Understanding Insurance

Understanding Insurance and Insurance Information

You can get insurance on or for anything. You just have to pay the premiums. Why do you need or want insurance? The answer to that question is in the analysis of insurance products offered. They fall into 2 general categories. There are insurances that protect your income or reduce spending on your budget. The second category of insurances includes the ones that protect the assets on your balance sheet. The concept is that you pay a premium on a monthly or annual basis. In return the insurance company will replace income or assets lost or spending incurred should you lose your income or your asset due to any of the reasons stipulated in the agreement.




















Budget oriented Insurance

Your income is the food for your personal finances. If you don’t eat you die. You don’t eat if you don’t work so most of these products are designed to replace most if not all of your income if you are out of work for some reason.


  • It starts in the workplace where you and/or your employer pay for workers’ compensation if you get hurt or killed in the workplace.;

  • If you get laid off there is unemployment insurance.

  • Whenever you take out a car loan or a mortgage you are offered insurance in case of job loss. Credit card companies and other lenders will offer you similar insurance to cover payments should you be out of work. You need to weigh using these versus purchasing a comprehensive income insurance plan. The package deal may be more than each of the small ones but the total cost for the package deal may be less than the sum of the smaller insurance premiums.

  • Whole life insurance is a dinosaur of a product and has mostly been replaced by term insurance. You pay a premium and if you die and your family loses your income they will get paid a specified amount of money to replace the long term loss of your income. This is good for young families but if you have a substantial net worth properly invested it is not really necessary.

  • There is a plethora of disability and dismemberment insurance plans. The idea is that if you are declared disabled you will be paid a lump sum amount or a specified amount per day or month to replace the income you will miss due to your disability or injury. The quality of these policies is varied so read the small print.

The other danger to your budget that you may protect yourself against is cost anomalies. The biggest player in all insurance is medical insurance. Medical costs can destroy any budget plan. Even where there is socialized medicine you can incur significant medical costs. These not only damage to your budget but may require the liquidation of assets to settle if you do not buy supplemental insurance coverage.

Balance Sheet oriented Insurance

You work hard and manage your resources diligently to build a strong balance sheet. A major threat to your financial security may result in overwhelming cost from ill health, through an accident, through an accident that results in litigation against you, theft, or destruction. These may be acts by persons or by Mother Nature.


  • Medical costs are high and increasing. If you do not have medical insurance you risk having to liquidate your assets to pay medical bills. If you ignore the need for medical attention you will get sicker to the point you risk disability and that is a risk to your income. Medical insurance is a necessity for Financial Therapy.

  • Auto insurance for liability is also a necessity. Even if you are a most capable driver all you need to make is one mistake that results in disability or injury and you are liable for paying compensation that can be in the millions. Without insurance such an incident can more than wipe out your net worth.

  • Auto insurance to cover the loss of your vehicle just makes sense. You need your transportation to get to your source of income. If you owe money on a loan for this asset and lose it through loss, theft or an accident and do not have insurance, you will not have your car but you will still have the loan. This would do huge damage to your balance sheet.

  • The same applies for insurance to cover the asset of your home. For insuring a home further concerns are acts of nature such as earthquakes, fires, hurricanes and tornados, floods and the gamut of financial disasters. People can cause as much damage through random or deliberate acts of human behavior. 

  • Home insurance for liability is also a necessity. Accidents can occur in a home that may result in disability or injury and you are liable for paying compensation that can be in the millions. Without insurance such an incident can more than wipe out your net worth.

  • House contents are insured in conjunction with but separately from the house itself. It does not matter if you are a home owner or a renter. You need to consider contents insurance. Furniture and other home contents are expensive to replace. In a worst case scenario you would start from 0 after a fire or a flood. These events are traumatic. Replacing the things you need to feel at home in is challenging enough without having to pay for it all again as well.


And Your Life Plan

Your life plan is built on the assumption that things will continue to unfold as long as there are not unforseen changes, accidents or catastrophes that would change everything. Insurance is there for you to protect your life plan and those in your life plan against overwhelming financial losses. How much protection you need against these financial calamities is a judgement call.

Conclusion

Anything can be insured. There is specialty insurance for that. Specifically, you may have assets like valuable collectibles or jewelry. On the income side there is the example of a movie actress and dancer of the 1930s named Betty Grable. She had her legs famously insured by Lloyds of London for $1,000,000…a lot of money at that time. Insurance companies will insure you and over insure you. Make sure that you get fair value for your insurance dollar and minimize overlap on your policies. When your balance sheet is large enough to need protection from one kind of insurance it is large enough that the protection offered by other insurances is redundant.