Financial Wellness with Richmond Kwame Frimpong
Insurance is a tool to reduce financial loss or hardship. It is a contract between the insured and an insurance provider under which the insured can be paid for certain losses. The insurance provider pools clients’ risks to make payments affordable for the insured. It is protection that can help cover the cost of unexpected events such as theft, illness, property damage, or death. The protection or coverage you receive can be for a limited period of time or throughout your lifetime. In return for the protection, you pay a premium. Premiums are the amount you pay periodically, depending on the type of insurance and what is stated in your policy. The amount for premiums you pay is based on the probability that you will suffer a claimable loss. Other factors that are considered in computing premiums can be the insured’s age, health, lifestyle, or family history.
For health, dental, home, and auto insurance policies, the amount for premiums also depend on the deductible. This is the amount of your claim you agree to pay before the insurer pays the rest. Of course, choosing a higher deductible will lessen your premiums because you are agreeing to pay for a larger part of your loss.
What happens when you pay your Insurance Premium?
When you pay your Insurance Premium, your money goes into a pool of funds with many others. Some of that pool helps the policyholders who suffer hardship in that period. When a hardship or loss occurs, a claim is made. The Claim is the official request for the insurer to pay for a covered loss. The insured’s agent or broker can assist in claiming benefits. Supporting documents will be required, depending on the type of loss (for example, photographs of an injury or property damage for an accident or property insurance claim, or a death certificate for a life insurance claim) during claims processing or claims investigation.
Life insurance provides payment to the insured’s family and loved ones after the insured’s death. The insured names a person or persons (beneficiary/beneficiaries) who will receive the death benefit as stated in the policy. The proceeds or death benefits are tax-free.
There are two types of life insurance. Term – provides coverage for a specific amount of time. If the insured dies within the period of coverage (and the premiums are paid), the beneficiary receives the death benefit as stated in the policy. The coverage ends at the specified term. It can be renewed after the term; however, the premium may increase since premiums may depend on the insured’s age. Permanent – covers the insured throughout their lifetime (unless the insured fails to pay the premiums). There are two kinds:
- Whole life insurance – this guarantees that your premiums will not change as you get older. This type of insurance has a guaranteed minimum cash value and death benefit amount.
- Universal life insurance – this is a product combining life insurance and investment.
Health insurance can help you pay for services that the regular health care plan does not cover. Some types can supplement your income if you suffer a major illness or injury. Other types can pay for medical expenses if you become ill while on vacation.
Here are some types of health insurance:
- Supplementary health insurance
- Disability insurance
- Travel medical insurance
- Critical illness or trauma insurance
- Long term care insurance
Property and Casualty (General) Insurance
Property insurance covers losses or damage to your home or personal possessions, to your car, or your business. Casualty insurance shields the insured from legal liability for losses caused by injury to other people or damage to property of others.
Here are some kinds of general insurance:
- Home or Property insurance
- Tenant or Renter’s insurance
- Auto insurance
- Liability insurance
- Accident benefits/bodily injury insurance
- Collision insurance
- Comprehensive insurance
- Business insurance
- Commercial property insurance
- Public liability insurance
- Errors and omissions insurance
“Group insurance provides a mechanism for employers to provide employee benefits as part of an employee’s total compensation package, as part of one group, outside of government-provided benefit programs”. Some commonly provided group insurance benefits are supplementary health insurance, basic life insurance, dental insurance, long-term disability insurance, and accidental death and dismemberment insurance.
Where do your premiums go?
Premiums are used to pay claims costs, investments, and operational expenses. They practice diligent financial management so that claims can be paid. For instance, they invest in low-risk investments that can be easily liquidated in case they need to pay out claims. They also set money aside as a legal reserve. They are required by law to maintain this amount. The legal reserve guarantees that an insurer can pay a large number of claims within a short period of time
Buying an Insurance Product
Insurers will evaluate whether they can issue a policy based on certain criteria such as:
- Medical history
- Previous claims made
- Amount of coverage you are requesting
Some types of insurance, such as life insurance, would require a medical exam. After this, the insurer would review your application and access your personal and medical history to assess your risk. After this assessment, you will know the amount of coverage you are qualified for and the premiums you need to pay. No matter what type of insurance you are applying for, answer all questions on the application fully and honestly. If you withhold important information or if you lie on the application, it can be the basis for canceling your policy, or worse, refusing your claim in the future.