Introduction to Insurance 03: Fundamentals of Insurance
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Introduction to Insurance 03: Fundamentals of Insurance
How does insurance work?
Insurance works by pooling risk.What does this mean? It simply means that a large group of people who want to insure against a particular loss pay their premiums into what we will call the insurance bucket, or pool. Because the number of insured individuals is so large, insurance companies can use statistical analysis to project what their actual losses will be within the given class. They know that not all insured individuals will suffer losses at the same time or at all. This allows the insurance companies to operate profitably and at the same time pay for claims that may arise. For instance, most people have auto insurance but only a few actually get into an accident. You pay for the probability of the loss and for the protection that you will be paid for losses in the event they occur.
Life is full of risks – some are preventable or can at least be minimized, some are avoidable and some are completely unforeseeable. What’s important to know about risk when thinking about insurance is the type of risk, the effect of that risk, the cost of the risk and what you can do to mitigate the risk. Let’s take the example of driving a car. (For more insight on the concept of risk, see Determining Risk And The Risk Pyramid.)
Type of risk: Bodily injury, total loss of vehicle, having to fix your car
The effect: Spending time in the hospital, having to rent a car and having to make car payments for a car that no longer exists
The costs: Can range from small to very large
Mitigating risk: Not driving at all (risk avoidance), becoming a safe driver (you still have to contend with other drivers), or transferring the risk to someone else (insurance)
Let’s explore this concept of risk management (or mitigation) principles a little deeper and look at how you may apply them. The basic risk management tools indicate that risks that could bring financial losses and whose severity cannot be reduced should be transferred. You should also consider the relationship between the cost of risk transfer and the value of transferring that risk.
There are two ways that risks can be controlled. You can avoid the risk altogether, or you can choose to reduce your risk.
If you decide to retain your risk exposures, then you can either transfer that risk (ie. to an insurance company), or you retain that risk either voluntarily (ie. you identify and accept the risk) or involuntarily (you identify the risk, but no insurance is available).
Finally, you may also decide to share risk. For example, a business owner may decide that while he is willing to assume the risk of a new venture, he may want to share the risk with other owners by incorporating his business.
So, back to our driving example. If you could get rid of the risk altogether, there would be no need for insurance. The only way this might happen in this case would be to avoid driving altogether. Also, if the cost of the loss or the effect of the loss is reasonable to you, then you may not need insurance.
For risks that involve a high severity of loss and a low frequency of loss, then risk transference (ie. insurance) is probably the most appropriate protection technique. Insurance is appropriate if the loss will cause you or your loved ones a significant financial loss or inconvenience. Do keep in mind that in some instances, you are required to purchase insurance (i.e. if operating a motor vehicle). For risks that are of low loss severity but high loss frequency, the most suitable method is either retention or reduction because the cost to transfer (or insure) the risk might be costly. In other words, some damages are so inexpensive that it’s worth taking the risk of having to pay for them yourself, rather than forking extra money over to the insurance company each month.
The Risk Management Process
After you have determined that you would like to insure against a loss, the next step is to seek out insurance coverage. Here you have many options available to you but it’s always best to shop around. You can go directly to the insurer through an agent, who can bind the policy. The process of binding a policy is simply a written acknowledgement identifying the main components of your insurance contract. It is intended to provide temporary insurance protection to the consumer pending a formal policy being issued by the insurance company. It should be noted that agents work exclusively for the insurance company. There are two types of agents:
How to Find Affordable High Risk Life Insurance?
Anyone, considered a high-risk prospect for a life insurance will find it extremely difficult to get affordable life insurance. People who have searched for such life insurance covers know the difficulty in finding an affordable policy. But, you needn’t worry too much as you are not the only person who faced this kind of situation. Even though you may think that such policies don’t exist on the surface, anyone willing to dig deeper should come across a host of affordable insurance policies to suit their budgets.
There are specialized insurance companies that are selling high-risk life insurance coverages to the average income earner. These companies have custom designed products to suit any person who is considered high-risk when it comes to obtaining a life insurance. The hard truth is that people who are considered high-risk require life insurance coverages more than other people do. This is why if you are over 50-years and having a chronic medical condition, you should immediately consider switching from a general insurance company to find the type of policy to suit your condition.
A specialized life insurance company will give you many choices when it comes to purchasing a suitable cover for you. Their agents will be trained to assess risks and provide you with an excellent solution to your condition. Call them now and explain the particulars of your current situation, and they will come out with a tailor-made solution to your problem.
You will have to fill out the application to the best of your ability without hiding anything about your current medical condition. So if you are looking for life insurance and have hemophilia or high cholesterol put that on there. This will help the company to offer you the best possible coverage, which would definitely be within your budget range. Various companies will offer numerous policies that would cover many types of risks.
You should remember that different companies will specialize in different areas when it comes to high-risk life insurance policies. Be on the watch out for a company that has a good track record of pairing high risk applicants with affordable coverages. When you provide correct information about your condition, you can definitely obtain affordable life insurance policies for your high risk situation.
How Is Life Insurance Beneficial?
Most people do not enjoy paying for their life insurance. Many of these people even consider cancelling their insurance policy at one point. This could be understandable especially with the hard economic times that make every dime worth budgeting for. If you are thinking of cancelling your life insurance policy to spend the money elsewhere, think again. What will happen if you are suddenly incapacitated, are diagnosed with a terminal diseases or meet a sudden death. What kind of a life will your loved ones and dependents lead once you are gone? How financially stable will they be? As the sole bread winner of the family, it is highly recommended that you buy or retain a life insurance policy. This will help secure a promising future for them even after you are gone.
The main reason why life insurance should be a necessity in every family is the benefits that come with its cover. The insurance policy for instance takes care of all funeral expenses when you die. This means your beloved ones won’t have to dig deep into their pockets to pay for these expenses as they are already taken care of.
Life insurance policies not only cover funeral and burial expenses, but also support the family financially for more than a year. This gives them peace of mind and enough time to find an alternative way of earning some money.
Life insurance premiums may be expensive at times, which is the reason why you need to look for the best life insurance company to use. Create some time to compare premium rates between several companies; this will give you a bigger opportunity to find an affordable policy to buy. The life insurance policy you choose to buy should be affordable and with adequate cover. An insurance agent should be able to help you find adequate life insurance cover to use.
Getting On The Road To Financial Freedom
Many people go through their lives feeling like a victim. They think the world is against them because their life is not what they envisioned it to be when they were a child. This feeling is often fueled by financial problems.
People like this can take control of their lives by learning to be financially literate. Knowing how to spend and save money is often the difference between living well and struggling to make ends meet.
The first step in gaining financial freedom is paying off debt. Debt is bad because repayments take up a considerable amount of a borrower’s income. This income could be saved, invested or spent in better ways.
The reason that people struggle so much to pay off their debt is that they pay the minimum amount required. When a person does this, interest charges and late payment fees become their worst enemy.
If borrowers pay off more than the minimum, their payment will go towards the amount borrowed as well as the interest. This will shorten the length of the loan.
The loans with the highest interest rates should be paid off first. If the borrower cannot make full repayments on time, they should talk to their lender.
Lenders are deathly afraid that their borrowers will file for bankruptcy. When this happens it is almost impossible for them to recover the loaned amount. Therefore, they are more than willing to arrange payment plans with customers who are finding it hard to pay off their loan.
Finally, borrowers should not take out any new loans. This includes payday loans. If they do this, save money and live within their means, they will achieve their financial goals. In fact, they may even be able to put some of their savings into investments which will increase their net worth.