Insurance
The Importance of Insurance
What is insurance? It is the way that people and businesses protect themselves against significant financial loss due to unpredictable events. Insurance is an arrangement or contract whereby a company or government provides coverage (compensation) for damages, loss, injuries, illness and death. The insured person makes premium payments, typically on a monthly, basis in order to pay for this safety net.
What are the most common types of insurance? There are many different types of insurance, but the most commonly purchased among the people are:
Property/Renters Insurance - Insurance that pays for damages on a house or apartment such as fire, flood, theft or natural disaster
Auto Insurance - Insurance that pays for car damages or if someone is hurt in an accident
Life Insurance - Insurance to be payed out upon your death
Medical Insurance - Insurance that pays all or portion of your medical bills
Travel Insurance - Insurance to cover the cost of a trip if you are unable to go on the trip
What types of insurance are mandatory, and which types are optional? Certain types of insurance are mandatory, such as vehicle insurance. The driver of a vehicle must be insured for property damage (if they cause damage to another person’s vehicle) and bodily injury (if they cause injury to another person). In certain states health insurance is required by mandate, although the federal law requiring all Americans to have health insurance was revoked in 2019.
Insurance Vocabulary
Premium - An insurance premium is the amount of money a company or person pays for any insurance policy. Premiums are often paid monthly and the amount is dependent on the level of coverage. Certain insurance premiums, such as life insurance for a young healthy person, are quite affordable. Other premiums, such as insuring a 16-year old with a history of speeding who’s driving a Porsche, can be very expensive.
Deductible - The annual out of pocket expense you must pay before insurance kicks in. For example, a person with a $1000 deductible gets into a car accident. The damages of the car are $3000, so the person who got into a car accident pays $1000, and the insurance picks up the other $2000. If the car accident damages were only $500, the person would have to pay out of pocket and would only have receive the benefit of insurance if they incurred another $500 worth of damage during the year.
Copays - Copays are a fixed out-of-pocket amount of money that an insured person pays for services. Copays typically cover the expenses of prescription drugs and doctors visits. For example, an insured may pay a $50 copay to see their physician, and a $10 copay for their monthly prescription drugs while insurance covers the remainder of the bill.
At its core, insurance is a simple concept. We pay for protection against unexpected events. The insurance company makes money because most people will not experience these events yet pay for the protection. If you think you are one of the “lucky” people who can get away without insurance, just remember that accidents happen and life is unpredictable. It’s always better to be safe than sorry and the financial risk of being entirely uninsured is too great to justify it. However, there are lifestyle choices and circumstances that may require you to talk to an expert and do some research on which types of insurance make the most sense for you.