At one point in life the consumer will eventually have to learn to understand the concept behind the matter of a risk-return trade-off when evaluating insurance policies, “insurance is based on the concept of risk pooling, which means that individuals share the financial risks they face” (Kenown, p. 273) “An insurance policy is a contract with an insurance company that spells out what losses are covered, what the policy costs, and who receives payments if a loss occurs” (Kenown, p.272).
Insurance companies are responsible for determining the consumer’s premium or payment. Certain characteristics such as an individual’s age, health background and lifestyle can influence the cost of premiums. The four common types of personal insurances to consider are life, health, property, and liability. Each form of insurance has its own specifications.
Life insurance protects family members from the financial burdens associated with an individual death. This type of insurance allows financial resources to become available to the dependents of the deceased in order to pay off debts, provide for cost of living and educational expenses. It can also become a source of retirement income for family members. People who benefit from this type of insurance are those who have dependents, a terminal illness, an uninsurable condition or any other high-risk health condition. Life insurance is also a valuable tool for business and property owners because they can help reduce any incurring debts and taxes.
Term and cash value are two types of life insurance. Term insurance provides low cost coverage for a set number of years after the death of the insured which can be anywhere from one to thirty years. However, renewable term insurance can be continually renewed up to the specified age of the beneficiary. Cash Value is more expensive because it includes both a life insurance and a savings plan. The monthly premiums are divided and applied to the two categories and if the policy is terminated than the policyholder is entitled to the cash value. Whole, universal and variable are three types of cash value insurances and all three provide permanent protection and death benefits upon the death of the insured party.
Avoiding devastatingly large expenses from medical bills is the main reason people choose to purchase health insurance. Due to the increasing costs of health care it is safe to assume that this type of insurance is a detriment to any living person, however, age, health, and the amount of dependents the insured has are some common factors that can influence the type of policy the consumer chooses to invest in. Most health insurances also require the individual to pay a co-pay or deductable before they can receive benefits. Typically most basic health insurances provide for the hospital, surgical and physician expenses.
Hospital insurance covers accrued cost from in-patient stays such as, room fees, operating room fees, prescription drugs, and nursing expenses, for a designated period of time. Surgical insurance covers surgical costs and physician insurance covers the physician’s fees such as office visits, lab fees and x-rays. Another form of insurance that covers the medical costs beyond those covered by basic health insurance is called major medical expense insurance. This type of insurance is good for those with serious health issues. Other insurances types to consider are those that cover dental, eye care and accidents. There are also various plans to choose from such as HMO, PPO or IPA each has its own list of coverage, physician options and premiums.
Property and liability insurance protects the consumer “against the financial risks of loss of or damage to your home or automobile and the legal liabilities associated with injuries or property damage to others” (Kenown, p.320). Homeowners are usually required to obtain some form of insurance while paying off loans and most states require licensed drivers to have insurance in order to operate a vehicle. Apartment owners, landlords and small business owners are also required to obtain professional property and liability insurance in order to protect the company, employees, renters and customers.
Property insurance protects the individual’s physical property or possessions. It includes coverage of losses due to fire, theft, vandalism and natural disasters. Homeowner’s insurance covers a specific dollar amount and has approximately six different packaged policies that can provide both property and liability insurance. The six forms are basic, broad, special, contents, joint-owners, and modified coverage.
“Liability insurance protects you financially against lawsuits that may arise if someone gets injured on your property” (Tyson,, p.351). Automobile drivers must consider which coverage to purchase depending upon the amount of bodily injury liability they want made available in case of an accident. A minimum amount of $50,000 is recommended for property and damage liability insurance for automobiles. Some policies can extend to cover the cost of both medical and funeral expenses. Some factors that determine the cost of automobile insurance are the vehicle type, driving record, age, and insurance credit score.
The consumer must learn to plan for the future in order to maintain their personal financial wealth. The basic principle of protecting the individual against catastrophes is the main purpose behind any type of insurance. Consumers must ask themselves if they will be willing to pay for a policy in order to cover possible risks. It would be the consumer’s best interest to investigate the various forms of insurance, specified coverage and cost in order to determine which policy would be the most beneficial to their financial future.