The world of insurance is often quite intimidating. There are many different types of insurance, a whole lot of legalese as to what is covered, and it’s often difficult to determine which policy is right for you. All that goes into making claims against those policies can also feel overwhelming.
Most people across the world are acutely familiar with car insurance. Americans deal with health insurance, which their employer might provide. Many Americans elect to purchase health insurance themselves if their employer doesn’t offer it. Some people probably have life insurance policies, as well.
We deal with insurance daily, and if you’ve ever had a car accident or a medical problem, you’ve probably dealt with the claims process also. Insurance as a financial tool, though, is much more nuanced. Let’s take a look at the details of what insurance is and the standard policies that can benefit you financially.
What Is Insurance?
Succinctly, insurance is a “hedge against the risk of financial losses.” If you have an asset or a potentially significant liability, then purchasing insurance is a way to offset the risk of that liability. Therefore, insurance is a risk mitigation strategy.
Consumers are acutely familiar with car insurance. If you get in an accident and your car gets totaled or you have health issues that require you to stay in the hospital for an extended period, then your auto policy will pay for some of your loss. The policy documents and coverage you select will determine how much financial compensation you receive. One person might obtain the value of their car, while another person may receive lost wages because they purchased that extra on their policy.
The process of seeking reimbursement for these damages is called the claims process. During this time, the company will review the documents, and evidence of your loss, to determine the amount for which the company is responsible.
How Do Insurance Companies Work?
Insurance works on probabilities. As a simplified example, suppose the chance of you getting in an accident is 1% this year. Further, assume that the average accident will result in a payout of $10,000 from the insurance company. The organization might charge you a premium of $150 for the year for this insurance. If there’s a 1% chance of an accident happening, which will cost them $10,000, the company expects to pay approximately $100 each year (1% * $10,000 = $100).
Of course, the company intends to make a profit. There’s the overhead of processing claims and the risk that maybe the accident you are in will cost $20,000 instead of $10,000. As such, they add a buffer that covers all that cost. In this simplified example, that buffer is $50.
If you never have an accident, then the insurance company keeps your premium money each year. If you have a significant collision with a substantial claim, the insurance organization might have a loss. With enough people, though, overall, the company still makes money.
What Are The Most Common Policies And Claims?
There are eight standard insurance policies. You may already have some of these, but if you don’t, you may wish to consider adding them!
Personal Health And Wellness Coverage
This type of insurance pays a fixed amount upon death. Typically, people use it to hedge against lost income for the family when the insured person passes away and isn’t working. However, this type of insurance is not limited to this scenario. Companies frequently use life insurance policies to protect against the expected revenue drop upon the sudden death of talented organizational people (like CEOs, TV personalities, etc.).
People have health insurance to cover the cost of prescription medications, procedures, and other expenses related to health. Claims for this plan involve submitting paperwork showing the medical work and loss incurred.
Protecting you from a financial hit from those pearly whites is the job of dental coverage. People with this insurance can have all or some of their dental work covered. If you need a root canal, dental insurance will ensure you also don’t have the pain of a big bill at the end of it.
If you cannot work due to a disability, then this type of plan will replace your lost wages. “Worker’s comp” is an example of disability coverage. If you sustain an injury on the job, then this type of plan will pay for medical costs, lost wages, and so on, while you recover from your injury. Governments often have long-term disability benefits for those unable to re-join the workforce.
Car, Motorcycle, or BoatThis insurance product is the one with which most people will be familiar. Most jurisdictions require some form of auto coverage, which will payout in the event of a loss involving car troubles. This type of insurance covers potential lawsuits as well.
Homeowners or Renters
Most banks mortgagees to have homeowners insurance, which will cover the cost of the structure and usually the goods inside in the event of catastrophic loss. For example, if there’s a fire in your house and it burns down, claims against these plans will get you some of the money you need to rebuild.
Similarly, apartment owners ask tenants to have renters coverage. These plans tend to be cheaper since they cover what’s inside the walls and not the complex itself.
Miscellaneous Policies And Claims
You can protect yourself from significant pet care bills with these plans. Instead of forking over $5,000 to fix Fido, for example, you can pay a monthly premium and have that covered by submitting a claim against your provider.
Umbrella plans are a type of liability insurance that covers payments above the maximum limits on your home or auto policies. For example, suppose you had $1 million in umbrella insurance and a $100,000 maximum liability in your auto plan. If you got into an accident with a $500,000 judgment, your auto plan would pay the first $100,000, and the umbrella insurance would cover the remaining $400k. For high net worth people, making claims against this insurance can protect their assets.
Umbrella plans are a type of liability insurance that covers payments above the maximum limits on your home or auto policies. For example, suppose you had $1 million in umbrella insurance and a $100,000 maximum liability in your auto plan. If you got into an accident with a $500,000 judgment, your auto plan would pay the first $100,000, and the umbrella insurance would cover the remaining $400k. For high net worth people, by making claims against this insurance, you can protect your assets.
Have Plans And Make Claims If Necessary
The bottom line is that most people need some form of coverage. Whether it’s an auto, home, or life policy, knowing that significant expenses or a significant accident won’t result in a financial catastrophe provides peace of mind!