MoneyTalk: Insurance Principles

This episode of MoneyTalk with OneOp 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.

Show Notes

1. 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

2. 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

3. 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

4. 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)

5. 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%

Music: “Happy” by MBB via Soudcloud.com, CC0