Insurance Summarized

The entire purpose of insurance is to transfer risk.

  • Insurance is paying rent to transfer the risk of unlikely events (perils or liability) you can’t afford.
    • It’s technically a “hold-harmless agreement” for a fee.
  • Large-scale monetary losses can bankrupt you, and an insurance policy protects from those risks.
  • Unless you carry insurance from others (which is a guaranteed exercise in severe statistical analysis), insurance is a terrible way to gain investment income.

Before insurance, it’s often worth distributing a proportion of the risks with others to share it.

Always insure a risk when you don’t think you’d be able to recover from it.

  • Insurance can, with some exceptions, cover every financial loss you could conceive.
  • If you can’t afford insurance, your lifestyle has taken on too many risks to be legitimately safe.

Insurance only manages pure risk.

  • A risk is the chance of a loss, but isn’t the actual loss (e.g., the chance of slipping).
  • Risk exposures can be speculative or pure:
    • Speculative risk – there are chances of losses and gain (e.g., gambling, investing).
    • Pure risk – there is only the chance of loss (e.g., hurricane).

In short:

  1. Insurance covers losses.
  2. Losses are caused by events/occurrences which are pure risks.
  3. Events/occurrences are caused by perils or liability, which are enhanced by hazards.

To be insurable, a risk must meet a few criteria:

  1. Predictable, typically with statistics.
  2. Outside the insured’s control (unexpected, accidental, or uncertain).
  3. Not a catastrophic thing affecting many people (e.g., war, nuclear hazards, flood), though excess and surplus lines can often cover those events.
  4. Be measurable, with a clear monetary value.
  5. Causes a legitimate financial/economic hardship (i.e., that party has an insurable interest).

The Insurance Policy

An insurance policy is a contract between an insurer and insured:

  1. The insured is responsible for multiple actions:
    • Fully report the values of properties and risks (honesty clause)
    • Pay a premium determined by an actuarial formula
    • Promptly report losses and cooperate throughout the claims adjustment process
    • Provide timely reports of relevant changes
  2. In the event of a covered peril or liability, the insurer has multiple “aleatory” duties:
    • Adjusting losses according to the policy’s guidance for a loss valuation
    • Duty to “indemnify” covered losses to the insured up to a predefined limit, either by restoring its value prior to the loss or paying the difference between before and after the loss (pair and set clause)
    • Duty to defend the insured on a covered liability claim, which includes investigating and defending any claim or lawsuit brought against an insured, with any doubt about their duty to defend working in favor of the insured
    • Coverage is highly dependent on the language of the policy
    • If the insured expands coverage without an additional premium, their expanded coverage will apply to all insureds immediately (liberalization clause)

The historical basis for many modern insurance policies in the USA was based on the 1943 New York Standard Fire Insurance Policy.

  • Most property policies are in some capacity inspired by it, even though the policy itself has been expanded in every direction and the original policy was phased out of everyday use.
  • In practice, it mirrors the Basic Form Dwelling Policy.

A policy has a few classifications of insured:

  1. The first named insured has the highest rank and the broadest rights/obligations under the contract.
    • They can initiate policy changes, receive claims payments, and cancel the policy.
    • The insured is prohibited from transferring or assigning a policy to someone else without the written consent of the insurer.
  2. The second named insured, if any, has the same rights as the first named insured.
    • They have the same rights as the named insured, including canceling the policy.
    • However, while the first named insured is always on that policy, the second named insured can be removed or changed.
  3. Additional insured are extra people who are also covered.
    • They’re on the policy document, but are often not on the insurance card.
  4. Excluded people are on the policy to indicate they’re not covered.
  5. If there’s a bailee (someone holding, storing, or moving that property), they are not covered unless they’re insuring their own liability.

The terms are abstractly and explicitly clarified in a policy document, which is precisely the same for every written policy in that classification of insurance.

  • The Definitions clarify exactly what specific terms mean in the contract (e.g., Named Insured, Vehicle, Address, etc.).
  • The Conditions that indicate rules, duties, provisions, and obligations of both the insured and insurer.
    • Insurance policies are typically standard contracts with a vast collection of pre-defined conditions.
    • Conditions often address problem areas that may arise later (e.g., value disputes regarding appraisal, multiple insurance policies at the time of loss).
  • Exclusions eliminate coverage for specific occurrences deemed uninsurable or not calculated in the policy’s premium:
    • It typically includes things that nobody can control (e.g., intentional acts, war, flood, nuclear radiation, smog, inherent vice, latent defect, rust/corrosion).
    • Exclusions also often exclude things the insured can control (e.g., wear and tear, marring, deterioration).
    • Property which can be better-insured under another policy is also excluded (e.g., autos in a homeowners policy).
  • Endorsements change a policy’s original terms, coverages, conditions, or exclusions.
    • They may be included when the policy is issued, later in the term, or during a renewal.
    • Mostly, endorsements add/change names and correct names/addresses.

Since an insurance policy is a frequently-used contract, it has many standard terms/provisions.

  • Policy period – a time period where coverage is provided.
    • Policy periods are most often 1 year, but can be 6 months or closer to a decade.
    • It tends to begin and expire at 12:01 am on the indicated date and address.
    • Sometimes, a policy will cover the time it takes to complete a task (e.g., a construction project, transit policies).
  • Policy territory – the location where coverage will provided (which may include property with a person while traveling).
  • Insured status – clarifies who is insured under a policy.
    • The insured status can range wildly in breadth, from a named insured all the way to entire people groups.
  • Standard mortgage clause – for real property, the legitimate interest with mortgage holders and how they most be notified of cancellation.
  • Loss payable clause – for personal property, the leigitmate interest that finance companies have in it (e.g., autos) and how the loss payees will be named on the loss settlement check.
  • Other insurance – appoints coverages in the event that more than one policy is written on the same risk at the time of loss.
    • It may be a product of design or of oversight, and can be nonconcurrent (written on a different coverage basis) or concurrent.
    • There are 4 ways to resolve multiple insurance in property and casualty policies:
      1. The specific insurance for the coverage pays first (primary coverage).
      2. Excess coverage pays after primary coverage (e.g. umbrella policy).
      3. Loss payments among concurrent policies will be distributed pro rata (e.g., if Policy A has $50K coverage and Policy B has $25K coverage, Policy A will pay 2/3 of the loss).
      4. Contribution by equal shares is paid the same as pro rata, but the loss is paid equally by each insurer until it’s exhausted, then the remaining policy covers the rest.

That policy document receives a certificate of authority or license by a government’s Insurance Division, and any updates must also be approved by that government as well to keep that policy authorized.

  • Nonadmitted or unauthorized companies may not be able to do business in that state.

Once that document is approved, every policy is combined into a policy jacket with a computer-generated declarations page (or information page in workers comp policies) as an insuring agreement, which declares how the defined terms in the policy connect to the insured:

  • The Named Insured and Additional Insured
  • Identification of the Property and Address
  • The Policy Term, Deductible, Premium, Coverages, and Limits
  • Any applicable forms
  • Any Exclusions

Often, many insurance policies have multiple insuring agreements together in the jacket (e.g., property and liability).

To clarify the information further, the insurer also provides policy guidelines for the underwriters, which give directives on what’s covered and under what conditions.

Before the policy can be formally written, but after the “binding” of the payment, the insurance agent issues a “binder” that gives temporary evidence of insurance until a policy can be issued.

  • Binders are valid according to the earlier of the effective date and issue date, and typically issued for 30-day periods.

The policy effective date can usually start on any day from the present and goes for 12 months.

  • The term can range all the way from 1 to 12 months, but is typically 6 months for auto, 12 months for homeowners/renters and recreational lines, and longer for most other insurance.

Any time there’s a need to change the policy document (e.g., address change), the policy has an endorsement attached to it.

  • The latest declarations page will reflect the latest endorsement.
  • It’s not uncommon for an insurance policy to have dozens of endorsements after a decade or two.

For legal disputes, underwriters can issue a certificate of insurance to indicate that someone is insured on a particular date.

  • An insurance certificate doesn’t amend or change the policy provisions, but can verify to another party that someone has insurance.

Insurance Rating

When framing a policy document, an actuary will have created a rating by gathering as many statistical correlations as legally possible toward an insured opening a claim.

  • The rating is based on how much statistical exposure the insurer is adopting as a rate per hundred.
    • e.g., if a $100,000 risk has a precisely 1% chance of a total loss for the term across 100 units of the same risk, the formula will provide at least a $1,000 premium (but probably closer to $1,500).
    • It’s a rate per exposure unit in property insurance, a rate per hundred of payroll in workers comp, and rate by rate exposure in liability insurance.
  • This rating is very important to get correctly, since incorrect rating can lead to overinsurance (over-valuing the risks for what they’re worth and over-charging) or underinsurance (not valuing the risks enough and harming the company).
  • There are many criteria they may use:
    • The property/liability being insured
      • Square foot area
      • Gross sales
      • Payroll
      • Construction of various components (e.g., roof, siding, safety features)
      • On large objects, the construction is very important (e.g., frame, masonry, noncombustible, fire resistive)
    • The proximity of that property to other things (e.g., fire departments, fire hydrants, etc.)
    • The location of the property or where it’s garaged
    • The usage of that property (e.g., work, personal, commute, business) and whether it’s vacant/occupied.
      • Vacancy is both the absence of people and possessions, while unoccupied is only the absence of people but with all the necessities for someone to live (e.g., food, utilities, bed or room for customary business operations).
      • Most insurance doesn’t cover vandalism, malicious mischief, broken glass, or burglary damages in a vacant property, as well as often not covering water damage or theft, and any covered losses are reduced by 15%.
      • If it’s owner-occupied, at least 31% of the square footage must be occupied/rented for customary purposes.
    • Known risks that may exist (e.g., certain dog breeds, swimming pool, trampoline)
    • The region’s historical meteorological history and past claims in the region (grouped by ZIP code)
      • Redlining involves clearly discriminating based on geographical region.
    • The insurance history of the insured pulled from a LexisNexis report (coverage amounts, prior insurance carriers, claims history, dates insured)
    • Financial history of the insured for the past 10 years (outstanding debt amount, foreclosures/bankruptcies)
    • Body type and gender
    • Age
    • Education level, occupation, military background
    • Architectural diagrams
    • Meteorological history of the region
    • Number of people in household or workplace
    • Payroll and job classifications
    • Family’s genetic diseases, health history, and known psychological disorders
    • Accident and driving history for the past 5 years (though past 3 is most relevant)
    • Ethnicity, religion, and political views
    • Residence and employment history
  • Further, many ratings require consistent reporting on the behalf of the insured for even more clarity:
    • Seasonal changes in inventory stock
    • Intermediate stages in construction

The law of adverse selection means people tend to only look for insurance when they think they may need it.

  • For that reason, insurance premiums must reflect that price difference to prevent the insurer from going bankrupt.
  • More statistical data forms a Poisson distribution that makes the chances and scope of risk more accurate (law of large numbers).

Ratings have different categories:

  • Manual/Class Rating – large homogenous groups that use specified rating criteria like construction type, location, protection class, and similar characteristics (frequent in most general insurance policies)
  • Individual/Judgment Rating – covering a specific risk after performing extensive risk analysis (almost exclusively a commercial insurance need)
    • Generally a catch-all solution when other risk categories don’t apply.
  • Merit Rating – applies schedules and experience toward a specific risk (i.e., underwriter override)
  • Loss Cost Rating – uses loss costs published by a rating bureau, which insurers then add their own expenses into

Policy Classes

Most insurance has two major, independent components:

  • Liability (Casualty) – making payments for things the insured may be liable for.
  • Property – making payments to replace property that may get damaged.

Many insurance policies are designed to have both liability and property coverage, according to use:

  • Personal lines policies cover personal, non-commercial use.
    • Personal policies include debris removal, fire department service charges, and preservation of property, as well as exposures like loss assessment coverage, credit card fraud coverage, and coverage for grave markers.
    • Recreational lines cover even less use than personal, and typically with the expectation of seasonal use.
  • Commercial lines policies cover the specific, frequent use necessary for businesses.
    • Commercial property policies include debris removal, fire department service charges, preservation of property, increased construction costs, and pollutant cleanup and removal.
    • Commercial insurance policies also typically extend to newly acquired property, personal effects and others’ property, valuable papers, off-premises property, outdoor property, and non-owned detached trailers.
    • Most personal insurance has a commercial version with much more coverage.
    • Since a commercial policy is much more robust than a personal policy, it tends to also cover personal use of commercial property.
  • Excess and surplus lines is for hard-to-place exposures that aren’t available or can’t be procured through admitted/authorized markets.
    • These forms of insurance have to be proven to not fit into any conventional insurance framework, and can’t compete on price against admitted companies.

There are a few exceptions to property and liability/casualty:

  • In health insurance, the payments are determined based on care needed/provided.
  • In life insurance, the payment is simply a defined claim payment upon death that also terminates the policy (i.e., it’s death insurance).

Insurance clarifies precise perils with a few basic formats:

  • Specified/named peril policies list everything the policy does insure:
    • Basic form policies cover the most likely perils (e.g., fire, smoke, wind/hail, lightning, explosion, aircraft/vehicles, riot/civil commotion, vandalism, sprinkler leakage, sinkhole collapse, volcanic action)
    • Broad form policies cover everything in basic form, with more unlikely things (e.g., falling objects, weight of snow/ice/sleet, water damage).
  • Special form/all risk/open peril policies cover absolutely everything, minus specified exclusions (e.g., freezing objects, theft, earthquake).

With some exceptions, the possessions of a typical person fit under a homeowner’s policy.

  • Homeowners policies cover the “estate” of a person, not just the dwelling:
    • Dwelling insurance covers only the dwelling itself, and is what most people think of when they think homeowners insurance.
    • Homeowners also has liability and property coverage for things on that dwelling (e.g., shed, garage, tools).
    • It also covers liability protection against legal issues like defamation.
    • It also has property protection for possessions while traveling (e.g., vacations).
    • A renters policy is simply a homeowners policy, minus the dwelling.
  • To protect something in a policy with more coverages, most agents can endorse a floater:
    • Personal articles floater (PAF) insures valuable personal property from all direct physical loss except war, nuclear risks, deterioration and decomposition, inherent vice, and insects/vermin.
    • Personal effects floater and personal property floater are other variations.
  • A person’s property and liability extends out to other domains that typically operate as an entirely different insurance policy:
    • Animal insurance (e.g., pets)
    • Auto insurance
    • Aviation insurance
    • Concealed carry insurance (for gun ownership in a population-dense area)
    • Cyber liability
    • Cycle insurance (e.g. motorcycles, ATVs)
    • Disability insurance
    • Watercraft insurance
      • Inland marine
      • Ocean marine
    • Mobile home and RV insurance
    • Snowmobile insurance

Large-scale perils (e.g., earthquakes) can easily bankrupt an insurance company, so they tend to be separated as excess and surplus lines:

  • Crop/hail insurance
  • Fire insurance
  • Flood insurance

Many businesses have larger, more specific needs, and is a key part of any Human Resources department:

  • Annuities
  • Boiler and machinery insurance
  • Businessowners insurance, like homeowners policies, combine a variety of coverages into a standard package
    • Directs and officers liability insurance
    • Employment practices liability
  • Cargo insurance protects either a class of cargo or specific shipments in transit.
  • Fidelity and crime insurance, which protects against both burglary (forced entry/exit) and robbery (taking with violence/threats) of any property
  • Farm insurance
  • Furrier’s block coverage is inland marine coverage for a fur dealer
  • Garage and dealers insurance
  • Glass and sign insurance
  • Group policies are any policy purchased in bulk (and typically at a discount).
    • If a large organization serves many clients with their contract requiring insurance (e.g., rental property, auto lien), they can have their own force-placed insurance policy and send the bill to their client.
  • Furrier’s block coverage is inland marine coverage for a jewelry dealer
  • Hole-in-one insurance for golf courses that run promotions for hitting a hole in one
  • Installation/builders risk
  • Linebacker insurance
  • Liquor liability insurance
  • Pollution liability insurance
  • Professional errors and omissions insurance protects the liability of a professional in the course of their work.
    • Malpractice insurance is designated specifically for high-ranking roles (e.g., attorneys and doctors)
  • Stop-loss/excess insurance (for companies who self-insure benefit plans but want liability protection)
  • Surety bond – a three-party written agreement where a principal pays a surety/insurance company to guarantee performance (and possibly pay) an obligee
    • Bail bonds
  • Transportation insurance
    • Truckers insurance
  • Weather insurance
  • Workers compensation insurance (for on-the-job medical damages and lost wages)

Other insurance can serve to accommodate additional liability needs.

  • An umbrella policy is excess liability insurance after the other policies’ liability amounts have capped off.
  • Commercial excess insurance is an umbrella policy for commercial policies.
  • Reinsurance is insurance policies issued for insurance companies.

Premiums/Binding

The insurance agent (technically named as a field underwriter) is responsible to write insurance policies.

  • The underwriter’s job is to evaluate loss exposure and determine whether or not to insure that risk by gathering information from a variety of sources:
    • Insurance applications
    • Insurance reports (e.g., CLUE from LexisNexis, loss run reports)
    • Inspection reports
    • Motor vehicle reports (MVR)
    • Loss records
    • Consumer credit bureaus (e.g., Equifax/TransUnion/Experian)
    • Financial sources (e.g., Dun and Bradstreet)
  • An underwriter is legally forbidden to give any preferential bias when making a judgment, and can only use the criteria of the given facts to determine a premium.
  • An underwriter is also effectively forbidden legally to misrepresent or lie in any capacity about an insurance policy that influences the insured’s decisions (twisting, false advertising, or illegal inducement).
  • Underwriters can’t receive more money or give back any money (e.g., part of their commission) in the course of binding (“rebating”).
  • When producing insurance, an underwriter can create an underwriting decision that can issue the policy, reject it, or provide specific exclusions or limitations for the policy.
    • An insurance agent’s knowledge is considered their principal’s knowledge, so their judgment represents the “vicarious liability” of their principal.
    • If an agent acts outside their authority, it’s a presumption of agency, which can easily happen through their implied or apparent authority.
  • In general, an insurance producer is very beholden to staying ethical and fair, on the same level as many other formal roles such as public accounting.
    • They’re responsible to report the information they gather through legislation like the Fair Credit Reporting Act.
    • Much of it is enforced through the Unfair Trade Practices Act and Unfair Claims Settlement Practices Act.
  • The agent of record is the underwriter or agency assigned to the policy, and is the only agent permitted to make changes to the policy.
    • If that agency goes out of business or an insured doesn’t like them, they must submit an agent of record change or cancel the policy directly through the insurer.

No matter what insurance, premiums are calculated with a relatively straightforward process:

  1. An underwriter uses that rating to capture key pieces of information during the binding or renewal of the policy.
    • That rating may be based on the underwiter’s judgment, or in a manual provided by the insurer.
  2. If the insured is an organization, the underwriter will include group policy discounts.
    • Generally, larger groups tend to be more stable and less likely to migrate to other carriers, meaning a lower premium.
  3. The underwriter clarifies any exclusions to the coverages.
    • These exclusions are any perils clarified as omitted from the policy.
    • They may be certain people, or certain perils, or specific conditions.
    • Without exclusions, insurance companies are often legally obligated to pay claims on unspecified perils.
  4. The rating formula adds a margin to ensure profitability across the duration of the term.
  5. The formula adapts for further decisions by the insured.
    • Liability limits
    • Deductible amount
    • How the insured wishes to pay (e.g., paid-in-full, month-to-month, autopay)
    • The insured’s consent to a data-gathering device
    • Extra features (e.g., gap coverage, built-in savings plans)
    • Discounts for multiple drivers, vehicles, policies, etc.
  6. The underwriter’s policy quote will give a premium for the entire term.
    • This premium is the quote, which is most of the work.
    • If not paid-in-full, chop up that premium into periodic installments (usually monthly), then add an installment fee each payment.
  7. The policy will bind when the insured pays, which may or may not have an effective date on that same day.
    • Sometimes, a policy will have an enrollment period for 1-2 months (e.g., group policies) that permits binding or endorsing, with only qualifying events permitted for endorsement during the rest of the term.
  8. As the insured pays, the billing is either handled by the agency (agency billing) or by the insurer (direct billing)
  9. If the insured must make an endorsement, prorate the premium from that day to the end of the term, then adapt the billing to reflect it.
  10. If the insured cancels the policy, the unearned premium is prorated to that day, has an administration fee added, and balances with either a prorated refund or short rate final bill.
    • At the moment a policy is bound, the premium is completely unearned, and the insured can perform a flat rate cancel (i.e., no premium exchanged and no coverage provided).
    • As the days transpire, the premium is earned by the insurer.
  11. If the insurer wants to cancel the policy, they typically issue a non-renewal for that policy, which will typically show up on the insured’s insurance report.

The billing for the premium is somewhat confusing for some people, since how the premium is paid determines what the price will be.

Sometimes, your lifestyle or situation can create a non-standard situation, and some insurance companies will outright refuse to insure you:

  • Owning high-value possessions.
  • Operating salvage title vehicles that were previously declared a total loss.
  • Living in a region with a high crime rate.
  • Being inexperienced (which includes the conditions that come with being foreign).
  • Having a condition that makes you more likely to be irresponsible (young, elderly, psychological disorders).
  • Having no prior insurance, a gap in days covered, or an insurance policy canceled or non-renewed.
  • Having lots of claims or accidents within a short window of time.
  • Having many moving violations or convicted of driving drunk.
  • Poor credit history.

Losses

To determine whether a peril is covered, insurance adjusters examine the uninterrupted chain of events that flows from the first action that caused the “injury” or “damage” (“proximate cause”).

  • e.g., if a windstorm caused a tree to fall on a fence that damaged a car, the wind was the proximate cause.
  • Most of the time, the proximate cause considers everyone at fault and uses the statutory concept of “comparative negligence” to assign percentages of fault to each party responsible.
    • e.g., if a precariously-placed rake knocks over a canister of gasoline, which then ignites from an electrical short nearby, the owners of the rake and/or gas canister is at fault.
  • The damages will be reduced if a party willingly exposed themselves to risk (“assumption of risk”).
  • The damages will also be reduced if someone creates an “intervening cause” that creates an entirely different set of circumstances from the original flow from the proximate cause.

Every object is treated as an extension of a person or legal entity:

  • e.g., if a person’s dog roams freely and bites a child, that person is the proximate cause.
  • e.g., an accident is an extension of a person’s negligence, even if it’s an automotive sliding on black ice.
  • In practice, every event is one of 3 possibilities:
    1. A person’s or legal entity’s liability from their agency of choice (meaning an insurance carrier will expect that person/entity pay for it, often by communication with their insurance).
    2. An “act of God” (meaning damages are an “external risk”).
    3. A liability that’s too difficult to determine (meaning damages are either property damage or “comparative negligence”). One frequent version of this is theft.

There are quite a few common perils:

  • Fire
  • Collision
  • Explosion
  • Flood
  • Disease
  • Death
  • Some perils are defined by context:
    • Theft is taking property from a known place.
    • Burglary is taking property through illegally entering/exiting (with some evidence of forcible entry/exit).
    • Robbery is taking property through threats or violence.
    • Mysterious disappearance is when there’s no explanation for its disappearance (covered in marine policies, but not typically in standard property policies).

Hazards can increase the severity or chance of a peril:

  • A physical hazard is an observable thing that increases the chances of a loss (e.g., slippery floors, faulty structural defects).
  • A morale hazard comes from reckless/careless actions or attitudes (i.e., negligence).
  • A moral hazard comes from deciding to do something unethical or negligent out of knowing the insurance will pay for the loss.

Insurance often classifies losses as direct or indirect, and may insure one or both of them:

  • Direct losses are caused by the covered peril (e.g., fire damages a home).
  • Indirect/consequential losses are caused by consequences of a direct loss (e.g., having to stay in a temporary place while repairing the effects of a fire in a home).

Losses are stated as a measurable financial amount, and can be total or partial.

  • Total losses often involve the insurance recovering some value of the property by purchasing the property for the value of the claim amount (with the option for the insured to buy it back at salvage value if they want).
  • An abandonment provision can prohibit the insured from abandoning the property to the insurer and claiming a total loss.

Health insurance makes a clear difference between mortality and morbidity.

  • Mortality is the complete cessation of life (i.e., an essential organ fails without a suitable replacement in time).
  • Morbidity is defined as a morbid state of quality, meaning someone is near death.

Claim Payments

The purpose of a claim is to award “remedy” for a party’s “injury” to “indemnify” them. However, without insurance the entire event can become the basis for a court case.

  • Compensatory damages pay an injured party due to negligence of an insured.
    • Special damages are direct financial damages and lost income affected by the negligence.
    • General damages are non-economic, natural, necessary results of a wrongful act or occurrence.
  • Punitive damages are over and above the compensatory damages, typically to punish someone and typically outside the scope of insurance.

In the event of a claim, an insured has quite a few responsibilities, and failing to perform one of those duties may void coverage:

  • Give prompt notice of the claim to the insurer or their producer
  • Prepare an inventory of damaged property showing quality, description, actual cash value, and amount of loss
  • Present the damage as often as reasonably required
  • Submit to examination under oath and a signed proof of loss within 60 days of request
  • Protect the property from any further damage and make reasonable repairs necessary to protect it
  • Keep an accurate record of expenses during the interim before the claim payout
  • Property claim duties:
    • If a crime, notify the police
    • If a theft, notify all affected banks
  • Liability claim duties:
    • Promptly forward every notice, demand, and summons related to the occurrence
    • Assist the insurer in settlement by attending hearings or trials

The claims process is pretty much the same no matter what:

  1. The claimant calls the insurer.
    • The claimant is either the insured (in a property claim) or holding the insured liable (in a liability claim).
    • In health insurance, the claimant are technically the healthcare providers’ medical billing departments.
  2. A customer service representative opens up a claim with a claim number.
    • It includes important information like the names of everyone involved, the policy number, details of the event, etc.
    • Even when a claim is absolutely certain to not result in a payout, claims department workers are legally forbidden from “steering” a claimant away from opening a claim.
    • Irrespective of a payout, a claim is still reported on the insurance reports and lingers for at least 3 years.
  3. A claims representative/adjuster opens a claim investigation, which often complies to a rigid legally-framed procedure.
    • Throughout the process, the scope of their effort is somewhat connected to the size of the expected claim and likelihood that the carrier will have to pay it.
    • They are typically looking for specific criteria that indicates the claim is not fraudulent (e.g., police report, evidence of forced entry).
  4. A special investigations unit (SIU) makes initial contact with all affiliated parties, and gather whatever information they can to determine liability.
    • The investigation will determine the proximate cause for the event.
    • Generally the longer they actually devote to the investigation, the more fair the outcome will be.
    • If there’s a legal complaint, then it triggers a “discovery” as well to gain more documentation.
    • Nobody is legally required to provide documents without a court order or subpoena, which can really slow down the process.
    • At the same time, the insurance companies may acquire a statement from the claimants by using leading questions to make the person confess to something they didn’t mean to.
  5. In the case of health insurance, the claims department may request access to claimants’ complete medical information.
    • They may find pre-existing conditions, though that may or may not apply depending on the law.
  6. If it’s property and casualty, they’ll also perform a damage inspection to determine how much the damages will be (and sometimes arranging for repairs) at the same time that they’re determining liability.
  7. Once they’ve determined liability (when applicable), the coverage limits apply to determine the amount(s) of the claim.
    • The only way a claims investigator will make a payment is if the conditions on the policy document are met, which may include canceling the policy, filing a proof of loss, or protecting the property from further loss.
    • The insured is responsible to submit a signed sworn proof of loss within 60 days of the request (which is the insured’s demand for payment), and the insurer has 30 days to respond to it.
  8. The adjuster must then determine who to pay.
    • The payment for a loss will go to an insurable interest or contractor, who is often not the insured (e.g., lienholder, collision center, construction company).
    • In a total loss, the payment may be a check for the entire balance minus the deductible, payable to the insured and/or lienholder.
    • Sometimes, a contractor may require a direction to pay form, which can direct the entire claim payout to them.
  9. The adjuster may deny the claim outright.
    • The contract may clearly state the situation is not covered (e.g., an event was excluded).
    • There may be differing criteria for different conditions (e.g., a medication taken orally may have different requirements than the same medication taken rectally).
    • The law is framed in a way that the rejection must be a legitimate reason, and everyone has the right to know why their claim is denied.
    • However, in all cases, the capacity to appeal the decision is very limited, and the claimant will typically need to file a lawsuit to get a denied claim paid.
  10. The claims adjuster gives an offer to the claimant.
    • They’ll sometimes make absurdly low initial offers, far below the value of a claimant’s case.
  11. Depending on the policy, the claim payment also triggers other expenses which may apply:
    • Rental vehicle reimbursement
    • Additional living expenses (ALE)
  12. Key details of the claim investigation are reported to insurance reports (e.g., CLUE), which nearly the entire insurance industry will track for future premium rating.
    • The date and cause of the event
    • Claim payment amounts (with thresholds defined at $1,000)
    • Whether an accident was the insured’s fault
  13. The insurer has the right to “subrogate” against third parties whose negligence caused the insurer to pay a claim (transfer of rights of recovery).
    • In other words, if a liable party does not have insurance but the claimant does, the insurance company can send their lawyers to sue on behalf of the claimant to get back the claim money they paid.
  14. If the insurer suspects fraud, they will report it to the government.
    • Fraudulent conduct can involve a fine or up to 10-15 years’ imprisonment, along with civil penalties if an Attorney General is involved.

While not all the parts are expressed, insurance claims use the same exact framework every time:

  1. The insurance company expects the insured to self-insure up to the deductible.
    • A deductible is often $500 or $1000, or not mentioned because it’s $0 (which is frequent for liability claims).
    • Sometimes, that deductible is a calculated percentage of the loss amount, property value, or limit (e.g., some property perils like earthquake or windstorm).
    • Sometimes, a time deductible mandates a certain number of hours/days before a claim payout.
  2. Up to a certain point past the deductible, both the insurance and insured will provide a copay.
    • Most insurance beyond health insurance doesn’t have a copay.
    • The copayment is often 50% (e.g., $100 is 50% paid by insurance and the insured pays the other $50).
  3. Beyond the deductible/copay, the insurance carrier covers losses all the way up to the predefined limit.
    • Some professional liability policies include a consent to settle provision that requires the insurer to have the potentially liable professional to agree to a settlement before payment (to protect the professional’s reputation if that professional doesn’t want to be held responsible).
  4. If the insured and insurer can’t agree on the value of damaged property, either one can make a demand for an appraisal.
    • Each party will select an appraiser who will each select an impartial umpire, then submit their estimate of damage, and any 2 of them agreeing creates a final decision.
    • This specific process promotes claim settlement and cuts down on expenses by requiring each party split the costs equally for their appraiser instead of hiring attorneys.
    • If the insured and insurer still can’t agree on the amount for the loss, anyone can demand arbitration, each with an appointed arbitrator who selects an impartial umpire, and any 2 of them agreeing creates a final decision.
  5. The insurance carrier makes a payment.
    • Typically, the payment will be to a service provider to fix things.
    • If the damages are too significant and the insurance company can take the asset, they’ll purchase the asset for the value minus the deductible/copay.
  6. To recuperate some of the losses, the carrier will sell the salvaged property in its salvage condition.

Most claims departments, to some small effect, take advantage of people who are not aware of their rights:

  • They may imply retaining legal representation (i.e., an attorney) will void their claim.
  • The statements they gather may provide leading questions that may invoke an insured to confess to something they don’t mean to.
  • They may delay claims for the claimants’ bills to pile up, meaning they’ll settle for less.
  • Finally, they may simply rush the case as fast as possible before claimants can understand their rights.

Property Valuation/Limits

For any property, an insurable interest of that property must exist at the time of the loss.

The property calculation can come from multiple possible valuation methods:

  • Replacement Cost Value (RCV) – the cost to actually replace it (often simply by applying a simple formula to square footage or consulting a chart).
    • Functional Replacement Cost – the cost of the insurer replacing the damaged property with a functional equivalent (e.g., sheet rock walls replacing plaster).
  • Actual Cash Value (ACV) – the RCV, minus depreciation (typically the most common property insurance valuation).
  • Market Value – how much it could have been sold for right before the loss (policies are rarely written on this basis).
  • Agreed Value – the insurer and insured agree to a discrete coverage limit, with no attachment to anything else, and becomes coinsurance if it’s not extended during a renewal.
    • If the insured and insurer can’t agree on a coverage amount, the insurer can waive the coinsurance requirement with an Agreed Value Approach with an inflation guard endorsement to reflect automatic coverage increases.
  • Stated Value – a value given by the insured, where the insurer pays the lower of their stated amount, the ACV, or the repair cost.
  • Salvage Condition – the remaining value of a total loss, typically used to recuperate some of the costs to the insurance company.

This valuation or its calculation is often clearly defined in the policy contract.

  • The property’s value must typically be determined before binding, meaning most of the underwriters’ work comes before the policy starts.
  • ACV conforms to the philosophy of indemnity, while RCV gives more than indemnification would imply.
  • Older buildings tend to be valued through ACV, with newer ones through RCV.

Property coverages have a few scopes:

  • Specific coverages indicate coverages for one type of property.
  • Blanket coverages indicate set coverage for multiple classifications of property.
  • Scheduled insurance covers specific property for specific amounts when it surpasses standard peril coverages (e.g., a diamond ring).
  • Sometimes, there will be no dollar limit on some property coverages.
  • Other times, insurers can place special lowered limits on property with a high possibility of a severe or total loss.
    • One form of lowered limit is a sublimit, where a fixed percentage of the total limit will go to a specific type of coverage (e.g., business lawsuit liability policy for $500,000 will have a 10% sublimit for punitive damages).

Coinsurance can allow an insurance policy that will cover less than the property is worth, which is common in commercial property:

  1. The property is assessed for a specified value.
  2. The insured makes an agreement to coinsure for less than 80% of the insurable value (e.g., 75%).
  3. If a loss happens, the insurance will pay the percentage of that coinsurance (e.g., 75% of a $5,000 loss).

Liability Valuation/Limits

Since liability can theoretically be unlimited, all liability insurance has a limit up to a specific, even amount.

  • The strict liability doctrine (everyone is responsible for themselves) applies when conduct is hazardous in nature or a defect must be proven.
  • Otherwise, the vicarious liability doctrine (an entity is responsible for other entities) applies.

All liability claims have 3 parties:

  1. The claimant who is seeking remedy
  2. The insured who holds the policy
  3. The insurer who pays the claim

For a liability claim to be valid negligence, it must have 4 non-negotiable components:

  1. A “duty” for the insured to act or not act.
  2. Violation of a “standard of care”.
  3. “Proximate cause” that connects to the liable party.
  4. An actual, measurable damage or injury toward another person (e.g., earnings, medical expenses, etc.)

Anything that isn’t resolved within insurance liability will make its way directly into the domain of tort law.

  • Intentional torts/acts are carried out with purpose and knowledge of their consequences (e.g., assault) and generally excluded from all liability policies.
  • Unintentional torts (aka negligence) is failing to exercise care that a reasonable/prudent person would take under similar circumstances, and is generally covered by liability insurance.

Liability insurance clarifies precise limits:

  • Split limits specify different coverage amounts for different types of losses.
    • Bodily injury (BI) and property damage (PD) are often separate limits.
      • BI – bodily injury, sickness, or diseases sustained by a person, including death.
      • PD – all damage to tangible property, including loss of use.
    • Per person – limits coverage per person.
    • Per occurrence – limits coverage per occurrence.
    • Most standard auto insurance policies give adequate liability coverage of $100K bodily injury per person capped at $300K per occurrence, with $100K property damage per occurrence (100/300/100).
  • Liability limits can also be aggregate limits instead of broken out.
    • Auto policies can have a combined single limit (CSL) instead of broken into BI/PD.
  • Liability policies can also point some of that liability back toward the insured as well.
    • Some states also accommodate for personal injury protection (PIP) to protect the insured for their injury.
    • Most states cover uninsured motorists (UM) and under-insured motorists (UIM), where the insurance company will cover the insured’s losses in the event of the other person not having sufficient insurance.

Insurance Organizations

An insurance company needs several key departments:

  • Legal – attorneys and actuaries frame the policy document.
  • Underwriting – company underwriters and field underwriters (aka insurance agents) write new business.
  • Marketing – branding to attempt to differentiate a fundamentally identical product.
  • Finance – performs accounting and billing activities.
  • Claims – manages insurance payouts.

There are a few ways to structure an insurance business.

  • Stock companies – incurs profits/losses and owned by shareholders who have voting rights
  • Mutual companies – incurs profits/losses and owned by policyholders who have voting rights
    • Assessment mutuals require policyholders to pay additional fees when premiums are insufficient for claims.
    • Nonassessment mutuals can’t require additional amounts from policyholders when premiums are insufficient (most modern companies are nonassessment mutuals).
  • Fraternal/benefit societies – memberships are based on religious, national, or ethnic affiliations, and members of the society must become a member of that organization.
    • They’re charitable organizations, so they’re exempt from taxation.
  • Reciprocals – an unincorporated group of subscribers who agree to pool their risks together to pay for losses and purchase reinsurance.
    • An “attorney-in-fact” solicits new subscribers, collects premiums, and performs administrative tasks.
  • Risk retention groups – members of a similar trade pool their risks to mitigate them together, when very powerful is effectively a cartel.
  • Lloyd’s associations – a group of members, which is not insurance, where professional underwriters accept risk on syndicates’ behalf.

Beyond private organizations, governments also create insurance policies.

  • Social Security, Medicare, Medicaid
  • State worker’s compensation programs
  • Special military insurance like Servicemembers Group Life Insurance (SGLI) and Tricare
  • Specific coverages like the National Flood Insurance Program (NFIP)

However, government and private insurance are not the same:

  1. Participating in government insurance programs is mandatory and automatic for all citizens (i.e., through taxation).
  2. The benefits to participants are through passing specific laws, not through a policy, and changing benefits means a cumbersome legislation process.
  3. Social insurance programs are always adequate enough to meet public needs, but aren’t equitable: while private insurance payments are approximately proportional to statistical likelihood, the least-contributors (indigent, elderly, dependents) benefit the most in government insurance.
  4. Any government insurance provider effectively owns a monopoly on the system from the lack of competitive alternatives.

Insurance Product Distribution

There are several ways to distribute insurance services:

  1. Captive/Exclusive Agency System – insurance producers who are part of an insurance company
    • Trained and supervised by a company employee or General Agent (GA) who may also be a producer
    • Represents the insurer and not the insured
    • Paid first year commissions, plus a training allowance, and comparatively smaller renewal commissions
  2. Independent Agency System – no direct affiliation with a particular insurer
    • Can be a General Agent or Managing General Agent (MGA)
    • Represents the insured more than the insurer
    • Can represent as many insurers as they desire and paid commissions on new business they write
  3. Managing General Agent System – recruits, hires, trains and supervises other producers
    • Producers tend to only insure with companies the MGA has had business relationships with
  4. Brokers – independent producers who sell insurance, but can’t bind insurance contracts
    • They’re a third party to any insurance arrangement
  5. Direct Response – non-agent services that involve mass media advertising and the customer responding by contacting with an advertised phone number or response document
  6. Direct Writing Companies – producers are salaried employees of a direct writing company, so the company itself owns the policy and not the producer
  7. Internet Insurance Sales Systems – insurance that can be purchased online directly through the insurance company or agent
  8. Franchise Marketing Systems – covering employee groups that are too small to meet the requirements of a group policy, so no group underwriting or premium rate reduction involved
  9. Non-Insurance Marketing Systems – insurance products through financial institutions which issue credit cards, with the product deducted from that bank’s accounts

For this reason, there can be multiple unrelated entities that form an insurance contract:

  1. The insurance carrier itself, which pays out a claim.
  2. An insurance agent, which can be independent of the carrier.
  3. A broker, who is independent of the insurance agent.

One strange language distinction in insurance is that a domestic company is an insurer domiciled with the same legal address as the insured, a foreign company is still in the country but outside the state, and an alien company is outside the country.

Sustainability

To stay in business, an insurance company has to maintain a delicate balance:

  1. The insuring company must compete with other insurance, so they must keep their premiums as low as reasonably possible.
  2. The insuring company’s loss ratio (losses from claims / premium income) must always stay low (never break above 100% or they’re losing money).
  3. Ideally, an insurance company’s loss ratio is <60% because a typical insurance company’s expense ratio (business costs / operating income) is 35-40%.

Since insurance needs liquidity to pay for claims, multiple organizations track their performance:

  • They check underwriting performance, management economy, reserve adequacy, adequacy of net resources, and the soundness of the investments.
  • A.M. Best is the oldest and largest financial rating service, but Standard & Poor’s, Moody’s, Duff & Phelps, and Weiss Research all rate performance.
  • The Insurance Division of each state also performs examinations and has the authority to place restrictions on writing new business, give directives on managing the company, and in extreme cases order liquidations of the company.
  • The National Association of Insurance Commissioners (NAIC) has no regulatory authority, but actively creates uniform recommendations which each state generally adopts (including minimum insurance regulatory standards and ratios), as well as conducting Zone Examinations, maintaining an Insurance Regulatory Information System (IRIS) to review insurance company operations.

There are only 3 ways for insurance companies to make money:

  1. Profit directly from underwriters.
    • The underwriters’ profit most steadily comes from insuring good risks with few to no losses.
    • Underwriters can also sell more coverage (e.g., higher liability limits) or adding more features (e.g., extra insurance gimmicks).
  2. Investments with income not related to claim payments.
    • They can’t simply invest into anything, and their investment portfolios are typically tracked.
  3. Reducing overall claims expense, typically from finding legal ways to not pay a claim.
    • This often comes through adapting policy language to conform to very specific situations.
    • Insurance companies have the most control over reducing claims expense, but it’s also the most unethical.

If an insurance company ever becomes insolvent (i.e., can’t pay claims), the government has its own guaranty.

  • That government’s Insurance Division will manage claims for certain admitted property, casualty, life, accident, and health insurance policies.
  • In effect, they end up requiring other carrier organizations to pay for a certain amount of policy claims and return unearned premiums.

If a person seeking insurance can’t get it through any conventional channels, most Insurance Divisions provide their own insurance plan.

  • Government-rated insurance typically has insanely expensive premiums, and its coverage typically isn’t very good.
  • Sometimes, a government will mandate a private insurance carrier to insure a particular risk.

Insurance Wisdom

Since insurance is a contract, the same wisdom for contracts applies in insurance.

Unless it’s the law, insurance never has to be permanent.

  • Research before starting or ending a policy, and don’t add features you don’t understand.
    • Generally, insurance becomes less beneficial and more expensive as it gets more complicated.
    • Weird gimmicks like “return of premium” or “waiver of premium” are often not worth the cost.
  • Don’t permit gaps in coverage by starting policies later than the old policy’s end date.

Insurance is a significantly complex business model that creates many hyper-specialized roles.

  • The only qualified person who has any idea beyond their small box is the independent agent, but that’s only to some degree.
  • Most people in the insurance industry are imprecise with insurance jargon, so ask for specific clarification on any trade-based term you hear, and record every conversation you make.
  • Nobody in an insurance office is particularly aware of your business and personal needs, though they’re often aware of the way they frame in the context of a policy.

The best way to save on insurance is to carry a reputation within your legal fiction that implies safety.

  • The credit score is for banks asking “will you pay off your debts on time?” and the insurance score is for insurance carriers asking “will you stay continuously covered and not file claims?”
  • Generally, shopping around can save 20-40%, but the most affordable insurance will often include a decrease in quality (and possibly claim payout) when you need to file a claim.
    • The project management triangle still applies, but insurance can instead be between quality, cost, or maintaining known risks.
  • Make lifestyle decisions that enhance your insurance score:

Only pay insurance premiums with already-taxed money to ensure claims are also after-tax.

Aim for as many premium discounts as possible that don’t cut back on coverage:

  • Look for group insurance policies through your workplace.
  • Keep multiple vehicles, people, and insurance policies with one insurer.
    • A decent insurance agent might find ways to split up policies, people, and properties, but it’s generally not common for saving money and insurance companies prefer that policies not have excluded individuals.
  • Most extra features are absolutely unnecessary, especially if you don’t understand them.
  • Raise the deductible as high as the emergency fund you typically maintain (at least $1,000 if possible).
    • There are also privacy benefits to a high-deductible arrangement, since small events don’t have to be reported.
    • If you can, make and sign legal agreements with others to settle without involving insurance companies.
  • You can sometimes get a discount for staying with an insurance company for several years.
  • How and when you pay insurance can provide discounts.
    • To get an early quote discount, shop about 1-2 months before a policy is up for renewal.
    • Pay the full premium at the beginning instead of in monthly installments.
      • If you can’t afford it, sign up for automatic payments.

Don’t cut back on coverages that may legitimately matter:

  • Carry an adequate amount of liability, and scale it upward as you gain wealth.
  • Use special form policies whenever possible to cover extremely atypical events (e.g., meteor shower).
  • When possible, use combined limits (e.g., blanket limits, CSL) to ensure you’re less likely to hit them.
  • For high-value assets, keep replacement cost valuation if at all possible.
  • Renter’s insurance is very cheap and always worth the expense (and often required for many apartments).
    • If you rent a home that burns down or floods, the owner’s insurance will not cover you!
  • The quality of an insurance policy is defined explicitly by its covered perils.
    • Customer service is only secondary to high-quality claim payments, but it can make the process of claim payments faster.
    • Always carry coverage for natural disasters common to your area.

When insurance is the law or part of a contractual obligation, pay close attention to what you need and why.

  • Most contractual requirements for insurance are also tests of financial responsibility.
  • When a lienholder requires insurance on their property, they only care that an unfortunate event won’t destroy their collateral and not your liability.
  • If a rental agreement requires insurance, they’re typically concerned with your liability (since they’re usually insuring the property you’re renting as their own policy).
  • If a business contract requires commercial insurance, they typically want proof you’ve had it for a set period before arranging for that contract.

Be explicitly honest with your insurance agent.

  • Many people will lie on their insurance (including concealment), and that will adversely affect the rate when a reporting bureau finds out, and can lead to nonpayment of a claim.
  • A claim submitted within a few weeks or months of starting a policy can often show up on the LexisNexis report to generate a very adverse reputation.

Online-only insurance companies are generally more expensive because people are more likely to submit fraudulent claims online than directly to an agent.

  • Agents are also typically aware of the odd discounts you may be eligible for with each carrier they work with.
  • Further, an agent can communicate when you shouldn’t submit a claim, since claims representatives are required by law to always submit a claim when you report an event (since anything else can be legally defined as steering).

Sometimes, you may want to insure something your insurance policy doesn’t cover.

  • Either you can add an endorsement to cover it (which may include manual underwriting) or will need a separate insurance policy altogether.

Submit claims wisely.

  • Your insurance rate will go up when you submit a claim, but you can always migrate to another carrier after the event (even if the claim wasn’t paid yet).
  • Let them know you have an attorney beforehand with a letter of representation, since you’re not supposed to speak with them directly if you do.
  • Work peaceably with the adjuster, since they’re a one-person bureaucratic dictatorship paid to be precise about your claim. They’re within a claims department and deal weekly with dozens of people in your exact same situation who are generally hostile.
  • Expect a week to 3 months for a claim to process into a payout, with lots of bureaucratic back-and-forth.
  • Don’t throw anything away, and send all the required documents at once.

If you’re interested in a more community-minded form of insurance, consider reciprocals.

Specific insurances

Auto insurance

  • State minimum liability is acceptable if you’re poor, but aim for at least 25/50/25 and preferably 100/300/100.
  • If you have an older car, consider dropping collision coverage.
  • Uninsured and under-insured motorist (UM/UIM) coverage is very affordable, and almost always worth it since 1 in 6 drivers in the USA don’t carry insurance.
  • If you don’t want to get auto insurance, you also have the option to post a bond for the state minimum combined amount or qualify as self-insured.

Crime insurance

  • Any identity theft protection should include some type of crime insurance, or it’s not worth the expense compared to changing cyber safety habits.

Disability insurance

  • Disability insurance should replace lost income from a disability (~65% of your current income).
  • Disability insurance is based on occupation, but doesn’t consider age.
    • Buy it if your profession has risks to disable you too much to do your job.
  • Don’t get policies for <5 years.
  • Make the elimination period longer (time to begin payouts) to lower your premium.
  • The best disability insurance will come through the workplace.
    • It’s usually called occupational insurance, and often only available in 2-year terms.

Health insurance

  • The number one cause of bankruptcy in the West is medical bills.
    • 70% of a person’s lifetime medical expenses are in the last year of their life, and 80% in the last 6 months.
    • At the point of reaching morbidity, additional healthcare is simply delaying the inevitable by a few months.
  • Since it’s too much risk, never decrease the maximum pay.
  • Your healthcare can improve your quality of life, but only after you’ve taken care of yourself without healthcare providers.
    • A health insurance company will often wholly reimburse the cost of a gym membership.
  • Healthcare won’t prevent the inevitable death that we all must face, so learn to accept what may come after it.
  • If you’re healthy and don’t expect children, try to bring insurance costs down:
    • Increase your deductibles, copayments, and stop-loss.
  • The health insurance system in the USA is not part of 1 unified healthcare system, but instead part of 50+ independent systems on a state-by-state basis.
    • It’s important to know which state applies for covering healthcare.

Homeowners insurance

  • If you have a property that’s vacant or unoccupied, it makes a lot of sense to have a human being present, since that person will naturally act to prevent many losses.
  • Whether it’s in the policy as an endorsement or you’re getting it separately, always get title insurance (for the rare situation where someone wrongly sold title of the home to you).

Long-term care insurance

  • Health insurance does not cover long-term care needs.
    • Long-term care insurance pays for a nursing home, assisted living facilities, and in-home care.
    • There’s a 69% chance a person will need long-term care.
    • Medicaid and other government programs are not reliable with providing long-term care.
  • Get long-term care insurance the day you turn 60, since it’s absolutely critical.

Life insurance

  • Life insurance replaces lost income due to death, and comes in two forms:
    • Term life insurance – will last for a specified period (e.g., 10 years)
    • Whole life insurance – lasts all the way to the end of a person’s life
  • Near the end of your life, your life insurance needs should not be significant.
  • Children’s life insurance should only serve to cover burial expenses.
  • Whole life insurance is almost always much more expensive than term life insurance.
  • Most people are completely unaware of the details of their life insurance policy.
  • Whole insurance typically funds a savings plan as well as an insurance product.
    • The gains on an insurance savings plan are abysmal compared to just about any investment vehicle (including CDs and savings accounts).

Travel insurance

  • If you’re ever traveling (especially on a vacation), always get travel insurance.
  • One of the most common features of travel insurance includes trip-cancellation insurance, which will reimburse your trip expenses if you experience a qualified unforeseeable event.
    • Some insurance will allow you to cancel for any reason, but their premiums are often 40-60% more.

Dumb insurance to avoid

  • Credit life insurance and credit disability insurance – pay off the creditors instead of buying insurance against the debt.
  • Mortgage life insurance – pay off the mortgage instead of buying insurance against the debt.
  • Supplemental health insurance – redundant, since it’s covering what health insurance is already supposed to cover.
  • Accidental death and dismemberment – only covers certain ways a person can die.
  • Prepaid burial policies – burial needs can be covered with a well-funded emergency fund.