insurance is a contract between an individual or business and an insurance company where the insurance company promises to compensate the individual or business should the insured risk occur this contract is referred to as an insurance policy so how does insurance work when you sign an insurance contract you agree to pay a premium your premium is put together with a premium from other customers in a pool when they ensure the risk occurs and you claim the insurance company uses money from the pool to settle your claim
Why insurance is important
if you’re healthy, you’ll need healthcare at some point. Health insurance protects you from the high cost of healthcare. Without insurance, you have to pay for the full cost of any care you get. The average cost of a trip to the ER is $1,630. The average cost for chest pain is over $7,000. Even just a 15-minute doctor visit can cost $175.
With insurance, you pay a monthly premium, but you share the cost of care with your insurance company. You benefit because your insurance company negotiated lower costs with doctors and the most you have to pay in a year is capped.
How insurance works:
- Let’s say that you have a car that right now is worth about $10,000 and you don’t have $10,000 as a cushion. If by chance your car were to get totaled or if it were to get stolen or something were to happen to it, you don’t have an extra $10,000 to then buy another car just like it.
Transferring Risk with Insurance
- So one option you have to try to transfer some of that risk is to buy car insurance. And this video is about all forms of insurance, but I’ll just use that as an example to just help think about how insurance works.
Consulting an Insurance Agent
- So what’s going to happen in that situation is that you would likely go to an insurance agent and you’re just, like, “I would like to insure my car in case it gets stolen, in case it gets totaled, in case something bad happens to it and I have to pay a lot of money for that.”
Getting Insurance Quotes
- And so then the agent, they might work for an insurance company or they might be able to get you quotes from many different insurance companies, but they’ll come back to you and say, “Okay, if you pay $200 a year,” and I’m making up these numbers, these aren’t necessarily the types of numbers that you will see when you go to an insurance agent.
Agreeing to the Insurance Terms
- “But if you pay $200 a year, we got you covered. If anything were to happen we will cover the cost of the car.” You’re like, “Okay, I do. I can pay $200 a year,” and I’m willing to pay $200 a year because I don’t have $10,000 if something bad were to happen, so I agree to do that.
How Insurance Companies Make Money
- Now the question you might have is, “Well, how does the insurance company make money here?” Well, they have a whole bunch of people looking at the statistics of it all, statisticians, they’re usually called actuaries when they’re at an insurance company, and they look at the probability of something like that happening.
Types of Insurance
- Life Insurance
- Health Insurance
- Property and Casualty Insurance (e.g., Homeowners, Auto)
- Business Insurance
- Specialty Insurance (e.g., Travel, Pet)
- and many more
Elements of an Insurance Contract:
Let’s talk about the key elements of an insurance contract. Insurance is the backbone of every established business’s operational plan, offering reassurance of financial stability should the worst-case scenario come to fruition. But understanding the elements of an insurance contract can seem daunting when it applies to a business versus a person. Today, we’ll talk about the components of an insurance contract that make it legally binding for both parties.
Offer and Acceptance
When you seek an insurance policy, you fill in an application that’s legally known as an offer. Acceptance occurs when the insurance company formally issues the policy.
Legal Consideration
This refers to the dollar value of the premiums you agree to pay and the dollar limit of the coverage the insurance company provides in return.
Competent Parties
Insurance contracts are only valid if both parties are of sound mind and body. Both parties must be at least the legal age of majority, and the insurance company must be licensed in your state.
Free Consent
Both parties in any insurance contract must enter into the contract of their own volition, with no fraud, misrepresentation, intimidation, or coercion involved.
Legal Purpose
The insurance contract must adhere to all state-specific laws that apply to the contract and cover only legal activities.
Insurable Interest
You have an insurable interest when you benefit financially from whatever is being insured, and you cannot get coverage for something in which you have no insurable interest.
Utmost Good Faith
This means that both parties have acted without any type of deception, omission, or misrepresentation.
Material Facts
Material facts are those things that the insurance company needs to know in order to insure your business.
Full and True Disclosure
Both parties are required to completely disclose all material facts pertinent to the contract.
How To Choose The RIGHT Life Insurance Policy:
Introduction
What type of life insurance do you own? Is it there to provide a living benefit or just a death benefit? Will your policy provide tax-free cash when you retire or just pay your loved ones when you die?
Life Insurance for Death or Living Benefit
It is surprising to me that so many people have never been asked these questions or even know which type of insurance they own and, more importantly, why they own it. There are many types of insurance you can purchase, and although I know that this is one of the least favorite topics for most people, it is one of the most important.
Integration with Financial Planning
Insurance is not something that should be discussed separate and apart from your financial planning meetings, and I believe that is why it is so confusing. You are not looking at your entire investment portfolio when making your insurance decisions.
Key Questions to Consider
Here is a list of questions you should have answers to on your current policies or those you plan to purchase: What type of insurance do you own? Why do you own it? How can you maximize the insurance to better work for your overall financial goals?
Annual Review and Investment Strategy
Do you realize this is an investment and that you should perform an annual review just like you do for all other investments to make sure it is the correct strategy for your needs?
Getting the Right Advice
Am I getting advice on my insurance needs from someone that can look at my entire portfolio of what I need today and tomorrow, or am I talking to someone that just offers insurance products?
Tax-Free Income and Health Conditions
Did you know that your life insurance policy could provide tax-free income during retirement? Did you also know that once you have a health condition, all of these options may disappear from your financial planning menu?
Rethinking Your Life Insurance Policy
You need to rethink the use of your life insurance policy to make sure you are working with someone that can articulate the strategy that best fits your personal financial situation and works for your needs.