Notes to my kids — Insurance

Although you learn a lot in school there are some practical issues that are not covered in class which these notes are intended to introduce. I know how you feel about Economics as it is taught in school (and I agree with you) — that it is all theory and useless in the real world. I hope this series of notes will help explain the basics of some real-world services that you will need to engage with as you move into the world. This one covers insurance.

You buy insurance because it protects you from loss. You hope you never need to use the insurance, but you’re very happy to have it when you do need it.

What is insurance?

It’s a business that attempts to provide compensation (read money) to you when “things go wrong.” You should understand that insurance does not prevent problems but rather it pays you some money (or sometimes gives you a replacement) to fix the situation.

Types of insurance

Think about what kinds of “things go wrong.”

  • A thief breaks into the house and steals the TV (or god forbid the PlayStation)
  • You break your arm skateboarding
  • You get into a car accident
  • You drop your phone and the screen breaks

Each one of these scenarios requires a different type of insurance coverage. From the top, home insurance, car insurance, health insurance, phone insurance.

Cool fact about insurance — you can insure almost anything. There is a company called Lloyds of London that will write a custom policy for almost anything. There are even rumors that J. Lo has her ass insured.

Insurance terms

When you buy insurance you are buying a “policy” that provides you “coverage”. The cost of insurance is split into the “premium” and the “deductible.” Usually, you pay the premium every month and you pay the deductible when something goes wrong and you file a “claim.” The deductible tells you the amount above which the insurance company will compensate you and you are responsible for any amount below the deductible.

Cheat sheet:

  • Policy — a contract with the insurance company that covers your losses
  • Coverage — specifies exactly what the insurance company will pay for
  • Premium — amount you pay (usually monthly) for the coverage
  • Deductible — amount you are responsible for paying when you file a claim
  • Claim — your communication to the insurance company that you have suffered a loss

An example

(I know this looks like an algebra word problem but go with it)

You want to protect your mobile phone so you insure it. The insurance company offers you insurance for $7/month with a $300 deductible.

Friday night… boom, your phone breaks. You file a claim with the insurance company. They send you a new phone (usually what they consider a good replacement) and a bill for $300. What?! I thought I had insurance. That $300 is your deductible. You have to pay the deductible because the new phone costs the insurance company more than $300 to replace it and you were responsible for the first $300 of the cost of the replacement phone.

Now you have a new phone and one strike on your claim history. And you have to keep paying $7/month for coverage if you want to keep the replacement phone covered.

A few weeks later you drop your phone in the toilet and it stops working. You file a claim. It is rejected. Water damage is explicitly excluded from your coverage and you must now pay the price of the replacement phone yourself. Now you are out $425 to replace your phone.

Six months later you are skateboarding and your phone gets smashed after a failed fakie to heel-flip. You make a third claim. You receive a new phone, another bill for $300 and a nice letter from the insurance company saying that they have cancelled your coverage. You are too risky to continue insuring.

Next year you get a new phone and want to insure it again. You might find now that the cost is $10/month and your deductible has gone up to $400.

When you make a claim

You will hear many stories about people making claims who are very dissatisfied with the service they receive. Lots of people find that their insurance doesn’t cover the accident they have gotten into and they disagree with that (sometimes strongly, and often correctly).

Never expect to receive compensation but always fight for your rights if you think you’re on the right side of the argument. This is why it is so important to spend a little time understanding your coverage. Yes, it’s boring reading (and some companies rely on the fact that nobody reads the fine print) and nobody wants to think about losses but it will serve you well.

It’s not free money

Never lie to the insurance company. This is called fraud and it is a serious crime. You cannot claim that your phone is broken when you want the new iPhone 27 instead of your busted iPhone 5.

Every time you file a claim the insurance company will adjust what it is willing to cover and how much it costs you — remember they are running a business.

Getting insurance

There are providers for every kind of insurance and the process of getting coverage can be confusing. For example, some home insurance may cover your computer getting stolen or broken and others will not. Ask questions and review the fine print.

You should always have health insurance and if you own a car you will need car insurance (get ready for some big numbers here) but other than these two many insurances are optional. You will need to do a little homework (ohhh man — thought that was done!) and figure out what you need. If you’re a stuntman you’ll probably need a little extra coverage on the health side and when you own a house or apartment you will want to protect that investment with home insurance.

It’s easier now than ever to find insurance providers and compare the costs. Try out Geico’s car insurance calculator which will recommend coverage you should have based on your driving habits and some other information. But, be warned, they don’t tell you the cost until you provide more information.

Ask lots of questions. Ask your friends and other people you trust about who they go to for insurance. It’s a good sign if one of your friends has a good experience with a company and recommends them to you — start there, but compare at least 3 offers to make sure you are getting a fair price.

The fine print

As we have discussed so many times before — always read the fine print. Always. The fine print is where the exact terms of your coverage are spelled-out. If you have questions always ask. There are no stupid questions.

For L&E — love you both.

Next up, banking.