Insurance; The What, Why, When, and How

Part 1: I decided to start a series of blogs discussing the various types of insurance. Insurance is an interesting beast that is not the most interesting topic of discussion. But it’s one of those things that are a necessary evil. You hate to pay, but when you benefit from any pay-out you are thankful for the coverage. In upcoming blogs I will discuss life insurance, health insurance and health care plans (THEY ARE NOT NECESSARILY THE SAME!!!), disability insurance, auto, homeowners, life insurance, and finally, personal and professional liability insurance.

Before I get started, let me explain why we even need to discuss insurance. Why is it even around??

Every day we are exposed to risks. According to Webster’s dictionary online, (webster.com) the definition of risk is “possibility of risk or injury”. Because we are exposed to many risks from the moment we step foot out our door, we must know how to protect ourselves. That’s where insurance comes in. I’m sure you’re aware that loss from any cause can be financially devastating. Without insurance we would need to keep lots of cash to cover those losses!

Please Note: Not All Risks Are Insurable!!! According to Winter and Mershon, authors of Insurance and Employee Benefits, there must be an insurance company who is willing to offer coverage AND there must be someone who will pay the premiums (those monthly bills we all love!) (Winter and Mershon, 14).

According to the authors, there are 4 factors that must be considered in order to determine if a loss is insurable. They are:

1-      The loss must be measurable (meaning the loss must have a dollar amount attached to it!)

2-      There must be a good number of other people who are exposed to the same risk. This is so the insurance company can spread the potential payout among many others. Think about it, if an insurance company only has 100 people who are exposed to a risk that can cause 1 person $10,000, that means that 1 person can put in a claim and the insurance company will have to spread that payout amount the remaining 99. Now what if that same insurance company had 1,000 people. The hit would not affect them as much.

3-      The loss can’t be CERTAIN. If something is CERTAIN to happen, it can’t be insured. Things insurable are accidental.

4-      No Catastrophes!!!! Webster.com gives a great definition of catastrophe. A momentous tragic event ranging from extreme misfortune to utter overthrow or ruin. Sounds a little dramatic, but this definition hits the point. If insurance companies are constantly paying out catastrophic claims, how will they continue as a company? And what would those premiums look like? Scary!

Now let me mention. My goal is to become completely self-insured and to show others how to do the same. This would mean my assets could cover any loss that may occur. I hope this gives you some basic knowledge on risk and insurance. Feel free to comment with any questions!

Winter, Mandell S, and Mershon Jeffrey B. Insurance and Employee Benefits. 3^rd ed. Kaplan University

http://www.merriam-webster.com/dictionary/catastrophe

http://www.merriam-webster.com/dictionary/risk