Insurance is one of the key elements in life-long financial planning and can minimize a large catastrophic loss. How much insurance and when you need it depends on changing life situations. For example, you need car insurance when you own a car or renters or homeowners insurance when you rent an apartment or buy a house. In this article, we will cover the basic types of insurance and some of the events that they cover.
Insurance works by providing protection against catastrophic financial losses. Some of these losses include:
- Income from an illness, disability or death
- Medical expenses which insure against poor health
- Damaged property from an accident, theft, and natural disaster
- Lawsuit if you or your property(s) is involved in an injury or loss to another person.
The premium is determined by the potential size of the loss you want to cover and the level of risk that this loss may incur. Insurance companies pool the money or premiums together from their policyholders and form a fund, which protects against losses by compensating for the damages incurred.
Automobile insurance protects you against losses due to property damage, personal injury and injury to others. As you may already know, auto insurance for teen drivers is very expensive due to the lack of experience and the increase chance of having an accident. Some of the ways to minimize the cost of auto insurance is to have a clean driving record, meaning no accidents or speeding tickets, and to increase the deductibles, which is the portion you pay out of pocket. It is felt by many companies that a higher deductible is a way for the insured to keep their own behavior in check and to drive defensively, similar to a “shared responsibility.”
Although most people have medical insurance through their employers, more and more people are being required to buy their own insurance. Medical insurance varies greatly from plan to plan and often your choices are limited by what your employer wants to cover and what they can afford. Some company plans require you, as the employee, to pay a portion of the premium (say 30 percent) while the company absorbs the balance (70 percent). In other plans the employer may pick up 100 percent of the premium. Common variables of medical insurance plans include:
- Annual deductibles which is the amount that you must pay on your medical bills each year before your insurance goes into effect.
- Co-insurance or co-pay which is the percentage of medical costs the insured person must pay (after paying the deductible). The share ratio is typically 20 percent paid by the insured and 80 percent paid by the employer. There may be a specific stop loss amount of $2000, and then the insurance company will pay 100% of the additional costs.
- Maximum coverage is the lifetime limit on the total amount your insurance company will pay. Some HMOs have unlimited coverage because they can exercise greater control over costs than traditional plans.
Disability insurance (DI)
DI is insurance for the protection of loss of income from a personal disability. This is distinguished from an injury that occurs at work that would be covered by the employer’s Workers Compensation Insurance. Many larger companies offer some form of disability coverage although it may be limited in nature. Generally DI is limited to one-half or two-thirds of your gross salary. The limit is designed to give a worker an incentive to return to work as soon as possible. It is important to have disability insurance coverage, however it can be very expensive because it is based on the risk factors in your type of profession and your age.
In the last article we discussed the different types of life insurance and their uses. Here is a quick review:
1. Term Life: The simplest and least expensive form of insurance, which allows you to buy coverage for a year or a specific period of time. If you die in the insured time frame the face amount of the policy will be paid to your beneficiaries or your estate.
2. Universal life: Allows you to vary your yearly premiums, provides coverage and creates some cash value that is generally a fixed amount of money. The policy can go on a longer time if the cash value is adequate enough to pay the premiums. If you die in the insured time frame the face amount is paid to your beneficiaries or your estate, but the insurance company keeps the cash balance.
3. Variable universal life: Allows you to choose how your insurance money is invested and you decide how much risk you want to take in trying to achieve a high level of return. If you die in the insured time frame the face amount and the cash value in the separate accounts are paid to your beneficiaries or your estate.
Property insurance includes real property insurance, which is a house or condominium, and person property insurance, which is furniture, electronics, jewelry etc. This insurance will compensate you for losses due to fire, theft and natural disasters that are spelled out in your contract.
Liability or Umbrella insurance
Liability insurance protects you from potential losses due to legal actions taken against you because of some alleged negligence. Liability coverage is included in auto and homeowners insurance. In a homeowner policy it covers lawsuits which may result from a person falling on your sidewalk or being bitten by your dog.
Before you buy insurance you need to compare policies to see how they stack up against one another. You should do business with an experienced agent, financial advisor or broker who understands many different company’s coverages and can get you the best policy for your individual needs. Insuring your property, life and health is critical to your financial well being. As you build wealth over an extended period of time, the appropriate insurance will protect you from losses, which could wipe out your assets and undermine your roadmap to financial success.