Am I Too Young To Mess With Insurance? Part 1

You've probably seen the bumper sticker around that says, stuff happens.

When it happens, you can take a pretty big financial hit.

If you haven't prepared for that hit, it could have pretty dire consequences.

You could lose your house or your car or

maybe even your life if you can't afford the very best medical care.

Of course, it's possible to self-insure against disaster,

just by saving up a bunch of money.

We encourage you to have an emergency savings reserve.

But that said, usually pays to be insured.

As for the big idea behind the concept of insurance, here it is.

Risk Pooling.

What do I mean by that?

Well, as the poet John Donne,

once said, no person is an island, but rather part of a broader me.

To put this in context, you're one of a group of people that faces various risks.

But for each person in the group, there is a relatively small probability

that an accident or bad event will occur in any given year.

Of course, if you are the actual one in the group that is unlucky,

the financial consequences can be devastating.

So the idea of insurance, is to put you in with the rest of the group, so

that each of you can chip in a relatively small amount of money

in case one of you needs a big accident payoff.

That's called pooling the risk, and

it is a concept that cuts across virtually every kind of insurance.

The other important part of the risk pooling concept to know about

is that you are rarely thrown in with the entire population to form a risk pool.

Instead, insurance underwriters will group you by risk, and charge rates accordingly.

For example, as a young driver in a young driver risk pool,

you are going to pay higher car insurance rates than normal.

That's because statistics show that young drivers are more likely to get into

accidents, particularly young male drivers.

But don't worry.

I'm going to show you how you can get your insurance costs down,

even if you are stuck in a high risk group.

Okay. With that as our big picture background,

let's dig into some details as we ask ourselves this.

Just what can be insured?

Well, just about everything, cars, homes, businesses,

equipment, even your own life can be insured.

But it doesn't stop there.

There are specialty insurers out there like the famous Lloyd's of London,

that can underwrite insurance policies for nearly anything you can imagine.

If you can afford it.

Some famous examples include Keith Richard's fingers, Bob Dylan's vocal

cords, and American football player Troy Polamalu's signature hairdo.

While there are lots of different kinds of insurance policies out there,

the language of the business is universal.

So, let's start with the most basic of terms.

The insurance premium.

Here's Investopedia's typically bone-dry definition.

The specified amount of payment required periodically by an insurer to

provide coverage under a given insurance plan for a defined period of time.

Basically, that means you, the insured person, pay the premium,

your small known loss, in exchange for the insurance company's promise to pay or

indemnify you in case of a much larger loss.

And by the way,

one of the most important jobs in the insurance industry is that of the actuary.

You may want to look into that as a career option

if you have a statistical perspective and enjoy the process of prediction.

As for what actuaries actually do, they make estimates of the ultimate outcomes of

insurable events using both past statistics and forward-looking models.

In this task, they work hand in hand with insurance underwriters.

Together, their job is to evaluate the risks of insuring folks like you, or

an asset you might own.

This allows them to set their premiums to ensure their profitability.

Of course, your job is to get the best deal you can.

Now, hear this key tip.

If you know what insurance companies are looking for before you seek coverage,

you will be a better consumer, thereby avoid any bad deals.

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