Types Of Insurance

An introduction to the most common types of insurance, including a step-by-step approach to buying insurance and an explanation of the different types of policies.

Insurance. We hate it. People have even compared it to the protection racket-you give the company your money and it (hopefully) takes care of you when you need it.

Basically, the purpose of all insurance is to protect yourself or your family against the financial impact of a tragedy. Insurance is not to help you budget moderate-sized expenses, but to protect you against the truly catastrophic.

There are two ways to buy insurance. One way is to go to an agent to whom you explain your situation and trust him/her to suggest the insurance that is right for you. The other is do it on your own. You research the various types of policies available, decide what you need, and then comparison shop among the various companies.

The advantage of going to an agent is that an honest and competent one can review your situation and make suggestions. The advantage of going on your own is that you usually pay less for the same amount of insurance

STEPS FOR BUYING INSURANCE

Use these three steps when buying insurance:

Step One: Do I need this type of insurance at all? Figure out what the type of insurance you are considering covers and decide whether you need it.

Step Two: How much of this type of insurance do I need? Policies vary in how much they cover. Some cover specific dollar amounts. Others cover percent of loss. Some have a deductible. Others exclude certain types of damage. Look at these differences among policies and decide which one is for you.

Step Three: Where will I buy it? If you are working on your own, the web has a host of services to help you comparison shop among companies. Type in "insurance" on most search engines and you will come up with a number of sites. If you are working with an agent, you may be working with a captive agent which means (s)he can only sell you policies form one company or an independent agent which represents several.

When selecting a company, consider also whether the company is both able and willing to pay on claims should you make one.. AM Best and other companies rate the financial solvency of insurance companies. The web comparison shopping services usually include and explain the ratings. You can also ask the company itself or your agent.

Consider also the company's record for trying to refuse to pay claims. Your state insurance commission may have a record of complaints.

When buying any insurance, you will most likely save money if you pay annually or semi-annually. Sometimes buying several types of insurance from the same company will save you money. Often taking steps to make claims more unlikely, such as installing deadbolt locks or taking a safe driving course will lower your premiums.

When shopping for insurance, also look into group policies offered by alumni associations, professional associations, or religious bodies. Usually you can forget about specialized insurance advertised on television with paid endorsers. They usually cover very little.

HEALTH INSURANCE

Don't go without this. Most people have it at work, but if you don't you will really save big by going for a group policy. When comparing policies, consider deductibles and what is or isn't covered. When given a choice, choose one that covers the huge, debilitating conditions over one that is good about routine immunization, but that balks at the larger, more expensive claims.

Health insurance comes in three types, though many policies mix and match traits of the three.

Fee for service, the most expensive, allows you to go to almost any provider and covers almost anything that is medically necessary. You don't have a primary care physician who has to approve visits to specialists.

Preferred provider options (PPO's) allow you to self-refer to any provider in the PPO's list and generally cover a wide variety of services recommenced by those providers. Some PPO's cover other providers, but with a larger co-payment.

Health maintenance organizations (HMO's) are the least costly, but the most restrictive. They assign you (or let you select) a primary care physician. That physician acts as a gatekeeper in that (s)he decides what is medically necessary and when you may see a specialist. Often the HMO itself has to permit certain treatment and can rule against your doctor if it thinks the treatment is too costly.

LIFE INSURANCE

For most people, the purpose of life insurance should be to replace the financial contribution made by a family member.

Life insurance can be pure insurance, which pays only on the death of the insured, or cash value insurance, which also has a savings vehicle. Most people who need life insurance are better off with pure insurance and saving for retirement through other vehicles.



Proceeds from life insurance cover three types of expenses: replacement of the policyholder's income or work, estate taxes, and burial costs. When you consider the amount of insurance to buy, consider the following:

1. Most of the life insurance should be on a family member whose salary is important to the family budget.

2. Consider a relatively small life insurance policy on a stay-at-home parent to cover child care and other expenses.

3. Don't buy life insurance on children. Instead, buy life insurance on other family members for the benefit of children.

4. Consider reducing the amount of life insurance you have as you build more financial assets.

5. Pass on credit life insurance and mortgage life insurance if you can. These plans are restrictive and expensive. Buy more general life insurance instead if you feel a need.

6. Pass on life insurance altogether if you are single and don't have anyone depending on you. At most, get a small policy to spare your family burial expenses.

You should buy about 12 times the amount of money you would need annually to replace what the family member is contributing. For example, if you would need $40,000 a year to replace the death of an employed member, you would need a $480,000 (rounded to $500,000) policy.

AUTO INSURANCE

In most states you are required to have auto insurance and you don't want to be without it.

Basically, you buy auto insurance for two purposes: to insure against liability you have to others and to insure against damage that others do to you or your car.

You need to have liability insurance. How much you need depends on how much you have in assets.

Whether you need insurance to protect your own car depends on your car and how detesting it would be to replace it.

If your car is expensive and if buying another one would wipe you out financially, consider buying comprehensive and collision. If you have an older car and wouldn't get much from the insurance company if it were totaled, don't bother. Instead, put the money you would have paid for comprehensive and collision toward saving for your next car.

HOMEOWNERS' INSURANCE

The purpose of homeowners' insurance is to protect you against damage to your home and property from natural disasters.

Insurance companies offer different ratings of insurance and assign these ratings with codes starting with the letters "HO". While these ratings are fairly standard, they do vary a little with companies, so check with the company to see what policies cover.

When comparing policies, consider differences among deductible, coverage of property other than the house (sheds, garages, etc.), and percent of loss covered. Consider also whether the policy covers resale cost or rebuilding cost. Rebuilding usually provides better coverage, but is more expensive.

Basic homeowner's insurance does not cover the contents, though you can often add it for an additional fee or buy it separately. When buying contents insurance, consider whether it covers replacement value or fair market value. Replacement value is a better buy because it pays to buy a new piece of furniture or appliance, not what your old one is worth.

Consider also buying liability insurance which covers you if someone sustains an injury or other loss on your property.

Renters and condominium owners need only contents and possibly liability insurance. Many companies have policies tailored to these purposes.

APPLIANCE PROTECTION

Don't buy any extended warranties or protection plans when you buy small or major appliances. These plans are pure profit to the appliance stores. That's why the salespeople, push them so hard, especially if they are on commission. They usually cover only periods when very little is likely to go wrong and have numerous exclusions.

Insurance is a complex subject. Do your own research or work with your agent. Hopefully this introduction will help you do that more effectively.

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