An event covered by insurance is referred to as an insurance event. The person to whom such an event occurs or may occur is called the person insured. When an insurance event occurs (you get ill, suffer an accident, reach a certain age), the insurer will pay you a certain amount of money referred to as an insurance benefit/claim paid. The insurance benefit/claim paid will help you or your family to overcome the financial difficulties or increased costs that may arise from an insurance event. This means that by arranging insurance you obtain insurance cover against a certain risk.

The Insurance Industry

Insurance companies largely fall into three categories:
– Life Insurance
– Non-Life Insurance
– Composite Insurance (a combination of Life and Non-Life insurance)

Four Types of Insurance Everyone Needs

Life Insurance

Life insurance is about your life. It is made up of two basic types; traditional whole life and term life. Simply explained, whole life can be used as an income tool as well as an insurance instrument. As long as you continue to pay the monthly premiums, whole life covers you until you die. Term life, on the other hand, is a policy that covers you for a set amount of time. There are other considerable differences between the two types of insurance, so you may want to seek the advice of a financial expert before you decide which is best for you. Factors to consider include your age, occupation, and the number of dependent children.

The greatest benefits of life insurance include the ability to cover your funeral expenses and provide for those you leave behind. This is especially important if you have a family that is dependent on your salary to pay the bills. Industry experts suggest a life insurance policy that covers 10 times your yearly income. But that’s a number not everyone can afford. When estimating the amount of life insurance coverage you need, remember to factor in not only funeral expenses but also daily living expenses. These may include mortgage payments, outstanding loans, credit card debt, taxes, child care, and future college costs.

Health Insurance

Statistically, every family is just one serious illness away from bankruptcy. The American Journal of Public Health in their Journal Survey of 900 Americans in 2019 who filed for personal bankruptcy between 2013 and 2016; more than two in three bankruptcies were caused by medical problems—from bills, income loss due to illness, or both. These numbers which are worst in developing economies should incentivize you to consider health insurance or review and possibly increase your current coverage if you do not have presently. But with rising co-payments, increased deductibles, and dropped coverages, health insurance has become a luxury fewer and fewer people can afford. When you consider that the national average cost for one day in the hospital was $2,517 in 2018, even a minimal policy is better than none.

The best and least expensive option may be participating in your employer’s insurance program, but many smaller businesses do not offer this benefit. The average annual premium cost to the employee in an employer-sponsored health care program was $7,188 for single coverage and $20,576 for a family plan in 2019, according to research published by the Kaiser Family Foundation. If you don’t have health insurance through an employer, check with trade organizations or associations about possible group health coverage. If that’s not an option, you’ll need to buy private health insurance.

Long-Term Disability Coverage

Long-term disability insurance is the one type of insurance most of us think we will never need. Yet, according to statistics from the Social Security Administration, three in 10 workers entering the workforce will become disabled and will be unable to work before they reach the age of retirement.
Often, even those workers who have great health insurance, a nice nest egg, and a good life insurance policy don’t prepare for the day when they might not be able to work for weeks, months, or ever again. While health insurance pays for hospitalization and medical bills, you’re still left with those daily expenses that your paycheck generally covers.

Auto Insurance

On average, there are six million car accidents in the U.S. every year, according to the National Safety Council. An estimated 38,800 people died in car crashes in 2019 alone. The number one cause of death for American’s between the ages of five and 34 was auto accidents, according to the Fatality Analysis Reporting System (FARS) in 2009 data (the last available data). Over two million drivers and passengers received treatment in emergency rooms in 2009, and the costs of those accidents, including deaths and disabling injuries, were around $70 billion.

Globally, if you drive without auto insurance and have an accident, fines will probably be the least of your financial burden. If you, a passenger, or the other driver is injured in the accident, auto insurance will cover the expenses and help guard you against any litigation that might result from the accident. Auto insurance also protects your vehicle against theft, vandalism, or a natural disaster, such as a hurricane or other weather-related incidents. Again, as with all insurance, your individual circumstances will determine the cost of auto insurance. To make sure you get the right insurance for you, compare several rate quotes and the coverage provided, and check periodically to see if you qualify for lower rates based on your age, driving record, or the area where you live.

The Bottom Line

Most experts agree that life, health, long-term disability, and auto insurance are the four types of insurance you must have. Always check with your employer first for available coverage. If your employer doesn’t offer the type of insurance you want, obtain quotes from several insurance providers. Those who offer coverage in multiple areas may provide some discounts if you purchase more than one type of coverage. While insurance is expensive, not having it could be far more costly.

Policy

A legal contract between you and the insurer. It details what risks are covered, under what circumstances the insurer will make a payment to you, how much money and what type of benefit you will receive if you make a claim.

Policyholder

The insured or the person covered under the policy.

Coverage

The amount of protection you have bought. It is also the maximum amount the insurance company will pay you if you make a claim for loss or event covered by your policy.

Benefit

The amount the insurer will pay you if the insurer accepts your claim.

Premium

The amount you pay for the insurance.

Rider/Endorsement

A specific change to a basic policy, intended for somewhat common deviations or to customize a policy to a particular insured

Surcharge

Extra cost added to the basic premium, usually due to at-fault claims or legal action (a traffic violation often results in a surcharge, which can be added in the middle of a policy period)

Actuary

A person who determines rates and settlements for an insurance company based on statistics and mathematical models

Adjustor

A person who assesses the extent of damage in an incident, which is used as the basis for the settlement offer

Cash value

This is the amount the insurer pays to the policyholder when a life insurance policy is canceled. It can also be an amount added to the death benefit and can be paid upon the insured’s death. This term is used with permanent life insurance policies.

Death benefit

The amount the insurer will pay the beneficiary or beneficiaries upon the insured’s death.

Claim

This is the official notice to your insurer to be paid for a loss or event covered by your insurance policy.

Beneficiary

This is the person or entity the insured names or assigns to receive the proceeds of the policy. A beneficiary can be revocable (can be changed at any time without informing the beneficiary) or irrevocable (can’t be changed without the beneficiary’s written permission).

Deductible

The amount you agree to pay before the insurer pays the rest.

Exclusions

Things that are not covered by your policy. For example, some health insurance policies may exclude certain medical conditions you had before you applied for insurance, or a travel insurance policy may exclude claims if you travel to a high-risk country. This is why it is important to read your policy thoroughly to check what it covers and what it doesn’t cover so that there will be no surprises when the time to claim comes.

Risk

Probability or likelihood that an insured event, such as loss, injury, or death, will happen while the policy is in effect.

Rider

It is a clause or term added to your insurance policy to provide protection. This has an additional cost because it covers risks not covered in the basic policy.

Term

The time period you are covered by your policy.

Lifetime Limit

Upper limit the insurer is required to pay over the policy lifetime

Annual Limit

Similar to lifetime, except per year

Liability Limit

Upper limit per claim

Annuity

Yearly payment (usually a settlement) which spreads a full benefit out over time

Insurance is intended to mitigate financial risks. However, insurance is not always necessary. There are insurance policies for so many possible problems and many of them simply are not relevant to all people or entities.

Some of the most important insurances regard life. Health and life insurance are practical and are much cheaper to purchase when the insured is far from needing them. Insurance is a business of probabilities, and a young, healthy, boring individual is much less likely to make a claim on health or life insurance in the near future. Conversely, a customer who is 95, smoked and drank all his/her life, and still enjoys skydiving once a week is much more likely to claim health or life insurance benefits. Timing is essential when purchasing insurance.

Other insurances, like auto, are only required when one owns or uses a car. If you plan to live in a major city with excellent public transit, your auto insurance is irrelevant (rentals usually have their own insurance attached). Purchase only what you expect to need, and there is little reason to purchase a plan that extends beyond that.

Entering into a policy early will affect lower premiums, but one must be careful not to discount the time value of money or possible life changes. Furthermore, applying earlier is better. Waiting can result in delays or denial, especially if a condition develops too much.

Remember, insurance is meant to mitigate future financial risks, and thereby it may ensure other important benefits, such as preventative medical care or income to purchase food after a major accident at work. Plenty of material is available online, and it may even prove overwhelming. Hopefully, we helped simplify some things about insurance for you. If you are unsure about what insurance is right for you, there are professional insurance brokers who can offer some assistance in choosing the most appropriate plan for your needs.

• Insurance is a tool to reduce financial loss or hardship.
• It is a contract between the insured and an insurance provider under which the insured can be paid for certain losses. The insurance provider pools clients’ risks to make payments affordable for the insured (Investopedia).
• It is protection that can help cover the cost of unexpected events such as theft, illness, property damage, or death.
• The protection or coverage you receive can be for a limited period of time or throughout your lifetime.

In return for the protection, you pay a premium. Premiums are the amount you pay periodically, depending on the type of insurance and what is stated in your policy. The amount for premiums you pay is based on the probability that you will suffer a claimable loss. Other factors that are considered in computing premiums can be the insured’s age, health, lifestyle, or family history.

For health, dental, home, and auto insurance policies, the amount for premiums also depend on the deductible. This is the amount of your claim you agree to pay before the insurer pays the rest. Of course, choosing a higher deductible will lessen your premiums because you are agreeing to pay for a larger part of your loss.

What happens when you pay your Insurance Premium?

When you pay your Insurance Premium, your money goes into a pool of funds with many others. Some of that pool helps the policyholders who suffer hardship in that period. When a hardship or loss occurs, a claim is made. The Claim is the official request for the insurer to pay for a covered loss. The insured’s agent or broker can assist in claiming benefits. Supporting documents will be required, depending on the type of loss (for example, photographs of an injury or property damage for an accident or property insurance claim, or a death certificate for a life insurance claim) during claims processing or claims investigation.

Types of insurance

Life insurance

Life insurance provides payment to the insured’s family and loved ones after the insured’s death. The insured names a person or persons (beneficiary/beneficiaries) who will receive the death benefit as stated in the policy. The proceeds or death benefits are tax-free.

There are two types of life insurance

Term–provides coverage for a specific amount of time. If the insured dies within the period of coverage (and the premiums are paid), the beneficiary receives the death benefit as stated in the policy. The coverage ends at the specified term. It can be renewed after the term, however, the premium may increase since premiums may depend on the insured’s age.

Permanent – it covers the insured throughout their lifetime (unless the insured fails to pay the premiums). There are two kinds:

1. Whole life insurance – this guarantees that your premiums will not change as you get older. This type of insurance has a guaranteed minimum cash value and death benefit amount.
2. Universal life insurance – this is a product combining life insurance and investment.

Health insurance

Health insurance can help you pay for services that the provincial health care plan does not cover. Some types can supplement your income if you suffer a major illness or injury. Other types can pay for medical expenses if you become ill while on vacation.

Here are some types of health insurance:

• Supplementary health insurance
• Disability insurance
• Travel medical insurance
• Critical illness or trauma insurance
• Long term care insurance

Property and Casualty (General) Insurance

Property insurance covers losses or damage to your home or personal possessions, to your car, or your business. Casualty insurance shields the insured from legal liability for losses caused by injury to other people or damage to property of others.

Here are some kinds of general insurance:

• Home or Property insurance
• Tenant or Renter’s insurance
• Auto insurance
• Liability insurance
• Accident benefits/bodily injury insurance
• Collision insurance
• Comprehensive insurance
• Business insurance
• Commercial property insurance
• Public liability insurance
• Errors and omissions insurance

Group Insurance

“Group insurance provides a mechanism for employers to provide employee benefits as part of an employee’s total compensation package, as part of one group, outside of government-provided benefit programs”. Some commonly provided group insurance benefits are supplementary health insurance, basic life insurance, dental insurance, long-term disability insurance, and accidental death and dismemberment insurance.

Where do your premiums go?

Premiums are used to pay claims costs, investments, and operational expenses. They practice diligent financial management so that claims can be paid. For instance, they invest in low-risk investments that can be easily liquidated in case they need to pay out claims. They also set money aside as a legal reserve. They are required by law to maintain this amount. The legal reserve guarantees that an insurer can pay a large number of claims within a short period of time

Buying an Insurance Product

Insurers will evaluate whether they can issue a policy based on certain criteria such as:

• Age
• Medical history
• Previous claims made
• Amount of coverage you are requesting

Some types of insurance, such as life insurance, would require a medical exam. After this, the insurer would review your application and access your personal and medical history to assess your risk. After this assessment, you will know the amount of coverage you are qualified for and the premiums you need to pay. No matter what type of insurance you are applying for, answer all questions on the application fully and honestly. If you withhold important information or if you lie on the application, it can be the basis for canceling your policy, or worse, refusing your claim in the future.