Following is some information to help you understand insurance, what it is and isn't, what to look for in a policy and how to get a good deal. It is by no means all of the information available; it is just the basics that you can use to start your search for the best insurance buy.
What is insurance?
Webster defines insurance as "Contractual coverage binding a party to indemnify another against specified loss in return for premiums paid." Pretty straightforward isn't it? But it is really a very complicated subject. Insurance companies base their business on the "rule of large numbers." This means that the more people you have insured, the more likely you are to have a predictable loss ratio and therefore can set insurance rates (the amount of premium paid by each person insured) so that the premiums will total more than the losses paid out. That is how an insurance company makes its profit.
In theory anything can be insured. But insurance companies only insure things that, if lost, would create a financial hardship for the owner or beneficiary (person receiving the insurance proceeds). Thus you cannot insure a new light bulb in case it burned out early or was broken; this would not be a financial hardship. However you can get insurance for your home, auto, expensive property items like boats and airplanes, your life and your health. You can also insure against your behavior or the behavior of others that results in a loss. This is liability insurance.
There are four basic types of insurance: Property, Casualty, Life and Health. Let's take quick look at each one.
Property
This type of insurance covers loss resulting from damage or destruction of a real tangible asset such as a home or car. Just about any form of damage can be insured by a homeowner's policy or renter's policy or auto policy. However there are exclusions and these are important to know. Flooding and rodent damage are usually not covered in your basic policy. There are several other exclusions. Intentional acts of destruction by you are usually not covered. Remember that all property insurance is designed to cover large losses such as hurricanes or fire. Thus it is important to keep as high a deductible on all your property insurance as you can. This will keep the premiums lower and will mean that you only claim large losses. A bunch of smaller losses can get your insurance cancelled, and once cancelled, it will be difficult to find coverage with other companies.
Casualty
This covers acts which harm other people's property, injure others or create financial hardship for others. Things like liability insurance and bonds are under casualty. So is insuring for legal fees. Since people tend to sue each other for large amounts for damages caused by errors or failures to perform something, liability type insurance can be very expensive. Juries award millions of dollars in damages for the simplest things nowadays, so liability type of coverage is very important. Just like every other type of insurance, there are exclusions where the insurance company will not pay a claim for certain occurrences. Most property type of policies carry a clause that includes liability.
Life
Your life is worth a certain dollar amount based upon your earning power and your importance to others. If your passing would create a financial hardship for others, than you can have life insurance to help those others. But there must be a true financial hardship associated with losing you. Thus is created the concept of "insurable interest". You can't have a life insurance policy with me as your beneficiary. I have no insurable interest in your death. However, your relatives, business partners and even charitable organizations do have insurable interest and therefore you can have a life insurance policy with any of them as beneficiary. Also, people you owe have an insurable interest. If you have a car loan, or a home mortgage, the lender is going to push you to buy "credit life" insurance. Don't do it. This is high priced term life insurance and you are better off buying your own term life policy for the amount of the loan.
There are two basic types of life insurance. Whole life and term life. Insurance companies determine the likelihood of your death at each age you attain and set rates based upon this likelihood. Thus life insurance is cheaper for younger persons. The pure insurance protection afforded by these lower rates is called term insurance. The name comes from the fact that the insurance on your life lasts for a specific period of time for set rates. As you grow older, the rates will increase. You can get different terms such as 5 years (before a rate increase) ten years, or any fixed term. I have always preferred ten year term insurance. The difference between a term policy premium and a whole life policy premium can be very significant. I have always advised people to "buy term and invest the difference". I think term life insurance is one of the best purchases you can make for your family. It is very cheap and brings peace of mind like no other purchase for the price. As ususal you want to shop around.
Whole life is basically term life insurance along with a savings plan. You pay more but your policy increases in value, giving you what is called "cash value". And the company pays you interest on the extra money you have paid in premiums that are over and above the actual premiums for insuring against your premature death. This cash value is yours and you can have it or borrow against it anytime you want. It does accumulate slowly and if there is no other way you can make yourself save, then whole life can be a type of "forced savings plan". There are exclusions on life insurance also, such as suicide in the first two years of ownership of the policy and other exclusions. If you can get life insurance through some type of group such as through your employer, or an organization you belong to, the rates will normally be a little cheaper. Just remember that when your affiliation with the group ends, your rates could go up.
Health
This type of insurance covers your expenses for losses due to medical problems that affect the human body. Many times this coverage is offered through your employer, and it is a valuable benefit on any job. You know what medical costs and prescription costs have done over the past few years - go up by leaps and bounds. It doesn't look like this is going to stop anytime soon. So health coverage is almost a necessity. Whether it is coverage for your overall health, your vision or your teeth, there is a type of insurance to cover you. Obviously the best way to obtain this coverage is through your employer. This is because many employers will pay part of the cost of the insurance, making your end of the cost much less than normal. Joining some other type of group can also get you lower cost health insurance. There are many exclusions and limitations in health insurance, so take a look at those before committing to any health insurance plan.
What Insurance ISN'T
Insurance is not a means of covering every thing that can happen to you that might cause you to loose money. It is only for those large (catastrophic) loses that really hurt that should be insured. Savings are for the minor things. That is why I advocate regular, consistent saving. You can offset small losses and deductibles on your insurance with your savings.
Also there are many plans that are not really insurance. They are just "lower cost" plans whereby you do not pay as much for a service as you normally would by paying for "discount privileges". Usually this means that you must use a service provider that has agreed to accept you at a lower rate than they normally charge. Some of these can save you quite a bit of money on services, but you have to be careful and examine their benefits closely. Also check to make sure there are several providers (doctors, clinics, hospitals, pharmacies, etc) in your area.
Homeowners
There are standard polices for homeowners, renters mobile home owners and landlords. The homeowner policy most used today is a form called HO3. It is pretty comprehensive and will cover for most losses including the actual structure of your home and outlying structures on your land, your personal possessions, any liability for property damage or injury you or your family cause to others and living expenses if you are denied use of your home. You can get coverage for the actual value of your home and possessions (replacement cost less an amount for age) or for the actual replacement cost, regardless of the value due to aging. Remember that normal maintenance is not a serious financial loss. And floods and earthquakes aren't covered, however you can get insurance for them through separate policies.
Renters can get insurance for their possessions and any damage they cause to others through use of form HO4.
Mobile home owners can use form HO2. This is a basic policy.
Homeowners insurance does not cover the land your house sits on. Nothing can happen to it. So you are only insuring the structures. Many companies have automatic increases in your coverage based upon some type of construction cost index. This can be a good thing because as your home value increase, the insurance coverage also increases. Just watch it to make sure it doesn't get well above the fair market value of your home.
If you have a loan on you home, you will have to have insurance. It is required by lenders to protect themselves from catastrophic losses. Same goes for any other property such as a car or boat.
Landlords have to get a "fire and casualty policy" since they are not an occupying homeowner.
Auto
The basic auto insurance policy covers you for property damage to others caused by you (or someone driving your car with your permission), bodily injury to others caused by you, medical payments arising out of injuries received by you and your passengers, collision damage for harm to your auto caused by hitting something or turning over, comprehensive items such as damage to your car by flying rocks, hail, fire, theft etc. and uninsured motorist harm caused to you or family member by being hit by another driver that has no insurance.
Auto insurance premiums can really be lowered by increasing deductibles. Driving records, previous claims, your age, average miles driven daily and even your credit rating can all affect the rates you pay for auto insurance.
Insurance Tips
Shop and compare polices for anything or anyone you are considering insuring. You can look up the rating of the companies you might be considering insuring with at A.M.BEST to make sure you are dealing with a good solid company.
Check out the insurance rates for any auto you are thinking of buying. Rates vary amongst the different types of autos. If your car is faster than normal, rates will be higher. If it costs more to repair your car, rates will be higher. And if you get a car that gets stolen a lot, your rates will be higher.
When looking to buy a new home, check out the fire zone boundaries in your area. Some areas have higher risk fire zones and rates will be higher in those areas. Your realtor should be able to help you with this.
Keep deductibles as high as you are comfortable with. Higher deductibles equal lower premiums.
Consider carrying all of your insurance with one company if it offers everything you need. Sometimes this can lead to lower overall premiums through multi-policy discounts.
Most auto polices cover your liability in any auto you are driving. So you probably don't really need to buy coverage from the car rental agency when you rent an auto.
Pay your premiums on time. A lapse in a policy that is required by a lender can lead to all kinds of bad things including a ding on your credit report and possibly an increase in your insurance rates. Also, if you are without insurance for a few months, the only insurance you will then qualify for is some type of high risk, high rate policy.
Nearly all companies charge more to make monthly payments as opposed to semi-annual or annual payments of your premium. Another good reason to have that savings account. If you are paying $50 a month for auto insurance, that is $600 per year. Save the $50 per month and pay an annual premium of $550 instead. This takes the same amount of monthly money, but leaves you with $50 extra in your savings account that you did not pay the insurance company.
Each state has an insurance commissioner. The commissioner's office usually has a wealth of information available to help guide you in any insurance situation. Check with them for any problems you might have with any insurance company.
Remember to shop and compare. A really good sites for shopping and comparing insurance plans is Insureme.com for free insurance quotes on property and casualty insurance.
Good luck and start saving on your insurance coverage. Remember "Save More...Spend Less...Now!".
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