Insurance

Insurance is a form of risk management, usually via a contractual arrangement under which one party pays another, the insurer, to take on a risk and make specified payments should that risk come to pass during the term of the contract. There may be other parties to the arrangement, such as a beneficiary to receive the payments that is different from the insured party. Insurers themselves may pass on some portion of the risk to another insurance company, known as a reinsurer. The contract is often called an insurance policy.

In life insurance, the primary risk being managed is the risk of death of a specific person. If an employer purchases life insurance for all of its employees as an employee benefit then the employer would own the contract, each employee would be an insured person, and each employee would be able to specify the beneficiary in their case, while the insurance company is the fourth party. That insurance company might also enter into a reinsurance policy to protect it from the risk of a single event killing many of the employees of the contract holding company. In the reinsurance contract, the original insurer would own the contract, be the insured party, and be the beneficiary, while the second insurance company would be the insurer.

When to Insure
In general, you should seek insurance when you have a real risk of loss to be avoided, the ability to pay for insurance, but not the ability to self-insure. A single person with no family to support may not have a meaningful risk associated with death, while the parents of minor children have a risk of leaving their children without adequate provision in the event of their death, and parents of children that are self-supporting adults may no longer have as much risk associated with their death. On the other hand, the potential loss from becoming disabled is highest at the beginning of a working career and declines as a person ages.

Purchasers of insurance should review existing coverage periodically and when there is a major life event. Changes in your family, major changes in employment or compensation, and purchases and sales of insured property are all events that should trigger a review of applicable insurance. Liability insurance limits should vary, up to the level of risk, with your net worth and future potential income. Insured property limits should vary with the value of the property. Insurance against the risk of losing your income should vary with the expected income.

Self Insuring
In general, an insurance company makes its money from two main sources. The first is the difference between the premiums paid for insurance policies and the amounts it pays out under the contracts, also known as the profit from underwriting. Because the payouts come after the premiums are paid, sometimes years later, it also has had for some time the use of the money paid out. This money that the insurance company has the use of is its float, which can be and is invested. The return on investment of the float is the second main source of income. Against these two sources of income the company needs to pay its administrative expenses and to generate profits for its owners.

Because the insurance company needs to pay administrative expenses and generate profits, when an individual can do so they are generally better off self-insuring than purchasing an insurance policy. By self-insuring, you get to keep the investment returns on the floated amounts, the profit that the insurance company will make, and the administrative costs of the insurance company. This requires both having saved enough money to cover the potential loss from the risk and the discipline to keep that money saved unless the risk materializes. Both are easier to manage for small amounts than large amounts. Thus, in auto insurance it is usually easier to self-insure for the risk of damage to your own vehicle (a fixed, relatively small amount) than for the risk of causing damage to other people and having to pay their medical expenses (an amount that could be very, very high in some situations).

Deductibles
Deductibles are terms in an insurance contract allowing the insured party to self-insure for small amounts of loss while having insurance protection against large losses. They are common in areas where a small loss is a reasonable possibility (auto, health, and home insurance) but not where any loss would be large (life insurance). Because a deductible keeps the first dollars of loss with the insured party, they have a relatively large effect on the premium to be paid for an insurance policy, and are a potential source of savings on insurance costs. For a disciplined saver, the amount that they can self-insure will rise over time, and thus deductibles in existing policies should be reviewed periodically to see if it would make sense to increase the deductible and lower the premium for future years.

Types of Insurance
While almost any risk can be insured via specialty insurers, broadly speaking there are two main types of risk insured. The first is risk of harms directly to the insured party (e.g. life insurance, medical insurance, damage to one's own car in an auto accident) and the second is the risk of harming someone else and having to pay for the harm done them (e.g. professional liability insurance, damage to someone else's car in an auto accident). Some types of insurance combine coverage of both types of risk. Below are some types of insurance coverage that individuals commonly have:


 * Auto insurance often covers both risks of property damage and needed medical care as a result of an incident involving a car. In most places, some degree of coverage is required by law in order to drive a car.  Deductibles are usually available, and amounts and types of coverage are often highly customizable beyond the legally required minimum.


 * Deposit insurance covers the risk of loss of money on deposit with a financial institution due to the failure of that financial institution. It is usually provided by a government agency to all holders of certain types of account, up to pre-specified limits, not purchased directly by individuals.  The cost of this insurance is charged directly to the financial institutions, which build it into the cost of their products.


 * Health insurance comes in many kinds, including dental insurance. In the U.S., most people with health insurance have either group insurance through an employer or family member's employer or government insurance, though individually purchased health insurance plans are also available.  In other countries, basic health insurance may or may not be provided by the government for all residents and supplemental privately purchased insurance may or may not be either legal or readily available.  Generally speaking, it covers only the cost of providing medical care to specific covered individuals, may have deductibles.


 * Homeowner's insurance, renter's insurance, and landlord's insurance generally provide coverage for loss of one's own property and liability to others occurred because of their presence on your property. Deductibles are usually available.  While a homeowner is paying off a mortgage on their house the lender will usually require homeowner's insurance, as may a buyer during the process of selling the house.  There are always excluded perils, which means that if the loss is caused by one of those items then the insurance provides no coverage.  There may be ways to cover these exclusions, either by riders amending the standard policy for an additional fee or by purchasing specialty insurance such as earthquake or flood insurance.


 * Life insurance provides money for the beneficiary upon the death of the insured person. Individuals may have it to ensure the well-being of their family in the event of untimely death or to provide bequests as part of their estate plan.  Deductibles are usually not available.  The most common forms are term insurance that is in force for only a period of time and the more expensive whole life insurance that combines the features of life insurance with those of a sub-par investment vehicle.  Generally speaking, you are better off purchasing term insurance and using a good investment vehicle than purchasing whole life insurance, but it does have a place in estate planning in certain situations.  Accidental death and dismemberment insurance may be offered as a supplemental employee benefit; it pays additional amounts above life insurance if the covered person dies or loses body parts.


 * Private mortgage insurance and credit insurance are forms of insurance that are rarely of value to the purchaser, but may be required by a lender. They protect the lender from potential losses and are paid for by the borrower.  Generally speaking, you should avoid these whenever possible, and if required to have them then remove them at the first possible date.


 * Professional insurance may take many names, depending on the profession, such as malpractice insurance or errors and omissions insurance but protects the professional from paying directly for losses caused to their clients, and potentially others, by their work.


 * Title insurance protects against the loss of property - usually land and buildings - due to flaws in the chain of prior ownership. It is usually obtained at the same time as either the property is purchased or mortgaged.  There are two forms: one that protects the lender on a mortgaged property and a second that protects the purchaser of a property.  Lenders often require the form that protects them, and the form protecting the purchaser may also be available at that time at no or limited additional cost.


 * Umbrella insurance provides additional liability insurance above and beyond that contained in your other insurance policies. Umbrella insurance will generally need to be coordinated with the liability limits under those other policies.


 * Worker's compensation insurance and disability insurance collectively provide coverage for loss of the ability to work and gain income due to accident, injury, or illness. Disability insurance generally covers losing this ability because of something happening outside the workplace, and can be available either from the employer as a benefit or by individual purchase.  Workers comp insurance usually must be provided by the employer and covers both losses caused by the conditions of work and the medical care costs of a workplace incident.