Insurance in your financial plan is an integral component, yet often misunderstood. While many see insurance simply as a tool to safeguard their assets, it should be seen as much more than that – protecting income, family and lifestyle can all be covered under an umbrella policy. Understanding its role will allow you to make better decisions that match up with your individual needs. In this article we’ll give an overview of different types of policies available and their purpose, plus provide some shopping tips so you can shop smarter.
What Is Insurance?
Insurance is a financial product designed to pool risk among a group of people to reduce it for each individual; thus mitigating risk from an event happening and shifting it off your shoulders to an insurance provider. Although different kinds of policies exist with their own purposes and goals in mind, all forms of insurance share three core characteristics – contractual obligations, financial backing and risk evaluation.
A contract between you and an insurance company sets forth what funds the insurance provider will pay out if an emergency arises. Financially-backed policies mean the insurance provider has put money aside into a reserve fund specifically used to reimburse those who make claims on their policies. Risk-based premiums take into account how likely it is that an event may take place; consequently, the more risky an event may be the higher its premium will be.
The Different Types Of insurance
Life insurance – Life insurance provides your loved ones with a death benefit upon your passing, providing the funds needed to clear debt and maintain lifestyle after you’re gone.
Disability and car insurance both provide you with monthly income if you become disabled due to illness or injury. Furthermore, disability covers medical costs for you while car coverage covers costs for repairs on both cars involved in an accident, as well as injuries suffered by other motorists involved.
Homeowners/renters insurance – Homeowners/renters insurance protects both your house and belongings in case of fire, flood, or another event which causes damage.
There are other types of insurance which could prove useful, depending on your lifestyle, such as pet insurance, life insurance policies that cover an additional person and additional health coverage.
The Role Of Insurance In Your Financial Planning
Insurance can serve many different functions when used as part of a financial planning strategy, from protecting yourself to your income, family and lifestyle. Let’s explore three scenarios wherein insurance could prove invaluable.
Protection – Health insurance, disability insurance and car insurance can all help safeguard against financial strain in case of illness or injury, providing income replacement and covering any debt payments while you can’t work – vital steps towards protecting future earnings potential and independence.
Income Protection – Life and term life insurance can help secure your family’s income. In the event of your death, your beneficiaries can claim on your death benefit policy to maintain their lifestyle or pay off debts. Unfortunately if this causes one of your spouses to quit their job or take one with lower pay after your passing away then that can severely compromise their income for years after.
Lifestyle Protection – Disability insurance can protect your ability to earn an income if you become disabled and unable to work. By securing some income each month from this policy, disability protection ensures you can maintain the lifestyle you’ve become accustomed to.
What To look For When Shopping For Insurance
When purchasing insurance and trying to determine which types you require, there are a few key indicators you should keep an eye out for.
Coverage – To start off right, it’s essential that the policy you buy provides adequate coverage.
Premiums – When looking for policies to provide only partial protection (e.g. disability insurance), make sure the premium is affordable. If you wish to secure multiple areas of your life with multiple policies, however, this may increase premium costs significantly; be prepared to spend more each month.
Company Reputation – Always make sure the insurer you purchase insurance from has an excellent track record, which you can check with organizations like the Better Business Bureau or free financial websites providing reviews of insurance providers.
The Do’s And Don’ts Of Insurance
Now that we’ve gone over the different types of insurance and what you should look for when shopping for insurance, let’s discuss some of the dos and don’ts of insurance. These tips can help you make sure you’re getting the most out of your insurance and that you’re protecting yourself appropriately.
Do protect yourself – Make sure you carry enough insurance at all times, even when things look uncertain.
Do Your Research – Investigate all available options to make sure that you get the best deal.
Do not assume you need life insurance – Life insurance can often be misunderstood and therefore everyone shouldn’t assume they require it.
Make an informed decision – Before purchasing any policy, be sure to thoroughly understand its terms and conditions to enable an informed decision-making process.
Conclusion
Insurance is an integral component of financial planning, and there are various forms of protection available. When shopping for coverage, it’s essential to do your homework and understand all your options thoroughly.
Also Refer :- The 3 Best Types of Insurance for Millennials
