Insurance

What is Insurance?

Insurance is a system where individuals and companies that are concerned about potential hazards pay premiums to an insurance company which reimburses them in the event of loss. Insurance is protection.

How role does “risk” play with insurance?

Insurance transfers risk from individuals to a larger group, which is better able to pay for losses.

Actuary: mathematician employed by an insurance company to calculate premiums using risk factors obtained from experience tables. These tables are based on both the company’s history of insurance claims and other industry and general statistical data.

Policy: an insurance contract

Policyholder (insured): person purchasing the insurance

Premium: dollar amount paid for the insurance

Coverage: the promise of payment for specific items and circumstances that are protected by the insurance policy

Exclusions(rider): items or conditions for which the company will not provide coverage

Limits: refer to a ceiling the insurance company is willing to pay for certain

Depreciation: the decrease in the value of property as it becomes older.

Types of insurance:

  • Health (medical & dental)
  • Life
  • Auto
  • Homeowner’s
  • Renter’s

Just remember:

  • Insurance laws vary from state to state
  • Shop around for the best insurance and the best rates

Health Insurance

Claims: formal requests from policyholders for payment of losses.

Be truthful on your health insurance application form. If you lie about a previous illness or family history (heart disease, cancer) this is considered concealment (unlawful withholding of information). As a result, the insurance company can refuse payment on a claim and/or cancel your policy.

Premiums vary according to the amount of the deductible, the amount of coverage you have, your gender, and other factors (gender, occupation).

Group insurance policies are offered to members of a group working for the same company or belonging to the same association. Group policies are usually less expensive and offer more coverage.

Why?

  • The insurance company collects premiums from the entire group and the risk is spread among many individuals.

Deductible is the amount of money the policyholder must contribute before the insurance company makes payment on the costs. Usually, the higher the deductible, the lower the monthly premium.

  • Some people take a higher deductible in order to avoid paying high monthly premiums.

Prepaid Health Plans: members pay a monthly fee for which they receive health and medical services.

  • Health Maintenance Organizations (HMOs)
  • Preferred Provider Organizations (PPOs)
  • Indemnity Plan

Auto insurance rates are based on several factors including risk.

Compulsory Insurance

  1. Bodily Injury to Others: if you hurt other people in an auto accident. You are only protected on public roads in Massachusetts.
  2. Personal Injury Protection (PIP): Protects you and people in your car. Will pay for wages until the amount of PIP is exhausted ($8,000 on policy)
  3. Bodily Injury Caused by an Uninsured Auto: If you or people in your car got hurt because other car operator didn’t have insurance.
  4. Damage to Someone Else’s Property: If your car causes property damage to another car, house, etc.

Optional Insurance

  1. Optional Bodily Injury to Others: Same as #1 except it applies if it occurs out of state.
  2. Medical Payments: payments made to you or people in your car. This coverage also covers you if you’re a passenger in someone else’s car.
  3. Collision: covers damage to your own car. Deductible applies if you’re at fault.
  4. Limited Collision: (few purchase this option) If you’re more than 50% at fault for an accident, you can’t collect anything.
  5. Comprehensive: Fire, theft, glass breakage, vandalism, if a tree falls on your car in a hurricane, if your car gets washed away in a flood.
  6. Substitute Transportation: car rental.
  7. Towing and Labor (if you don’t have AAA. Only pays for $25 per claim.)
  8. Bodily Injury Caused by an Underinsured Auto: Protects you. If someone hits you, and you get seriously injured, you can collect up to the maximum of their Bodily Injury (#1), then you can go to your insurance company and they’ll pay you up to your amount in #12.

Major points:

  • Surcharges: each point in Massachusetts is 7% of your premium. Accidents and speeding tickets will increase your automobile insurance. Points are added on immediately, but will take years to come back down.
  • If you do not own your car (have a bank car loan), you’re required to have Comprehensive in addition to the Compulsory Insurance.
  • Massachusetts is a no-fault state. (Personal Injury Protection). You are protected as long as it is not intentional. System of quick payments and has a goal of lowering premiums by avoiding litigation.
  • Step system (safe driver insurance plan)
  • Discounts: Safe Driver Discounts, group discounts, car safety discounts (air bags/automatic seatbelts, annual mileage, anti-theft, multi-car)
  • Anti-theft discounts: $15 VIN window etchings will save you 15% off your comprehensive insurance; a $1,000 security system will save you 20% off your comprehensive insurance.

Risk factors that determine cost of auto premiums:

  • Gender
  • Age
  • Marital status
  • Personal driving record
  • Claims history
  • Rating territory (location)
  • School grades (if presently in school)
  • Year, model, & make of car
  • Use of car
  • Types of protection
  • Amount of deductibles & limits

Liability: means that a person may be held legally responsible for any damage that occurs as a result of an accident in which that person is at fault. Two types & separate limit per category:

Property damage liability coverage: insurance company will pay the cost of the damage to the other person’s car or property up to the amount of coverage you have.

Bodily injury liability coverage: insurance company will pay the claims of injury or death up to the amount of coverage you have.

How much car insurance should you have?

If you have a lot of insurance $100,000 BI $300,000 PD – someone might be more apt to sue you. It also doesn’t mean to always carry the minimum.

Collision coverage: pays for repairs of damages to your car only. Pays for repairs to your car when you collide with any object or are hit by an uninsured motorist. It is the most expensive coverage because the risks of damaging a car through an accident are great. (Required of a bank if they hold the title)

As your car gets older and the value decreases, you might consider dropping the collision insurance altogether because collision insurance only pays for the estimated value of the car at the time of loss. You don’t want the cost of the collision insurance to exceed the amount you will be paid if the automobile is totaled.

Comprehensive Physical Damage coverage

Protects you against loss when the car is damaged in any way through no fault of your own. Damaged by fire, storm, flood, vandalism, or other causes listed in the policy. A deductible applies to this coverage.

Medical Payments coverage

Pays medical expenses for the driver, all members of the driver’s family, and any guests riding in the car at the time of the accident.

Uninsured Motorists coverage

Protects you against hit-and-run drivers and motorists who have no insurance. This protection covers bodily injury. Collision insurance must be carried to cover damage to the car damaged by an uninsured motorist.

No-fault insurance means that your insurance company pays for bodily injuries to you and your passengers no matter who caused the accident.

Homeowner’s Insurance

Kinds of Protection

Property Protection: pays for losses to the home and other property.

Liability Protection: covers bodily injury to others, damages to property of others, and medical payments to a person injured on your property.

The coverage in most policies is for the house itself and the contents. There is a distinction between personal property and real property.

  • Personal property includes furniture, clothing, appliances, etc.
  • Real property includes physical property such as home, garage, fences, etc.

Actual Cash Value Coverage vs. Replacement Cost Coverage

Example:

You bought a TV 5 years ago for $500. If you house burns and you lose the TV, what will the insurance company pay you?

Actual Cash Value

The insurance company assesses the useful life of the TV.

  • 10 years
  • TV depreciates $50/year
  • The insurance company will pay you the actual cash value today, $250.

Replacement Cost

The insurance company will pay the insured the amount needed to replace the TV today, $500.

Renter’s Insurance is an insurance policy that insures the personal property of individuals who rent.

Life Insurance

Beneficiary: Person named in the policy to receive the benefit(s)

Term Life Insurance: insures you for a specified term (or number of years). There are several variations of term life insurance.

Cash-Value Life Insurance: In addition to protection in the case of death, the policy is building cash value annually. Cash value is the amount of money to be paid to the policyholder if the policy is terminated. There are several variations of cash-value life insurance.

Universal Life Insurance: is a combination of term and cash-value insurance.

Basic Insurance Guidelines

  • Assess your need for life insurance at various stages in your life.
  • Decide on the amount needed.
  • Life insurance is for the financial protection of the dependents you leave behind.

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