Transcript HSF-Module 17: Introduction to Insurance

"Fun is like life insurance; the older you get, the more it costs."
-Frank McKinney (humorist and journalist)
Learning Objectives:
 Know what insurance is
 Understand why insurance is important
 Learn important terms
 Learn the main type of insurance
What is Insurance?
Insurance:
 An agreement which forms protection against a
potential financial loss.
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Someone makes regular payments to an insurance company.
The company in exchange for these payments promises to
pay money in the case that something of value is damaged,
lost, or stolen or if a person is injured or dies (depending on
what the insurance is covering).
How it works:
 Insurance works by pooling risk (that is combining individual
investors into one large group or pool).
 Insurance companies use statistics to project the amount of
claims and the costs of the claims that will occur in each pool.
 They then determine what rates or premiums to charge
individuals based on what their projected losses are.
 This is what allows insurance companies to be profitable, and
still be able to pay for claims that may occur.
Its Importance:
Why we need insurance:
 Insurance helps you to manage the risks in your life.
 Provides you with peace of mind.
 Having proper insurance for your specific situation is of
grave importance in order for you to have a solid financial
plan.
About risk:
Risk  Chance of losing something of value.
Types of risks:
 Personal risk- loss of life or income as a result of age, illness, or the loss
of a job.
 Property risk- loss occurring to personal property such as your house
or car.
 Liability risk- Loss caused by negligence (the failure to take reasonable
care to help prevent an accident from occurring).
 Example: failing to stop at a stop sign causing an accident.
Pure vs. Speculative risk:
Risk can either be pure or speculative:
 Pure risk (insurable risk) o Can be insured
o Risk in which there is only a chance of loss not gain
o Result of uncontrollable circumstances
o Example: chance that someone’s home will be destroyed by a hurricane
 Speculative risk o Cannot be insured
o Risk in which there is a chance or loss or gain
o Result of choices which can be controlled
o Example: chance that a small business will not succeed
Insurance terms to know:
Policy holder (the insured)  The business or individual who transfers their risk of loss to another
party through an insurance policy.
 This is who will receive compensation in the event that a loss that is
covered under the agreement occurs.
Insurer (insurance company)  The company who accepts the risk of loss through an insurance policy
in exchange for payments.
 Compensates the insured in the event that a loss occurs.
Insurance terms to know:
Coverage  The amount of protection provided against risk by your insurance.
Premium • The amount of money you pay to receive the coverage.
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Example: Your monthly or semi-annual payments made to the
insurance company
Claim • A request to the insurance company for payment to cover a financial
loss that is cover by insurance.
Insurance terms to know:
Deductible  The amount of money the policyholder must pay out of pocket before an insurer
will pay any expense.
 Generally, the higher your deductible, the lower your premiums.
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Example: If you are in a car accident you may have to pay $400 towards the repairs, but the
insurance company will pay the remainder.
Peril  The cause of a loss.
 Example: theft, fire, car crash, etc.
Hazard  Something that increases the probability of a loss.
 Example: defective wiring in a house will increase the likelihood of a fire
Ways to reduce risk:
Risk reduction o Reducing the probability that a risk will cause harm.
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Example: Installing sprinklers in your house decreases the
possible destruction that a fire could cause.
Risk avoidance o The practice of avoiding risks.
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Example: Not driving in order to avoid the risk of a car accident.
Ways to reduce risk:
Risk shifting o Shifting the risk to another party.
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Example: Purchasing insurance. When you purchase insurance you
are transferring your risk to the insurance company in exchange for
the payments you give them.
Risk assumption o Taking responsibility for all risk.
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Example: Not purchasing insurance. Usually done on items that will
not lead to a substantial loss.
Types of insurance:
 Liability insurance
 Home insurance (can also be known as property and casualty
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insurance)
Auto insurance (can also be known as property and casualty
insurance)
Life insurance
Health or medical insurance
Disability
Long-term care insurance
Determining your insurance needs:
Before purchasing insurance it is important you take several steps in
order to accurately determine the appropriate amount and type of
insurance you need.
 Step 1: Set insurance goals
o Factors such as age, income, lifestyle, family size, and responsibilities etc. are all
factors that will affect your personal insurance goals.
o Everyone’s goals will be different depending on their own life situation, it is
important for you to determine what or if you have any current insurance goals.
 Examples of insurance goals:
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Reduce possible loss of property. (Important if you own things such as a home or car.)
Reduce loss of income caused by premature death. (Important if you have a child under
18.)
Determining your insurance needs:
 Step 2: Develop a plan to reach your goals
o First you need to determine the different types of risks you face and which of these risks
you can and cannot afford to take.
o Then you need to determine what resources are available to you in order to reduce the
damage of the risks that you cannot afford to take.
o Next you need to determine what insurance you have available to you and their cost
differences.
o Finally you need to research the reliability of different insurance companies along with
their varying costs.
 Questions to ask yourself as you create your insurance plan:
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What do I need to get insurance on?
What type of insurance should I buy?
How much insurance should I have on these items?
Where should I purchase this insurance from?
Determining your insurance needs:
 Step 3: Put your plan into action
o After developing your plan and determining what kind, how much and
where to purchase the insurance from, you need to actually purchase
the insurance.
o During this time however it is possible that you might realize that you
didn’t purchase enough insurance.
 In which case you should either:
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Purchase additional coverage
Adjust the coverage you have, or
Increase your savings and investments so that you have the available to use
those funds in case of an emergency
Determining your insurance needs:
 Step 4: Check your results
o Your need for insurance will periodically change along with
changes in your life that take place which cause shifts in your
needs and goals.
 Therefore it is important that you re-evaluate your insurance
needs periodically and with big life changes, such as having a
child or purchasing a new home or car.
 The National Association of Insurance Commissioners (NAIC)
has put together some guidelines/questions for navigating six
major life changes.
Worksheet:
 Go through the steps just listed to create your own insurance
plan and determine how much insurance you currently
need. Then re-evaluate and determine what your future
insurance needs might be in ten years. Consider what your
goals are for this point in your life example: do you want to
be a home owner, do you want to have children, etc.
Question Cluster
Liability:
 Your legal responsibility for the financial cost of injuries or
damages to a person or their property.
 You can be held legally responsible even if it was not your fault.
o For example: Lilly is play softball in John’s backyard and gets hurt. Lilly may
be able to sue John even though John did nothing wrong.
 Generally if you are found liable it is because your negligence
caused the mishap.
o For example: A store not cleaning up after a spill occurred thus causing a
shopper to fall and break their hip.
o Reading and Video Assignment: Liability
Liability Insurance:
Liability insurance:
 Protects the policy holder if they are sued for claims that fall within
the coverage of the policy.
Types of liability insurance:
 Auto liability insurance:
o Guarantees that drivers have the financial means to pay for damages or injuries
to a person or their property as a result of an automobile accident.
o A basic policy is required in most states.
 Homeowner’s liability insurance:
o Covers incidents that may occur on the property of the policy holder.
 Example: A visitor getting injured on the property.
Liability Insurance:
Types of liability insurance cont.:
 Professional liability insurance:
o Covers harm that may be caused by business professionals as well as the
legal cost associated with the claim.
 Umbrella liability insurance:
o An additional policy that kicks in when your other insurance policies
have reached their limits.
o You can add an umbrella policy to your home or auto insurance if you are
worried that the liability coverage you have through your auto and
property policies will not be enough.
o Fairly inexpensive to acquire. http://www.farmers.com/umbrella/
 Reading and Video Assignment: Liability Insurance and
Umbrellas policy
Question Cluster