Insurance Policy Selection: Needs Analysis & Premiums

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we will review how to consider a person's needs and the amount of coverage for insurance policies. Let's also take a look at how premiums affect the total cost of insurance.

Insurance Policy Selection

Jim has returned from his first day at a new job with information about his benefits options. His company offers a number of insurance products, such as health and life insurance, but before he commits to buying anything through the company, he wants to make sure it's worth the money. In this lesson, we can help Jim consider how much coverage he needs and figure out what is affordable for him.

Needs

Insurance companies sell coverage for specific events or losses. The insurance companies pool money from multiple buyers, invest it, and use the proceeds to pay out claims as well as make a profit. Policy costs for each customer are based on individual risk profiles and the probability of an insured occurrence. Why bother with insurance? In many cases, it's the law. Jim must have an approved health insurance policy or pay a fine each year, and he is also required to have liability insurance if he owns a car. In other cases, it makes more sense to pay a little bit of money each month to protect against the risks of a catastrophic event.

A few dollars a month might pay for a life insurance policy that would allow Jim's family to replace his income if he died. Disability insurance can provide additional income in the event Jim becomes injured and is unable to work. Whether he's required to own it or not, insurance policies can help Jim financially survive events that would otherwise personally cost in the hundreds of thousands or even more than a million dollars.

For disability insurance, Jim should consider how much income he has to replace each month to get by. If his spouse works or if he could trim other expenses, he may need only a limited amount or no coverage. Life insurance can be used to pay off a mortgage, fund his kid's college education, or replace the lost income from a deceased family member.

Cost

When looking at a specific insurance product, Jim should consider four primary factors: the coverage, premium, deductible, and co-pay. Coverage refers to the exact event being insured against, such as death, vehicle damage, personal liability, or needing emergency surgery. Since insurance coverage may vary between policies, it's important to know what is covered when comparing costs.

Premiums are the monthly fees Jim pays to keep the policy in effect. A deductible is the amount of money that Jim must pay on his own before insurance will begin to pay for covered events. Generally, the lower the premium, the higher the amount of the deductible. The insurance company minimizes its own financial risk by requiring a customer with low premiums to self-insure through a larger amount of financial loss. Some insurance products have a co-pay, which has Jim pay a set amount or percentage of the cost while the insurance company pays for the remainder of the expense. Selecting different co-pay amounts can also influence the cost of premiums.

Insurance is there to hedge risk. However, it is impractical for most people's budget to buy every insurance product out there with maximum coverage. The odds of an earthquake in the midwest are very low, but Jim lives in California, so protecting his personal belongings from loss or damage with earthquake insurance might be worth purchasing. On the other hand, if the cost of the policy is incredibly expensive compared to the cost of his belongings, it might be wise to pass.

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