 Personal finance PowerPoint presentation. What is insurance? Get ready to get financially fit by practicing personal finance. Insurance is a tool to help us to mitigate or lower risk. We could think about a whole bunch of different kinds of insurance, but the general rule is that we're purchasing the insurance in order to help mitigate or lower risk. It's also a little bit different, a little bit abstract when we compare it to other goods and services that we might buy, because normally when we buy goods and services, we get the goods and services at the point in time that we pay for them. With the insurance, we're getting a service that we expect to be getting in the future. So normally when you pay for something like even a service, when you pay for the utility bill, you had already used the utilities. When you pay for the phone bill, you already used the phone, and now you're being charged for the usage of it that you have already received. With the insurance, you're gonna get the coverage out into the future. You're gonna get covered a month or a year, for example, out into the future. You're also being covered for an event, for example, that might trigger the insurance that you're hoping won't happen. For example, if you buy car insurance, then the insurance company might pay you if an accident happens to cover the costs in that event. But you're hoping that an accident doesn't happen, and if an accident doesn't happen, that doesn't mean that the insurance company didn't actually give you something because the insurance company is giving you risk protection. So you're buying risk protection with the insurance in the event that something happens in the future that would have the financial costs. Obviously there could be other costs with something like a car accident, but the recompensation that we can get from something like an insurance company has to be in the form of generally dollars that cover us from a financial perspective. So it's a way to manage our risk when buying insurance, we purchase protection against unexpected future losses. So we've got future losses, and we're saying, hey, this future loss could be significant if it were to happen. What's the likelihood of it happening, and then how can I mitigate that risk with the use of insurance? The insurance company pays us or someone we choose if a covered event happens. So the car insurance, for example, if we're covering against a car accident, if that event happened, we had a car accident, then the financial conditions with relation to it might be something that would be covered. That's when the insurance company would pay out. So if we have no insurance and event that would have been covered happens, we may be responsible for the related costs. So if we got in a car accident and we didn't have any insurance, we may still be responsible for the costs and they could be significant for us to handle because we weren't really planning for that event to happen. So in order to mitigate that, we can have the insurance. So having the right insurance can reduce risks you face. So clearly insurance is therefore gonna be a significant component that we wanna manage well so that we can mitigate certain risks. And insurance policy is a written contract between the policy holder, the person or company that gets the policy and the insurer, the insurance company, the policy holder is not necessarily the insured. So it might be the case that the policy holder is the insured person, but it's not necessarily the case. An individual or company can get an insurance policy making them the policy holder to protect another person or entity who is the insured. So for example, a company buys life insurance for an employee that employee is the insured and the company is the policy holder in that case. Insurance reduces our financial risk. Imagine driving a car, we hit someone that damages our car. So if we're driving a car, we hit something, our car has been damaged. If we have the right kind of auto insurance, the insurance company will pay the costs of the car repairs minus the deductible. So the deductible is the amount that we would have to pay so when we get the insurance, we gotta think about that deductible amount, the portion we have to pay. So what if the plumbing breaks ruin everything in a room? Typically, if we have homeowners or renters insurance, the insurance company will pay to replace some or all of the damage property once we pay the deductible. So we might have homeowners insurance or renters insurance, for example, if there was some catastrophe that happened, if a water pipe breaks or something, then hopefully that would be something that would be covered. You can see of course that insurance is typically gonna be something that we would want to cover those large type of items, those large items that are unexpected possibly that we hope will not happen. But if they did, they would cause a significant financial hardship and therefore significant financial problem for us. And therefore something we might want to safeguard against even though we're hoping the likelihood of it actually happening being low. However, insurance policies will only pay for things that are described in the policy. So it's important for us to understand what our actual risks are, which could differ between our lifespan, different times in our life and where we live and so on and what our occupations are and so on. So we wanna make sure that we're covered for the specific things that we know we're covered for. So therefore it's important we read a policy to carefully before we buy it. So when we get the policy, we wanna make sure that it's covering us for the things that we know that it's covering us for. So how insurance policy works. Insurance policies are usually in place for a specific period of time. So it's gonna be very specific because you gotta know whether or not something's covered in the policy. So you might get a policy that's gonna be a month by month policy or a year policy, for example. So this is referred to as the policy term. At the end of the term, we need to renew the policy or buy a new one. So typically we'll be renewing the policy as we go generally unless we don't need the insurance anymore. So when we buy an insurance policy, part of our responsibility includes paying a fee called a premium. Some premiums are paid monthly like health insurance. So now we're thinking about paying the premiums for the policies. We might pay the premiums on a monthly basis for something like the health insurance. Others can be paid once or twice a year like the auto or homeowners insurance. So the car insurance, sometimes we pay on a yearly basis. Sometimes it's cheaper like many things to be paying on a yearly type of basis if you are able to do that. The cost of your premium usually depends on how much of a risk we are to the insurance company. So it gets complicated to determine how much you're going to pay. So that's where it gets a little, because everything seems a bit abstract. You're saying, okay, we're getting an insurance like car insurance for an event that may happen in the future, but we're hoping it won't happen. But I have to buy the insurance to mitigate that. How do I value how much is an appropriate price to be paying for the insurance company? And obviously the insurance companies use complex actuarial kind of calculation tables, different kind of estimation tables to determine how likely that's going to be happening. And that's how we're going to come up with basically the price of the insurance. In addition to the premiums, most insurance policies include a deductible. A deductible is the amount we have to pay first before the insurance company pays their share. So now we can start thinking about different mixing and matching between different policies in terms of how much it would cost with regards to the risk and then adding in the factor of the deductible, meaning that's the amount that if the, if covered event happens, I would still have to pay myself before possibly the insurance then kicks in. So the general thought process for us to mitigate risk being, well, if I got in a car accident or if I had whatever catastrophe happened, I could pay this deductible like 5,000 or something. I think I could cover that or something like that, whatever the deductible is. And then if it goes over that, then the insurance hopefully will kick in and cover that. That would be the general kind of thought process. So it wouldn't be a catastrophe from a financial position as well as possibly other catastrophe positions in terms of health and so on. So for example, if we have a $600 deductible on our homeowners policy and a covered event caused 4,000 in damage, we will pay 600 out of our insurance company, we'll pay the 3,400. So we have a deductible of $600. Something happens, whatever it is. We have the homeowners insurance or something, the pipe broke or whatever. It's cost us $4,000. If we had the deductible of 600, then we would be paying the 600, but the insurance company hopefully paying for the rest, which would be the 3,400. So we can say, okay, we're covered. It's not gonna be a financially crushing event for us because we've got the deductible and we can handle that. But then the insurance company should pay the amount over that, that being the general idea. With some policies, we can choose our deductible. Usually a higher deductible means a lower insurance premium. So oftentimes now you're thinking, well, if I'm getting something like health insurance sometimes, for example, if you're a younger person, you might be saying, hey, look, I'm gonna try to get a higher deductible. For example, because I think I can handle a higher deductible and then have lower payments on the premiums that I'm going to be paying because obviously as the deductible goes up, then you would think that the calculation for how much the insurance costs, the premiums on it would go down. So in that case, your strategy is, I don't need to be covered for the minor things. I want to be covered for basically the big thing. Like if I had a big financial condition, I can then still pay off the big deductible and then be covered for the added costs, which of course can be quite extensive if you get into medical things and stuff like that. So common types of insurance, there are many types of insurance, but some common types are described here. So clearly again, any type of thing where you're thinking I'm paying for this to mitigate my risk into the future, that you can think of as some kind of general form of insurance. Now clearly the types of insurance would include things like health insurance, helps us pay for doctor fees and sometimes prescription drugs. Once we buy health insurance coverage, we and our health insurer each agree to pay a part of your medical expenses, usually a certain dollar amount or percentage of the expenses. We've got the life insurance, which is the common one. Pays a person, we select a set amount of money if or when we die. So if we die, then we're gonna have people that are dependent upon us. So if we die unexpectedly, then that's when they would be covered. They would be covered. The money from our life insurance policy can help our family pay bills and cover living expenses. Disability insurance protects individuals and their families from financial hardship when illness or injury prevents them from earning a living. So it's kind of similar to the life insurance. People are dependent on us. We're no longer able to earn the living due to whatever circumstance. And therefore possibly we have the disability insurance. Many employers offer some form of disability coverage to employees or we can buy an individual disability insurance. Auto insurance, of course, protects us from paying the full cost of vehicle repairs and medical expenses due to a collision. In most states, the law requires us to have auto insurance when operating a motor vehicle. And then we've got the homeowners or renters insurance protects our home and personal property against damage or loss and ensure us in case someone gets hurt while on your property. So if we have a mortgage on our property most lenders require us to have homeowners insurance as a condition of the loan. So considerations when buying an insurance policy should what should we know when we're getting the insurance policies? A useful rule to live by is to do our homework before we buy insurance, obviously. So insurance is one of those things because it's abstract it could be a little bit more confusing for us to kind of figure again like what's gonna be the reward for us because we're trying to cover some possible event in the future, possibly one we don't want to think about and possibly one we're hoping is gonna be somewhat remote and happening. So it could be a little bit confusing to weigh the pros and cons of purchasing the insurance and we got to do a little bit more homework and thought process to wrap our minds around it. Research any insurance company we are thinking about buying from to be sure that the company is financially sound and provides good service. So clearly insurance is gonna be something about trust. We're gonna have to have a trustworthy company that we will be dealing with because if the event happens that you need to be insured under you wanna make sure that they're gonna be holding up their end of the deal because you're paying them upfront for coverage that happens into the future. And you wanna make sure that if that event happens that you're covered by a company that has a track record of doing so also find out what factors matter so that we can get the coverage we need to be at the best price. So that means that when you're doing comparing and contrasting what is most important to you? I mean, does the high deductible gonna be good? Do you need it to be covering smaller kind of dollar amounts that are gonna be involved? Clearly when you're looking at something like medical insurance, for example you could try to start to mix and match things like the deductible, the amount of premiums. Sometimes you're just trying to, if your budget is tight you're trying to get the premium as well as possible. And so you got the mix between the premium and the deductible. And so you gotta find what's the most important to you. And even though there's not too many factors involved when you're comparing and contrasting there's still could be a lot of mixing and matching involved in it. So again, you gotta spend some time with it.