Episode 10: What’s insurance, and how do I get it?

Insurance is one of the most complicated, and yet the most simple personal finance concepts. You might have heard of insurance referred to as anything from "life-saving" to "scam". The accepted definition of insurance is paying for someone else to assume your financial risk. Let's try and understand this in the simplest way possible.

Imagine the most financially valuable thing in your life - not a person, not an idea, a tangible object with those $$$ value. Maybe you thought of your computer, or an expensive instrument, or something in your room. Now imagine something terrible happening to it - it gets smashed by a car, it accidentally catches fire, it incurs water damage. Would you pay however much it costs to replace it? If you couldn't afford that, you'd have to just go without it, or take out a loan to buy it.

That's where insurance comes in - it's a safety net that you pay a specific company for. For example, if you have insurance for your laptop or desktop, that means that when your laptop incurs damage, the company you insured your device with will have to essentially cover the costs of fixing that damage or replacing your computer. You won't have to pay back the company for fixing the damage. Instead, you pay the insurance company for the contract, known as an insurance policy, a little bit every month.

Here's the fun part of having insurance - when you experience that financial "something terrible", your insurance company will cover the amount they said they would in the contract, rather than the amount you've already paid them. For example, let's say that you've paid the tech insurance company $50 dollars a month for 3 months, and they've given you a lifetime contract. You've paid $150 dollars to them...but then your computer gets $800 dollars of water damage. The insurance company, having agreed to cover the cost of water damage, will spend the $800 dollars on you.

Now, you're probably wondering how insurance companies can just manifest money from nowhere. You didn't pay them $800, you paid $150! Well, you're not the only person who was worried about their laptop getting damaged. Instead, they've got 100 other people who paid for the same insurance policy. Suddenly, they have a pool of $15000 to pull from, instead of just your $150 dollars. Not everyone will damage their laptop - it actually might just be you or maybe two other people. Now, insurance companies can tap into their fund and simply pay out the $1600 it would cost to repair two computers. That would leave them with $13,400. Basically, when you pay for an insurance policy, you're contributing to a big pool of money managed by the insurance company that you can tap into if something goes wrong without panicking about paying the money back.

The Process of Insurance

When you get insurance, you'll probably either work with a single insurance company or multiple insurance companies to get the coverage you need for specific things. Coverage is essentially the stuff that is covered by your contract that your insurance company will pay for, in the case something goes wrong. Coverage is progressive - going from your life, to your health, to the stuff that you own. Whether or not you need a specific type of insurance is really dependent on what you actually value and the risk you're willing to take on for those things.

For example, let's say you own two laptops - a brand-new MacBook and an older Windows desktop. You do most of your work on your MacBook, so you value it more. Plus, it's newer and more efficient. Since you travel with your MacBook while your desktop kind of just sits at home, it's also under more risk of being damaged. As such, you might want to just get your MacBook insured instead of paying for both to be insured.

Once you've decided what type of insurance you need, you can then choose an insurance company that will offer that specific type of insurance. The perfect insurance company for your context is completely subjective, but we've also included a quick screening guide at the end of this article.

We're going to go ahead and assume that you've found maybe two or three companies that you're interested in. What you can do then is look at the different insurance plans that they offer. A plan is basically like a subscription "level" - think about apps where as you pay for a "Lite" plan, you might get some basic features, but if you pay for "Mega", you'll be getting other features. Insurance plans operate similarly, with varying amounts of a premium, basically a subscription fee, that you'll be paying in exchange for coverage. Sometimes, insurance plans will have specific exclusions - things that they specifically do not cover for whatever reason. For example, in the US, many health insurance providers will not cover dental care as part of your overall healthcare plan.

When you decide on a plan, you'll sign an insurance policy - a legal contract that binds you and the company, and makes them financially responsible for you in the ways outlined by your plan, as long as you keep paying your monthly subscription fee.

Let's look at the MacBook insurance. You might pay a premium once, like a $1000-dollar care warranty, that would kick in for any damage happening to your device ever, or with a premium of $10 dollars a month, which you continually pay for your laptop to remain covered by your insurance.

In your budget, the monthly insurance premium will then be something you have to factor in so that you don't lose your insurance. If you keep paying, you're typically good to go, but if you fall behind, there are a few potential financial risks that we'll cover below.

In the case that something does go wrong, your insurance will come in handy. If you experience an insured event - a "something terrible" that your insurance company has, in your insurance plan, said that they will pay for - you can then file an insurance claim with the company - this is basically a document or an online form where you detail out what happened, what your plan is, various details about the situation, and all other information that the insurance company needs to finally give you a decision on how much they'll cover for you.

You then submit the claim to your insurance company - and you'll probably need to talk to them to clarify the claims process - and they will get back to you once they've decided on the reimbursement that they'll provide. The exact services you'll get is very dependent on the type of insurance you have and the extent of the damages done. Sometimes, it might be an insurance payout where you will receive cash or a refund on a service you've paid for. Other times, your insurance company will have specific services or companies you can go to, where costs will be covered by the insurance company.

Some insurance plans may have some extra features to consider when you actually are in the situation to claim:

• Deductibles: Some insurance companies need a minimum amount of money
• Co-Pays: Sometimes, insurance companies will expect you to pay part of a bill that you file for. A co-pay is a set amount or percentage of a bill you incur that your insurance company will expect you to pay, while they cover the rest
• Out-Of-Pocket Maximums: For an insurance plan where your company also expects you to contribute to your bill, there will typically be a limit on the total amount of money that you will actually have to pay in a year

The key skill to practice is ensuring that you are communicating with your insurance company at each stage of this process, from getting an insurance plan to paying your premiums to filing a claim. Sometimes, it's worth the extra hour on the phone, on the company's website or reading the fine print to ensure that you know exactly what you're paying for, and how you can best utilize it.

Types of Insurance:

For almost anything that could be of any value to anybody, from a wedding ring to your cat, there's going to be an insurance plan out there that helps cover that. For fun, you could probably just search up the most ludicrous insurance policies you can imagine! Here are some of the most common insurance types that you might need:

1. Life Insurance: helps to support your family in case "something terrible" happens to you, or to support you in the case that you get a lifetime disability or something stopping you from having an income. Life insurance plans make sure that you remain financially protected in the case of permanent disability, and your family is kept financially stable if you aren't there.
2. Health Insurance: focuses on mitigating the cost of elaborate medical treatments - from the cost of visiting a doctor to getting an X-Ray. Health insurance will typically cover specific medical services, with specific doctors, and with various requirements - it's always good to read the fine print with Health Insurance! Not everyone might need health insurance - if your country has hospitals open to the public that cover your medical bills that you can't afford, or your employer/school already provides you with insurance, then you most likely don't need health insurance especially early on
3. Travel Insurance: supports you when you're not in your country of residence, helping protect against unexpected events like medical emergencies, lost luggage or missed flights. Having travel insurance can keep you safe even while you're not at home
4. Auto Insurance: If you end up buying a car or a vehicle, auto insurance will help cover the costs of repair and help you fix damage on the car, or even replace the car in specific incidences. Your insurance company can also represent you legally if you get into a car accident
5. Home and Personal Items Insurance: This is a broad category of insurance that basically helps you to protect the stuff that you own that are assets. From your home to your expensive artwork, this type of insurance means that you can get financially compensated if anything happens to your stuff.

What makes a good insurance company or plan?

All insurance companies are legally obliged in most countries to follow certain principles that guide their business ethics. They are actually within insurance contracts, so you can definitely check the contract you sign to make sure that it hits all these principles:

1. Good Faith: Your insurance company should always be looking out for your best interest as long as you aren't trying to scam them. That means that they aren't supposed to lie or misrepresent information
2. Indemnity: You are supposed to receive all compensation that's outlined in your insurance contract - if you experience a financial loss, your insurance company's job is to bring you to a state where the financial loss isn't a problem
3. Insurable Interest: The thing that's being insured has to be proportional to the value of a premium - if it's something that you could simply replace with your own money, you shouldn't be paying a monthly fee for it. Plus, it's supposed to be valuable to you, and not anyone else - don't take out an insurance policy against someone else's house!
4. Contribution: This just means that if you have two different insurance plans taken out with two different companies for the same thing, let's say your MacBook, they are legally obligated to split the bill
5. Subrogation: This just means that if your "something terrible" involves legal matters, like if you can sue someone for damaging your items, your insurance company will represent you, but all of the proceeds will go to you
6. Proximate Cause: This means that the most direct cause of damage will be the one considered for insurance - for example, if you throw your MacBook onto a street, but it gets run over by a car, it would not be covered unless accidents were covered by your insurance

To make sure that your insurance company is following the rules it's supposed to, check in with your insurance company to see whether or not they have a credential from a regional regulatory body. Many governments and affiliated associations will have a credential that they give to reliable insurance firms to make sure that they do what they're supposed to. Many governments around the world will offer special insurance coverage for specific things to their citizens, or similar benefits, in the form of social security. For example, instead of paying health insurance, your government might offer you healthcare in a government hospital that is covered by them instead. Make sure that if you're eligible for government plans for things you can't afford, you aren't then paying insurance on it.

Since insurance can be complicated, the most important factor that goes into choosing a good insurance policy with a strong insurance company is communication. What you really want to find is a company that will communicate with you about exactly what you're paying for, and let you make the decision to get coverage for whatever you decide.

What happens if I accidentally don't pay my insurance?

Once you've gotten an insurance plan, it's very important to continue staying on top of your insurance premium. If it's a monthly fee, you definitely want to keep paying it every month and prioritize it. While some insurance companies will have a grace period, when if you don't pay the insurance premium, they will give you some extra time to pay it. However, once you pass the grace period, your insurance company can:

• Terminate your insurance, which means you are no longer covered for risks
• Cancel any further policies with the same insurance company, which means that you'd have to switch companies
• Bring down your credit score - See Episode 7