Humans have been wary of risk since societies began and have used insurance to mitigate that risk for thousands of years. The first written insurance policy was written on a Babylonian obelisk monument with the code of King Hammurabi carved into it. The “Hammurabi Code” was one of the first forms of written laws. These ancient insurance laws insured that a debtor didn’t have to pay back his loans if some personal catastrophe made it impossible (disability, flooding, etc.).
Insurance in its most basic form is a financial product that enables you to pay an insurance company a premium, or fee, to protect yourself or your property from financial obligations that result from damage, injury, loss of life, or loss of property.
- The insurance company is known as the insurer.
- The protected person or property is called the insured.
- The policy owner is also called the policyholder.
When an incident covered by the policy occurs, the policyholder submits a claim to the insurer, and the insurer reimburses the beneficiary, the individual or entity eligible to receive the benefits of an insurance policy. The beneficiary may be the policyholder or the insured or someone completely different.
Basic Insurance Terminology
To navigate the process of getting insurance, it helps to understand the language that insurance companies use.
- Agent (or broker or writer): A person licensed in a particular state to sell insurance on behalf of an insurance company.
- Claim: A request for reimbursement that a policyholder files after a qualifying event, an event for which the insured has purchased coverage. The amount a policyholder pays in premiums is based in part on the likelihood that the insured will file a claim—the higher the likelihood, the higher the premium.
- Coverage: A specified dollar amount or type of service that an insurance company covers (reimburses) after a policyholder files a claim for a qualifying event.
- Deductible: A set amount of money excluded from coverage (per incident or per calendar year) before coverage takes effect. For instance, a health insurance policy with a $500 calendar-year deductible will not cover the first $500 worth of services that the insured incurs in a calendar year. Instead, the policyholder will pay this first $500 out-of-pocket. Once the $500 deductible is reached, though, the policy then covers all subsequent claims until the end of that calendar year, when the deductible resets.
- Liability: Your financial obligation to pay for the medical bills or property damage that other people sustain as a result of accidents or other incidents that you cause. For instance, if you hit another car while driving and injure the other driver, your auto insurance policy may cover expenses you incur for having to pay for the other driver’s medical bills and auto repairs.
Types of Insurance
The four most common types of insurance:
- Car insurance
- Homeowner’s and renter’s insurance
- Health insurance
- Life insurance
If you drive a car, you need car insurance and in most states (48 of them), it’s more than just a good idea — it’s the LAW! When you buy car insurance, you are buying what is called a policy. The amount you pay is called a premium. Your policy’s premium is based on a variety of factors including the type of car you drive, your driving history, your credit score, other drivers in your family and what kind of insurance you want.
Since state laws vary, some of the coverage types listed here may be required by your state and some of the coverage may be optional.
- Liability – This is the minimum coverage you must carry in 48 states. Liability protection pays for accidental bodily injury and property damages to others, not YOU! Injury damages may include the medical expenses, pain and suffering and lost wages due to someone involved in an accident where you’re at fault. Property damage includes the damaged property of others and their vehicles. This coverage also pays defense and court costs. State laws determine how much liability coverage you must purchase, but you can always get more coverage than your state requires.
- Collision – Pays for damages to your vehicle caused by collision with another vehicle or object.This coverage is almost always required if you owe money on your vehicle.
- Comprehensive – Pays for loss or damage to the insured vehicle that doesn’t occur in an auto accident. The types of damages comprehensive insurance covers include loss caused by fire, wind, hail, flood, vandalism or theft.Again, if you owe money on your car, you’ll probably be required to carry comprehensive coverage.
- Medical Coverage – Pays medical expenses regardless of who is at fault when the expenses are the result of an auto accident.
- Uninsured Motorist -Pays your car’s damages when an auto accident is caused by a driver who breaks the law and doesn’t carry liability insurance.
- Underinsured Motorist – Pays your car’s damages when an accident is caused by someone who didn’t buy enough liability insurance.
- Rental Coverage – Pays for a rental car if your car is damaged in an auto accident and needs repairs. Often this coverage has a daily allowance for a rental car.
The first step in choosing the insurance you want for your car is to know the laws in your state. This will tell you the minimum insurance you need for your car. It’s good to keep in mind that, just because your state may not require extensive insurance, extra coverage may be worth the expense. After all, no one wants to be stuck with thousands of dollars worth of bills because of an auto accident — especially if you were not at fault!
Many insurance policies combine several of these types of coverage into various packages. Don’t be afraid to ask your agent to tailor a package with the types of insurance you specifically need. They CAN do that, trust me. If they won’t, move on to another agent.
Anyone who owns or rents a home should have homeowner’s insurance (called renter’s insurance or tenant’s insurance when applied to rentals). This insurance covers the physical structure of the home and the possessions in it. With rentals, it applies only to the possessions.
Homeowner’s Insurance Coverage Options
There are six main coverage options included in homeowners insurance. Only some of these types apply to renters, but all apply to homeowners.
- Residence (not applicable to renters)
- Detached structures (not applicable to renters)
- Personal property
- Living costs
- Personal liability
- Medical payments
When buying coverage, you’ll have to choose the coverage level you want for each of these six options. There is where the potential for large variations in your policy premiums will lie.
Residence coverage covers the cost of repairing or replacing your house, or parts of it, if the physical structure is damaged or destroyed by a “cause-of-loss,” such as a fire, hailstorm, tornado, or hurricane. Buy coverage equal to 100% of the current estimated replacement cost of your home (not the original price you paid for the home).
How to Determine your Home’s Replacement Cost
There are several ways to determine your home’s replacement cost.
- Insurance agent evaluation: Your insurance agent (if you have one) will come to your home and write up an informal assessment of the home’s replacement value. The agent will provide you with a copy of the worksheet that he or she used to calculate the home’s value. There is typically no extra charge for this service.
- Appraisal: If you recently purchased your home, or had it refinanced, you likely have a home value appraisal on file that includes a replacement cost. If you didn’t purchase or refinance recently, you can hire an appraiser to help determine a replacement cost. Appraisals typically cost a few hundred dollars.
- Builder estimate: Alternatively, a builder can provide an estimate for the cost of rebuilding your house. Be sure to choose a builder who knows the area and your neighborhood well. Builder estimates typically cost less than appraisals but aren’t as reliable or accurate.
Types of Cause-of-Loss Coverage
There are three main levels of cause-of-loss coverage (though the exact causes-of-loss that each type covers vary based on your policy and insurer):
- Basic: Very limited coverage; usually covers only fire, vandalism, and windstorms.
- Broad: Covers about 15 types of cause-of-loss; this is the most popular option.
- Special: The most comprehensive coverage; covers almost everything, including water damage—but not water damage that results from a flood. Water damage can result from the rain that damages your home if a tornado destroys your roof or from the fire hose needed to extinguish a fire.
Damages that result from floods and earthquakes are typically NOT covered by homeowner’s insurance. If you live in an area prone to floods or earthquakes, you’ll need to buy separate policies that cover those specific natural disasters. I live in an earthquake zone and I have earthquake insurance!
Residence coverage for the typical homeowners insurance policy includes a fixed amount of coverage for detached structures, such as barns, garages, and pools, which is usually equal to 10% of the residence coverage. If the replacement value of your detached structures is greater than 10% of your residence coverage, you should purchase additional detached structure insurance.
Personal property coverage covers all the items you own and store within your home. Personal property insurance works differently for renters and homeowners.
Personal Property Insurance for Renters
If you need renters insurance, you can purchase two types of personal property coverage: actual cash value or replacement cost.
- Actual cash value: Covers the replacement cost of your possessions based on their value in their current (used) condition. That 15 year old television and your 10 year old blender aren’t worth as much anymore.
- Replacement cost coverage: Covers the replacement of your possessions based on their original (new) value.
In my experience, renters usually choose the actual cash value option and buy an amount of coverage approximately equal to the total value of their possessions in their current state. Actual cash value policies are, you guessed it, much cheaper.
Personal Property Insurance for Homeowners
Residence coverage typically includes an amount of personal property coverage equal to 50–75% of the current estimated replacement cost of the home. Certain high-value items (such as fine art, furs, jewelry, and camera equipment) usually arenot included in personal property insurance or are capped at $2,500. Most insurers will allow you to buy additional personal property coverage that applies specifically to items you stipulate and whose value you declare. This type of coverage is usually called scheduled personal property coverage.
How to Determine the Value of Your Personal Property
There are several ways to determine the value of your personal property.
- Take inventory: Go from room to room in your house and take an inventory of everything you own. Then write down the amount you paid for each item. Use a video camera to record your possessions, closely examining each room, opening your closets, and even recording the contents of your attic or basement is a great idea. Put this tape or DVD in a safe place (such as a safe deposit box). Accounting for all your items worth more than $20 or so will give you a fairly good estimate of the total value of your personal property.
- Hire an appraiser: Professional home value appraisers often conduct personal property value appraisals as well. These appraisals typically cost a few hundred dollars and are usually worth it only if you own many items whose prices you can’t determine easily.
- Estimate: The insurance industry has developed formulas that can help you assess the value of your personal property based on the square footage of your home. Contact your insurance agent (if you have one) or an insurance company to have them perform this calculation for you. The estimate gives you a ballpark amount that you can adjust up or down based on your assessment of the value of your personal property.
Living costs coverage covers housing costs you incur if your primary residence is destroyed and you must live somewhere else temporarily—even if you don’t own the residence. Most homeowner’s insurance policies include living costs coverage equal to a percentage of the residence coverage amount. Other policies require the insured person to buy a fixed amount.
Personal liability coverage covers costs that result from lawsuits in which you are a defendant. These costs can include judgments you must pay for the plaintiff’s medical bills, lost wages, and pain and suffering, or expenses you incur as a result of the lawsuit, such as legal fees. Personal liability extends to incidents that happen anywhere except within your vehicle.
Buy as much personal liability coverage as you can afford. The amount of coverage you buy should match the amount of liability coverage you buy under your auto insurance policy.
Some insurers will allow you to add an umbrella insurance rider that will increase your liability protection up in to the millions of dollars.
Medical payments coverage applies to medical bills only — not lawsuit-related expenses — incurred by visitors who sustain injuries in your home, regardless of fault. Coverage usually applies to a set maximum amount, such as $10,000. Most homeowners don’t buy medical payments coverage, assuming that house guests who injure themselves on the homeowners’ property either won’t ask them to pay for their medical bills or will be covered by their own health insurance policies.
If you have, or expect to have, frequent house guests whom you don’t know personally (such as service people, maids, home health nurses, gardeners, etc) or whom you suspect don’t have health insurance, consider buying an amount of coverage equal to the liability coverage you buy under your auto insurance policy. You should also insist that any service people entering your home have their own worker’s compensation coverage and be bonded.
Homeowner’s Insurance Costs
The amount of your homeowners insurance premiums depends on many factors, such as your coverage amount, your location, and the type of home in which your live. The average annual premium for homeowner’s insurance is about $696 but premiums vary considerably. Idaho has the lowest average premium at $369 and Louisiana the highest at $1,389. Payments may be annual, semiannual, or monthly, depending on your insurance company.
How to Lower Your Homeowner’s Premiums
Insurance companies calculate homeowner’s insurance premiums based on your risk factor, the likelihood that you’ll file a claim under your homeowner’s insurance policy. There are a few ways to reduce your risk factor and, in turn, reduce the amount of your premiums:
- Install smoke detectors, fire extinguishers, and carbon monoxide detectors in your home’s main living spaces.
- Install deadbolt locks on all exterior doors.
- Install a central burglar alarm and fire alarm.
- Install a sump pump, a device used to suck up water that can collect in the basement, such as after a flood.
- Install handrails on exterior steps and stairways.
- Trim trees that lean over the roof of your home.
- Keep walkways and sidewalks clear of obstructions.
- DON’T install a swimming pool.
How to Buy Homeowner’s Insurance
You can purchase homeowner’s insurance directly or through independent or captive agents. Try different companies that can shop your insurance for you such as InsureMe.com.
People pay a lot of money for health insurance and most of us would agree that it is necessary. The cost of even occasional health care services is so high that most people can’t afford it without insurance. However, you’ll want to look at the type of health insurance you have and see if you really need as much as you are paying for.
For example, you may consider getting a health savings account instead of a traditional health care plan. You pay less for this account and it’s tax deductible. If you rarely use your health care then you may find this type of plan is sufficient and you don’t actually need standard health insurance.
Health insurance is a political hot potato with various special interest groups vying for billions of dollars. Consumers are mostly lost in the shuffle, especially if they’re unemployed or their employer doesn’t offer a health care plan. And that’s a surprise to many people:
Your employer doesn’t have to provide health insurance
That’s right! There are no state or federal laws requiring private employers to offer health benefits to their workers. However, many employers offer health insurance as a way to attract and keep workers. When group health plans are offered, they are then subject to a variety of state mandates about what benefits must be included, unless the employer is self-insured (meaning it pays the claims costs itself, not an insurance company).
State mandated benefits do not apply to individual (private-market) plans that you’d buy on your own.
Life insurance is paid upon the death of the insured and is paid to a beneficiary. Most financial gurus make two critical mistakes when advising clients about life insurance needs:
- They assume all people ONLY need term insurance
- They assume you ONLY need to insure a breadwinner
The easiest rule of thumb is that if you’ll need life insurance permanently, buy permanent insurance. If you’ll only need it for a defined period of time, buy term insurance. It really IS as simple as that.
When it comes to insuring someone other than a breadwinner, ask yourself these questions, questions the average financial guru always seems to forget:
- Who will pay the funeral expenses? How will they pay for them? Funerals cost an average of $10,000 and that number will only go up.
- Who will pay for any final medical expenses? How will those expenses be paid? Your health insurance does have a deductible and probably has a family maximum and those will have to be paid.
- If someone dear to you were to die (spouse or child), would you need to take a few weeks off? Would you like the option of professional counseling? The old school mantra of “getting back to work is the best thing for you” doesn’t apply in every case. In some cases it might be best to allow several weeks or even months to grieve without the stress of work and your boss pressuring you to hit your numbers.
Life insurance gives you options and while it may not have the best ROI, that isn’t why you buy life insurance. The financial gurus seem to only think in term of “the return on investment” and it’s a shame that so many have suffered from that twisted way of thinking.
Your life insurance premium is determined primarily by three factors:
- Family Medical History
Though two of the three main factors affecting your life insurance premium (age and family medical history) are beyond your control, there are steps you can take regarding that third factor – lifestyle. There are some other ways to reduce your premiums as well and give your budget a break.
Lifestyle Changes That Can Lower Your Life Insurance Premium
Laying down the cancer sticks.
Non-smokers generally live longer, meaning the life insurance company will have more years to collect your premium payments before coughing up the death benefit for your beneficiary.
Dropping some pounds.
Weight loss often means lower cholesterol levels, lower blood pressure, and lower risk of developing chronic diseases like diabetes. All of these improvements to your health can make you a better insurance risk. Sweet!
Driving like an adult – not a teenager.
Insurance companies can jack up your premium if you have multiple moving violations. Those speeding tickets can come back to haunt more than just your car insurance premiums.
Cutting back on the booze.
Alcohol consumption can pose a potential health risk. Drinking less alcohol – or stopping entirely – lessens the risk for the company and you’ll likely be rewarded with a lower premium. Life insurance companies will probably check not only your application, but your driving record, and your medical records to get an idea of your drinking habits.
Other Ways To Reduce Your Life Insurance Premium
You may be able to get similar or better coverage for less money. Companies like InsureMe.com can connect you to one of the top insurers in the nation. Trust me, you don’t want to cheap out on life insurance, but you don’t want to get ripped off either. That’s why it’s best to go with a well known, top-rated life insurer like those you’ll find at InsureMe.com.
Switch from permanent to term life insurance
Depending on your age and how long you expect to need life insurance coverage, you may want to consider switching to a term policy, but NEVER, EVER cancel an existing policy until your new policy is in effect. NEVER NEVER NEVER.
Don’t let riders drive up your premium
Riders are optional policy provisions that pay additional money to your beneficiaries. Types of riders include:
- accidental benefit rider – pays your beneficiaries if your death was the result of an accident
- children’s term life insurance rider – pays if a child covered under your life insurance policy dies
- waiver of premium rider – pays your policy premium if you become permanently and totally disabled
- living benefits rider – pays a portion of your death benefit payment in advance if you are diagnosed with a terminal illness or if you require long-term care or nursing-home services
- payor rider – waives premiums if you die or become disabled before a covered dependent child reaches a certain age.
Inquire about “no-load” or “low-load” policies
These life insurance policies are often less expensive because agents are paid a flat fee rather than a steep commission.
Pay annually rather than monthly.
You may get a discount for paying your bill in full (annually) rather than paying monthly – and yes, that’s a big bill to pay at once. Some insurers may also give a discount for having your payment automatically withdrawn from your checking account.
Review your credit report.
Life insurance companies regularly review your credit report when calculating your premium. Paying your bills on time (which could even be noted on your report) assures the company that you are likely to pay your premium on time and in full.
Choose a company that has experience covering people with your condition.
If you have a certain medical condition, a broker can help find a company that is likely to work with you and may provide a better rate class.
Review your Medical Information Bureau file.
Insurers share information with each other on applicants’ medical conditions through the Medical Information Bureau (MIB). You can request a free copy of your file from the MIB’s website. Then review it for incorrect information that could negatively affect your premium.
How to Buy Insurance
You can buy insurance from four primary sources: Internet sales agents, independent agents, captive agents, and direct writers. Insurance companies offer insurance using one or more of these sources.
- Internet Sales agents: These agents are licensed to sell insurance in most, if not all, states and may sell them from a multitude of companies. Their primary means of making contact is through the Internet and since the volume of customers they can service is much higher than a traditional grounded agent, their premiums are often discounted. Virtually any type of insurance you wish to buy can be purchased through the Internet.
- Independent agents: These agents are licensed to sell various types of insurance from several insurance companies. Independent agents usually have contracts with different insurance companies and receive commissions equal to a percentage of the premium you pay. Working with an independent agent can lead to higher premiums, but you’ll have the benefit of an expert’s assistance throughout the entire process of selecting and buying insurance—your agent will do all the necessary research and communicate with the insurance companies for you. In addition, only independent agents will offer you quotes (cost estimates) from various competing insurers.
- Captive agents: Captive agents are independent agents that work with only one insurance company. Major insurance companies that use captive agents include State Farm, Allstate, and Nationwide. Working with a captive agent gives you the benefit of the agent’s advice and guidance at a cost that’s usually higher than buying direct, but lower than working with an independent agent.
- Direct writers: Companies that offer insurance directly allow you to contact the company and inquire or purchase it yourself without an agent. Some of the better-known direct writers are GEICO and Progressive. The fastest and often the least expensive way to buy insurance is to work with a direct writer. This option works best for people who know exactly what type of insurance and amount of coverage they need.