Insurance Basics

Insurance, at its most basic level, is a way to spread the risk of financial loss over a pool of people. Whether it’s homeowner’s, renter’s, car or life insurance, they all share a lot of the same concepts. Insurance companies charge a premium to the insured. The premium is calculated by factoring in the probability and magnitude of loss, the minimum regulatory required reserves, an estimated rate of return on investments (yes, insurance companies collect premiums and invest a portion of them), and a normal profit.

With health insurance, the insured is moving the risk of financial losses that exceed the cost of premiums, deductibles and copays over to the insurance company. The insurance company spreads the risk of financial loss across all of the plan participants, and this is why rates are always going up. Sometimes insurance companies will even spread the risk of financial loss out to other insurance companies through a process known as reinsurance.

This process of “insurance” applies to just about every kind of insurance you can think of. Some types of insurance are mandatory under certain circumstances: car, renter’s, homeowner’s, but most are voluntary. Lenders often require car and homeowner’s insurance to make sure they are able to recover the bulk of the outstanding loan if anything happens to the asset they financed.

Let’s apply these concepts to the types of insurance that are specifically designed to provide financial stability to families when there is a loss of life (life insurance), earning potential (disability insurance) or independence (long term care insurance).

To be clear, complete books could be dedicated to each of these types of insurance, so I will limit this post to just a brief description of the type of coverage, along with some of the benefits and uses of the insurance. If you would like to know more about one of these topics and whether it is right for your situation, please use the contact me link to schedule a consultation.

Keep in mind that every family is unique and the need for insurance coverage varies greatly. When it comes to insurance there are a few things that are so consistently true that they can be turned into sweeping generalizations but here are a few:
1) Typically, the younger and healthier an individual is, the cheaper it is to acquire insurance.
2) The best time to get insurance is before the need for it presents itself.
3) Members of the US military who have dependents should never turn down SGLI coverage.
4) Members of the US military should always consider carrying an additional $500k of life insurance coverage if they have dependent(s) and can afford it.