Personal Insurance

Understanding insurance can be tricky, so it's crucial to have a working understanding of your coverage and what you need. This can make a major difference in the price you will pay, as allow you to understand how your choice of insurance will protect your lifestyle, assets, and personal property.

Insurance Is About Financial Security and Protecting Your Independence

It may seem like you need to study volumes of books and information to understand insurance, but at its core, the principle of insurance is very basic:

When you have something to lose, and you know that you could not afford to pay for a loss yourself, insurance provides a way for you to protect your investment, lifestyle, and assets by paying a small amount of money every month in exchange for the assurance that if something goes wrong, the insurance company will have your back in the form of financial compensation.

What Is Personal Insurance?

Personal insurance lines are types of insurance you buy to protect you from risks that could create financial losses that you would not be able to afford to cover on your own. Personal insurance relates to risks that you as an individual may face, due to accidents, illnesses, death, or damage to property you own.

How Does Insurance Work?

When you buy insurance, you normally will pay an agreed-upon amount — the premium — to the insurance company in exchange for protection from listed risks. In exchange for the premium you pay, they agree to compensate you for losses, should one occur. Personal Insurance is based on the principle that spreading risk of an economic loss (such as a fire or theft, for example) among many people makes the risk manageable for all.

Many people pay into the protection from the loss via their insurance policy premium. The premium is collected by the insurance company and when it comes time to pay a claim, they take money from that “collection” to compensate the policy holder.

Does Everyone Have to Buy Insurance?

Everyone does not have to buy insurance, but it is a good idea to buy insurance when you have a lot of financial risk or investment on the line.

Depending on the type of insurance, some insurance is optional while other insurance like car insurance, may have minimum requirements set out by law.

Why Does the Bank Require Insurance?

Although some insurance may not be a legal requirement, it may be a requirement of a lender or bank or mortgage company.

Depending on the type of insurance, you may “have” to buy insurance in order to get a loan. Insurance is often a requirement of obtaining financing for large purchases like homes because the lenders want to make sure that you are covered against risks that may cause the value of the investment to disappear before you have paid it off.

Getting a Better Price on Insurance

The premium is the amount of money you will be charged by an insurance company (usually on a monthly basis) in exchange for the financial protection provided to you by your insurance policy.

To lower your premium, the best thing you can do when choosing insurance is to shop around with different companies, or use an insurance broker who can do the shopping for you and see which insurance company can give you the best rate for your insurance. Based on the claims experience and underwriting of the insurance company, the rates will vary.

Some insurance companies may have discounts geared at attracting their profile of client. How well your profile fits the insurer's profile will determine how good your rate will be.

For example, if an insurer is interested in attracting younger clients, they may create programs that offer discounts for recent graduates, or young families. In comparison, other insurers may create programs that give bigger discounts to seniors, or members of a professional order or the military. There is no way to know without shopping around and comparing options.

When Should You Buy Insurance?

You should buy insurance for circumstances where a financial loss is beyond what you could afford to pay or recover from easily.

Understanding 5 Basic Types of Personal Insurance

When most people think about personal insurance, they are generally thinking about one of these 5 major categories, among others:

1. Residential insurance, such as home insurance, condo or coop insurance, renter insurance.
2. Car insurance, and other vehicle insurance such as snowmobiles, motorcycles, and mopeds.
3. Boat insurance, which can be covered under home insurance in some circumstances, and stand alone boat insurance for vessels of a certain speed or length that are not covered under home insurance.

1. Health Insurance, Life Insurance, and Disability Insurance
2. Liability Insurance

Although all these categories cover what you might consider your personal insurance, you can not usually get them all from one person. Insurance requires licensing and is divided into categories. This means that before someone is authorized to sell you insurance, or provide you with insurance advice on your insurance needs, they must be licensed by the state to represent the type of insurance you are buying.

For example, your home insurance broker or agent may tell you that they can not personally offer you life insurance or disability, but may refer you to a colleague with the proper licensing, such as a Financial Planner or Advisor.

What Do the Different Types of Insurance Cover?

Home insurance covers the buildings on your property, including your main residence, and any additional structures on premises. It also covers your contents — movable property usually kept on your residence premises — as well as additional living expenses and liability.

Renters Insurance covers your personal property regularly kept in your rental unit as well as additional living expenses, and personal liability on premises and worldwide.

Condo or Co-op Insurance is similar to renters insurance, however in addition to your personal property, additional living expenses and personal liability worldwide, it also covers some things that are very specific to the ownership of a unit, or shares in a building.

Car Insurance, Boat Insurance, and Other Vehicle Insurance

Car, Boat and other vehicle insurance offer various options in coverage. The most basic being liability insurance, covering your liability for your ownership or operation of the vehicle or vessel. Then there are optional coverages you may purchase, such as coverage for physical damage to the vehicle or vessel itself, and its components. Options for medical payments to others, and death benefits due to death or injury resulting from the operation of the vehicle may also be included as optional or mandatory depending on state financial responsibility laws or minimum car insurance requirements.

Health, Life and Disability Insurance

Health Insurance, Life Insurance, Disability Insurance and Coverages like Long Term Care Insurance all provide coverage for financial compensation or reimbursement for health, illness or death related events.

Health insurance includes many different types of policies, from basic health benefits, to supplemental health policies like Dental Insurance or Long Term Care Insurance. There is a vast range of insurance coverage available to suit your needs depending on what kind of financial protection you need, you can read more about finding affordable health insurance tips here.

Understanding the Small Print in Insurance Policies

Your insurance declaration page lists the basic limits of coverage that you have purchased in the policy, however it is in the policy wording that you uncover how your insurance works in a claim. Most people do not read the small print in their insurance policy which is why people are often confused and frustrated in the claims process.

7 Definitions to Understand Insurance Policy Terms and Conditions

The following are some key areas that are in the small print, with explanations to help you understand why they may be important to you.

1. The deductible is the amount of money you will pay in a claim. He higher your deductible, the more risk you take on personally, and therefore the less you will pay in premium. Some people use the deducible as a strategy to save money.
2. Exclusions are things that are not covered as part of your insurance policy. It is really important to ask about the exclusions on any policy you purchase so that the small print doesn’t surprise you in a claim.
3. Type of Policy: Insurance companies often offer various levels of coverage. If you get a really low price on an insurance quote, you might want to ask what type of policy you have or what the limits of coverage are and compare these details to those in other quotes you have.
4. Special Limits: Insurance policies all contain certain sections that list limits of amounts payable. This becomes very important when you are making a claim. This applies to all kind of policies from health insurance to car insurance. Ask about what coverages re limited and what the limits are. You can often ask for a different type of policy which will offer you higher limits if the limits in the policy concern you.
5. Waiting Periods and Special Clauses: Some types of insurance have waiting periods before the coverage takes effect. For example, in dental insurance you may have a waiting period, and in life insurance you may be subject to a suicide clause. These are just two small examples, but you always want to ask when coverage begins and if there are any waiting periods or special clauses that could affect your coverage when you buy a new policy.
6. Endorsements are add-ons to a policy to get more coverage or in some cases endorsements may amend a policy to reduce or limit coverage. Learn more about endorsements here.
7. Basis of Claims Settlement represents the terms under which the claim will be paid. In home insurance, for example, you could have a replacement cost, or actual cash value policy. The basis of claims settlement makes a significant difference on how much you get paid. It is important to always ask how claims are paid and what the claims process will be.

How Do Insurance Companies Pay Claims?

The money collected from premiums by an insurance company allow the insurance company to build assets from all premiums collected so that when a policy holder or individuals has a loss, there is enough money to cover the claim.

Do You Get Your Money Back If You Don’t Make an Insurance Claim?

When you pay into insurance for many years, you may start to wonder why you’ve been paying so much when you have never had a claim. Some people may even feel like they should get their money back when they haven’t had a claim, however that’s not how insurance works. Insurance companies collect your money and put it aside to pay out when there is a claim.

Example of Premium vs. Claims Payments

Imagine you pay $500 a year to insure your $200,000 home. 10 years of paying insurance and you’ve made no claims. That’s $500 times 10 years, and you’ve paid $5,000 to the insurance company. You start to wonder why you are paying so much for nothing. In the 11th year, you have a major claim. The insurance company pays you $50,000.

If the insurance company gave everyone back their money when there was no claim, they would never build up enough assets to pay out on claims. Even the $5,000 you paid them over 10 years doesn’t cover your $50,000 loss. One loss, and you become unprofitable to the insurance company, but thankfully because insurance is based on spreading the risk among many people, it is the accumulated money of all people paying insurance premiums together that allows the insurance company to build assets and cover claims when they happen.

What Makes Insurance Company Rates Go Up or Down?

Insurance is a business, and although it would be nice for insurance companies to just leave rates at the same level all the time, the reality is that as a business they have a responsibility to make enough money to make sure they have the money to cover all the potential claims their policy holders may make.

When an insurance company tallies up how much they paid in claims at the end of the year, vs. how much they collected in premiums, they must revise their rates to remain profitable. Underwriting changes and rate increases or sometimes even decreases are a result of the actual results the insurance company had in the previous years.

Agents, Captive Agents, and Insurance Brokers

The front line individuals you deal with when you purchase your insurance are the agents and brokers who represent the insurance company. They will represent you to the insurance company as well as explain the coverages and products they have available.

Depending on what insurance company you purchase insurance from, you may be dealing with a captive agent or an insurance representative that is able to represent several insurance companies.

What Is the Difference Between a Captive Agent in Insurance and a Broker or Independent or Non-Captive Agent?

The captive agent is an insurance representative that only represents one insurance company. They a familiar with that insurance company’s products or offerings, but can not speak towards other insurance company policies, pricing or product offerings.

An Insurance Broker, Independent or non-captive agent may deal with several insurance companies on your behalf. They will have access to more than one insurance company and must be familiar with the range of products offered from the various companies they represent.

How to Decide What Insurance Coverage You Need

There are a few key questions you can ask yourself that might help you decide what kind of insurance coverage you need.

• How much risk or financial loss can you assume on your own?
• Do you have the money to cover your costs or debts if you have an accident or if your home or car is destroyed?
• Do you have the savings to cover you if you can’t work due to an accident or illness?
• Can you afford higher deductibles in order to reduce your insurance costs?
• Do you have special needs or considerations in your personal life that you might want to ensure you have financial protection for?
• What are you most worried about? Insurance policies can be tailored to your needs and identify what you are most worried about protecting, which may help you narrow down the kind of insurance you need and reduce your costs.

Choosing Insurance Based on Your Current Lifestyle and Life-Stage

The insurance you need will vary depending on where you are at in your life, what kind of assets you have, and what your long term goals and responsibilities are. That’s why it is important to take the time to discuss what you want out of insurance with your representative. Finding the right insurance products form a good part of a strong financial strategy that will protect you and help you remain financially independent even when you have a financial loss.