How does an insurance policy "protect" me?
UPDATED: May 2, 2012
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Insurance policies offer protection against economic loss, that is, loss or damage which can be measured in purely financial terms and compensated by money. For example, an insurance policy can pay for the cost to repair or replace a damaged automobile or to rebuild a building damaged by fire, for the cost of medical treatment for an injury or illness or for the lost income of a person who dies or is unable to work. The purpose is to place the injured party, as nearly as possible, in the same financial position as if the loss had not occurred.
It is important to understand this limitation of insurance, since there are many types of losses which can not be compensated by money. For example, insurance can not replace a life or take away the emotional injury or pain which often accompanies an accident or serious illness or compensate for loss of the "sentimental" value of an item of property. When you buy homeowners property insurance, for example, you are insuring only the economic value of the home, i.e., the cost to repair or rebuild it.