Being insured means that you have agreed to make scheduled payments to a company that has agreed to reimburse you for an agreed-upon amount should an event take place that is covered, such as auto insurance for a car accident or homeowners insurance in the case of weather damage. This simple-sounding relationship is how you protect yourself from unexpected and possibly expensive damages and financial losses.

While the basic insurance relationship is simple to define, insurance products, how to buy them, and from whom to buy them are not. There is no federal regulatory agency for the insurance industry like the Consumer Financial Protection Bureau in the financial marketplace. When trying to navigate the insurance industry maze, you are on your own.



Basic Insurance Terms

When you are shopping for insurance coverage for your life, home, vehicle, or health, there are a couple of basic terms you need to know. The terms “premium,” “policy limit,” and “deductible” apply to all insurance products.

Premium

An insurance premium is the amount of money that an insurance company charges you for the policy that you buy. The insurance premium is the cost you pay for your insurance. Premiums are typically paid monthly, but can be on any schedule stipulated by the insurance company such as quarterly, semi-annually, annually, or in-full when a policy is purchased.

The amount of the premium for an insurance policy is determined using several factors related to the person or business buying the insurance. For example, a person in their 20’s will pay less for the same life insurance policy than a person in their 40’s will because, statistically, the younger person is expected to live longer. For vehicle insurance, a person that has been involved in several accidents will pay a higher premium for the same policy than a person of the same age with a clean driving record.

Insurance products are the ultimate customized commercial product. When you go shopping for insurance, your situation, health, finances, and history will be used to determine how much insurance you are qualified to buy and the premiums you will pay. The same policy for anyone else could be very different both in policy provisions and cost.

Policy Limit

When an event covered by an insurance policy happens, the purchaser of the policy submits a formal claim to the insurance company for a payment based on the terms of the policy. The insurance company reviews the claim for its validity and, once approved, pays the claim up to the maximum amount stipulated in the policy. This maximum is the policy limit. If damages cost more that the policy limit, the policyholder is responsible for paying the difference.

Deductible

A policy deductible is the amount the policyholder must pay out-of-pocket before the insurance company will start paying on claims. Most insurance policies have a deductible, but the amount varies. In general, the deductible affects the premium inversely: a higher deductible will lower the premium while a lower deductible comes with a higher premium.



Types of Insurance

There are many types of personal insurance, but there are five that are considered important for everyone to have:

  • Home or Property - Coverage that helps pay to repair or replace your home and its contents in case of damaging events such as fire or theft. Damage you do to another person’s property may also be covered, as well as injury suffered by someone on your property.

    Homeowners insurance is typically required by a mortgage lender until the mortgage is paid off.

  • Life - In exchange for your premiums, the insurance company agrees to pay a lump sum upon your death to a chosen person or party.

    There are two basic types of life insurance...term and whole life. Term insurance is the least expensive and simplest. You pay premiums until the coverage expires or you die. Whole life policies do not expire. You pay higher premiums than for term insurance because your entire life expectancy is included in the premium calculations. There are numerous ways to configure whole life policies that can include paying premiums for a specified period and accruing value that you can withdraw.

  • Disability - A disability policy pays a portion of income, typically up to 60 percent, when the policyholder is unable to work because of illness or injury.

  • Health - Insurance that pays medical bills incurred because of illness or injury. Coverage for dental, eyecare (vision) expenses, and prescriptions could also be included.

    A mix of health, dental, vision and prescription insurance are offered as a benefit to employees by some companies and the military services. The U.S. Affordable Care Act (Obamacare) offers an online enrollment portal for selecting and buying health insurance for qualifying consumers. The state managed Medicare health coverage is available to those who qualify based on income.

    After reaching retirement age (currently 65), you become eligible for Medicare. This federally managed health care coverage is also available to certain disabled people before retirement age.

  • Auto - Coverage that protects you from loss because your vehicle is damaged or stolen. Also fulfills your legal responsibility to others for injury or damage.

    You are normally required to carry insurance on a vehicle that you own and is operated on public roads and highways.

There is an additional type of insurance that is associated with mortgage loans:

  • Mortgage Insurance - Also known as private mortgage insurance (PMI), this coverage can be required by mortgage lenders to protect them against the home buyer defaulting on the loan. This insurance does not protect the homeowner. Instead, PMI protects the lender should the homeowner fail to make the loan payments.



How to Buy Insurance

When shopping for insurance, you can deal directly with an insurance company, with an insurance broker, or online with Obamacare. Dealing directly with the company limits your options to that company’s products. You do not have the ability to comparison shop for policy features, premiums, and deductibles. This is okay if you are dealing with a reputable firm that specializes in serving only one segment of the customer base such as:

  • AARP - Seniors aged 55 and over
  • USAA - Military members, veterans, and their families

An insurance broker is a professional who represents you in your search for the best coverage that fills your needs. Instead of dealing directly with insurance companies, you are working with one person who will research coverage, terms, conditions, and premiums, as well as recommend the policy that best fits your needs.

Your insurance broker is normally paid a commission by the insurance company. They receive a percentage of the premiums that you pay. If a broker charges a fee above your premiums, they may not be someone with whom you want to deal.

Finding the right insurance broker for you is a matter of finding someone who you trust. Ask for referrals and references. Check with friends and family for recommendations. Contact the Better Business Bureau in your area. Find out if a broker specializes in the type of coverage you want.

Spend the time you need to find the right agency. You could be dealing with an insurance broker for the rest of your life while buying insurance, changing coverage as your situation changes, and processing claims.



Can You Afford It?

When you buy insurance, you are typically committing to making monthly premium payments for the term of the policy. For life insurance, that could be until you die. For homeowners insurance, you will be making monthly premium payments as long as you live in the house. In other words, buying insurance could be a very long financial commitment. It is important that you buy only the insurance that you can afford so that there is no lapse in your coverage because of your inability to make premium payments.

Before signing on the dotted line for an insurance policy, play “What If?” with the premiums in Income Companion.

  1. Go to the Plan Bills page and add a bill for the insurance premiums.
  2. Go to the Look Ahead page, set the Months to “12” and look at the “New cushion balance” row to see the effect of the premium payments on your cash flow. Right-click on the row to see the “New Cushion Balance (Bottom Line)” chart.
  3. Optionally, if the policy is for homeowners insurance, go to the Debt-to-Income Ratio page and add the monthly premium to see how it affects your DTI.
  4. Go to the Plan Bills page and edit the bill added in Step 1 to uncheck the “Include in Look Ahead” checkbox to remove the bill from your Incredibly Cool Budget.

If you are okay with the changes to your bottom line and debt-to-income ratio that are a result of the new premium payments, you can proceed confidently with the purchase of the insurance policy. After you have purchased the coverage, edit the insurance bill added in Step 1 above. Check the “Include in Look Ahead” checkbox to add the new premiums to your Incredibly Cool Budget.

If the premium payments added in Steps 1 and 3 above result in unacceptable, negative changes to your cash flow or debt-to-income ratio, what you do next is up to you given your financial situation. You could look at making the premiums affordable by:

  • renegotiating the insurance policy coverage;
  • increasing your income maybe by doing a side hustle;
  • eliminating bills that have a lower priority for you than the insurance;
  • if you have multiple debts, getting a consolidation loan to reduce your debt payments;
  • discontinuing or reducing your use of credit cards to increase your bottom line;
  • reducing or pausing set-asides to sinking funds and savings to free up current cash.

By playing “What If?” with the contemplated premium payments you will know whether or not they are a good fit in your Incredibly Cool Budget, and, if not, you will be able to consider all of your options.



Should You Self-Insure?

Sometimes buying insurance doesn’t make sense. A prime example is eye care. Coverage for eye exams, frames, and lenses is normally not included in a health insurance policy. Or, when included, the premiums typically cost more than is recovered with claims which means, instead of reducing the cost of seeing an optometrist, the vision coverage actually increases what you pay for eye care.

In this type of situation, having an ongoing saving plan in Income Companion will provide what could be considered self-covered insurance. Add the savings plan in Income Companion by:

  1. Estimating the total amount paid annually for eye exams, frames and lenses.
  2. Dividing the estimate by 12.
  3. On the Plan Savings page, adding a new fixed amount saving for the amount calculated in Step 2.
  4. Entering a set-aside limit equal to the estimate from Step 1.
  5. If you have added your optometrist as a bill, go to the Plan Bills page and link the optometrist bill to the savings added in Step 3.

With the optometrist bill linked to the savings plan, the money set aside for the savings will be used automatically to pay the optometrist’s bills. With such a self-insured savings plan you can be assured that you will not be spending more than what your eye care costs just to have insurance coverage.







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