Why do you need insurance? When something goes wrong, insurance can help make it right again. Insuring your house so it is replaced after a fire; insuring your life to provide for dependents; or insuring your mobile phone for replacement if lost are all examples of contingency planning.
Planning for the future can seem very daunting, but it helps us deal with the uncertainties yet to come, commonly known as risk. Insurance helps us manage these risks. Webster’s Dictionary defines insurance as “a means of guaranteeing protection” and in most cases, we look at this as financial protection, but this was not always the case.
Insurance in History
As a concept, insurance dates back as far as 3,000 B.C. when Chinese and Babylonian traders would separate their goods and place on several vessels during water transport to reduce their amount of loss should a ship go down. Today, insurance is a bit more complicated, but it is still a tool to help us recover when the unexpected happens. Insurance can be difficult to understand, select, and pay for. To help navigate, here are some tips.
Finding the Perfect Match
Researching insurance policies should begin with the insurance company. An insurance policy is only as good as the company backing it. If the insurance company that is supposed to pay for a financial loss, is having financial woes itself, where will it get the money needed to settle claims for their policy holders.
An insurance company can be rated by several rating companies, but the A.M. Best is perhaps the most well-known. The rating is very similar to how we were graded in school with A++ being the best all the way to F. An insurance company with a rating from A++ to B+ is considered in good standing. For more details on the ratings of a particular insurance provider, visit www.ambest.com. After you find a company that you feel comfortable with and has a good standing in the insurance industry, contacting a representative to discuss policy options is the next step.
Accepting Some Risk
When looking at insurance, it is important to understand the value while not being mystified with the options. Insurance should be used to protect you and your family from financial ruin if the unthinkable happens. Insurance is your contingency plan.
It sounds logical to purchase an insurance policy that would cover us for 100% of our financial loss. Unfortunately, if you shift all of the risk to the insurance company, the policy premium would be very high. If you are willing to retain some amount of the financial risk, you will be able to save money on the premium, while continuing to be protected from financial ruin in the event of a major catastrophe. This retention of risk is known as a deductible. The larger the deductible, the lower the premium you pay.
Handling the Small Stuff
This may seem backwards, but once you have purchased a policy, try to avoid using it. I know this sounds strange, but insurance should not be handled like a new toy that you can’t wait to try out. Insurance is simply a tool to help protect your assets and your family’s financial resources. Since your premiums are based upon the amount of risk assumed by the insurance company, the more claims you send their way, the higher the risk becomes to insure you. This would likely result in future increases in your premium or even cancelation of your policy. Should you have a claim that is less then catastrophic, or something that you could cover by using your savings, it may be prudent to pay this out of pocket rather then submit the claim to your insurance company.
Summary
There are many planning concerns that can be quite overwhelming if not viewed with the right perspective. When looking into insurance, whether health, auto, or home owners’, the goal behind this financial tool is to protect you and your family from a devastating loss, not take all risk away.
