Insurance and the Basics
You will hear people talk about insurance – life insurance, home insurance, auto insurance – the list goes on. You might find yourself asking “what is insurance, why do I need it, or which insurance policies should I purchase?” The purpose of insurance is to provide a safety net, financially speaking, when life does not go as planned. Here’s how it works: an individual buys an insurance policy and is then covered for any losses or claims made against them. Sounds simple, right? While this is true, there are components you need to take into account that apply to all types of insurance.
What is Insurance?
There are numerous types of insurance plans that are available for policyholders, such as life insurance, health insurance, or car insurance. These types of insurance will have various policies concerning the amount of coverage offered. An insurance policy is the contract between the insurer and insured stating the terms of the plan. You should compare quotes before deciding which policy works best for you.
Insurance is full of confusing jargon, so it is wise to familiarize yourself with the basics beforehand so that you do not find yourself scrambling to understand the fine print during a time of need. Insurance companies build assets from the premiums people pay. They spread the risk among many people, and that pooled money from policyholders allows them to pay out claims. Furthermore, insurance may be the determining factor saving you from bankruptcy or financial ruin.
A premium is the price you pay for a policy. It can be paid monthly, semiannually, or annually. The cost of premiums depends on the insurance company, as well as an individual’s specific circumstances and other factors, such as age, the type of coverage, or any past claims. Higher premiums usually result from a policy or person(s) having greater risk associated with them. If an individual fails to pay the premium, the policy may be cancelled.
A deductible is the amount an individual pays before the policy begins covering them. This amount will go towards payment for a loss or claim when they occur. Deductibles may be a specific dollar amount or a percentage of the insurance’s total amount. Typically, higher deductibles mean lower premiums. But weigh your options when considering a higher deductible for a lower premium versus a lower deductible for a higher premium – if you elect a high deductible, make sure you have enough cash savings to actually pay the deductible should a claim occur.
Types of Insurance
Have you found yourself asking which insurance plans you should buy? Finding it a challenge to sort through all the available options? To figure out what is best for you, think about where you are in life – your age, lifestyle, children to provide for, or any employment benefits. Most experts agree on the importance of these major types of insurance.
Auto insurance is crucial because car accidents are costly, even more so if the crash is fatal. In fact, in most states you are legally required to have auto insurance, even a basic policy to cover legal fees, injury or death, and vehicle damages. In addition, individuals may be required to carry personal injury protection (PIP) and/or uninsured motorist coverage in some states. Even if you are in an accident that is not your fault, coverage is necessary for any medical expenses, potential hit-and-runs, and drivers who do not have auto insurance. Auto insurance also provides protection for theft, vandalism, or damages from natural disasters.
Home insurance gives you protection for unexpected damages. There is a good chance your lender will require home insurance with your mortgage. Even if you have paid off your mortgage, home insurance is still a necessity because it can still cover expenses for property damage, as well as protecting you against any liability for injuries to guests on your property. In addition, home insurance can cover you if the house becomes uninhabitable.
Renter’s insurance is just as important. The landlord will have insurance to cover the house itself, but in the event of a burglary, fire, or other disaster or damage to your property, renter’s insurance should be able to cover those expenses.
Essentially, good health is an individual’s greatest asset because good health allows one the ability to work, make money, buy a house, etc. Most healthcare plans cover basic preventive services including vaccines, screenings, and checkups. But medical costs can add up exponentially due to a serious illness or car accident, and if you are not insured, the lack of health insurance could not only prevent you from receiving proper treatment, it could lead you to financial ruin. However, factors including rising co-payments, increased deductibles, and dropped coverages, have turned health insurance into a luxury for many families. But even a policy that covers the basics is better than nothing, as many households have found themselves going bankrupt from surging medical expenses.
This type of insurance is probably the most overlooked, but a disability happens more often than you think. While worker’s compensation provides disability benefits for injuries that happen on the job, it will not cover off-the-job injuries or illnesses. Weigh the benefits of long term and short term disability insurance to see which one is suitable for you. A policy that promises income replacement is most ideal. Many pay about half of your income, and the average cost is around 1% to 3% of your annual income. Disability insurance premiums are generally reasonable in price, but the cost will depend on your profession and personal circumstances. Regardless, disability insurance is a crucial part of your financial plan until you reach retirement.
Life insurance is one that comes up in conversation, but is it really necessary? That depends. A single person with life insurance would have burial expenses and other debt covered. On the other hand, a person with a family would consider life insurance to cover lost income, debt, and education for their children. Generally the answer to whether you need life insurance is straightforward; how much life insurance you need is not as black and white. Think about you and your family’s specific needs and what life insurance would do for you specifically:
- Think about immediate expenses that your family would face in your absence. Do you still have debt, such as a mortgage, car loans, or student loans?
- Ask yourself how long would your surviving spouse and/or dependents need financial support?
- Besides the family’s urgent needs, is there money to be set aside for inheritance, retirement, children’s future education, or even charitable giving, etc.?
Found Reassurance Yet?
At the end of the day, insurance helps protect you financially when unexpected events occur. When life gives you lemons, insurance provides you reassurance by covering losses or claims. While there are plenty of insurance options, many experts agree that these common insurance plans are most beneficial. Talking to financial planners might be helpful to receive advice about which insurance plans will suit your needs. Check with your employer to see what insurance programs they offer as well or ask for quotes and compare policies before landing on the right one for you. Ultimately, there is not a one-size fits all when it comes to insurance, but the importance of being covered by insurance will be worth it.
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