Insurance is one of the key elements in life-long financial planning and can minimize large catastrophic loss. It can also help in situations where you survive an event that could have resulted in financial disaster. How much insurance and when you need it is dependent on changing life situations. For example you need car insurance when you own a car or you need homeowners insurance when you rent an apartment or buy and own your home. In this article we will cover all 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 are losses are of:
- 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 properties are involved in and injury or loss to another person
The potential size of the loss you are trying to cover and the level of risk that this loss may incur determines the premium. Insurance companies pool the money or premiums together from policyholders and form a fund, which will protect against losses.
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 increased chance of having an accident. Some of the ways to minimize the cost of auto insurance is to have no accidents or speeding tickets and to increase the deductibles, which is the portion that you pay out of pocket. It is felt by many companies that the higher deductibles 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 to pay a portion of the premium (say 30%) while the company absorbs the balance (70%). In other plans the employer may pick up 100% 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% paid by the insured and 80% paid by the employer. There may be a specific stop loss amount (for example, $2000) 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.
DI as it has been called is insurance for the protection of loss of income. Many larger companies offer some form of coverage although limited in nature. Generally disability insurance 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 “DI” but it can be very expensive because it is based on the risk factors in your type of profession and your age.
In the last series we discussed the different types of life insurance and their uses. Here is a quick review:
- Term-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.
- 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.
- 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 personal 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 companies coverage’s and can get you the best policy for your individual needs. We can help do that for you, so Contact us to get started. Insuring your property, life and health will be 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.