About Insurance

 
INSURANCE

Insurance has a long history. 
The first report regarding insurance dates back 4000 years ago in Babylonia, when a man's home was destroyed, his neighbours would be required to offer their labour free of charge, to help him rebuild his house. 
Early Chinese traders, sailing the dangerous Yangtze river, devised a method of reducing loss to a single trader instead of carrying all his cargo in his own boat, would place a portion of his goods on other boats in his group.  This way, when one boat was lost, no one trader was wiped out.  These are simple devices to reduce the impact of a disaster upon any individual by collectively transferring the risk to a larger group. 
Insurance works on the concept of risk sharing. Insurance reduces the effect of risk of an unaffordable magnitude by shifting the risk to an insurance carrier. 

Risk 

Risk is the state of uncertainty about the actual outcome of a decision or process in which each possible outcome and its probability is known. Risk can also be defined as chance of loss or a condition in which a possibility of loss exists.

Risks are of different types and not all risks can be insured.  Generally, risks are seen as falling into one of two classes - pure and speculative. Your companies equipment, goods may be damaged or destroyed by fire, lightning, windstorm, explosion, riot, theft or robbery. These risks are pure risks and they are insurable. Speculative risks, also referred as dynamic risks, are inherent in business.  The possibility of loss arising out of business decisions is known as speculative or dynamic risk. This type of risk is not insurable.
Faced with a risky world, most people wish to reduce the effect of that risk by insuring. The take life insurance cover, protect against accidents with auto insurance, take safeguards in the event falling ill with health insurance and the like. The insurer collects a payment from the insured, which covers the cost of risk, which is then pooled into a fund that is used by the insurer to cover the loss when it occurs. The charge on the insured is called the premium and the loss payout by the insurer is referred to as indemnity. The ratio of amounts of loss covered to premium collected is called the loss ratio.

The maximum the insurance will pay as compensation is called the cover.

The insurance company uses the principle of pooling the risk of a large number of individuals in order to provide insurance cover in a cost effective manner.

Law of Large Numbers

All forms of insurance spread risk over large numbers.  The rates for covering any hazard are set based on the frequency of occurrence of the particular hazard being insured. The larger the number of exposed individuals in the pool of insurance for a particular hazard, the greater is the accuracy of estimated probability of occurrence.  

This is known as the law of large numbers which has been illustrated with an numerical example below:

# of houses    10,000
avg. value each    $80,000
Total property value =    = $800 million
predicted losses = 1.5% of value     = $12 million
Predicted Loss per house    = $1,200
Rate per $100 of value    = $1.50

Insurance Premium =    
    Cost of losses    = $1.50
    Admin. Costs    0.45
    Reserves for unexpected losses    0.10
    Rate per $100 value    $2.05

Arnold has a country house in a colony in Florida. The place is visited by hurricanes. Without insurance, he runs the risk of losing on an average of $80,000, the cost of his house, in the event of devastation by the hurricane. However, this outside chance, the possibility exists. His cost of risk is $80,000. Alternatively, if the residents of the colony decide to contribute a certain sum each year, their individual loss can be minimised.

The probability of devastation by the hurricane has been predicted to be 0.015. The average loss to the community would be $12 million that is 1.5 percent of the total value of all the houses or $1.5 per $100 of value. This is not the only cost that has to be charged from the residents. The administrative costs have to be added. This makes the total charge equivalent to $ 2.05 per $100 value of house. By involving a large number, the cost per head of the calamity has been reduced drastically. Arnold as the promoter of the insurance concept in the colony, collects $2.05 per $100 value from each of the residents, thereby all are covered. Arnold pays $1640 per annum for a cover of $80000.

Types of Perils

Insurable    
Natural Perils
Storms, Lightning, Fire, Heart Attacks    
Human Perils
Sickness, Theft, Vandalism, Fire    

Difficult to Insure

Flood, Earthquake, Frost, Epidemic
War, Civil Unrest


Life Expectancy Chart 

For individuals the principal of insurance works based on life expectancy.

Current Age    50% Will Live To
    Male    Female
60    85    89
65    86    90
70    87    90
75    89    91
80    91    93
85    93    94
 

Factors of Insurability

Not all factors can be insured. These are some of the factors that  make a risk insurable

1.  Must be large number of people with similar potential for loss.
2.  Loss must be definite.
3.  Loss must be accidental.
4.  Loss must cause financial burden.
5.  Loss must be calculable.
6.  Insurance must be affordable.
 
Types of Insurance 

There are many types of insurance; the following are the common insurance schemes.

*    Life Insurance
*    Health and Disability Insurance
*    Home Owner Insurance
*    Auto Insurance
*    Other Insurance

Life insurance covers the risk of financial loss due to unexpected death or the risk that the person may outlive his financial resources. 
Health and Disability insurance covers risk of financial loss due to illness, injury, or medical bills. 
Homeowners insurance covers many types of insurance that handle damage or loss of property. It includes home, businesses, electronic equipment, furniture, jewellery, etc. 
Automobile Insurance covers risk of financial loss to accidents resulting in property damage and serious injuries to self and others. 

Liability Insurance You are liable when you are legally bound to make good on a loss or damage that occurs in an interaction.

Other Liability Insurance covers all other types of insurable losses not included above, like property insurance, animals, jewellery, electronics, household articles, liability insurance etc. Liability insurance covers losses due to bodily injury, personal injury and property damage where you are legally bound to make good any loss or damage that may occur in an interaction. Different types of liability insurance are Environmental liability, Product liability, Professional liability, Employment practices liability, Crop Insurance, Flood, Nuclear liability, weather etc.

LIFE INSURANCE

Life insurance is a crucial step in planning for you and your family's future. It can fulfil promises and obligations to your family if you are no longer living. Life insurance is financial protection for your family, estate, or business against your premature death. How much life insurance to carry will vary at different times throughout your life. It is based on the probable life expectations for groups of people. Because people have many different needs, there are many types of life insurance plans.

Ron and Jeff own a home in the city together. 

They also own a vacation home in the mountains. The mortgage on the city 
house is  $200,000 and the vacation home is $100,000. Together they can afford 
both  mortgage payments, but if something should happen to one of them the 
survivor could not afford to make both payments. They each take out an insurance policy for $300,000 so that the survivor can use the funds to  pay  off the mortgages. Ron and Jeff could opt for more insurance.
There are various forms of life insurance. The most important classification is Term Insurance and Whole Life Insurance. The Whole Life Insurance has variants such as Universal Life Insurance, Variable Life Insurance etc.
Term Life Insurance: is generally the most affordable and least complicated type of life insurance. Term policies provide life insurance only for a limited period of time, or a "term," and premium payments for the coverage you choose may remain constant or increase gradually throughout that period. When a term ends, you may convert it to whole life insurance, even if your health has made it impossible to otherwise obtain other coverage. Susan and George after their first child Joey was born decide to take a term insurance for 20 years that will mature to $25,000 and ensure that Joey will go to college if he decides.

Term insurance does not include the savings features of whole/permanent insurance. This type of insurance is especially useful for young, growing families with limited incomes and high insurance needs, as well as for circumstances where a need will decline over time, such as paying for education or a home mortgage.

Permanent or Whole Life Insurance: is designed to be in effect for the entire life span of the insured person. The Insurance Company will pay benefits to the beneficiary in the event of premature death. You get this money back either by surrendering the policy or by borrowing against it.

Teri is the sole breadwinner for her household, earning $100,000 per year. Her partner Clara maintains the house and organizes all social activities Clara receives a small income from a trust fund established by her grandfather. Teri is concerned that if anything should happen to her, Clara would not be able to maintain her lifestyle. 

Teri and Kara consult a financial planner. After taking into account Clara assets, liabilities, investments, age, and trust income, it is determined that the amount of cash needed to replace Teri’s lost income stream for Clara’s life is $750,000. They could also opt for setting up a trust or other form of financial planning for Clara from the insurance policy. The take a whole life policy for that amount.

Universal Life Insurance: is a variation of Whole Life. It was developed in the 1970s, when insurance industry regulations changed so that companies could be more competitive with other financial services industries. With Universal Life Insurance, the investment portion of your premium goes into money market funds rather than long-term securities. In addition, unlike the cash value portion of a Whole Life policy, the cash value portion of a Universal Life policy grows at a variable rate. If Teri and Kara want to take a chance a try to earn a higher sum, they could opt for an Universal Life insurance. If they are lucky and the investments are successful, they will receive a larger sum. Nevertheless, there is risk involved and they could loose a bit of their insurance cover if the investments are not successful.

Variable Life Insurance: allows a portion of the insured premiums to be invested according to the policyholder’s wishes. Since Clara follows the stock market regularly, for which she has time, when Teri is away at work, they decide to take the variable life insurance option as Clara can use her spare time to suggest the investments to be made with investable portion of the premium.

As with Whole Life Insurance and Universal Life Insurance, the cash portion of the insured policy will vary. With Whole Life and Universal Life, the insurance company is taking the risk. With Variable Life, the risk is transferred to the insured. 

If you are a conservative investor and have trouble saving, traditional whole life makes sense. If you need premium flexibility especially in the early years of the policy, universal life is for you. Moreover, if you consider yourself a knowledgeable and risk-accepting investor, check out variable life. It may well be that you cannot afford all the permanent insurance you have decided you need, so consider a combination term-plus-permanent policy.

When is Term the right choice? 

If the low dollar outlay is your main concern, and your insurance need is for a period of 20 years or less, term may have an advantage. If your need for coverage will last beyond 20 years, a low cost Universal Life or Whole Life policy may be more effective. Should your life insurance needs change, many term policies carry a conversion privilege that will allow you to covert your term coverage to permanent Universal Life or a Whole Life policy without a medical examination. It is important to check the conversion privileges of the term policy before you make your purchase.

Individual and Group Insurance

David and Erica have been together for three years. Their combined household income is just under $60,000. David is employed at a computer company where his employer offers a basic $20,000 in life insurance to all employees, including their domestic partners. Erica works in  retail  and doesn't have any benefits of her own - they share through David's  employer. They manage fine in the city on their combined incomes but should either one of them perish, that small amount of life insurance coverage wouldn’t be enough to keep them in the city.

David and Erica should consider any life insurance benefit coverage from your employer as supplementary and plan by doing the research and having a consultation for more insurance cover

Further, the insurance plans can be grouped into individual and group policies. In individual policies are sold directly to one person. The purchaser of the policy then chooses his or her beneficiary. Group policies sold to groups of people often consisting of employees in a company and they are all covered under a single master policy. Each group member has the same amount of coverage and each group member names their own beneficiary. In all employer/employee group life policies, the employer pays a portion of the premium for the entire group. 

How Much Life Insurance do I Need?

The starting point for an effective life insurance plan is to identify whether a risk exists and to define the financial impact of a premature death. Several methods are used to quantify this amount.

(i) A Simple Rule of Thumb

The amount of life insurance can be calculated as a multiple of your annual salary or earnings. Five to ten times earning is the simplest rule of thumb. However, it may not allow you to address all of your individual financial goals. That would mean a person making $50,000 a year should have anywhere from $250,000 worth of coverage to $500,000 or more.

(ii) Income Replacement

This method focuses on the replacement of some percentage of salary or earnings for a specified period. The value of the income replacement can be calculated and compared to the assets you currently have. Any difference between needs and resources can be funded with life insurance.

(iii) Financial Needs 

This method focuses on the expected financial needs, including:

•    Family income needs. 
•    Emergency funds. 
•    Estate settlement and administration costs. 
•    Family educational costs. 
•    Paying off debts. 
•    Survivor retirement needs.

To determine your financial requirements, start by looking at your capital needs and divide your insurance need by its use. If you need $60,000 for college and your youngest child will graduate in three years, you need $60,000 of term insurance as a short-term hedge against your death, thus "insuring" that your child can finish his or her education. Meanwhile, if your estate will owe $500,000 in taxes at your death, you probably need permanent insurance because no one knows when they are going to die!

Once you figure out your term or permanent needs (or combination thereof) you are faced with the happy task of choosing which type of term or permanent insurance makes most sense for you.

Take the time to get professional assistance and dig into how Life Insurance can make it easier for the people that you care for.

How are premiums set? 

Several factors contribute to the price of your premiums. These include: 

•    Risk: 

How high risk a client are you? The higher the probability that you will file a claim, the higher your premiums will be.  Joan is 75 years old in good health. Despite this her health insurance premium is high as she runs a high risk of falling ill and claiming insurance. Hence, her premium is based on the probability of falling ill. 

•    Liability: 

Dr. Fraud, a surgeon, takes out a big malpractice insurance as he anticipates a big claim by his patients in case he makes a mistake while performing surgery. The potential payout that the insurance company is exposed to will also affect your premiums. Similarly, if your home contains many valuables or if you have an expensive car, then you'll have higher premiums. The larger the potential loss, the larger the premiums will be. 

•    Deductibles:

Sometimes, as with life insurance, insurance companies are required to cover the entire loss. In other cases, policies may have deductibles. A deductible is the amount you pay for a covered loss before the insurance company begins picking up the bill. The higher your deductible, the lower your premiums will be. 

•    Experience:

The better the company's track record, generally the more reasonable your premiums will be. 

Insurance Ratings

There are several independent companies that provide ratings on the financial stability of insurance companies. These ratings will help you determine the likelihood your insurance provider will be solvent. You must periodically review the ratings as some badly managed companies could become insolvent. Some of the major rating agencies are: 

•    Standard & Poor's (S&P) 
•    Moody's Investors Services 
•    A.M. Best 
•    Duff & Phelps 
•    Weiss Research

Insurance is not an investment tool

Life insurance should never be purchased solely as an investment. After all, some of your premiums are being used to buy the death-benefit coverage and to cover other expenses. Life insurance should not be purchased on children as a way to save for college, and make sure you and your spouse have all the coverage you need on yourselves before you buy any on a child.

ANNUITIES

What is Annuity?

In addition to all of the different life insurance policies out there, life insurance companies also sell annuities. Unlike life insurance policies, which pay beneficiaries a lump sum when you die, annuities pay a regular stream of income while you live, usually after you retire. An annuity is a contract in which an individual agrees to pay premiums to an insurance company and receives, in exchange, a regular stream of income payments from the issuer.

The fact that Ronald had a difficult childhood was fresh in his mind. He was a late child and his parents had retired by the time he was in high school. His father was not able to support his studies at College, since his meagre savings did not permit him to sent little Ronal to College. Ronald did not want the same thing to happen to himself and his children. He contacted an insurance company and found out how much he would have to save each month to get himself an annuity of $5,000 per month after the age of 60 for the rest of his life.

Annuities are a type of protection people can invest in to provide protection for themselves and their family against the risk of outliving one's financial resources. An annuity is any series of payments made at regular intervals in the form premium. The benefits provided by a life insurance company are called a life annuity. 

Benefits of Annuity

Tax-Deferral: The interest, dividends and capital gains are tax-deferred until you start receiving the annuity. 

Guaranteed Death Benefit: Generally, annuities also offer a death benefit. While the types of death benefits differ between products, all of them allow you to pass the annuity proceeds directly to a named beneficiary, avoiding the delay and expense of probate. 

Lifetime Income: If you decide to take an income stream from your annuity, you can choose from a variety of annuity payout options, including payouts guaranteed for the duration of your life. The Life Annuity option does not include a death benefit.

How an Annuity Works

The life of your annuity can be broken down into two phases: accumulation and annuitization. During the accumulation phase, Ronald contributes monthly which is paid back to him during the annuitisation stage.  
Accumulation Phase: During this phase, collections and earnings thereof accumulate tax-deferred. 
Annuitization: In this phase, you choose an annuity payout option and begin receiving income. Typical annuity payment options include payouts for one's lifetime, or for a specified number of years. Once the payout option has been chosen, it cannot be changed, nor can premium be added after this point. 

Depending upon investment goals and need for income, investors can choose an immediate annuity or deferred annuity.

Immediate vs. Deferred

*    If you start to receive payments right away, you've entered into what's called an "immediate annuity." 
*    If your payments don't begin until sometime in the future, you've entered into what's called a "deferred annuity."
Annuities can be further categorized into fixed and variable annuity, depending how your premium is invested. 

Fixed annuity

Fixed annuities are the more conservative. Fixed annuities provide you with a yearly fixed return that is dependent on the insurer's current investment portfolio. Here is how it works: 
•    Your insurance company invests your premium in bonds and mortgages. 
•    Companies announce the fixed return in the beginning of each year, based on their investment results. 

Variable annuity

Variable annuities can offer higher return than fixed-dollar annuities, but also have potentially greater risk. It is up to the policyholder to choose to invest his premium in stock, bond, or money market portfolios. The policyholder may allocate his funds any way he likes to and may transfer those dollars as market conditions change.

Pay-out option choices

There are quite a few choices and not all companies have the same pay-out options, but this list is fairly comprehensive.
Life Annuity – In life annuity, when you decease, all annuity payments stop. If there is any remaining balance in your account, the insurance company keeps it. However, if you outlive your balance, the insurance company keeps paying you until you die. 

Period Certain Annuity - Here you choose a specific length of time for the distribution of your monthly income payments. The shorter the contract period, the higher the monthly income. Once the contract period has ended the account will be at zero. The typical period certain options are 5 years, 10 years and 20 years. 
Life Annuity with Period Certain - The company will pay you an income for as long as you live, but if you die before the period certain that you choose, the income will be paid to a survivor you designate until the end of that period. 
For example: Jackson is 75 years old and is a widower, however, he has a daughter. Jackson opted for Life Annuity with a 20 year Period Certain. He started to receive payments in 1995, he passed away in 2001, six years into his annuitization. His daughter will receive the payments for 14 more years.
Joint and Survivor Annuity - The company will pay an income to you during your life, and after your death, the company will pay a percentage of that income (50% or 75%, for example) to a survivor that you have designated at the time of purchase.

HEALTH INSURANCE

Health insurance has become a vital component to everyone's financial planning. Due to the cost of health care, health insurance has become a necessary, although not a mandatory purchase. Health insurance is confusing. With today's rising health care costs, it's important that you have a basic understanding of your options and how they can protect your health as well as your family's health.
People are demanding less restrictions and more control over their healthcare, even if the premiums are a little more expensive than HMO's.
Roger Smith had heart disease in the family; his father and mother had died of it. He contacted a consultant who explained the various types of health insurance schemes.
Traditional Fee-For-Service Indemnity Plans 

Fee-for-service indemnity plan benefits are paid based on the usual, reasonable, and/or customary rates for services provided. Indemnity plans are generally divided into two parts 

•    Basic plans -- Basic plans cover your doctors' bills, drugs, outpatient surgeries, and other medical expenses up to a specified amount. They can be offered by your employer or through an outside insurance company. Roger could go in for a basic plan if his employer was not already providing him with it. 

•    Major medical plans -- Major medical plans cover extended hospital visits and other major medical procedures. These plans typically pay the total cost of a semi-private hospital room for a certain time - typically 120 days. After this time passes, the plan will usually cover eighty percent of your bills. Expenses covered usually include room and board, nursing care, medical devices, in patient tests, and drugs. There is usually a lifetime or annual limit of $250,000 - $1,000,000. This was the appropriate type of insurance for Roger Smith, as he feared he could suffer major hospitalisation costs in the future.

Managed Care

Managed care plans are among the fastest growing options in the health insurance universe today. These plans generally require that you use doctors or hospitals that are part of the provider network. You have no deductibles or co-insurance, but you may be charged a small co-payment fee for certain services. Under the typical plan, you will select a primary care physician who then coordinates your care, referring you to a specialist when necessary. 
There are four plans you will most likely encounter: 

Health Maintenance Organization (HMO):
HMOs offer full medical services for a flat annual fee. These plans offer Unlimited access to participating physicians' services either locally or elsewhere and Prescription drugs are included in coverage..

Preferred Provider Organization (PPO):
A PPO operates much the same as does an HMO, allowing for access within a "network" of independent providers and/or facilities. Each visit or procedure carries a fee for the service provided. 

Point of Service (POS)
Point of service plans are somewhat of a hybrid. An HMO can include a point-of-service option to allow visits outside the HMO network. Similarly, it can include network privileges and the reduction in costs associated with managed care plans. 

Provider Sponsored Organization (PSO)
Lastly, a PSO also operates much the same as an HMO does, except rather than being managed by an insurance company, the participating physicians are managed by organizations of medical providers themselves. 
Congressional Omnibus Budget Reconciliation Act (COBRA)
If you leave your job, you can keep your previous job's insurance for 18 months, as long as you pay your premiums at your old corporation's rate. 
Hospital Indemnity Plans

These plans are designed to help cover the costs of a hospital stay. 

Medicare

Medicare provides health insurance benefits for those persons over sixty-five years of age. The program covers part of your expenses for short term acute medical problems hospitalization, surgery, home healthcare if it is at a 
reasonable cost. 

Medicaid

Medicaid is federal-and state-funded assistance offered to those who are near the poverty level and have no other means to pay for their care. 

Long Term Care

Long Term Care Insurance has become a popular vehicle to help ease the potential financial burden that can occur if long term nursing home, home health, custodial, or assisted care are needed. These kinds of policies are designed to help take care of those who can no longer care for themselves, and cover a wide range of services from nursing homes to in-home care. 

DISABILITY INSURANCE

The Health Insurance Association of America has estimated that Americans who are forty years old, have a nineteen percent chance of suffering from at least one disability that will keep them out of work for at least ninety days, and the percentage increases with age. Disability insurance can replace your income and provide for you and your family when you cannot. 

Types of disability insurance

There are several sources and types of disability insurance: 

Individual long term disability insurance
Group disability insurance

There are basically two kinds, short term and long term of group disability insurance depending on the employer's choice. 

Specialized disability insurance

Specialized disability insurance comes in two main forms. 

1.    Credit disability insurance -- Credit disability insurance covers loan payments if you become disabled. 
2.    Mortgage disability insurance -- Mortgage disability insurance covers your home payments if you become disabled.
 
AUTO INSURANCE

While driving your car, you caused an accident that resulted in property damage and serious injuries to yourself and others. Do you have the right coverage and limits that can eliminate or substantially reduce the risk of losing your life savings?

If you own a vehicle, understanding auto insurance is a must and auto insurance is mandatory. 
It fall into two broad categories when it come to the types of auto insurance coverage mandated by state law: 

No-fault insurance

No-fault simply does away with the concept of one party or the other being at fault. If you are insured in a no-fault state and have an accident, you don't go after the other driver. Instead, you contact your own insurer and file a claim. Your insurance policy guarantees you immediate compensation for damages, medical expenses, lost wages, etc. 

Fault Insurance

Fault states or states with financial responsibility laws, while do not mandate auto insurance, have "financial responsibility laws" that require all drivers to be able to pay for any damage or injury they may cause. However, carrying liability insurance is the best way for you to meet your state's financial responsibility requirements. 
The cost of auto insurance and coverage varies depending on the place of living, age, driving record, sex, type of car, size of deductible. 

There are different types of auto insurance.

1. General Liability

General liability covers damage you may cause to other people's property (Property damage liability) and injuries to the people themselves (bodily injury liability). If you were driving negligently at the time of the accident, you are normally responsible for paying for the damages, if the state you live in assigns fault for accidents. 

2. Collision 

Collision insurance will reimburse costs related to repairing damages to your car due to an accident. 

3. Comprehensive

Comprehensive insurance pays for damages caused by events other than collision. These may include natural disasters, theft, explosions and riots. 

4. Medical Payments or Personal Injury Protection (PIP)

Medical payments insurance, usually in the range of $5,000 to $10,000, covers medical expenses for injuries. This coverage guarantees immediate medical payments for you, your passengers, and other parties, regardless of who is at fault. PIP can also cover lost wages, and the cost of replacing services normally performed by someone injured in the auto accident. This is mandatory in some states, optional in others. 

5. Uninsured Motorist

Uninsured motorist and underinsured motorist coverage protects you if you are injured in an accident with others who themselves carry insufficient or no liability insurance. 
 
HOMEOWNERS INSURANCE

Most people, when asked what there most valuable asset is, reply it's their home.
For this reason, protecting your home should be top priority.

Insurance is complicated.  As a responsible person you have a responsibility to understand how your homeowners insurance policy protects your biggest investment.

You have two considerations when it comes to insurance and hurricanes. The first is to review your coverage before trouble strikes; the second is knowing what to do afterward if trouble does strike. There are several things you should do now to protect your home and property from the financial impact of hurricanes. To begin with: 

•    Make a list of all furnishings and valuables. A photographic or videotape record is a good idea. Keep the list and photo records in a safe deposit box or somewhere else safe away from your home. 
•    Keep auto and homeowner policy numbers and agents' phone numbers in a safe place as well. 
•    Next, make a complete and thorough review of all your insurance policies. The following is a list of important disaster-related coverage considerations that will help you evaluate the adequacy of your policy: 
•    Make sure your insurance is adequate. The cost to rebuild your home as estimated by an independent contractor -materials, labor, profit and overhead -determines the proper amount of insurance you should carry. 
•    Make sure your personal property insurance is adequate and that it settles personal property claims at replacement cost. 
•    Know the difference between replacement cost and actual cash value basis. Replacement cost means the insurer will pay the full cost to repair or replace your house with new materials of the same type, kind and quality of those damaged or lost. A six-panel wood door gets replaced with a six-panel wood door. 
•    Actual cash value means the insurer could pay less. The insurer is allowed to depreciate the cost of a six-panel wood door based on the age and condition of your original door. 
•    Guaranteed replacement cost coverage will pay the full cost to rebuild your home even if the reconstruction cost exceeds the policy limit. If you are insured for $50,000 and it costs $60,000 to replace your home, the insurer will pay the $60,000. 
•    Water that comes from the sky is covered by most homeowners' insurance policies. Water that comes from street flooding; creek, river or stream flooding; storm surges; and other rising water is not. You need a separate policy under the National Flood Insurance Program that your insurance agent can tell you about. Coverage does not begin until 30 days after you get the policy, so get it before the rainy season. 
•    Your policy might not cover losses from wind damage. Check your policy for all wind damage provisions and deductions Wind losses are settled on an actual cash value basis. 
•    Increased construction costs caused by changes in local building codes are not covered. If you live in an older home, check with a building contractor to see what additional costs due to changes in the building codes could be involved in replacing your home. There are at least ten different types of insurance polices that can protect your home . . . Do you know if you have the right policy.

Every insurance policy has variables, like deductibles, cash value vs. replacement cost, scheduling requirements like jewelry, furs, special collections, golf clubs etc.

Homeowners insurance provides a broad array of personal insurance coverage, for owners of homes and renters. Homeowners are known as a "package" policy, because it includes both protections for your property, as well as liability. The property covers your structures and possessions and the liability component  covers what you are legally obligated to pay to another person for actions caused by you, your family, or your property. This Liability also extends to medical payments to others for injuries caused by you or your family. For instance if you German Sheppard gets irritated and bites your little daughter the home owner insurance can cover it. But if id bites a stranger you have to rake separate liability insurance for it.

Your personal liability policy covers you if you use part of your home as an office, school, garage or studio, but only for things that would have happened whether or not you worked at home.  If the accident or injury is directly tied to the type of work you’re doing, it’s not covered.

You teach woodworking in your basement workroom and charge a fee for the lessons.  If one of your students slips on your kitchen floor, you’re covered.  Why?  Because the injury isn’t connected to your classes.  He could have slipped even if he was a guest.  If the same student is injured while operating a power saw in class, you’re not covered.  The injury in this case was a direct result of lessons ;you charged for – a direct result of your business.

You’re also covered against liability involving someone you’ve hired to work in or around your home if that person is injured on the job.

You hire a contractor to put an addition on your home.  While his workers are busy working on the roof, it collapses.  One worker is injured and sues you for $50,000.  If a court finds that you’re liable for those damages, your personal liability policy pays the entire $50,000.
Software professional, Sushma Srinivasan,  from India, is relocated in the US in a new job with a large software company. His salary permits her to buy a house on mortgage. To protect her hard earned investment, she needs to know the various types of homeowner insurance and their features, which has been summarised in the Slide below:

Homeowners insurance is known by HO designations. 

HO-1, referred to as basic form, is very old and not much in vogue. It covers 11 basic risks i.e. fire or lightning, explosion, riot, aircraft, vehicles, smoke, vandalism, windstorm or hail, theft, damage by glass or safety glass and volcanic eruption.

HO-2 is named peril insurance, includes six more risks than HO-1, covers against dangers named in the contract. They are falling objects, weight of ice, snow or sleet, three categories of water related damage from home utilities and electrical surge damage. 

HO-3 policies is called All-risk Insurance, provides extended coverage and covers the 17 standard perils plus any other peril not covered in the policy except for earthquakes and floods, war and nuclear accident. This is the most commonly purchased home insurance and is the minimum for those who purchase new homes.

HO-4 is renters policy and covers personal property other than dwellings only under the 17 standard perils. It is for tenants and apartment dwellers.

HO-5 is special form, and is the top of the line and costs about 15% more than the HO-3. It bundles up all the extra type of riders that might be available with other policies- such as included coverage for jewellery, furs, etc. By bundling all the extras in one policy, it invariably ends up considerably cheaper than buying a less expensive policy and adding on all the upgrades.

HO-6 covers condominium and co-op owners but just for personal property and only under the 17 perils.

HO-8 is primarily for older homes of special architecture and covers for the 11 perils mentioned in HO-1. It pays for actual repairs-not rebuilding costs.
There are generally six types of coverage suffixed with alphabets A to F. A typical homeowners policy (HO-3 and HO-5) has the following coverage structure included automatically. This has been illustrated with a house that costs $200,000.

Coverage

Insures your:    Description    Value of coverage

Coverage A    Dwelling / House    This is the limit of insurance on the actual dwelling. Not applicable for tenants (HO-4)    $200,000
Coverage B    Other Structures    For sheds, barns, detached garages, in-ground swimming pools, etc.    $20,000 (usually 10% of coverage A amount)
Coverage C    Personal Property    Property not part of the structure: e.g. furniture, clothes, appliances, etc     $100,000 (usually 50%, occasionally 70% of Coverage A amount)
Coverage D    Loss of Use    For your living expeses over and above your normal living expenses, if you home is made uninhabitable (by insured loss such as a fire).    $40,000 (usually 20% of coverage A amount) 
Coverage E    Personal Liability    if you get sued, bodily injury & property damage, non-auto related.    $500,000 common, but limits of $100,000 and $300,000 also available 
Coverage F    Medical Payments    Payable to injured guest, without regard to your liability or negligence.    $1,000 common, but higher limits (2,000 - 5,000 ) are also available


“Good Will” Payments.  In certain situations where you or your family damages someone else’s property, but aren’t legally liable, you can ask your homeowners insurer to make a “good will” payment to the owner of the property.  It pays everything up to $500 for each accident or incident.  This coverage doesn’t apply if the property owner has full insurance coverage for the damage to his or her own property or to damage caused by a motor vehicle.  Except, it will pay any applicable deductible up to $500 that the property owner must pay before the property owner’s coverage applies.

Your five-year-old son, who may be too young to be responsible for what he does, damages a neighbor’s valuable painting which isn’t insured.  It will cost $700 to repair.  In this case it will pay up to $500 to repair or replace the painting, at their option.

Personal liability insurance excluded from coverage the liability of any person who intentionally causes personal injury or property damage, including sexual or physical abuse.  Even if the property damages or personal injury is more than was intended, it won’t be covered because it is the result of an intentional act.  It will, however, cover the legal liability of you and any family member resident in your household for the intentional acts of a person age 12 years or younger.

 
TYPES OF INSURANCE COMPANIES

The different types of insurance companies selling insurance are

*    Mutual Companies
*    Stock Companies

Mutual insurance companies are cooperatives owned by their policyholders. Policyholders have dual relationship with the company as customers and as owners. These are non-profit organizations. Profits are distributed to the policyholders as policy dividend. The largest among them are Prudential and State Farm Mutual.

Stock Companies are incorporated companies, which sell insurance. Like any other company, they are listed in recognised stock exchanges. Typically, they do not give dividends to the policyholders.

INSURANCE REGULATION

Insurance regulation has been conceived to promote and protect the public’s welfare by Public Law 15 that gives the power to the states to regulate insurance. The reasons for Insurance Regulation are to ensure:

*    Insurer Solvency
*    Unequal Knowledge and Bargaining Power
*    Problem of Pricing
*    Promotion of Social Goals

Insurer Solvency

Insurer Solvency is meant to ensure that the insurance company remain solvent and deliver the insurance in future which the consumer cannot not evaluate and monitor.

The insurer should not go bankrupt as it could create serious problems to the insured whose number are large and the impact can be quite significant. These companies are vulnerable as they invest a substantial amount of savings. 

Unequal Knowledge and Bargaining Power

Due to the imbalance in competition in the insurance market and the complexities of contracts, it is difficult for consumer to evaluate the insurance policy so a public regulator is needed.

Problem of Pricing

Open competition on prices does not to work in an insurance market because prices set before costs are known. Consumers cannot judge the adequacy of prices; hence regulation is required to safeguard their interest. 

Each state has its own insurance code. New York has the Appleton Rule which implies that any company doing business in NY must meet NY standards anywhere they do business.
The National Association of Insurance Commissioners (NAIC) promotes consistency, prepares model bills and legislation and undertake research in special problems.

REINSURANCE

The mechanism by which one insurance company contractually passes a proportion of insured risks to another insurance company, the reinsurer is called reinsurance. Insurers reduce their exposure to risk by insuring themselves against claims. The company transferring the risk is called the "ceding company"; the company receiving the risk is called the "assuming company" or "reinsurer."

Some of the important insurance companies carrying out reinsurance business in the US are:

*    Allianz Life Insurance Company
*    Employers Reinsurance Corporation
*    ING Reinsurance
*    Lloyd's America, Ltd.
*    London Reinsurance Group
*    Zurich Reinsurance (North America), Inc.