Insurance, explained

Insurance is a deal: you pay a small, predictable amount so you don't get stuck with a huge, unpredictable bill. Lots of people pay in, and the money covers the few who have a bad accident, a big medical bill or a fire.

Two numbers matter most:

• The premium is what you pay to have the insurance, usually every month or every six months.
• The deductible is what you pay yourself on a claim before the insurance kicks in. With a $500 deductible and a $3,000 repair, you pay $500 and insurance pays $2,500.

They trade off. A higher deductible usually means a lower premium, but you need enough savings to cover that deductible if something happens. That's one reason an emergency fund matters.

Types you'll run into:

• Car insurance is required in almost every state. Teen drivers pay some of the highest rates, because they're more likely to crash. Good grades, a driving course and a clean record can bring it down.
• Health insurance covers doctor visits and hospital bills. Most people can stay on a parent's plan until 26.
• Renters insurance covers your stuff if it's stolen or destroyed, and it's usually cheap.
• Life and disability insurance replace income for a family if someone dies or can't work.

The rule of thumb: insure against things you couldn't afford to pay for yourself, and don't pay extra to insure small things you could cover from savings.