Personal Risk Management Insurance 101

(In our teen workshop on personal risk management, Nick Bosco explained the often-confusing lingo of insurance policies and premiums. With prior careers in engineering and telecommunications, he says that owning a Farmers Insurance agency in Chattanooga for the past seven years is the most rewarding job he’s ever had.)

The insurance industry tends to use big words and technical jargon, so let’s break it down. First off, let’s think about the difference between risks and hazards. Risk is exposure to danger, harm, or loss. Hazards cause risk. Examples of hazards and the risks they cause include: (1) smoking can cause lung cancer, (2) wet floors could cause you could slip and fall, and (3) tornadoes can cause damage to homes and vehicles.

Insurance is what protects us from these risks and others. It works by transferring risk from an individual to an insurance company. Being insured means that an individual or entity receives financial protection, in the form of reimbursement against losses, from an insurance company.

To begin coverage, you pay the insurance company a premium, which is calculated using many factors such as your credit score and the area where you live. In exchange, the company accepts the risk if something major happens. This premium costs far less than it would to bear the entire financial burden of the event yourself.

TYPES OF INSURANCE

Health insurance typically helps pay for most doctor and hospital visits, prescription drugs, medical tests, wellness care, and medical devices.

Life insurance provides income to a family in the event of a parent’s death. For wage-earning mothers or fathers to buy life insurance is probably one of the most selfless things they can do for their family, because it will not benefit them, but rather the family members they leave behind. An ancient Greek proverb describes this type of generosity: “A society grows great when old men plant trees whose shade they know they shall never sit in.”

Proper homeowners insurance is extra important, because a house on property is one of the biggest investments you will ever make.

Flood insurance can be almost as expensive as homeowner’s insurance, and it often covers the home itself but not any contents. Before buying a home in a flood zone, be sure to ask yourself if the reward is worth the risk of damage and the additional cost of insurance protection.

Renter’s insurance protects you from loss or damage to personal property while living in a home owned by someone else.

Recreational vehicles insurance provides coverage for boats and personal watercraft, off-road vehicles, motor homes, travel trailers, etc.

Business insurance covers not only property damage caused to a business by fire or storms or robbery, but also any income that was lost as the result of a catastrophe or lawsuit.

Auto insurance will most likely be the first insurance you purchase for yourself, so we will examine this one in greater detail. Auto insurance covers several different categories of damage: liability for bodily injury, liability for property damage, medical payments, collision, comprehensive, and uninsured or underinsured motorist insurance.

Liability for Bodily Injury – In the event of an accident, this compensates for the other person’s medical expenses, lost wages, pain and suffering/loss of enjoyment of life, or fatality. The average personal injury lawsuit is usually over $400,000, and if you are insured, the insurance company will step in to cover that. Insurance can be the difference between going into financial ruin because of an accident versus being able to go on with life as normal.

Liability for Property Damage – This pays for damage caused by a vehicle, such as if you ran off the road and smashed into a house or fence or mailbox.

Medical Payments – Also referred to as personal injury payments, this coverage applies to the insured driver, passengers, and any affected pedestrians in the event of an injury or death. It pays for medical bills and funeral expenses, and it also covers you and your family members while traveling in another person’s vehicle.

Collision – Covers repairs to your vehicle if you hit something. Be aware that policies have a deductible, which is how much you pay out of your own pocket before the insurance company begins to pay. This prevents reckless driving by requiring drivers to assume a certain level of financial responsibility.

Comprehensive – This includes damage that happens when you are not even in your vehicle. You’d be covered if, for example, your car were damaged by hail, a falling tree branch, a runaway shopping cart, or if it catches on fire.

Uninsured or Underinsured Motorist – Every driver is required to have some sort of auto insurance, but some people carry only the minimum coverage demanded by the state, which doesn’t cover the entire cost of damage in the event of an accident. Buying uninsured or underinsured motorist insurance means that you do not have to pay that difference.

Insurance fraud happens when an insured person falsely claims damage to a vehicle or lies about what really happened to the car. For example, policy holders have been caught saying that a shopping cart hit their car and they want the insurance company to pay for repairs, when actually they backed into a tree, which would not be covered because it was their fault.

The cost of an auto insurance policy is based on several different factors, including the value of the vehicle (based on its age and condition), the policy holder’s driving record (number and frequency of traffic tickets or accidents), and the driver’s credit rating (likelihood to pay bills on time).

One thing I tell my clients is that the most expensive insurance is the wrong insurance. The most important choices you need to make in selecting insurance is not so much the carrier, but the type of coverage you buy. An insurance agent might give you a quote and try to sell you on how cheap the premium is, but an insurance advisor will give you a full evaluation, make sure you are correctly and fully covered, and sell you on the value of the insurance coverage. You need to have a good relationship with your insurance advisor, because risks will change dramatically over your lifetime, so your insurance needs to change as your circumstances do.

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