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Writer's pictureRon Gilbert

Understanding the Basics: What Is Insurance and Why Do You Need It?


 

Insurance is a way to manage risk by purchasing protection against financial losses. Having the right insurance can make a big difference in your life, covering unexpected events and routine expenses like medical checkups. An insurance policy is a contract between the policyholder and the insurer, where the policyholder may protect another person or entity, such as when a company buys life insurance for an employee.


Picture yourself behind the wheel of your car when suddenly you collide with a deer, resulting in damage to your vehicle. With the appropriate type of auto insurance, the insurance provider will cover the expenses for repairing the car (excluding the deductible - the amount you are responsible for). Now, envision a scenario where a water pipe bursts in your bathroom, causing damage to everything in that area and the adjacent bedroom. Typically, if you hold homeowner's or renter's insurance, the insurance company will reimburse you for replacing some or all of the affected belongings once you have paid your deductible. Insurance policies solely cover items specified within the policy. Therefore, it is essential to thoroughly review a policy before purchasing it to understand precisely what is included.


Insurance policies typically have a specific duration known as the policy term. When this term ends, you must either renew the policy or purchase a new one. For certain types of insurance, you designate a beneficiary who will receive the benefits or payments from the policy. When you acquire an insurance policy, you are required to pay a premium, which can be a monthly, annual, or semi-annual fee depending on the type of insurance. The amount of your premium is usually determined by the level of risk you pose to the insurance company. Most insurance policies include a deductible, which is the initial amount you must pay before the insurance company covers the rest. For instance, if you have a $1,000 deductible on your homeowner's policy and incur $5,000 in storm damage, you will pay $1,000 while the insurance company covers $4,000. Some policies allow you to choose your deductible, with a higher deductible typically resulting in a lower premium.


Common types of insurance

  • Auto insurance: provides protection against having to cover partial or the entire expense of car repairs and medical bills resulting from a car accident. In many states, it is mandatory to have auto insurance while driving a vehicle. In Washington State you are required by law to carry minimum bodily injury labiality limits of $25,000 per individual / $50,000 per occurrence with $25,000 in property damage liability. There are a variety of other coverages and options, so it's very important to discuss with your agent as it pertains to your individual needs.

  • Homeowner’s Insurance: is essential for protecting your home and belongings in case of loss or theft. It is often required by mortgage lenders to safeguard the property securing the loan. Having this insurance ensures protection for your investment and provides peace of mind against unforeseen events. Your home is your biggest long-term investment.

  • Renter’s insurance: protects your personal belongings in case of loss, theft, and your liability for damages to others. Typically a policy includes additional living expenses also known as loss of use, which means if you are unable to stay in your place due to a covered loss, it will cover those out-of-pocket expenses. A landlord might require you to have renter’s insurance. It is possible that you will receive a discount for bundling a Renter's policy with your Auto policy.

  • Life insurance: provides a designated beneficiary with a predetermined sum of money in the event of your death. The funds received from the life insurance policy can assist your family in managing final expenses, maintaining a quality of life, and meeting financial obligations. Various types of life insurance exist, including term life insurance, which pays out only if the insured individual passes away during the policy term (typically ranging from one to 30 years), and whole life insurance, which can accumulate a cash value and guarantees a payout whenever the insured person dies.

  • Disability insurance: safeguards individuals and their families against financial difficulties in case an illness or injury hinders their ability to work. Some employers provide disability coverage to their employees, or individuals can opt for a personal disability insurance policy.

  • Annuity: is a financial product typically offered by insurance companies that provides a series of payments to the holder at regular intervals, usually monthly or annually. An annuity can be purchased with a lump sum payment or through a series of contributions. The main purpose of an annuity is to provide a steady income stream for the holder during retirement or for a specified period of time.

  • Health insurance: Assists in covering doctor fees, occasionally prescription medications, and catastrophic medical events. Also, via the Affordable Care Act (ACA) your preventative healthcare procedures are covered at no additional cost. When you purchase health insurance, both you and your insurer commit to sharing the cost of your medical bills, typically by paying a fixed dollar amount or percentage of the expenses.


When it comes to interacting with your insurance agent, there are five essential questions that you should always consider asking to ensure you have a clear understanding of your coverage and options.


  1. Find out the specific details of your current insurance policy - this includes what is covered, any limitations or exclusions. Seek clarification on any potential discounts or savings that you may be eligible for, as this could help reduce your premiums.

  2. Discuss any recent life changes or upcoming events that could impact your insurance needs, such as moving to a new home, purchasing a vehicle, or starting a family. Your agent can advise on how these changes may affect your coverage requirements and when you need to let them know about them.

  3. Ask about any additional coverage options that may be beneficial to add to your policy, such as umbrella (excess liability) insurance, identity theft protection, or equipment breakdown coverage.

  4. Inquire about the process for updating your policy and how often you should request a review it to ensure it aligns with your current circumstances.

  5. Review with your agent about their customer service and claims handling procedures to gain insight into what to expect should you need to file a claim in the future. Should you ever be in that situation you will feel less upset when you all ready know the steps you will need to take. Most statistics state that the average American will get into 3-4 accidents in their lifetime.


By addressing these five key questions with your insurance agent, you can feel more informed and confident in your insurance coverage decisions. It is not necessary to wait for you policy renew period to have a conversation with them. They are happy to answer any question you may have at any time.



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