Understanding Types of
Insurance
What is Insurance?
 An arrangement
between an individual
(consumer) and an
insurer (insurance
company) to protect
the individual against
risk.
Insurance is…
 Insurance should play
a large role in an
individual’s financial
management plan.
 1 in 12 dollars in the
US economy is spent
on insurance.
Purpose of Insurance
Limits
financial loss.
Prepares for the unexpected.
Transfers part of the risk of
financial loss to the insurance
company.
Insurance Terminology
 Policy – contract between individual and
insurer specifying terms of insurance
arrangement.
 Premiums –fee paid to the insurer to be
covered under the specified terms.
Terminology Cont…
 Deductible –amount paid
out of pocket by policy
holder for portion of a loss
before insurance coverage
begins.
 Policyholder –consumer who
purchased policy.
Types of Insurance:
 Automobile
 Health
 Life
 Disability
 Homeowner’s/Renter’s
1. Automobile Insurance
 Purpose
of auto insurance is
to help individuals limit their financial
losses when an auto accident occurs.
 Insurance Education Foundation (IEF)
states there is 70% chance a person will
be involved in an auto accident within
the first three years of driving.
Four Types of Auto Coverage
 1. Liability Insurance
 Covers the insured if injuries
or damages are caused to
other people or their
property.
 Minimum amount of
insurance required by law
for automobiles.
Types of Auto Coverage cont…
 2. Medical Payment Insurance
 Covers injuries sustained by the
driver of the insured vehicle or any
passenger regardless of fault.
 Covers insured family members
injured as passengers in any car or
if they are injured while on foot as
a pedestrian or while riding a
bicycle.
Types of Auto Coverage
cont…
 3. Uninsured or Underinsured Motorists
Insurance
 Covers injury or damage to
the driver, passengers, or the
vehicle caused by a driver with
insufficient insurance.
 Does not cover the other driver.
Types of Auto Coverage
cont…
 4. Physical Damage Insurance
 Covers damages caused to the
vehicle.
Collision – covers a collision with
another object, car, or from a
rollover.
Comprehensive – covers all physical
damage losses except collision and
other specified losses.
Types of Auto Coverage
cont…
 Comprehensive and Collision Coverage
 Often
carries a deductible.
• Example, suppose collision damage to
your car costs $1,200 to fix. Your
deductible is $500. You would have to
pay the first $500, and the
insurance company would
pay the remaining $700.
Factors Affecting Auto Premium
 1. Driver Classification
 Age, gender, marital status
• Statistics prove that young males have more
accidents than young females under the age
of 21. Young males pay more for insurance.
• Married people have fewer accidents than
single people. Single people pay more for
insurance.
Factors Affecting Auto Premium
cont…
 2. Rating Territory
• Might be cities, parts of a city or rural areas.
• If you live in a territory that generates more
claims than others, than you will pay more for
insurance.
• Example: More accidents take place in urban
than rural areas.
• A basic insurance policy in rural Nebraska can
be purchased for less than $500 a year. The
same policy in Boston, Washington, D.C. or
Los Angeles costs more than $1,200.
Factors Affecting Auto Premium
 3. Driving Record
 Your driving record is an official list of your
accidents and traffic violations.
 Points will be added to your record.
• 1 point - increase premium 10%
• 2-3 points – increase premium 25-100%
• Accumulation of too many points can cause
insurance company to drop policy;
• Trouble reinsured; high risk – high premium.
Factors Affecting Auto Premium cont…
 4. Type of Car
 Some cars are more expensive to repair or
replace than others.
 Thieves tend to steal expensive sports cars
and luxury cars more often than other types
of cars.
 Premiums reflect this risk.
 5. Claims History
 More claims make premiums higher
2. Health Insurance
 Health care costs are extremely high.
 Large medical expenses can wipe out
savings.
 Health insurance provides protection
against financial losses resulting from
injury, illness, and disability.
 Purpose is to provide coverage for
medical expenses, emergency and
routine.
2. Health Insurance
 Health Coverage
 Hospital
 Surgical
 Dental
 Vision
 Long-term care
 Prescription
 Major expenditures
Health Insurance cont…
 Coverage depends on
terms of policy.
 Policy Purchased


Individual
Family
 Employer-Based

61% of Americans
through employer
3. Life Insurance
 70% of American
adults have life insurance.
 Life insurance provides
money for family members or dependents when
a wage earner dies.
 Dependent is a person who relies on someone
else financially.
Life Insurance Terminology
 Contract – policy which states the
amount to be paid to beneficiary upon
death of insured.
 Beneficiary –recipient of policy proceeds
if the insured person dies.
Who Needs Life Insurance?
 Not
necessary if a person is single
with no dependents.
 Necessary
for people who have a
dependent spouse, dependent
children, an aging or disabled
dependent relative, or business
owners.
4. Disability Insurance
 One out of ten people will
become disabled before age 65.
 Disability insurance replaces a
portion of one’s income if he/she
becomes unable to work due to
illness or injury.
4. Disability Insurance cont…
 Benefit Package
 Pays between 60%-70%
of one’s full time wage.
 Never pays 100% of the wages
because there is no incentive to
return to work.
Disability Insurance cont…
 Factors that Influence Benefit
Package
 Length
or severity of a disability will
impact the percentage of income a
person will receive.
 Employers may offer a portion of the
benefits package.
5. Homeowner’s/Renter’s Insurance
 Property and liability insurance policy
will protect a home from damage costs
due to perils.
 Peril is an event which can cause a
financial loss.
 Fire
 Falling
trees
 Lightning
 Others
5. Homeowner’s/Renter’s
 Property Insurance
 Protects
from financial losses
due to destruction or damage
to the property or possessions.
 Liability Insurance
 Protects the insured from
financial losses due to being
held liable for other’s losses
Homeowner’s Insurance cont…
•Insurance
should cover
the
replacement
cost to rebuild
the home if it is
completely
destroyed.
5. Renter’s Insurance
 Protects
insured from loss to contents rather
than the dwelling itself.
 Covers major perils.
 Liability protection.
 Additional living expenses.
 Landlord’s insurance policy on the dwelling
does not cover the renter’s personal
possessions.
Resources:
 Southwestern Publishers, Economic
Education for Consumers 2000
 Glenco McGraw-Hill Publishers, Consumer
Education and Economics 2003
 www.ConsumerReports.org
 www.quicken.com
 www.farmersinsurance.com