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.
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.
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.
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.
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.
There are many types of personal insurance, but there are five that are considered important for everyone to have:
There is an additional type of insurance that is associated with mortgage loans:
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:
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.
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.
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:
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.
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:
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.