Money, Health, and Other Things

Educational Blog in the Area of Family and Consumer Sciences for the Middle Peninsula


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Risk Management and Insurance Basics, Part IV

Over the next two weeks, we’ll return and discuss auto insurance.

While we’ve all probably heard of car insurance, do we all know what it entails? Is it required by law? Does our policy cover the damage to our car in an accident? What if we crash into tree? Does it cover us for things like theft and vandalism? What about damage from wind or hail?

To begin answering some of these questions, let’s start by discussing automobile liability insurance. Liability insurance covers you for accidents you’re responsible for – it pays for the bodily injury and property damage to others caused by accidents that you’re at fault for, and is currently required by law in the majority of states. It is important to note that automobile liability insurance will not pay for bodily injuries suffered by yourself or property damage to your vehicle. If you want to cover your own car, you’ll need additional insurance, which we’ll discuss next week.

Liability insurance is often quoted as three number separated by slashes. The first number is the per-person bodily injury limit – the limit, in thousands of dollars, of how much your insurance will pay for a single person injured. The second numbered is the per-accident bodily injury limit. This is the limit of how much your insurance will pay in total for all persons who are injured in that accident. The last number is the maximum amount your insurance will pay for any property damage your accident causes.

Each state has its own requirement for minimum liability coverage. In Virginia, the minimum liability coverage for policy holders is 25/50/20. Virginia is also one of the few states where a driver can legally drive uninsured, if they pay an Uninsured Motor Vehicle Fee with the DMV. With that said, while having state minimum or even no insurance may be cheaper, it leaves the driver at a significant risk. Accidents can easily result in personal injuries above $25,000, or $50,000 for the entire accident, and a couple newer cars involved in the collision can easily double or triple the $20,000 property damage liability. Any injuries or damages above the liability limit becomes the responsibility of the driver at fault. For this reason, many experts recommended liability coverage of at least 100/300/100.

There also exists the risk that you’re in an accident caused by another person and they are either uninsured or underinsured. To cover yourself, you can also have uninsured or underinsured motorist insurance which can cover you, your passengers, and property damage loss that occurs as a result of another driver with insufficient insurance coverage. In fact, in the state of Virginia, policyholders are required to have a minimum of 25/50/20 uninsured and underinsured motorist coverage, and it’s often recommended to carry uninsured and underinsured motorist insurance at the same limits as your liability insurance.

Next week, we’ll return and wrap up our discussion on auto insurance.


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Risk Management and Insurance Basics, Part III

This week, we’ll return and discuss some common insurance terms.

Two more insurance terms you’ve probably heard a number of times, but may not fully understand, are copayments and coinsurance.

For insurance policies that have copayments, which are most common among health insurance policies, copayments are specific dollar amounts you have to pay each time you use that insurance, for instance, each time you go see a doctor or specialist.

Coinsurance, which is also most common for health insurance policies, is the percentage of any loss that you will be responsible for. For instance, if you have an 80/20 coinsurance, that means you’re responsible for 20% of the cost, after the deductible.

This illustrates one reason that’s it’s still so vital to have money in savings for an emergency, even if you have insurance. Let’s say you have a procedure that costs $11,000 – expensive but you have insurance, so you’re fine, right? If you have a $1,000 deductible, first you have to pay the first $1,000 before your insurance covers any costs. If in addition to that, you have 80/20 coinsurance, now you’re responsible for 20% of the remaining cost, which is $2,000 of the remaining $10,000. Now, even with insurance, you’re responsible for $3,000 of that $11,000 procedure.

To address some of these concerns, many policies will have what’s called a max-out-of-pocket. This is the most an insurance holder will be responsible for. In the last example, if your insurance policy stated a max out-of-pocket of $2,500, once you reach paying that much, your insurance would be responsible for the remaining cost. You can also often lower your deductible and reduce your portion of the coinsurance, but as we discussed last week, at the cost of a higher premium. The balance between risk retention and insuring against risk often comes down to personal preference. However, at minimum, be sure you can afford the monthly or annual premiums within your budget or spending plan, and be sure you have adequate savings to cover the cost of deductibles, copayments, coinsurance, and elimination periods.

Next week, we’ll return and discuss auto insurance.


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Risk Management and Insurance Basics, Part II

For the next two weeks, we’ll discuss some common insurance terms and why they matter, before moving on to discuss specific insurance policies starting in Part IV.

You’ve probably heard terms like premium, deductible, co-payment, co-insurance, and elimination period thrown around but maybe you’re not 100% what they mean. Let’s talk about it!

What are premiums? Premiums are the amount of money you pay to have an insurance policy. This can be payments made annually, semi-annually, or monthly, depending on the insurance policy. Some of these insurance premiums may be made automatically – your employer may withhold some of your paycheck for your health insurance, and your homeowner’s insurance is often included in your monthly mortgage payment paid from your escrow account.

What are deductibles? A deductible is the amount of money you’re required to pay on any loss before your insurance policy will make payments. For instance, your car insurance policy may cover you for the damage of your car during a collision, but if you have a $500 deductible, you’ll be expected to cover $500 of the cost before your insurance covers the rest.

The final term we’ll discuss today is elimination period, or waiting period. This is the time between when a risk or loss occurs and when your insurance will pay for it. This is most common for disability insurance and long-term care insurance. While a serious injury may prevent you from working, certain disability policies won’t provide you your periodic payments until the end of the policy’s elimination period.

If you recall from last week, we discussed the four different risk management strategies. Having an insurance policy and paying the premiums would be an example of risk transfer or insuring against risk, while having a deductible and having an elimination period would be forms of risk retention. As such, they typically have an inverse relationship – the higher the deductible or the longer the elimination period, the more risk you retain, and therefore the lower your premium will be, because you’re transferring/insuring less risk. With that said, while higher deductibles and longer elimination periods may keep your premiums down, don’t set them so high that you won’t have enough in savings to cover those losses!

Next week, we’ll return and discuss a few more common insurance terms.


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Risk Management and Insurance Basics, Part I

Over the next few weeks, we’ll discuss the different ways to manage risk, introduce some insurance terms, and discuss various types of insurance such as auto, health, homeowner’s, disability, life, and long-term care insurance.

First, let’s discuss what sources of risk we face out in the world. We risk the loss or damage of some of our property, like to our vehicle, our home, and our valuables like our jewelry. We risk developing health problems or getting hurt, including the consequences of whether or not we’ll be able to continuing working as a result. We risk being liable for the unintentional harm to a person or their possessions. We risk passing away without leaving the resources needed for our spouse and/or our children. Lastly, we risk not being able to afford long-term care expenses after we retire.

Looking at these risks, there are two things we need to address to decide how to manage them: how frequent might these risks or losses occur, and how much is at stake – what is the severity. Depending on the frequency and severity, we can determine whether or not we want to avoid that risk, reduce it, retain it, insure it, or some mix of these four approaches.

For risks with both high frequency and high severity, we’ll want to avoid that risk altogether. As an example, think about the proposition of building a home on a plot of land that significantly floods multiple times a year. It’s probably better we avoid building a home there at all.

For risks with low severity, often some level of risk retention is recommended. Because of the low severity, it probably doesn’t make sense to insure against that risk, such as the risks of employees stealing office paper or pens.

For risks with high severity and low frequency, such as the risk of your home burning down, or a serious car accident, this is where insurance is recommended. With that said, all four risk management strategies can be used simultaneously. Let’s take driving as an example. To avoid certain risks, a driver can avoid driving drunk, and if they have vision impairments at night, not drive after it’s dark. They can reduce risk by wearing a seatbelt and abiding by the speed limit. They can insure against the risk that their car gets damaged or that they’re liable for being in a car accident by having insurance. But even with insurance, they can retain some of that risk by increasing their deductible and therefore lowering their premiums.

Once we’ve decided on an approach to managing our risk, we need to implement that plan, which may include purchasing insurance, adjusting deductibles, and/or adjusting certain lifestyles and approaches. These plans need to be regularly monitored and adjusted when necessary, as the risks people face in their lives changes continually.