1. IntroBefore I begin to discuss this month’s insurance topic I want to highlight a little irony that occurred at the end last month. After writing an article on what to do in case of a winter auto crash, I found myself sliding on the ice and heading slowly toward another car at an intersection. I was going at the right speed given the conditions. Sometimes, however, things happen beyond your control. As I slowly slid toward the other car, I was thankful for two things. I was slowing sliding and I was protected from the financial loss that was coming my way. You’ve been there. Writing the monthly check for your auto or home insurance and wondering why I had to fork out money for the promise of a company paying me when I needed it. It was a day I was grateful for, but I know there are many other days when I don’t feel the same emotions. This month’s article will focus on the differences between insurance types and their reasons for existence.
2. What is insurance?
Simply put, insurance is the payment of a predetermined amount of money (“premium”) that protects against an unpredictable expense (“loss/claim”) which can be larger than expected. This transfer of risk takes place from you to the insurer for a fee. There are many ways to get this protection.
Liability insurance:
Everyone speaks of our “litigious society”. All of us know someone who is sue-happy. One could argue that liability protection is only for certain people. The insurance company will offer you liability insurance, which is protection that covers you for the amount you are legally required to pay. This could be a case in court, but it is more common for the insurance company to resolve the matter for you. Imagine your houseguest falls on the ice and blames your insurance company for not putting salt or sand out. Your insurance company will pay for your guest’s medical bills, lost wages, and pain and suffering due to the accident.
Property insurance:
This type of insurance protection protects more than just liability. Property insurance covers physical property against loss or damage. Many policies will exclude or include certain types of events, known as “perils”. War, for example, is not covered by almost all policies. This is because on 9/11, President Bush declared war and canceled coverage for lower Manhattan. Because fire insurance was historically the origin of property insurance, almost all insurance policies include fire.
Professional insurance:
This type of insurance can be referred to as “liability insurance” for certain professions. Engineers, Lawyers, and Doctors all need this type of insurance to protect themselves against bad advice or making a wrong decision. This type of insurance can be expensive, especially for professionals in the medical field who make judgment calls multiple times per day.
3. Why do we need insurance?
Many people have never had to file a claim against their insurance. We feel like we are wasting money every month by writing check after check. Although you have never had to file a claim on your insurance policy, there are good reasons it is there. Insurance is necessary to protect your investment and yourself. But let’s face the truth, many people wouldn’t bother with insurance if they weren’t required by law.
Insurance not only protects you and your family, but it is also a key to America’s economic success. Consider this: Who else is responsible for protecting your property? If you rent your car or mortgage your home, the bank will also be responsible. They want to protect their investment. If they were certain that they would get their money back, banks wouldn’t lend money. Insurance provides protection to the American consumer lending process, which is the backbone for the American economy. Insurance is like grease for the enterprise.
