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2.6.5.

F1

TypesofInsurance
AdvancedLevel
Protec ngYourWellBeingThroughInsurance
Eventhemostcarefulpeopleexperienceunexpectedeventsinlifethatcausefinancialloss.Beinginacaraccident,
losingahomeinafire,ormanagingunexpectedmedicalbillscanhaveanenormousnega veeectonyourfinancial
wellbeing.Theseunfortunateeventscanhappentoanyonebecauselifeisfullofrisk.
Riskisthechanceoflossfromaneventthatcannotbeen relycontrolled.Whenyouwearyourseatbeltwhileinacar
youreduceyourriskofinjuryandloss,butaccidentscantbeeliminateden rely.Youcanreduceyourfinancialriskby
pu ngaplaninplacetoprotectyourselffrommajorfinancialloss.Planningforlossisanessen alstepinhelpingyou
achievefinancialsecurity.
Havingemergencysavingsisoneofthefirstresourcestoputinplacetohelpyoumanageunexpectedlosses.Building
anemergencyfundequaltoatleastsixmonthsofexpenseswillhelpyoutohandlesmallerunpredictedexpenses,such
asrepairingorreplacingthe resonyourcar.
Toprotectyourselfagainsttheriskoflargerlosses,youcanpurchaseinsurance.Insuranceisafinancialproduct(called
aninsurancecontractorpolicy)purchasedfromaninsurancecompanybymanypeoplefacingasimilarrisk.An
insurancepolicyisacontractbetweentheinsurancecompanyandtheinsured(you).Itstatestheexacttermsofthe
policyincludingwhatrisksarecoveredandhowmuchwillbepaidforanylosses.Ifyouincuranunexpectedlossthatis
coveredbyaninsurancepolicy,theinsurancecompanywillmakeapaymenttothepolicyholder(thatwouldbeyou)to
payforsomeoralloftheresul ngloss.
Hereisanillustra onofhowinsuranceworks.

Supposethereare100
peopleinahealth
insurancegroup

Ifeachpersonpays$100
intoapooltheywill
collec velyhaveover
$10,000tocoverthe
medicalcostsoftheperson
whogetssick

Witha1%chancethatany
oneofthemcouldgetsick
andrequire$10,000
inmedicalcare

But,nooneknowswhowill
getsick

So,everyonegivesup$100
butnobodylosesmore
than$100

99peopledonotcollect
anythingbuttheygain
peaceofmindand
importantprotec on
againstlargeloss

Insurance shis the


risk of big loss from
the individual to
the insurance
company.

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2.6.5.F1
2.6.5.F1
TypesofInsurance
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Whenselec nganinsurancepolicyshopthoroughly,askmanyques onsand


comparefeaturestodeterminewhichpolicyandcoverageisbestforyou.Intheeventofloss,thepayments
youreceivefromaninsurancepolicytocoveryourlosscanfarexceedthepolicyspremiums.Apremiumisthemoney
youpaytoaninsurancecompanytopurchaseyourpolicy.
Imaginethecostofreplacingahomethatisdestroyedbyfireornatural
disaster,anditiseasytoseethatpurchasinginsuranceprotec oncanbe
thedierencebetweenfinancialwellbeingandfinancialdisaster.
Insurancecanprovidefinancialsecurityandpeaceofmindbyprotec ng
youagainstlargeanddevasta nglosses.Somepeoplethinkthatiftheydo
notgetmoreoutoftheirinsurancepoliciesinpaymentsthanthey
contributed,theinsurancewasnotworthit.Thisisamisguidedno on.
Thebestoutcomeistohavetheinsuranceincasesomethinggoeswrong
buttonevercollectonthepolicybecausenothingwentwrong.

Typesof
Insurance

Tobewellprotected,importanttypesofinsuranceinclude:

TheInsuranceProcess
Ifyouareaninsurancepolicyholderandhaveanaccident,illnessorinjuryyoumustsubmitaclaimtotheinsurance
company.Aclaimisaformalrequesttoaninsurancecompanyaskingforapaymentbasedonyourinsurancepolicy
termsandcondi ons.Onceyousubmityourclaimtheinsurancecompanywillreviewitmakingsureyourrequestfor
paymentisvalid.Whenthatprocessiscomplete,theinsurancecompanywillissuepaymentforyourloss.
Acommoncharacteris cofinsurancepoliciesisthatthepolicyholderpaysashareofthedollarloss.Mostinsurance
policieshaveadeduc blewhichistheoutofpocketmoneyyoupaybeforeaninsurancecompanywillcoverthe
remainingcostsa ributedtoyourloss.Letssayyouhaveanautoinsurancepolicythathasa$200deduc ble.Inthe
eventyoufileaclaimduetoanaccident,youllpaythefirst$200(yourdeduc ble)tocoveryourshareoftheloss.
Similarly,healthinsurancepolicieso enhaveacontractfeaturecalledcoinsurance(orcommonlyreferredtoasaco
pay).Thisfeaturerequirestheinsuredindividualtopayafixedpercentageofthelossa erthededuc blehasbeenpaid.
Wouldyouratherhaveahigherpremiumordeduc ble?Why?

Louisehasahealth
insurancepolicywitha
$500deduc bleand20%
coinsurance(copay).

Louisepaysthefirst$500
ofanycoveredmedical
careplus20%ofthe
remainingcosts

thismeans

whatif...

Louiseisinanaccident
resul ngina$5,000
medicalprocedurethat
iscoveredbyinsurance

Louisepays$500+20%
oftheremaining$4,500
foratotalof$1,400.
Theinsurancecompany
pays$3,600

then

Evenwithinsurancecoverage,doyous llthinkhavinganemergencysavingsaccountis
asmartfinancialplanincaseyouhavetocovertheoutofpocketcostsyourself?

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2.6.5.F1
2.6.5.F1
TypesofInsurance

Insurancepoliciestypicallyincludededuc blesandco
insuranceforagoodreason.Thesefeaturesofaninsurance
contractreducetheproblemofmoralhazard.Moral
hazardoccurswhentheactofinsuringaneventincreases
thelikelihoodthattheeventwillhappen.Insurance
companiescannotstayinbusinessforlongifinsurance
contractsactuallyencouragelosses.Abasicprincipleof
insuranceisthatthedollarspaidfromaninsurancepolicy
shouldnevermakeapersonbe erothanbeforetheloss
happened.Becausededuc bles,copaymentsandother
featuresofatypicalinsurancecontractplacesomeofthe
lossbackonthepolicyholder,theyencouragecareful
behaviortoavoidtheloss.

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Areyouoryourfamilycoveredbyinsurance?Ifso,doyou
knowwhattype?Haveyoueverfileaclaimagainstaloss?

Whatisanexampleofamoralhazard?

SourcesofInsurance
Inmostcases,individualsacquireinsurancefromacombina onofsources.
PurchasedbytheIndividual
Thereisawideassortmentofinsuranceandfinancialproductsavailabletoyouthroughinsuranceproviders.
Individualstypicallypurchasebothpropertyandliabilityinsurancepoliciesdirectlyfromaninsuranceprovider.Long
termcareinsuranceandlifeinsurancearegenerallysolddirectlytoyoualthoughmanyemployersalsooersomelife
insurancecoverageaspartoftheemployeesbenefitpackage.
ProvidedbyEmployers
Throughyouremployeebenefits,youremployermayprovidehealth,disabilityandoccasionallylifeinsuranceop ons.
Yourcontribu on(payment)forthesetypesofpremiumsismadethroughapayrolldeduc on.Youremployermight
alsomakethesepoliciesavailabletomembersofyourfamily(dependentsand/orspouses)resul nginalargerpayroll
deduc ontopayforthefamilycoverage.Regardlessofthetypeofcoverageyouoptinto,youremployertypically
paysalargeshareofthepremium.Thiscontribu onisconsideredaninkindcontribu on(thedona onofaproduct
orserviceinplaceofcash)andisnotsubjecttoincometaxes.Employmentbasedhealthinsurancetypicallycostsless
thanifyouweretobuytheexactsamecoverageonyourowndirectlyfromaninsurancecompany.

ProvidedbyGovernmentPrograms
Governmentprogramsalsoprovideinsuranceaspartofthesocialsafetynettoprotectci zensfromeconomic
hardship.Someexamplesofmajorprogramsthatcoverrisksindividualsandfamiliesmightfaceinclude:
SocialSecurity
Medicare,
Medicaid,andotherprograms.
Someprogramssuchasunemploymentinsuranceandworkerscompensa onrequireaworkhistoryandemployer
par cipa onbeforeyoucanbeeligibletoapplyforbenefits.
Governmentinsuranceprogramsalsocanaddressspecificcatastrophes,suchastheaidprovidedtovic msa er
HurricaneSandyhittheEasternSeaboardin2012.

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2.6.5.F1
2.6.5.F1
TypesofInsurance
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TypesofInsurance
TypeofInsurance

ExamplesofRisksCovered
(dependinguponthepolicypurchased)

Providedby

Notes

Health
Providesmoneytopayfor
healthcareforillness,injury,
or,insomecases,preven ve
care.

Doctorvisits,hospitalbills,therapies,
prescrip ondrugs,mentalhealth
treatment,otherexpensesassociatedwith
healthissues.

Mayincludedentalandvisioncare

Employer,
individual,
and/or
government

Ifyoureonlyabletopurchaseonetype
ofinsurancebecauseyourfinancial
resourcesarelimited,considerthe
importanceofchoosinghealth
insurance.Itisextremelyimportantto
protectyourselfagainstriskofnot
havingthefinancialresourcestopay
yourmedicalbills.

Providesincomewhenapersoncannot
workduetoillnessorinjuryfromany
cause.Disabilityinsurancecoveragevaries
inthedefini onofdisabilityandinthe
amountand mingofpaymentstothe
insured.
Longtermcare
Longtermnursinghomecare,assisted
Providespaymentforextended livingcosts,skillednursingservices,
assistanceinge ngmealsorin
nursingcareduetoaccidents,
accomplishedeverydaytasksofliving
illness,oroldage.
Propertyinsurancehastwoparts:
Thereareseveraltypesofproperty
Property
insuranceincluding:
Automobileinsurance
Providespaymenttothe
insuredpersonifhisorher
Providespaymentsforbothliability
andpropertyinsuranceonavehicle.
propertyisdamagedor
Homeownersinsurance
destroyedbyanaccident
coveredbytheinsurance
Providespaymenttocoverliability
policy.
lossesaswellasdamageandlossof
Liability
thehomestructureanditscontents.
Providespaymenttoothersifa Rentersinsurance
memberoftheinsured
Providespaymenttorenterstocover
householdaccidentlycauses
thedamageandlossofpropertyina
harmtootherpeopleor
rentalunitinaddi ontoliability
property.
losses.

Employer,
individual,
and/or
government

Thehigherthedisabilitypayments,the
moretheinsurancepremiumswillcost
you.

Individual

Neededwhenapersonisnotsick
enoughtobeinahospital,butcannot
liveindependently.

Individual

Propertyinsurancepolicies(including
rentersinsurance)havemanyop ons.
Somepoliciescovertherealcosts
associatedwithreplacingpersonal
belongings,structuresorvehicles.These
typesofpoliciescostmoreinpremium
paymentsthanpoliciesthatreplaceyour
propertyatadepreciated(garagesale)
value.

Life

Employer
and/or
individual

Disability
Providespaymenttoreplace
earningsduring meswhen
workerscannotworkdueto
illnessorinjury.

Providespaymentto
beneficiaries(someonewho
receivesmoneyifaninsured
persondies).

Providesasinglepaymentoraseriesof
paymentstobeneficiarieswhowere
namedbytheinsuredperson.

Ifapersondrivesanautomobilethen
thatpersonisrequiredbylawtocarry
automobileliabilityinsurance.

Lifeinsuranceisimportanttoindividuals
whohavedependents(someonewho
reliesonsomeoneelseforincomeand
care).
Apolicycanreplacethewagesofthe
deceasedand/orthehousehold
produc onthedeceasedwas
responsibleforwithinthehome.Unpaid
householdproduc oncouldincludethe
childcare,mealprepara onandother
domes ctasks.

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