Insurance Terms Explained
63More Insurance Terms
In my previous hub, I talked about co-pay and co-insurance. So, in this hub, I am going to explain more insurance terms and I will provide an illustration of annuities, whole life insurance and term life insurance to help you make your decision before buying any into insurance policies.
Apart from co-insurance and co-pay, insurance companies also have a term in which they call a deductible. Just like the two "co's", a deductible's main purpose is to prevent moral hazard and to protect insurance companies from frivolous claims. In exchange for a deductible, the policy holder pays a lower amount of premium. So, for instance, if an insurance policy has a deductible of $1000, this simply means that the policy holder is responsible for any losses or damages below $1000.Then, we have the limit. The limit works just like the deductible but it represents a maximum amount of loss covered by the insurance policy. So, if a policy has a limit of $100,000, that simply means that the most insurance companies would pay for a loss is $100000.
Next, the re-insurance. This term probably does not apply to the common policyholder. A re-insurance only applies to insurance policies that cover a huge amount of losses, mostly $10 million and above. To have a single insurance company cover a huge loss amount is a cumbersome task. And it is risky to the insurance company as well because if the policy holder files a claim, they have to pay out millions and millions of dollars. The obvious solution is doing a re-insurance where the loss amount is shared among the many insurance companies. So, back to our example of the 10 million loss. Let's assume that the loss is split among 10 companies. So, company A will cover the first $1 million layer, company B the second layer and so on and so forth.
Related hub: Coinsurance
Annuities,Term Insurance and Whole Life Insurance
An annuity is a series of fixed payment paid out over a certain period of time. Life insurance is a lump sum benefit paid out to policy holders in the case of death or emergency. Term life insurance and whole life insurance differ in terms of the coverage period. Term life insurance may cover a policy holder for 5, 10 or 20 years but whole life insurance covers the policy holder as long as he/she lives. Remember, every time you buy an insurance policy, you are playing a game of life and death with the insurance company. So, when you buy insurance, you would want to buy the most relevant policy.
The following paragraphs may sound very morbid.
Playing the annuity game. Let's say you buy an annuity for 20 years. If you die within 20 years, the insurance company keeps your premium. They win. If you die after 20 years, you get more than what you paid for. Is annuity necessary? To be honest, I do not think they are. It basically works the same way as fixed income securities. You are better off spending the 'premium' buying T-notes for a fixed payment for 30 years and you will also get your 'premium' back after 30 years.
Playing the life insurance game: You pay your premium every year. Now, for this type of policy, the insurance companies want you to live. They do not want you to die because if you live, you keep paying annual premium and they would have more money to cover your benefits. If you die, you stop paying the premium and they would have to fork out more money to cover your premium.
Not everyone needs life insurance, If you are single and you do not have any dependents, you certainly do not need any insurance. If you die, you just die...
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