The purpose of insurance is to invest in risk, invest in protection if something bad happens to you. One accident can put a major dent in one’s financials, so having insurance helps relieve the financial burden. For example, you’ve been paying for auto (car) insurance for 6 months with a premium (monthly payment) of $50. Then you get in a car accident and your hospital bill is $3,000. By paying your insurance company $300 (50 x 6) for their protection, they will cover your hospital bill, saving you money in the end. This is purely an example and won’t reflect every case.
There are certain types of insurance that are required depending on where you live. For example, flood insurance protects you from natural floods, and if you live in a designated “flood zone” and are renting a house/apartment, you may be forced to have the insurance. There are also different types of disaster insurance to cover natural disasters like hurricanes and earthquakes, but someone living in Kentucky has no need for protection from hurricanes. Listed below are types of insurance typically needed by everyone, regardless of where you’re living.
Some jobs give insurance to you and your family as a benefit, like a health care or dental plan. This benefit changes though with every job, so take note of which plans are offered by which job and how much coverage is offered; it may impact your decision to take a certain job.
Words to Know:
Beneficiary: the person who receives payment from a will, life insurance plan, trust, or other contract
Claim: a request made by an insured person for payment due to a loss incurred and covered by the insurance plan
Copay: the insured person pays for part of a medical expense and the insurance company pays for the rest
Declarations: statements regarding the insurance applicant and the covered property
Deductible: part of the plan that the applicant has to pay
Medicaid: government program that financially assists low income families with their insurance
Medicare: government program that provides medical insurance to those over 65
Premium: money charged by insurance company (typically monthly) reflecting the expectation of loss
Rebate: a refund of your premium payment
Life Insurance - the insurance used when the working member of the family passes away. Life insurance is not mandated by any state; however, it’s extremely useful especially for a single-income home. If the working member of a family passes away and has life insurance, the family will be given a sum of money to help them financially continue as they don’t have an income anymore. The amount given to the family corresponds with the plan you have.
The premium for life insurance gets more expensive as it becomes “more likely” for the insured to die. For example, as the insured gets older, the premium will grow, or if they are diagnosed with a disease, have dangerous hobbies or tendencies (like being a smoker or reckless drinker), etc. Sometimes, the insurance company will not allow someone to buy life insurance if they are too much of a risk. If one is diagnosed with cancer and then tries to apply for insurance, they may be denied. However, once someone has life insurance and continues to pay the premium, the life insurance can never be revoked. So, if you buy life insurance when you’re 25 and you’re diagnosed with cancer at 30, the insurance company cannot take away your insurance plan.
Term Life Insurance is one you only have for a term of your life, like 20 or 30 years. This insurance is beneficial if you only want life insurance while your kids are living at home under your care. If the plan expires without the insured passing away, no benefits/money is given back. Essentially, you’re paying due to the risk of something happening. Whole Life Insurance is one you can keep forever, as long as you pay the premiums; however, it’s typically more expensive than the Term Life plan. One may want Whole Life if they are always caring for a disabled child. You can also gift the life insurance policy to a beneficiary, but there are certain restrictions and regulations surrounding that.
Auto Insurance - the insurance you need when buying a car; it’s illegal to drive without having a minimum amount of auto insurance (however, the amount/type of policy changes by state - click HERE to see what’s required by your state). Within the umbrella category of “auto insurance”, there are specific policies one can buy. Typically, when renting a car, you’re forced to buy insurance from the car rental agency. If you’re ever pulled over, the cop will likely ask to see your car registration and proof of insurance, so make sure to keep these documents in your car.
There are different factors that affect your monthly payment to the insurance company (your premium). These factors can include age, gender, how often you drive, driving record, grades in school, etc. The insurance company will give a lower premium if you are deemed a low-risk driver (meaning they don’t expect you to get into accidents).
When you’re in a car accident, different types of insurance will determine the payout towards yourself, the person in the other vehicle, and towards property damages. For example, if you’re in a car accident and you’re determined at fault, your insurance company will help cover the damages up to a certain amount incurred by the other driver; however, your premium is likely to increase.
Property Insurance - insurance used to protect your assets, like your home. Homeowners Insurance is needed if you own your house or condominium. Renters Insurance is needed if you’re renting a house or an apartment. These are needed to protect the property and the people when they are on it.
Within the insurance plans are different types of coverage. Liability Coverage protects you if people get hurt when on your property and choose to sue you, like if a guest slips on the steps of your house and gets injured. It also covers if your pet bites someone on the property. Property Coverage is for the property itself, like if a window breaks from a tree falling down or there’s a fire and the house itself or items inside it are destroyed. This coverage is also used if someone burglarizes your house while you’re not there. It’s important to have some kind of list or a group of photos that takes inventory of all your possessions inside your house; this is needed for your insurance company to give you money if items are stolen or destroyed.
Most insurance plans will only cover a certain amount of each item (like a certain dollar amount of jewelry or furniture). So if there’s a really expensive piece of jewelry (like an engagement ring) or furniture in your house, you need to buy additional insurance for that one piece, which is called a rider on the policy.
Health Insurance - arguably the most important type of insurance for you to have because your life may actually be in danger if you don’t have it as this insurance pays for part of your medical costs. Many hospitals and physicians won’t accept patients if they don’t have acceptable health insurance plans, which may stop you from getting critical help. As stated before, many employers pay the bulk of your premium for health insurance (the rest if paid for by you - they take a little from your paycheck each period). There are also ways for the federal government to help pay for your insurance, but that may change with each presidential administration.
Low-deductible health plans: Low deductible health insurance plans are plans that keep your out-of-pocket costs for care low. However, they provide more coverage, which requires higher premiums. This may be better if you’re prone to going to the doctors because you know what your up-front premium will be, regardless of the cost of the doctor visit.
High-deductible health plans: High-deductible health plans (HDHPs) have low premiums, but the deductible is typically thousands of dollars. This may be better if you rarely have health expenses.
Catastrophic health plans: Catastrophic health plans are the cheapest in terms of premiums, but provide virtually no coverage for care unless you incur thousands of dollars in medical costs. The deductibles are even higher than that of a typical high-deductible plan.
Health maintenance organizations (HMOs): With an HMO network, you are restricted to receiving care from a specific network of participating doctors ("in-network"). You will need a referral from a primary care physician to see a specialist. Most HMOs define "specialist" to include anyone other than your primary care physician, like dermatologists, psychologists, and chiropractors.
Preferred provider organizations (PPOs): With PPOs, you don't have to get a referral to see a specialist. And while care will be cheaper if you pick a doctor who is in-network, you'll have better coverage for out-of-network care than with an HMO.
Exclusive provider organizations (EPOs): EPOs don't require that you get a referral to see a specialist, but will pay nothing for out-of-network care except in emergencies.
Point-of-service plan: A point-of-service plan pays for in-network and out-of-network care, although you'll pay more if you see a doctor out-of-network. A primary care doctor will need to make referrals to specialists when needed.
Want to learn more? Here are some helpful Quizlets:
Sources include: Fool, Policy Genius
Photo credit: Insurance Centers