Key Takeaways:
- Insurance coverage is a way to protect assets from loss.
- Insurance policies can be long and complicated, but it’s critical to understand in detail.
- Typical insurance policies to have in your portfolio include life, disability, health, auto, and house insurances.
- The amount of coverage is a personal choice and depends on the amount needed to feel secure.
Defining Insurance
In simple terms, insurance is protection from financial loss. Insurance policies are contracts where the insurer (a third party) promises to protect the insured (you) from losses for specific reasons and contingencies. For example, if your car insurance policy covers you from accidents and you get into a covered accident, you will be protected to an extent.
Insurance comes into play in financial planning because it’s a method to protect valuable assets. While the variety of assets differ from person to person, we all have assets, including ourselves. Insurance helps us recover financially from unexpected situations.
Key Terms and Concepts
Insurance policies can be complicated and filled with technical terms. It’s important to speak with the insurance provider to understand, in detail, the terms and conditions of the policy. There are a couple of common terms and concepts that one should understand.
- Insured is the individual(s) covered by the policy.
- Premium is the fee for the coverage. In other words, the premium is the amount paid to the insurer in return for protecting you from the defined risks in the contract. This fee can be monthly, semi-annually, or annually.
- The deductible is the amount you need to pay before the insurance policy kicks in to cover losses. For example, if your deductible is $1,000 and you had an accident costing $1,500, you pay the first $1,000 and the insurance company covers the remaining $500.
- If applicable, the beneficiary is the person(s) designated to receive the insurance payout.
Overview of Main Types
Insurance policies exist for nearly everything. At a high-level, the coverages that a typical person should consider are coverages to ensure their family is not significantly impacted due to a loss. This objective boils down to two actions: 1) protecting earnings, and 2) safeguarding essential possessions. The main types of insurance are listed below.
- Health insurance. Health insurance, including dental and vision, is arguable the most important type of insurance because it impacts life today. Health insurance pays for the costs of medical care. Many get health insurance through employers, but independent insurance is available on the market.
- Life insurance. If the unthinkable happens and you passed away, life insurance pays your beneficiary (or beneficiaries). Life insurance intends to provide financial assurance to individuals who rely on you and your income.
- Disability insurance. Disability insurance replaces your income if you become unable to work due to a covered event. This insurance covers a percentage of your current income after an agreed-upon period.
- Homeowner’s or renter’s insurance. This type of insurance has two components: 1) liability coverage and 2) property coverage. Liability coverage protects you from damages that happen to others on your property. Property coverage pays if there are damages to your property and possessions within it.
- Auto insurance. Auto insurance is legally required to drive. Auto insurance also has a couple of components, including liability insurance, personal injury protection, and several others. It’s crucial to meet the state-required minimum level of coverage.
- Umbrella insurance. Finally, if the above coverages mentioned do not satisfy your need, an umbrella policy provides incremental liability protection above other insurance policies. This insurance is effectively a “catch-all” bucket.
Conclusion
Insurance plays a role in financial planning because it serves as peace of mind. If an incident happens, insurance coverage helps you lessen the impact. The goal with purchasing insurance is to get sufficient coverage for your risk tolerance and individual circumstances (e.g., the specific environment you live in) so that you can feel confident that you are protected in unlikely scenarios.
There’s a reason why one of the first calls anyone makes after an accident is to the insurance providers. Insurance is important!
Disclaimer: The contents of this website is an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.