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Insurance Explained - In a Straightforward Way I

9/18/2014

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Insurance is the financial product you don’t need until you do. Unfortunately all insurance companies know this, so they go to great lengths to properly protect themselves. Well, so should we! Let’s be honest, nobody likes to discuss the possibility (or probability) of bad things happening but we all know they do. We also know that nobody likes to deal with insurance companies. Whatever the case may be, there always seems to be a “loophole” where they get off the hook. However, they are legally and contractually bound to the provisions outlined in the contract as long as you (the policy holder) hold up your end of the bargain…which generally just entails paying your premiums on time.

In the most basic of terms, we buy insurance to protect things of great value.

It’s important to be educated on the topic and knowledgeable of what your policy stipulates. You can buy insurance for just about anything…cars, homes, income, TVs, the Vegas dealer drawing Blackjack…the list goes on and on.

Let’s start with some insurance basics. To simplify as much as possible, there are a few key items and definitions to be familiar with:

Premium – What you pay for the insurance coverage.

Coverage Amounts – What the insurance company is on the hook for after your deductible has been satisfied.



Coverage Term - How long the contractual relationship between you and the insurance company lasts.

In general their relationship to one another is as follows:

The higher the coverage amount, the higher the premium and vice versa.



The longer the coverage term, the higher the premium and vice versa.

Okay, so now that you know the basic principles of insurance, where do we go from here?

Let’s look at some of your most valuable possessions; car, house, baseball cards, grandfather’s watch, golf clubs, Mac Book? All of these are valuable and can be insured, but arguably the most valuable possession you have is your ability to generate an income, which can be insured in a couple of ways. So how do we prioritize where we devote our protection dollars?

Of course we all know that cash flow is king. From bills to savings to vacation money, it all hinges on generating cash flow. Undoubtedly, the most devastating loss to a household is the loss of income, either due to death or disability of the primary wage earner. Consider this:

70% of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if a primary wage earner were to die today.

40% of U.S. households with children under 18 say they would immediately have trouble meeting everyday living expenses.

With those startling figures one would assume that, given its significance, income would be protected with insurance. However, less than 45% of individuals owned life insurance, and less than 40% owned disability insurance. On top of this, there’s a good chance that even the ones who are insuring their income, are most likely under-insuring.

Now, how do we go about putting this protection in place?

Please read our next blog post.

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