Insurance is an important part of financial planning. It is about risk management of life. Not a lot of people can set aside sufficient funds for all unpredictable perils. Basically, insurance carriers collect a large pool of money (premiums) in preparation for unexpected loss which a small percentage of people (insureds) will suffer. Insurance buys the insureds a peace of mind, and indemnifies the insureds or the beneficiaries when a loss happens.
Auto Insurance
The National Highway Traffic Safety Administration reported that 38,680 people died in motor vehicle crashes in 2020. In Georgia alone, about 1600 people died in car crashes on state highways in the state in 2020.
A 2015 study conducted by the CDC estimated that fatal car crashes cost the U.S. $44.4 billion each year. Even without fatality, car accidents can be costly too. Auto liability insurance is required by law, though minimum coverage varies from state to state.
Property Insurance
Property insurance can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance, among other policies. A standard homeowners insurance policy provides coverage to repair or replace your home and its contents in the event of damage. Covered perils usually include fire, smoke, theft or vandalism, weather events such as lightning, wind, or hail, as well as external forces like a falling tree. Usually, a homeowner’s insurance also covers cost due to loss of access to the property, i.e., temporary living.
In 2019, fires alone caused an estimated 3,704 civilian deaths, and $14.8 billion in direct property damage. In 2020, the United States experienced 22 weather or climate disasters that each resulted in at least $1 billion in damages.
Homeowner’s insurance usually does not cover earthquake or flood, which can be purchased separately depending on your location.
Business Insurance
If you own a business, you probably want to have a business insurance policy. Business insurance can help pay the costs of property damage, lawsuits, lost business income, and other covered losses. It helps protect against specific risks unique to your situation. A Business Owner’s Policy (BOP), for example, combines property, general liability and business income coverage into one convenient policy.
You will need professional liability coverage if you are a real estate agent, insurance agent, lawyer, accountant, architect, engineer, etc. General liability coverage is necessary for tradesman and contractors.
Medicare Insurance
Medicare insurance is the health insurance program offered by the federal government, funded by the Medicare tax portion of the income tax. The original Medicare include part A for hospital coverage, and part B for medical coverage. Medicare also regulates the part D prescription drug coverage. There are popular private Medicare plans that further reduce the risks not completely covered by the original Medicare.
Immediate participation of part B and part D is required once you become eligible for Medicare, if you want to avoid late enrollment penalty (LEP). LEP can be imposed if participants delay enrollment in part B or D (with some exceptions). For both part B and part D, you have to pay a monthly premium. To enroll in a Medicare Advantage plan or a supplement plan, you have to participate in part B first.
Health Insurance
Accident and sickness happen and medical bills can easily grow out of your means. That’s why we need health insurance. However, even the premiums from private insurance companies can get expensive and not everybody can afford to pay.
The Affordable Care Act of 2010 was intended to make health insurance affordable to everyone by government subsidy (to lower income families) and guaranteed issue (prohibiting pre-existing conditions limitation from the carrier).
Government subsidy comes in the forms of APTC (Advance Premium Tax Credit) that reduces the monthly premium for plans selected from a Federal/State Marketplace, and income-based CSR (Cost Sharing Reduction) that helps participants pay out-of-pocket deductible, copay, or coinsurance.
Life Insurance
Unlike health insurance (individual, family, or Medicare), beneficiaries of a life insurance policy is not the insureds. Rather, original life insurance policies were written to benefit the survivors if the insured (often the breadwinner) dies. Contemporary life policies have evolved to become a form of investment. Whole life insurance usually contains a cash value which can be used as ‘living benefits.’ Policy owners can take out a loan against the cash value, or withdraw from a policy tax-free. If the policy owners cancel a policy, they can cash out the surrender value of the policy too.
Other than whole life insurance, there are term life insurance and variations. A term life policy lasts only limited number of years, and usually have no cash value, hence the premium is much lower than whole life policies. Variation of term life insurance can be written for very specific goals, for example, mortgage protection. A mortgage protection policy is a decreasing term which last only the life of a mortgage. This type of policies is designed to protect the family in case of untimely death of the breadwinner which otherwise will leave the surviving family a mortgage to pay.
Insurance carriers write policies to profit. So they have to carefully use actuary to calculate/predict returns. They categorize the insureds by risk, e.g., preferred risks (low risk, low premium), standard risks, etc. They want to prevent adverse selections to make sure they profit. The highly regulated health insurance is prohibited to cherry-pick for protection of consumers. Otherwise, insurance carriers can deny your coverage if you are deemed too risky. For auto insurance, if you are too risky, you will have to find a non-standard carrier to write you a policy.
Carrier’s Risks
Insurance policies can be highly customized for your specific goal. There are carriers that write unusual risks. For example, Tom Jones had his chest hair insured, Jennifer Lopez has her butt covered, and a photographer bought an insurance policy against his model getting married.