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Insurance 101

by: sahil | last updated: August 25, 2009
Category: Personal Finance | Tags: insurance, health insurance, car insurance.

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Insurance 101

Insurance has become an integral part of millions of people around the world and there are numerous types of insurances available in the market. Choosing the right type of insurance and making sure it works for you when needed may not be as easy as it sounds. The intricate and complicated clauses and conditions make it difficult to understand and implement insurances in your favor. The money grubbing attitude of many insurance companies has added fuel to the flame. A comprehensive and holistic understanding of how insurance companies work may help in cutting costs and avoiding financial hurdles.

Types Of Insurances. The various types of insurances include auto insurance, life insurance, medical insurance, pet insurance, property insurance, title insurance and home insurance. The policies of insurance companies vary according to the type of insurance and across various countries. The common factor among all insurance companies is that they play on the chance that not all people will suffer loss or damage in the future. However many capitalistic democracies are facing serious issues because of greed on the part of insurance companies.

Auto Insurance. Auto insurance indemnifies people who have suffered losses to the automobile due to accidents or other reasons. Auto insurance provides property, liability and medical coverage. There are six types of coverage under the auto insurance but not all of them are mandatory. The premiums vary according to the gender, age, marital status and vehicle classification.

Gender. Insurance companies may charge more premiums for male customers compared to females. This is because men use automobiles more frequently compared to women and suffer from more accidents.

Age. Teenage drivers are likely to shell out more premiums in many countries because they do not have a previous driving record. However, in some countries, insurance providers mitigate the amount of premiums if the youngster enrolls for advanced driving classes.

Marital Status. Unmarried drivers are likely to be charged more in some countries compared to married ones. This is perhaps due to the fact that married people are more responsible compared to single or unmarried drivers.

OnBoard Diagnostic Port. In 2008 the progressive corporation launched the MyRate program in which a telematic device is placed in the car. This device collects data about the distances that the car has covered, the speed of the vehicle and the time of the day when it is used. Discounts are provided to people who are more responsible and have lesser risk of meeting with an accident. However, this program is only available in eight states in the United States.

Deductibles Or Excess. Deductibles are also financial tools that can help in reducing your premiums. Deductibles are the amount paid up-front by the insured if the vehicle suffers damage, before the insurance company starts paying for the losses. The basic fact is that the higher the deductible, the lower would be your premium.

Liability. Liability is nothing but additional coverage where the driver is at fault. For example if the driver hits an electricity pole then the damage to the electricity pole as well as to the insured will be covered by the insurance company. Bodily injury to third party can also be covered under liability in some jurisdictions in the United States.

Life Insurance. Life insurance covers the risk of financial loss due to the death of the policy holder. However, there may be other parties to this contract. A person can be insured by his wife where the policy holder is the wife however the insured person is the husband. The various types of insurances include whole life insurance, permanent insurance and term insurance.

Term Insurance. Term insurance is short term in nature and provides protection for usually one year. This is the cheapest form of insurance that is available albeit the catch is that you do not get anything if the term expires. This type of insurance can be renewed periodically and requires lesser amount of premiums to be paid.

Permanent Life Insurance. This type of insurance stays in force until the policy matures or till the event of the death of the insured person. These are more binding and expensive compared to term insurances. However, these are more popular in many developing countries compared to term insurances. The basic types of permanent life insurance are whole life coverage, universal life coverage, limited pay and endowment.

Whole Life Coverage. Whole life coverage is good for people who want to pay a fixed amount of known premiums. Some advantages of whole life insurance include known and fixed premiums and guaranteed cash value. Another advantage is that the mortality and expenses will not reduce the cash value of the policy.

Universal Life Coverage. Universal life coverage is more flexible as far as premiums are concerned. This is because premiums are based on interest rates (interest sensitive policies). A universal life insurance includes a cash account. Premiums paid are directed towards this account and interest (pre-determined by the company) is also credited to the account. Mortality and administrative charges are reduced from the account. There are two options for the insured in this type of policy. The first one pays the face amount on death and the second pays the face amount plus the cash value. The disadvantage of the latter is that the cost of insurance increases over time and so do premiums.

Limited Pay. Limited pay insurances are those that provide the facility of paying all the premiums over a specified period of time and there is no requirement for paying any more after the period expires. The policy still remains in force. Usually there is ten year or twenty year limited pay insurances that generally mature at the age of sixty five.

Endowment Insurance. Basically endowment insurance pays out, whether the insured lives or dies, at a certain age or after a certain period of time. These are more expensive compared to universal and whole life insurances.

Riders. Riders are additional optional coverage available to the insured. The most common rider is accidental death or double indemnity. This type of rider pays twice the amount in case of the accidental death of the insured. There are many riders such as joint life, group life insurance, survivorship life insurance, and single premium whole life insurance. All these are going to cost more and should be avoided if possible.

Medical Insurance. Medical insurance pays for medical expenses. The policies and procedures vary according to country and jurisdiction. Points to be taken into consideration for medical insurance are premiums, co- insurance, exclusions, co-payments, deductibles, coverage limits and out-of-pocket maximums.

Premiums. The amount paid by the insured person every month for medical coverage is the premium.

Deductibles. Deductibles are a fixed the amount paid by the insured person before any financial help from the insurance company. Expenditure up-to a fixed amount for initial doctor’s visits usually comprise of deductibles.

Co-insurance. Co-insurance is the amount that the person needs to pay on top of the deductibles and is a percentage of the total costs incurred. This means that the insured needs to pay a percentage of the cost before the insurance company pays the rest of it.

Coverage Limits. Some insurance companies only pay up to a certain dollar amount and this is the coverage limit. Some insurance companies have schemes such as lifetime coverage maximums or annual coverage maximums. In such cases the health plan will cease paying once the plan has reached its benefit maximum. Individual and family lifetime maximums differ in their nature and further probing is recommended if opting for lifetime coverage maximums.

Out Of Pocket Maximums. These are similar to coverage limits albeit they end the liability of the insured when he or she reaches the out-of-pocket maximum. After that the insurance company pays the rest of the charges. These can be limited to a specific category or may be applicable to all the coverage throughout the year.

Comprehensive and Scheduled Plans. Comprehensive plans are those in which the insurance company pays a percentage of the cost after the deductible is exhausted. These are expensive compared to scheduled plans that offer coverage for non-catastrophic events such as doctors visits or petty charges for small surgeries.

Waiting Period And Pre-existing Conditions. Some insurance companies have a clause about the waiting period. This means that the insured person cannot enjoy the benefits of the policy as soon as he or she enters into the contract. There is a stipulated period for which the insured has to wait before availing of any benefits. Pre-existing conditions are not covered by insurance companies and this is true of almost all the countries.

Comparisons. Some of the countries that are very efficient and provide excellent medical care include France, Britain, Australia and Canada. Others who are in the headlines for the wrong reasons are underdeveloped countries and United States. The healthcare system is so inefficient in the United States that many September 11 rescue workers who are suffering from chronic illnesses due to rescue efforts are not able to provide themselves good care and are either dying slowly or suffering.

Home Insurance. Home insurance, also called hazard insurance or homeowners insurance covers losses to the home. These losses include loss of personal possessions, damage to the house and also cover liability. Home insurance is a multiple-line insurance which means that the premium covers both liability as well as property with an indivisible premium.

Types Of Home Insurance. There are seven types of home insurance policies available in the United States which includes HO1, HO2, HO3, HO4, HO6 and HO8. These are based on the type of house or property that is insured. For example HO1 is a basic type of policy whereas HO6 is only for condominium owners. The HO2 policy provides protection against 11 listed perils and the HO3 provides all risk coverage excluding floods and earthquakes. The HO8 policy is for old houses and HO4 is for renters.

Coverages. There are six basic types of coverages for each policy and are divided in to categories A, B, C, and D. These are for dwellings, other structures (garage/ outhouse), personal property (cash, gold), and loss of use or additional expenses respectively. Additional coverage is also available for damage to trees, repairs, debris removal, fire department charges, credit card theft, removal of property and some building additions.

Exclusions. In open perils policy some exclusions include power failure, neglect, war, nuclear disasters, earth movement, water damage, and intentional loss. The insurance will not cover damages due to these reasons.

Pet Insurance. Pet insurance is one which covers financial losses if the pet undergoes treatments due to accidents. However, this type of insurance is on the decline since many pet insurance companies have suffered losses due to a plethora of claims in the recent years. Pet insurances work on the principles of property insurance and have a deductible, co-insurance and policy limits just as in property insurance. Pet insurance is only recommended for people who have expensive and delicate pets or pedigree animals that need special care.

Title Insurance. Title insurance is one which covers the authenticity of the ownership or title of the property owner. Title insurance can come in handy if and when someone challenges the right of ownership to the property. This comes under home insurance or property insurance. This type of insurance is recommended for people with extensive estates or who own bigger houses.