Insurance: A Necessary Evil?

Insurance is a contract or arrangement in which an insurer agrees to indemnify another party against financial losses, damage, or liability in exchange for a premium. The primary goal of insurance is to spread the risk of a loss from an individual to a large number of people, with each person paying a premium into a shared pool. This pool of funds is then used to cover the costs of any insured incidents.

There are many types of insurance policies available, including health, life, homeowners, and auto insurance. These policies can provide financial protection in the event of accidents, injuries, property damage, or legal liability. Insurance is important as it helps protect individuals, their families, and their assets from unforeseen financial risks.

Life insurance as an asset

Life insurance is a necessity for most people, but only some types are classified as an asset. Whether a life insurance policy is an asset depends on whether you can benefit financially from your policy while you’re alive.

Term life insurance, which only pays out to your dependents in the event of your death, is not an asset. Term life insurance is not considered an asset because you can’t get value from it when you’re alive. It is a form of protection that lasts for a set period of time (usually 10 to 30 years) and pays a death benefit to your beneficiary if you die while your policy is active. If you live longer than the policy lasts, you won’t receive any money.

Whole life insurance, and other types of permanent life insurance with a cash value component, are considered assets because you can withdraw funds from your policy while you’re alive. With whole life insurance, a portion of your premiums goes into a tax-deferred savings account, called the cash value of the policy. Because the policy’s cash value earns interest over time and you can withdraw from those funds, the amount is included in the value of your estate.

Whole life insurance is a unique asset in that you can both borrow your cash value and earn money on it at the same time. For example, if you have $50,000 in cash value and you take out a tax-free policy loan for $25,000 to buy a car, you will continue to earn interest on the full $50,000.

In rare cases, proceeds from a term life policy might become an asset if you sell the policy for a profit or your assets total $13.61 million or more.

Life insurance is meant to provide financial peace of mind for yourself and your loved ones. If you’re a primary breadwinner for your household, for example, you may want to avoid leaving your spouse and/or children in a tight spot financially. So that alone can make paying the premiums for life insurance worth it.

Health insurance

In the US, there are two types of health insurance: taxpayer-funded and private-funded. The Affordable Care Act (ACA) prevents ACA-compliant plans from instituting a lifetime limit for essential healthcare benefits such as family planning, maternity services, and paediatric care. The ACA also includes an 'individual mandate' that every American must have medical insurance or pay a fine.

Insurance as a contract

An insurance contract is a legally binding agreement between an insurance company and an insured party. This contract allows the insured party to transfer the risk of a significant financial loss or burden to the insurer. In exchange, the insured party promises to pay a small, guaranteed payment called a premium.

Elements of an Insurance Contract

To be enforceable, an insurance contract must contain all the essential elements of a contract. These include:

• Offer and Acceptance: The insured party submits a proposal form to the insurance company, which then agrees to provide insurance.
• Consideration: This is the exchange of items of value, such as money, services, or goods. The insured pays a premium, while the insurer promises a payout if an insurance claim is made.
• Legal Capacity: Both parties must have the legal capacity to enter a legally enforceable contract. Neither party can be under the influence of substances, mentally impaired, or a minor.
• Legal Purpose: The agreement must not entail any illegal activities to be valid and enforceable.

Additional Components of an Insurance Contract

In addition to the above, an insurance contract typically includes:

• Declarations: The declaration page identifies the insured, the insurance company, the risks or property covered, policy limits, policy period, and other important information.
• Definitions: This section defines specific terms used in the policy to ensure the insured understands all elements.
• Insuring Agreement: This is a summary of the insurance company's promises, stating what is covered. It includes named-perils coverage and all-risk coverage.
• Exclusions: Exclusions specify what is not covered by the policy, such as certain perils, losses, or property.
• Conditions: These are requirements of the insured, such as paying premiums or reporting losses, that must be met for coverage to apply.
• Limitations: Limitations specify policy limits, such as the maximum amount the insurance company will pay.
• Endorsements and Riders: These are amendments to the policy that add, delete, or modify the original contract's provisions.

Understanding Your Insurance Contract

It is important to carefully review and understand the terms of your insurance contract before signing. Consult an insurance advisor or expert if you need help interpreting any part of the contract. Remember that insurance contracts are legally binding, and providing false information or withholding material facts can result in the contract being voided by the insurance company.

Insurance for businesses

Insurance is a contract that provides financial protection to the policyholder against losses from specified risks in exchange for a premium. Businesses can obtain insurance policies to protect themselves from unexpected costs and financial losses resulting from accidents, property damage, lawsuits, and other events. Here are some common types of insurance for businesses:

• General Liability Insurance: This type of insurance protects businesses from financial losses due to bodily injury, property damage, medical expenses, libel, slander, and legal costs associated with defending lawsuits and settling claims. It is recommended for most businesses as it covers a wide range of risks.
• Product Liability Insurance: This insurance is designed for businesses that manufacture, wholesale, distribute, or retail products. It provides protection against financial losses resulting from defective products that cause injury or harm to customers.
• Professional Liability Insurance: This type of insurance is for businesses that provide services to customers. It covers financial losses arising from malpractice, errors, and negligence claims.
• Commercial Property Insurance: Businesses with significant physical assets can benefit from this insurance, which covers loss or damage to company property due to events such as fire, smoke, windstorms, civil disobedience, and vandalism.
• Home-Based Business Insurance: For businesses operated from the owner's home, this insurance can be added as a rider to their existing homeowner's insurance policy. It offers protection for a limited amount of business equipment and liability coverage for third-party injuries.
• Business Owner's Policy (BOP): A BOP combines multiple types of insurance, such as general liability and commercial property insurance, into a single package. It simplifies the insurance process and can be more cost-effective for small business owners, especially those running their businesses from home.
• Commercial Auto Insurance: Businesses that own vehicles used for work-related purposes need commercial auto insurance. It covers liability and physical damage protection for company vehicles.
• Workers' Compensation Insurance: This type of insurance is legally required in most states. It provides financial protection for both employers and employees in the event of work-related injuries or illnesses. It covers medical expenses, lost wages, and rehabilitation services for employees.
• Medical Malpractice Insurance: Healthcare and wellness professionals can protect themselves and their careers with this type of insurance, which covers claims of negligence and provides defence counsel costs.
• Cyber Liability Insurance: This insurance protects businesses from computer-related attacks, such as malware, phishing, ransomware, and theft of laptops containing confidential information. It is particularly important for businesses that store sensitive data.

When choosing insurance for your business, it is important to assess your specific risks and needs. Consult with licensed insurance agents to determine the types of coverage that make sense for your business, and compare terms, prices, and benefits from different providers to find the best fit.

Insurance for travel

Travel insurance is a safety net that can be purchased to protect yourself from financial loss in the case of unexpected events during your trip. It is not necessary for every trip, but it is highly recommended for international travel or non-refundable trips. The cost of travel insurance is usually between 5% and 10% of the total trip cost and is influenced by factors such as the traveller's age, the length of the trip, and the destination.

There are several types of travel insurance available, which can be purchased separately or as part of a comprehensive package. The most common types include:

• Travel medical insurance
• International travel insurance
• Trip cancellation, interruption and delay insurance
• Baggage and personal belongings insurance
• Emergency medical assistance, evacuation and repatriation insurance
• Accidental death and dismemberment insurance
• Rental car insurance

When purchasing travel insurance, it is important to evaluate your financial risks, examine what coverage you already have, and compare different policies to find the one that best suits your needs. Travel insurance can be obtained through credit cards, travel agents, travel insurance comparison sites, or directly from insurance providers.

• You have booked flexible tickets and accommodation with good cancellation policies.
• You already have adequate coverage through your credit card.
• You have not booked any non-refundable activities.

Frequently asked questions