Back to the Basics - Insurance Cheat Sheet
Health Insurance: One of the most important forms of insurance to purchase is health insurance. Many Americans go bankrupt because they do not have medical insurance, and have to pay huge amounts of money out of pocket in order to seek the treatment that they need. Having health insurance is a necessity. You never know when a medical crisis will occur. Even seemingly healthy, young adults run into trouble and end up needing to pay thousands or even hundreds of thousands of dollars in medical bills.
Deductible: This is the amount of money you need to pay before your insurance policy’s benefit kicks in. If you have a deductible of $2,500, and medical bills of $10,000, then you will need to pay the first $2,500 and the insurance company should pay a portion of the remaining $7,500 based on the terms of your health insurance policy.
Co-insurance: Depending on your insurance policy you may be required to cover a certain percentage of the bill after the deductible is met. For example, using the medical bill mentioned above, and the same $2,500 deductible, you would be responsible for paying 20% of the remaining $7,500 that is due if your plan had an 80/20 co-insurance. Your insurance company would be on the hook for the remaining 80%.
Copay: Your copay is a set amount of money that you need to pay for certain expenses. For example your insurance policy may include a $20 copay for visiting your primary care physician, or a $100 copay to visit the emergency room. Your copays will count towards your deductible.
Preferred Provider Organization (PPO) versus Health Maintenance Organization (HMO): PPO’s offer more flexibility as you are able to go to providers outside of the system, however HMO’s tend to be cheaper.
Auto Insurance – If you drive a car in the U.S. most states require you to carry auto insurance. Auto insurance protects you not only from the damage that occurs to your car, but also liability should someone else be injured.
If you get into an accident where another party is harmed because of your negligence or perceived negligence, the liability portion of an auto-insurance policy can save you significantly.
Tips: Choosing a high deductible policy is a good way to save money on your annual premium. Additionally you can choose to omit collision coverage, especially if your car is older, less valuable, or easy to replace. Liability coverage however is extremely important and should generally be kept high for everyone.
Life Insurance – Unlike health and auto insurance, there are many people who do not need life insurance. Life insurance is a way of protecting the financial security of your family in the event that you die prematurely.
When you purchase a life insurance policy you are agreeing to make regular payments in exchange for your insurance company paying your beneficiaries (usually spouse or children) an amount of money.
Life insurance is necessary when an entire family is reliant on the income of at least one of the family members. It can help to cover the lost income that came as a result of the premature death, as well as expenses associated with the death such as burial costs.
Term Life Insurance: This type of insurance is active for a specific amount of time (i.e. 10 or 20 years). If you purchase a term insurance policy and then pass away before the term is up, your beneficiaries get the death benefit. After that amount of time, your policy expires, and you either need to purchase a new policy at your current age and health status, or forgo having life insurance altogether.
Permanent Life Insurance: This type of insurance gets its name because it does not expire. Your beneficiaries receive a death benefit upon your passing as long as you continue to make your regular premium payments. Because it does not expire, permanent life insurance tends to be significantly more expensive than term insurance.