Insurance

Your home, your car, your health and your life are among the most valuable assets you will ever possess. Any loss, damage, injury or illness that comes to them could decimate your finances. You must also protect against the liability of harm to another's person or property. Insurance lessens many of those risks. But insurance itself is a costly expense, so you must find the coverage that meets your needs at the lowest possible price.

How do I choose an insurer?

Many people buy insurance through agents. Independent agents are paid on commission; exclusive agents are paid employees who work for one insurance company. Of course, you do not have to work with an agent to buy many insurance products. Rather, you can apply for coverage directly through the mail, the Internet or over the phone. You will receive greater customer service when working with an agent, but you will pay lower premiums if you do not work with an agent because the insurance company does not have to pay them.

Whichever route you choose, you will want to investigate the insurance company's financial stability first. After all, you will be paying them significant sums of money in the form of premium payments in exchange for the protection they are offering. You want to make sure they have the ability to pay your claims. Private companies, called rating agencies, such as A.M. Best Company, Standard & Poor's, Weiss Research, Duff and Phelps, and Moody's, use certain standards to judge the financial health of insurance providers and issue letter grades based on their assessments.

How does an insurer decide whether or not to accept me as a customer?

Insurance companies want to know how risky you are as a customer. They will ask you pertinent questions, depending on the type of coverage you are applying for, to determine your risk profile. With that information, they will decide whether or not to offer you coverage and how much they will charge you for it. Obviously, the higher your risk profile, the higher the premiums you will pay.

What does homeowners insurance cover?

Anyone who owns property should have homeowners insurance. Lenders usually require that homeowners buy this type of insurance to get a mortgage. That way, in the event something happens to your home, the lenders know their exposure to the loss is limited.

Homeowners insurance generally covers the dwelling and its contents. Both should be insured for their replacement value, not the actual cash value. The market value of your home and the depreciated value of your personal possessions may be lower than their replacement value. You want to be paid the amount it takes to replace the property with something similar at current prices.

You can pay extra amounts to increase your coverage on the dwelling and its contents as well as buy special provisions, or "riders," for jewelry and other expensive items. Loss or damage caused by natural disasters, such as earthquakes, may not be covered in a basic policy, and you will need to pay extra for those provisions as well.

What liability protection do I have if someone is injured in my home?

Homeowners insurance typically offers $100,000 of liability protection to cover legal costs if you are sued, but it can range up to $300,000 or more. Many wealthy homeowners with significant assets to protect buy what are called "umbrella policies" that provide liability coverage of between $1 million and $5 million on both homeowners and auto insurance policies.

What can I do to get the best price on homeowners insurance?

Rates for the same amount of coverage can vary considerably from company to company. Get numerous quotes before making a decision.

You may also qualify for certain discounts. Non-smokers cause fewer home fires and therefore may receive lower premiums. Senior citizens have more time to maintain and watch over their homes and can qualify for sizable discounts for age alone. Security measures, such as alarms, deadbolt locks and smoke detectors, typically lower premiums. Also, insurance companies will usually give you a discount if you buy both your homeowners and auto insurance from them.

You can also save money on insurance by increasing your deductible, which lowers your premium. But make sure you can afford to pay the deductible if something happens.

TIP: When purchasing a home, keep in mind that newer homes tend to cost less to insure than older homes. Whether your home is located in a dangerous or safe area is also a determining factor.

What should I do if I have to make a homeowners insurance claim?

Notify your insurance company immediately and provide them with a detailed written assessment of the problem and photographs. If you have had a break-in, immediately report it to the police-you will need to present the police report to the insurance company when you make a claim. Do not make repairs until the insurance company has an adjuster inspect the damage. You can get independent estimates of the damage and sue if you do not believe the claim settlement is fair.

What does auto insurance cover?

Auto insurance policies can provide many different types of coverage, but you are usually required by law to have a minimum amount of coverage, depending on your state. It generally makes sense to buy more than the required coverage to adequately protect yourself, but the higher the liability limits the higher your premiums will be.

  • Liability insurance covers injury and damage to others as well as legal costs if you cause an accident. Forty-seven states require different amounts of this type of insurance.
  • Collision insurance covers the cost of repairing the cars if you cause an accident. If the repairs cost more than what the car is worth, the insurance company will "total" the car. In that case, collision insurance will usually only pay the car's actual cash value, not the replacement value. You can opt for replacement value coverage, but the premium will be much higher. Collision is typically the most expensive part of car insurance.
  • Comprehensive insurance covers damages that are not caused by an accident, such as damages from break-ins, fire and hitting an animal.
  • Medical payments (MedPay) insurance covers the medical expenses of you and your passengers after an accident, regardless of who caused the accident.
  • Personal injury protection (PIP) and no-fault insurance are types of medical payment insurance required by some states that offer coverage for such things as lost wages and a death benefit.
  • Uninsured motorists (UM) insurance covers your injuries and damages if an accident is caused by a hit-and-run or uninsured driver.
  • Underinsured motorists (UIM) insurance covers your injuries and damages if an accident is caused by a driver whose insurance does not cover all the incurred expenses.
  • Rental car and towing coverage reimburses you for these expenses after an accident.
  • Gap insurance covers the difference between what you owe on your car and what your insurance company will pay if your car is totaled. This type of insurance is especially important if you lease a car or if you made a small down payment on a car loan.

How do I decide how much auto insurance coverage I need?

With liability insurance, it depends on how much you stand to lose if you are sued. Once your liability insurance runs out, your personal assets are at risk. If you do not own a home and have little in savings, you may not need much liability insurance because you do not have much that needs to be protected from a judgment. If you do have assets that you cannot afford to lose, you need to purchase as much liability insurance as it takes to comfortably protect those assets.

With collision and comprehensive insurance, it depends on your financial ability to repair or replace your car. If you cannot afford to do it out of pocket, then you need enough insurance to pay for those expenses.

With regard to insurance that covers medical expenses, it depends on the health insurance you have. If your plan is adequate, you might not need to buy more medical payment insurance than what is required. If you have disability insurance, you may not need much PIP insurance.

Rental car and towing coverage may be covered by your credit card or membership in groups such as AAA.

What factors determine how much I will pay for auto insurance?

Auto insurance premiums are largely determined by the amount of coverage, the deductibles, the kind of car you own, where you live, how much you drive, your driving record, your age, your gender and your marital status. Your credit history may also be a consideration.

What can I do to get the best price on auto insurance?

Auto insurance rates also vary considerably from company to company, so it pays to comparison shop. If you can afford a higher deductible, that will lower your premium. Insurance companies usually offer discounts for low-mileage drivers, drivers with good driving records, older drivers, young drivers with a high grade point average, cars with air bags and automatic seatbelts and cars with anti-lock brakes. You can also get lower rates if you buy both your homeowners and auto insurance from the same company.

What should I do if I have an accident?

Call the police and summon medical help if necessary. Otherwise, exchange names, addresses, phone numbers, vehicle license numbers, driver's license numbers and insurance company names with the other driver. Contact your insurance company immediately.

If you need to file a claim, provide the insurance company with all pertinent information. An adjuster may inspect the car, or you may have to get estimates for the work on your own. Make sure the insurance company agrees to pay before proceeding with repairs.

What are the different types of health insurance coverage?

Most people get health insurance through their employers, who pay most of the premiums and choose what coverage will be offered. Sometimes, employees can choose the type of plan they want. If you buy health insurance on your own, you have more choices, but it can be quite expensive.

The basic types of health insurance plans include:

  • Traditional, or fee-for-service, plans

With this type of insurance, once you have paid your deductible, the insurance company pays a portion of the rest of your medical expenses-usually 80 percent of your bills. You either have to pay the doctor up front and submit bills for reimbursement or have the doctor submit bills to the insurer directly. In a traditional plan, you can pick whichever doctor or hospital you want without needing permission from the insurance company. However, you usually pay more out-of-pocket expenses. This type of coverage used to be the norm but is increasingly being replaced by the managed care plans that follow.

  • Preferred Provider Organizations (PPO)

Like all managed care plans, PPOs negotiate lower fees with a selected network of health care providers. PPOs offer you financial incentives to stay within the network. But you can still go to doctors outside the network if you are willing to pay the expenses up front and submit the bill for reimbursement later. The PPO may only reimburse a portion of out-of-network expenses or charge you a deductible for going outside the network.

  • Point-of-Service (POS)

POS plans are very similar to PPO plans, but POS plans require the insured to choose a primary care physician from the network, who makes all referrals to specialists. POS plans follow the same procedures as PPOs for out-of-network treatment.

  • Health Maintenance Organizations (HMO)

HMOs require that you see only health care providers in its network. The insured pay a low or no co-payment for treatment. If you go out of the network, you pay all expenses yourself.

What should I do if I do not have health insurance through an employer?

Buying health insurance on your own can be quite expensive. Employers enjoy discounts on premiums for group plans, but as an individual, the same coverage that an employer can offer you will cost much, much more. Also, while coverage is guaranteed under an employer's plan, insurance companies do not have to accept you as an individual. And your premium will be determined, not by a group rate, but by your personal health history. But whatever you do, do not go a single day without health insurance.

First, consider COBRA coverage. COBRA (the Consolidated Omnibus Budget Reconciliation Act) requires employers to offer most employees the option to continue coverage through the employer's plan for up to 18 months after leaving the job. However, the employee must pay the full premium. You have 60 days after leaving employment to elect COBRA coverage, which applies retroactively to those 60 days.

What happens when my COBRA coverage expires?

After your COBRA coverage runs out, the Health Insurance Portability and Accountability Act (HIPAA) requires insurers to renew your coverage if you were part of an employer's plan, even if you have a pre-existing medical condition. However, the insurer can increase your premium.

What is long-term care insurance?

Long-term care insurance covers the protracted medical expenses that are usually incurred later in life, such as for assisted-living facilities, nursing homes and in-home medical care. The cost of long-term care can be so high that even affluent individuals could potentially deplete their wealth paying for it.

Premiums for long-term care insurance are determined by your age when you buy the coverage. The younger you are when you buy this type of insurance the less it will cost you. Your premium then stays the same, regardless of changes to your age or health.

What does disability insurance cover?

Disability insurance provides you with income if you are seriously injured and unable to continue working. This type of insurance is offered by many employers, including both short-term and long-term benefits. But if you feel your employer does not provide adequate disability insurance or if you are self-employed, you may want to purchase additional coverage.

Disability insurance coverage can include:

  • Residual disability: If you go back to work, you lose the income you received from disability insurance. But if you are only able to return to work at a lower-paying or part-time job, residual disability insurance will pay the difference between your new salary and what income you previously received from insurance.
  • Elimination periods: When you become disabled, you may not receive your first benefit check for as long as 90 days. You can pay extra to have the elimination period shortened to 60 or 30 days.
  • Guaranteed-increase options: If you want to increase your disability insurance coverage, perhaps because you make more money than when you originally bought the policy, you have to pass another medical physical. But if you buy a guaranteed-increase option the first time around, you can increase your coverage without a physical.
  • Lifetime benefits. Most disability insurance payments end at age 65 when Social Security kicks in, but you can pay more for a lifetime benefit.

How do I know if I need life insurance?

In general, if someone, usually a spouse or child, depends on you for financial support, you need life insurance. The amount of life insurance coverage you should buy depends on the level of financial support you wish to continue providing the beneficiary after you die. Parents usually buy enough life insurance to support their children through college age. Spouses without children usually buy enough life insurance to pay for shared debts, such as a mortgage. Retired married couples may buy enough life insurance to support the surviving spouse. Those with significant assets may buy life insurance to pay estate taxes after they die.

What type of life insurance should I buy?

The two basic types of life insurance are term and permanent. Both charge a set monthly payment over the life of the policy.

"Term life insurance" provides a death benefit only. When the policy owner dies, the insurance company pays the face amount of the policy to a beneficiary. You can buy term life insurance for periods of 1 to 30 years. Premiums for term will increase as you age, and if your health deteriorates, you may not be able to get another policy after the term is up. But term life insurance makes sense for a lot of people who cannot afford permanent life insurance or who are young enough to invest their money in better-performing investments than permanent life insurance.

There are three basic types of term life insurance:

  • Non-guaranteed term life provides death benefit protection for a short time period.6
  • Yearly renewable term life insurance provides death benefit protection for longer time periods-from 5 to 30 years-on a renewable basis.
  • Convertible term life insurance can be converted to a permanent policy in the future.

"Permanent life insurance" is permanent protection that combines a death benefit with an investment vehicle. The face amount is paid to the beneficiary when the policy owner dies. In the meantime, the policy invests the money in stocks, bonds or money markets with the cash value of the policy accumulating tax-deferred over the years. The policy owner can borrow against the cash value.

Permanent life insurance costs quite a bit more than term life insurance, but it can be a good investment vehicle for those who have trouble saving any other way or who put the maximum amount into their other tax-deferred accounts and would like to save more.

There are three basic types of permanent life insurance:

  • Whole life stretches out the cost of the insurance over the life of the policy-that is, over the course of your life.
  • Universal life allows you to increase or decrease the amount of the death benefit and to pay premiums at any time and in any amount within certain limits.
  • Variable life can apply to both whole and universal life insurance. The cash value of these policies is not guaranteed but rather, fluctuates with the performance of the underlying investments, which you get to choose.

How do I get the best rates on life insurance?

Life insurance rates are determined by your age and your health. If you do not smoke, have low cholesterol and low blood pressure and maintain a healthy weight, you should qualify for the best rates.

Many employers provide life insurance to employees as a benefit, but it is rarely enough to meet most people's needs. Sometimes employers give employees the option to buy additional coverage, but you can usually get a better rate on your own.

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