This episode of MoneyTalk with MFLN Personal Finances discusses some topics from the July 2019 webinar, Insurance Principles and Resources: What Financial Educators Need to Know. You can watch the recording and find associated resources from the event here.
- You began by discussing five ways to manage risk. Will you share them and give examples?
Five ways to manage financial risks are:
- Doing nothing and hoping for the best (e.g., no accidents, illnesses, disability, property loss, lawsuits)
- Avoiding risks such as not driving in bad weather and electing not to ski or skydive, etc.
- Reducing risks such as installing alarm systems and wearing seat belts and eating healthy food
- Accepting risks by self-insuring for risks and increasing deductibles on insurance policies
- Transferring the risk of large out-of-pocket losses to insurance companies in exchange for a premium
- What are common insurance errors that you described?
Common insurance errors that I mentioned in the webinar include:
- Not following the “large loss principle” and adequately insuring for large potential financial losses such as disability and liability
- Not being familiar with the specifics of your insurance plan (private, employer, or government policy)
- Lack of disability insurance to cover a loss of income resulting from an accident or illness
- Not checking the credit rating of insurance companies before buying a policy
- Not following the “Rule of Three” and shopping around and comparing 3 competing insurance policies
- What are key factors that affect the cost of auto insurance?
- The type of vehicle: make, model, age, and theft rate statistics
- The rating territory: accident, theft, and vandalism rates for the location that a car is located (e.g., cities)
- The driver: age, gender, marital status, driving record, and credit score
- Amount of liability coverage (e.g., the required state minimum vs. higher limits like 100/300/50)
- Policy discounts: savings available for short distance driving, bundling with other property insurance, use of security devices, and good driving record
- What are key factors that affect the cost of homeowners’ insurance?
- Amount of policy coverage (e.g., $100,000 vs. $500,000)
- Location of the home (e.g., rural vs. urban location and weather-related risks, other risks such as earthquakes and sinkholes)
- Type of structure (brick vs. wood, size, layout, other structures such as a “she shed” or “man cave”)
- Policy replacement coverage features (e.g., actual cash value vs. replacement cost coverage of contents)
- Home insurance policy discounts for alarm system, smoke detectors, and bundling
- Company pricing differences (e.g., “brick and mortar” offices vs. online insurance support services)
- You mentioned a study where few people understood basic health insurance terms. What are they?
Yes, only 14% of the sample was able to correctly identify four basic insurance terms and only 11% could correctly calculate the cost of a hospitalization by applying the four terms correctly: (dash.harvard.edu/bitstream/handle/1/17190506/simple_insurance.pdf)
- Deductible: A specific dollar amount that you must pay for a claim before insurance benefits begin
- Copayment: A specific flat dollar amount that a person must pay for a health care-related product (e.g., prescription drug) or service (doctor’s office visit)
- Coinsurance: A percentage of the total cost of medical services that a health care participant must pay (e.g., insurer pays 80% and participant pays 20%)
- Out-of-Pocket Maximum: The maximum amount of expenses (e.g., $5,000) that health care plan participants must pay themselves before approved medical expenses are covered 100%