered and will need a separate policy.

Your material possessions like clothing, furniture, appliances, and most other contents will be covered if they’re lost in a disaster covered by your insurer, but usually up to a limit.

Liability coverage will protect you from lawsuits should you be at fault for something like your dog biting someone or a neighbor’s window broken by a stray ball, for example. Your insurance will cover the medical bills or repairs.

There is a low chance a disaster will force you and your family out of your home while it is being rebuilt or repaired. Your insurance will cover the bills and a daily allowance to live in a hotel or rent another location.

Auto insurance

Now that you know what is home insurance, auto insurance, put simply, offers to pay all or part of the costs of an accident, theft, or other cause of damage to your vehicle.

Liability insurance is the most basic package and is required to be allowed to drive. It will cover repairs to damages you cause to other drivers and vehicles: property repairs and medical bills. It is a necessity since, due to a rule known as “comparative negligence” both drivers in most accidents are deemed to share the responsibility.

Collision insurance will help you to repair or replace your car if you are in an accident, the main benefit being that it will cover you even if the accident was your fault, but at a higher price than liability coverage.

Comprehensive coverage covers “everything else”. Usually optional, it covers unexpected events like windshield damage, fire, vandalism, falling objects, storms and natural disasters, or accidents with animals.

There is also uninsured and underinsured motorist coverage, which will pick up the bill if the driver at-fault doesn’t have enough insurance to cover the damage, and personal injury protection, which will cover your medical bills. Personal injury protection will also cover lost wages, rehabilitation costs and funeral costs if necessary.

However, auto insurance will not cover damages caused by someone else driving your car or routine maintenance and vehicle repairs, crucially. It also won’t cover exotic or vintage cars, or damages that exceed your liability coverage.

Life insurance

Life insurance is a policy designed to guarantee your loved ones are kept well with a sum of money after you are gone in exchange for premiums paid throughout your lifetime.

Term life insurance is a policy with an end-date and is usually a lot less expensive than permanent life insurance. You can choose the term when you take out the policy, usually of 10, 20, or 30 years. You can choose a decreasing term policy with the coverage decreasing over the life of the policy, a convertible term policy which allows the policyholder to convert to permanent insurance or a renewable term policy which provides a quote for the year the policy was purchased and will increase annually.

Permanent life insurance is an ongoing policy for the policyholder’s entire life unless they stop paying or surrender the policy. You can choose from whole life, universal life, indexed universal and variable universal policies and don’t worry if you don’t understand any of those terms.

Whole life insurance accumulates cash value, which allows the policyholder to use it as a source of loans or cash. Universal life also accumulates cash value, but with interest and features flexible premiums. Payments can be adjusted over time and designed with a level of death benefit or increasing death benefit. Indexed universal policies allow the policyholder to earn a rate of return on the cash value component of their policy and variable universal policies allow the policyholder to invest their cash value in a separate account. Like universal life policies, it also has flexible premiums and can be designed for a level or increasing death benefit.

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