Does not reduce the risk
Some analysts argue that insurance does not reduce the risk, because insurance costs the policyholder, due to the premiums that they have to pay. Insurance is a risk for both the insurance company and the insured. The insurance company understands the risk involved and will perform a risk assessment when writing the policy. As a result, the premiums may go up if they determine that the policyholder will file a claim. If a person is financially stable and plans for life's unexpected events, they may be able to go without insurance. However, they must have enough to cover a total and complete loss of employment and of their possessions. Some states will accept a surety bond, a government bond, or even making a cash deposit with the state.
Using Insurance to Reduce Risk
All Choices Involve Risk
There are no risk-free choices. Usually, the best way to reduce risk is to take action yourself. For example, to reduce health problems, eat right, get plenty of exercise, get enough sleep, don’t smoke, avoid drugs and so forth.
But, since there is no way to avoid risk completely, a common approach is to buy insurance to help reduce the financial losses that can result from bad things that happen.
How Insurance Works
The purpose of insurance it is to spread out risks over several people. Here’s a (very) simplified example:
Imagine an apartment complex with 100 residents. The residents’ association wants to offer insurance against theft. Suppose the residents have an average of $200 worth of possessions. Suppose further that on average five of the 100 residents lose their possessions each year. In a typical year, residents lose a total of $1,000 ($200 x 5 burglaries). That $1,000, spread over 100 residents, equals $10 per resident. If each resident paid $10 for personal property insurance from the residents association, all the residents would be protected from financial loss due to theft of personal possessions.
In the real world, the fee (premium) would have to be large enough to cover not only the losses but the cost of operating the business and earning a profit. And because things don’t always go according to plan, an insurance company needs to be prepared for unexpected costs. If 10 residents have their apartments robbed, the insurance company needs to have enough cash in reserve to pay them back, for instance.
Types of Insurance
Auto Insurance: Provides financial protection from losses due to an auto accident or other damage.
Types of coverage:
- Collision provides for the repair or replacement of the car damaged in an accident.
- Liability covers the cost of property damage to injuries to others caused by the policy owner.
- Comprehensive covers the cost of damage to an auto as the result of fire, theft or storms.
Rental Car Insurance: Provides financial protection from losses or liability due to driving a rental car.
Be careful. Your own auto insurance policy or your credit card often provides sufficient rental car coverage without buying more. Check out the provisions of your credit card and your own auto insurance before choosing to purchase rental car insurance.
Renters’ Insurance: Provides financial protection in case of loss of personal possessions in a rental unit due to theft, fire, water damage and so forth.
Don’t pass up this coverage too quickly. Many people underestimate the value of their personal possessions. Think for a moment about the value of your clothes, television, computer, jewelry, etc. Could you afford to replace everything in your apartment? A $10,000 policy often costs as little as $10 per month, and could prevent financial catastrophe.
Health Insurance: Provides payment for certain health care costs. Basic health covers office visits, lab work, hospital costs and routine care up to a certain limit. Major medical provides protection against catastrophic illness.
Life Insurance: Provides financial protection to dependents of the policy owner when the policy owner dies. Term life offers protection for a specified period of time. If you don’t die within that time, you don’t get the money (which is a good thing, remember?). Permanent life offers protection that remains in effect during the lifetime of the insured and acquires a cash value. Or, you can purchase a variable plan which combines both.
Homeowners’ Insurance: Protects against financial loss from damage to a home or its contents as well as injury to others on the property.
Disability Insurance: Provides income over a specified period of time when a person is ill or unable to work.
Long-term Care Insurance: Protects against financial loss from the cost of long-term care such as nursing homes, skilled nursing facilities, assisted living facilities and so forth.
- Install a security system in your home. Many insurance companies will give you a credit on your premium if you have a security system installed in your home.
- Remove trampolines, diving boards, water slides, or other hazardous things from your property. You may think that trampolines and slides are fun, but insurance companies see them as a nightmare when it comes to a liability claim.
- Install hurricane shutters if you live on the coast.
- Buy a house built from concrete block and one with a hip roof. A hip roof looks like a trapezoid if you are staring straight at it.
Auto Insurance
- Increase your deductible for comprehensive and collision coverage. This will help your premium quite a bit.
- Buy a car with high safety ratings. A car with a lot of air bags, ABS, and anti-theft systems will warrant lower premium quotes from insurance companies.
- Drive safely! You all know that the more accidents and tickets you get could affect the cost you’ll pay for auto insurance once you go to buy from a different carrier.
Life Insurance
- Maintain good health. Non-smokers, moderate drinkers, and those that exercise and eat healthy will pay less for life insurance. This could help you save thousands over the long term. Stick to good level-term life insurance. Term life insurance does exactly what life insurance was intended to do – supplement your income to support your family in case of an unexpected death. Stay away from life insurance products that package together an investment product. Generally, the fees are terribly high, the rate on return is terrible, and life insurance was never meant to be an investment product.
