Insurance 101: Health, Life, Home and Auto Insurance Coverage


Throughout our lives, most of us will have to deal with four basic types of insurance:

  • health,
  • life,
  • home,
  • and auto.

Making good choices and finding cheap insurance depends on a basic understanding of how each works.

Health Insurance

As the country transitions toward the full implementation of federal health care reform in 2014, approximately 46 million Americans still have no medical coverage. Families and individuals that are already one major illness away from financial disaster, have been placed in even greater danger by the recession, which has deepened since 2009.

Medical debt is responsible for roughly 60 percent of all U.S. bankruptcies, so while health insurance itself can be a monetary burden, the consequences of going without the protection are potentially more dire.

Increasingly businesses are phasing out health benefits, but more than 50 percent of Americans still get their coverage as an aspect of their employment. Around 30 percent have some degree of protection via government programs like Medicare or Medicaid. The remainder shop the private insurance market where it is much more difficult to find cheap rates.

The Problem of Pre-Existing Conditions

Pre-existing conditions in group plans are normally not a problem because the degree of risk to the insurer gets spread out over a large number of members. This is not the case with individually underwritten private medical policies, however.

Consequently, applicants should anticipate a thorough scrutiny of their medical history and a likely denial for a pre-existing condition. Another possibility is the placement of a rider, which will stipulate that no benefits be disbursed for claims related to the condition.

The Effect of Health Care ReforM 

Health care reform did not remove the problem of policy denial for pre-existing conditions. Instead the federal government via the Department of Health and Human Services  provides coverage for about 2 million Americans to compliment high risk insurance pools operated by individual states.

Policy holders still pay premiums, but the government puts up the money (about $5 billion) for benefit payments in the event of a claim. This is the system that will remain in place until 2014, when competitive insurance exchanges or marketplaces will allow consumers to shop for cheaper coverage.

Honesty is Key with Medical Coverage

Policy applicants who do not disclose the presence of a pre-existing condition can face an industry practice known as recission. The sequence of events runs something like this:

  • A claim is filed.
  • The policy holder’s medical history is reviewed.
  • An undisclosed condition is discovered.
  • The policy is canceled.

This is a difficult situation not only because no benefits are paid, but all the premium money is basically lost. Even if being honest results in a rider for a pre-existing condition, that is better than forfeiting the entire investment in the coverage.

Run the Numbers and Research Carefully

Every individual and family has to determine the amount of medical debt they could reasonably carry before applying for a health policy. What regular expenses, like check-ups or a visit for a simple cold could be handled out of pocket? The more you can cover on your own, the higher deductible you can set, thus allowing the insurance to address catastrophic illnesses, not every little sniffle.

Because insurance costs vary by age group, occupation, and state, multiple price quotes are absolutely essential to get cheap health coverage. Don’t just compare prices, but also research the insurer. A company that isn’t financially sound may not be around when you need to file a claim.

Life Insurance

Although life insurance is one of the first types of coverage to be canceled in tough economic times, it is actually the best future protection you can offer to your loved ones. Beyond the staggering costs of burial in the United States — often $7,000 to $10,000 — life insurance helps maintain the standard of living for the surviving spouse and children. The funds may also address medical debts that your health insurance fails to cover, or go toward the realization of future dreams like a college education for your children.

The Two Plus Two of Life Insurance

There are two fundamental questions to consider as you begin to shop for cheap life insurance:

  • What kind of coverage do I need?
  • How much coverage should I take out?

There are also two basic types of life insurance policies: term life and permanent life. Each works just a bit differently.

  • Term life policies cover a specific time period for a specific amount of money. The named beneficiaries can receive that amount and nothing more.
  • Permanent or whole life policies are in place for the life of the holder, and over the years accrue greater cash value. Essentially, the longer you live, the greater the value of your policy.

When you’ve answered the first two questions, the choice of policy type will likely be more clear, but everyone wants a formula.

Figuring Out the Life Insurance Math

The time to shop for life insurance is when you are young and in good health. This is, however, a time when the expenses of raising young children seem endless, and now the recession and high unemployment make any extra monthly bill just seem impossible.

Financially think about two things:

  • Term life coverage is less expansive than a permanent policy.
  • You can, however, borrow money against the value of a permanent policy.

Which one can be best made to work in your current financial situation?

Although everyone would like a set formula for determining their life insurance coverage level, the decision is more highly personal today than ever before. There are some standards “go bys,” however, as you begin thinking about a dollar amount you can afford.

  • You can simply take your income level and multiply it by 8.
  • Or you can multiply by 6 and factor in a major one-time expense, for instance paying off the mortgage on your home..
  • There’s also the option of looking at expenses, both one-time and long-term, and multiplying that figure by the number of children you have.

Do bear in mind that the third method assumes a two-parent household. Single parents should even more seriously consider taking out a life insurance policy. Estimates suggest that from birth to age 18, raising a single child and providing nothing but daily necessities costs more than $250,000. Remember, that’s per child.

A qualified insurance professional can help you with all these considerations, and it would also be a good idea to consult with your financial planner, accountant, broker, or family lawyer. Life insurance is all about the future, not the present, and these are the advisors best able to counsel you about your options.

Homeowners

Most mortgages require the presence of a homeowners insurance policy. Actually, obtaining coverage for the home is rarely the problem people face. The major issues are wasted money or inadequate protection as a consequence of neglect and inattention on the part of the policyholder. No other form of insurance is more likely to be blindly renewed and seldom reviewed than home coverage.

Insuring the Structure 

The typical homeowners policy covers the structure of the home as well as the personal property and possessions inside. There will also be a degree of coverage for liability claims extending to people who live in or visit the home.

Common structural threats normally covered in a homeowners policy are:

  • fire,
  • extreme weather,
  • and theft.

Remember that any kind of incident that is not specifically singled out for exclusion is normally included. However — and this is a big “however” — you will likely need separate policies for floods, wind, and earthquakes.

Insuring Personal Property and Possessions

There are many variations on coverage for possessions and personal property. Start by making a personal inventory of your possessions.

  • Be detailed.
  • Take down serial numbers.
  • Photograph key items and date the images.
  • Include appraisals as applicable.

You can never have too much information or documentation in a home inventory. This is the data that will help you determine if riders for particular valuables are necessary in addition to the basic policy provisions.

Review your home inventory annually and adjust your coverage accordingly. Most people continue to insure things they no longer own and never get new acquisitions on their policy — and don’t find it out until the worst possible moment!

Covering Liability in the Home 

This aspect of a home policy protects the owners against lawsuit by providing benefits for individuals injured while on the property or whose own property has been damaged on the premises. Generally this coverage is capped at $100,000, but this amount can be increased easily.

Maintaining Cheap Homeowners Insurance

Some things to consider in balancing the affordability of your coverage with the comprehensive quality of the protection include:

  • Keep your deductible as high as possible, but make sure you have enough cash on hand to meet the amount in the event of a claim.
  • If possible consolidate all of your policies with one insurer to get a multi-policy discount.
  • In arriving at a value amount for your home do not insure the land. Why cover dirt?
  • Get all the security discounts you can including those for dead bolt locks, smoke detectors, burglar alarms, or professionally monitored alarm systems. These savings can knock as much as 20 percent off the cost of the insurance.

But, above all, tend your homeowners policy annually!

Automotive 

In most states (except New Hampshire), it’s illegal to drive without insurance. The coverage not only extends to accidents, addressing damages to your car and to that of the other driver if you are at fault, but also to instances of vandalism, fire, and theft among others. Although auto coverage requirements vary by state, first-time customers need to go in understanding liability and collision coverage.

Liability Coverage

The policy language for liability coverage (damage caused to others) is generally written as 20/40/10, meaning you have:

  • $20,000 in bodily injury protection per person,
  • $40,000 in bodily injury protection per incident,
  • $10,000 in property damage per incident.

Liability for bodily injury covers medical expenses and lost wages for injuries you cause to others while liability for property damage pays for property you harm. This can be the other vehicle, or something you’ve hit, like a fence.

Do be aware, however, that your financial liability can exceed the limits of your policy and you are responsible for paying the difference. You can always raise your limits, but, of course, that also raises the overall cost of your auto insurance.

Collision and Comprehensive 

Collision coverage pays for your damages. Generally there is a threshold, about 70 percent of the value of the car, after which the vehicle will be totaled. Deductibles routinely range from $250 to $1,000. The higher the deductible, the cheaper the coverage.

This protection also extends to damage not caused by accidents including fire, theft, vandalism, natural disasters, and collisions with animals (for instance, deer.) Some comprehensive coverage also includes glass replacement with no deductible, but that varies by state.

Other Provisions and Extras

Many states require other elements of coverage to be present in an auto insurance policy. Your best bet is to work with a qualified insurance professional and to carefully review all aspects of the policy, including extra provisions you may well be able to do without, like benefits for a rental car.

Multiple rate quotes are essential to maintain cheap auto coverage, a process made simple by readily available online price quote engines.