Protecting Your Income Source

When you think of insurance coverage, the two most common types - home and car insurance - are often the first that spring to mind. Because the mortgage company requires the former and the law requires the latter, you don't have much of a choice when it comes to deciding whether to be insured. However, it's your ability to earn an income that allows you to afford these items. In fact, without earning potential, it would be difficult for many of us to maintain our homes and automobiles while still providing for our families. The solution for supplementing this missing income in the event of a permanent or temporary disability is known as disability insurance. Here we explain why disability insurance should be an integral part of your financial plan and what you'll need to consider when choosing a policy to protect your income.

Social Security and Disability

Many U.S. workers take disability risk management for granted because they assume that the Social Security system will take care of everything should they become disabled. Contrary to popular belief, qualifying for Social Security disability benefits can be quite difficult, and it often takes a long time for the benefits to start. To qualify, you must prove that you are incapable of performing any job, not just your primary occupation. As long as you can be gainfully employed, even if it's working for minimum wage, you won't be able to collect on Social Security disability.

The Social Security Administration (SSA) will consider a person to be "disabled" if all of the following requirements are met:

1. He or she lacks the ability to engage in any substantial gainful activity (SGA).
2. The incapacity is due to one or more medically determinable physical or mental impairments.
3. The incapacity has lasted or can be expected to last for a continuous period of at least 12 months or to result in death.

In order to meet the requirements for disability coverage under Social Security, applicants must have worked at least 20 out of the last 40 calendar quarters immediately preceding the onset date of the disability to be covered. Passive income activity, such as investments and sick pay would not be considered gainful activity income. However, if you claim disability and are earning income of more than $860 a month (in 2006), this will typically lead to a declined claim because it would be considered substantial gainful activity. Even if you are eligible for benefits, it's highly unlikely that the benefit will meet your financial obligations - the maximum payment for a 30 year old who earned $70,000 per year before becoming disabled is only $1,600 per month.

Protecting Your Family and Income

When reviewing your risk management objectives, you need to take a close look at your emergency reserves and liquidity capabilities. (To learn more, see Build Yourself An Emergency Fund.) If you became disabled and qualified for a maximum SSA $1,600 monthly payment, would this be enough income to support your budget? According to a 2004 report by the U.S. Census Bureau, the average real median monthly household income was $3,700 in 2004. This data strongly suggests that a supplemental income source would be a necessity for many Americans if they were to become disabled. It's important that you understand the benefits provided by your company, as you may be covered under a short-term or long-term disability policy through your employer benefits plan. When it comes to disability insurance, "short-term" refers to periods of 90 days or less, while "long-term" refers to periods of more than 90 days.

Once you've determined what disability risk management you have in place, you can then make an educated decision as to whether you are fully insured or underinsured. If you lack the appropriate income replacement, you may want to consider buying a personal disability policy. As with most types of insurance, the older you get, the more expensive the coverage will become. Therefore, you may want to acquire a policy now while you are illness and accident free. Whether your benefits are taxable will typically depend on how the premium is paid. In most cases, if you pay the premiums with after-tax dollars, the benefit received will be tax free. However, if your employer pays the policy premiums for you, then the benefit will likely be treated as taxable income when paid to you. (For further reading, see Insight Into Insurance Scoring.)

Here are some questions to consider when looking into disability insurance:

How much coverage should you consider?

You should consider obtaining enough coverage to maintain your family's current standard of living. While gauging your required amount of replacement income, it is best to err on the side of conservatism. However, recognize that you may save on certain living expenses (such as driving to and from work every day) that may reduce the amount of replacement income you will need to maintain your family's lifestyle. In short, be sure to consider both sides of the coin when assessing your coverage needs.

What is an "elimination period"?

The elimination period is the amount of time that you must wait before your benefits kick in. The typical elimination or waiting period for most policies is 90 days, which means you must have your own resources for the first 90 days of your disability. Be sure to incorporate your insurance plan's elimination period into your personal saving requirements.

For how long will an individual policy pay a benefit?

Since there are many different options for this, you can select the period of time for which your benefit will last. The best policy would entail benefits being paid until you reach age 65, at which time retirement benefits should become accessible to you.

What is the difference between "own" and "any" occupation?

If you're looking at policies that allow you to select between "own occupation" or "any occupation", you'll want to consider a plan that defines "disabled" as unable to continue work in your current profession - known as "own occupation". Otherwise, if you choose "any occupation", you'll need to be unable to perform any type of work in order for the policy to pay any benefits.

Conclusion

Many years ago, there were 535 disability insurance companies. That number dropped to 390 in 1990. In 2003, the number had dropped even more, to just 26 disability insurance companies! According to a 2004 Disability Status Report by Cornell University, only about 27% of American income earners had disability insurance, while more than 20 million of the nearly 168 million working-age population reported one or more disabilities. As you can see from the decline in the number of insurance companies writing disability insurance, the cost and frequency of disabilities among workers appears to be increasing. What would happen to your household income if you became disabled for a long time? Hopefully, you and your family would be taken care of, but if you're not sure that's the case, now might be the time to cover that risk. After all, part of being a savvy investor is making sure that your family is not unduly burdened by risks you can't afford to take.

Fifteen Insurance Policies You Don't Need

Fear of the future sells insurance. Because we can't predict the future, we want to be ready to cover our financial needs if, or when, something bad happens. Insurance companies understand this fear and offer a variety of insurance policies designed to protect us from a host of calamities that range from disability to disease and everything in between. While none of us wants anything bad to happen, many of the potential catastrophes that happen in our lives are not worth insuring against. In this article, we'll take you through 15 policies that you're probably better off without. (To learn about the basics of insurance, see Understand Your Insurance Contract and Exploring Advanced Insurance Contract Fundamentals.)

1. Private Mortgage Insurance

The infamous private mortgage insurance (PMI) is well-known to homeowners because it increases the amount of their monthly mortgage payments. PMI is an insurance policy that protects the lender against loss when lending to a higher-risk borrower. The borrower pays for this insurance but derives no benefit. Fortunately, there are several ways to avoid paying for this unnecessary policy. PMI is required if you purchase a home with a down payment of less than 20% of the home's value. The small down payment is viewed as putting you at risk of defaulting on the loan. Put down at least 20% and the PMI requirement goes away. Alternatively, you can put down 10% and take out two loans, one for 80% of the sale price of the property and one for 10%, although interests rates can prevent the economics of this maneuver from working out in the homeowner's favor. (To read more about mortgages, see Understanding the Mortgage Payment Structure, To Rent or Buy? The Financial Issues - Part 1 and Part 2.)

2. Extended Warranties

Extended warranties are available on a host of appliances and electronics. From a consumer's perspective, they are rarely used, particularly on small items such as DVD players and radios. If you purchase a reputable, brand-name product, you can be fairly certain it will work as advertised and that the extended warranty is statistically likely to be unnecessary. If you spend $5,000 on a giant, flat-screen television, the policy is still unlikely to pay off, but might make you feel better. For everything else, forget it.

3. Automobile Collision

Collision insurance is designed to cover the cost of repairs to your vehicle if you are involved in an accident. If you have a loan out on the car, the loan issuer is likely to require that you have collision insurance. If your car is paid off, collision is optional; therefore, if you have enough money in the bank to cover the cost of a new car, collision insurance may be an unnecessary expense. This is particularly true if you are driving an old car, because cars depreciate so quickly that many vehicles are worth only a fraction of their purchase price by the time the loan is paid in full. (To find out more about car insurance, read Shopping For Car Insurance.)

4. Rental Car Insurance

Most auto insurance policies offer additional coverage for the cost of car rentals, touting it as a useful feature if your car is ever involved in an accident and needs to spend some time in the repair shop. This may sound like a good idea, but in reality, most people rarely rent a car, and when they do, the cost is relatively low and hardly worth insuring against. Although rental car insurance is relatively inexpensive, amortized over the course of a lifetime you are still likely to spend far more than you will benefit.

5. Car Rental Damage Insurance

Many auto insurance policies already cover rentals, so there's no need to pay for this twice. Check your policy before you pay. Depending on where you rent the vehicle, you may also be able to pay a small fee for insurance on your rental when you pick it up at the rental center. If this fee is less than what you'd pay for a year in your old policy, choose the fee over the policy. (To read more, see Travel Tips For Keeping You And Your Money Safe.)

6. Flight Insurance

Flight insurance coverage is completely unnecessary. Despite media portrayal, airline accidents are relatively rare, and your life insurance policy should already provide coverage in the event of a catastrophe. (For more information on life insurance, see How Much Life Insurance Should You Carry?, Life Insurance Distribution And Benefits and Life Insurance Clauses Determine Your Coverage.)

7. Water Line Coverage

Water companies have made an aggressive push to sell policies that cover the repair of the water line that runs from the street to your house. The odds are in your favor that you will never use this coverage, particularly if you live in a newer home. If you live an average suburban neighborhood and you do need to repair the water line, the distance to the street is short, the likelihood of a problem is low and repair costs are a few thousand dollars or less. The same goes for policies offered by other utility companies.

8. Life Insurance for Children

Life insurance is designed to provide a safety net for your heirs/dependents. Because children don't have heirs to worry about and, statistically speaking, most kids will grow up safe and healthy, most parents should not purchase life insurance for their kids. Instead, use the money that you would have spent on life insurance to fund an education plan or an individual retirement account (IRA). (To read more on saving money for your kids, see Investing In Your Child's Education, Teaching Your Child To Be Financially Savvy and Don't Forget The Kids: Save For Their Education And Retirement.)

9. Flood Insurance

Unless you live in a flood plain or an area with a history of water problems, don't even bother buying flood insurance. If none of the homes in the area has ever been flooded, yours is unlikely to be the first.

10. Credit Card Insurance

Purchasing coverage to pay your credit card bill in the event you cannot pay it is a waste of money. A far better idea is to avoid running up your credit cards in the first place, so you won't need to worry about the bills. Not only do you not save on the insurance premiums, you'll also save the interest on your debt. (To learn more about credit, see Take Control Of Your Credit Cards, Credit, Debit And Charge: Sizing Up The Cards In Your Wallet and Understanding Credit Card Interest.)

11. Credit Card Loss Insurance

Federal law limits your liability if your credit card is stolen. Your out-of-pocket costs are limited to $50 per card and not a penny more. In fact, many credit card companies don't even try to collect the $50.

12. Mortgage Life Insurance

Mortgage life insurance pays off your house in the event of your death. Rather than add another policy - and another bill - to your list of insurance plans, it makes more sense to get a term-life policy instead. A good life insurance policy will provide enough money to pay off the mortgage and to cover other expenses as well. After all, the mortgage isn't the only bill your survivors will need to pay. (To read more, see Buying Life Insurance: Term Versus Permanent.)

13. Unemployment Insurance

This coverage makes minimum payments on your bills if you are out of work, which sounds like an attractive proposition. A better plan is to save your money and build up an emergency fund instead. You won't have to cover the cost of the insurance policy and, if you are never out of work, you won't spend any money at all. (Find out how to create an emergency fund in Build Yourself An Emergency Fund.)

14. Disease Insurance

Policies are available to cover cancer, heart disease and other maladies. Instead of trying to identify every possible disease that you may encounter, get a good medical coverage policy instead. This way, your medical bills will be covered regardless of the problem you face. (For related reading, see Fighting The High Costs Of Healthcare.)

15. Accidental-Death Insurance

Unless you are extraordinarily accident prone, an accident is unlikely. Major catastrophes such as car wrecks and fires are covered under other policies, as is any harm that comes to you while at work. Accidental-death policies are often fraught with stipulations that make them difficult to collect on, so skip the hassles and get life insurance instead.

When Choosing Insurance

There are so many policies to chose from, and they all cost money. While a certain amount of insurance coverage is necessary and prudent, you need to choose carefully. In general, broad policies that offer coverage for a multitude of potential events are a better choice than limited-scope policies that focus on specific diseases or potential incidents. Before you buy any policy, read it carefully to make sure that you understand the terms, coverage and costs. Don't sign on the dotted line until you are comfortable with the coverage and are sure that you need it.

Five Insurance Policies Everyone Should Have

Protecting your most important assets is an important step in creating a solid personal financial plan. The right insurance policies will go a long way toward helping you safeguard your earning power and your possessions. In this article, we'll show you five policies that you shouldn't do without. (To find out about some insurance basics, see Understand Your Insurance Contract.)

1. Long-Term Disability Insurance

The prospect of long-term disability is so frightening that some people simply choose to ignore it. While we all hope that, "Nothing will happen to me," relying on hope to protect your future earning power is simply not a good idea. Instead, choose a disability policy that provides enough coverage to enable you to continue your current lifestyle even if you can no longer continue working. (Protecting Your Income Source provides a closer look at this important topic.)

2. Life Insurance

Life insurance protects the people that are financially dependent on you. If your parents, spouse, children or other loved ones would face financial hardship if you died, life insurance should be high on your list of required insurance policies. Think about how much you earn each year (and the number of years you plan to remain employed) and purchase a policy that will replace that income in the event of your untimely demise. Factor in the cost of burial too, as the unexpected cost is a burden for many families. (For a more detailed look at the types of coverage available and factors involved in choosing the right coverage for your situation, read Buying Life Insurance: Term Versus Permanent and How Much Life Insurance Should You Carry?)

3. Health Insurance

The soaring cost of medical care is reason enough to make health insurance a necessity. Even a simple visit to the family doctor can result in a hefty bill. More serious injuries that result in a hospital stay can generate a bill that tops the price of a one-week stay at a luxury resort. Injuries that require surgery can quickly rack up five-figure costs. Although the ever-increasing cost of health insurance is a financial burden for just about everyone, the potential cost of not having coverage is much higher. (For more insight, see Fighting The High Costs Of Healthcare.)

4. Home Insurance

Replacing your home is an expensive proposition. Having the right home insurance can make the process less difficult. When shopping for a policy, look for one that covers replacement of the structure and contents in addition to the cost of living somewhere else while your home is repaired. (To keep reading on this subject, see Insurance Tips For Homeowners.)

Keep in mind that the cost of rebuilding doesn't need to include the cost of the land, since you already own it. Depending on the age of your home and the amenities that it contains, the cost to replace it could be more or less than the price you paid for it. To get an accurate estimate, find out how much local builders charge per square foot and multiply that number by the amount of space you will need to replace. Don't forget to factor in the cost of upgrades and special features. Also, be sure the policy provides adequate coverage for the cost of any liability for injuries that occur on your property.

5. Automobile Insurance

Some level of automobile liability insurance is required by law in most localities. Even if you are not required to have it and you are driving an old junker that has been paid off for years, automobile liability insurance is something you shouldn't skip. If you are involved in an accident and someone is injured or their property is damaged, you could be subject to a lawsuit that could cost you everything you own. Accidents happen quickly and the results are often tragic - having no automobile liability insurance or purchasing only the minimum required coverage saves you only a small amount of money and puts everything else that you own at risk. (To learn more, see Shopping For Car Insurance.)

*Bonus Tip For Business Owners: In addition to the policies listed above, business owners need business insurance. Liability coverage in a litigation-happy society could be the difference between a long and prosperous endeavor or a trip to bankruptcy court.

Shop Carefully

Insurance policies come in a wide variety of shapes and sizes and boast many different features, benefits and prices. Shop carefully, read the policies and talk to the salesperson to be certain that you understand the coverage and the cost. Make sure the policies that you purchase are adequate for your needs, and don't sign on the dotted line until you are happy with the purchase.

Exploring Advanced Insurance Contract Fundamentals

The topic of insurance contracts is vast, but it has to be studied carefully. After all, your family's financial security may be the price you pay for lack of conscientiousness. One or two small terms found in a footnote can drastically change your coverage, and you need to understand those terms. In this article we'll explain some additional fundamentals you need to know to understand your insurance contract fully. (To read the basic fundamentals, see Understand Your Insurance Contract.)

The Doctrine of Utmost Good Faith

The doctrine of utmost good faith is a key principle in insurance contracts. This doctrine emphasizes the presence of mutual faith between the insured and the insurer. It doctrine includes:

* Duty of Disclosure: You are legally obliged to reveal all information that would influence the insurer's decision to enter into the insurance contract.

Factors that increase the risks - previous losses and claims under other policies, insurance coverage that has been declined to you in the past, the existence of other insurance contracts, full facts and descriptions regarding the property or the event to be insured - must be disclosed. These facts are called material facts.

Depending on these material facts, your insurer will decide whether to insure you as well as what premium to charge. For instance, in critical illness insurance, your smoking habit is an important material fact for the insurer. As a result, your insurance company may decide to charge a significantly higher premium as a result of your smoking habits.

* Representations and Warranty: In most kinds of insurances, you have to sign a declaration at the end of the application form, which states that the given answers to the questions in the application form and other personal statements and questionnaires are true and complete.

Therefore, when applying for fire insurance, for example, you should make sure that the information that you provide regarding the type of construction of your building or the nature of its use is technically correct.

Depending on their nature, these statements may either be representations or warranties:

A)Representations: These are the written statements made by you on your application form, which represent the proposed risk to the insurance company. For instance, on a life insurance application form, information about your age, details of family history, occupation, etc. are the representations that should be true in every respect.

Breach of representations occurs only when you give false information (for example, your age) in important statements. However, the contract may or may not be void depending on the type of the misrepresentation that occurs. (For more information on life insurance, read Buying Life Insurance: Term Versus Permanent, Long-Term Care Insurance: Who Needs It? and Shifting Life Insurance Ownership.)

B)Warranty: Warranties in insurance contracts are different from those of ordinary commercial contracts. They are imposed by the insurer to ensure that the risk remains the same throughout the policy and does not increase.

For example, in auto insurance, if you lend your car to a friend who doesn't hold a license and that friend is involved in an accident, your insurer may consider it a breach of warranty because it wasn't informed about this alteration. As a result, your claim could be rejected.

Breach of Utmost Good Faith

As we've already mentioned, insurance works on the principle of mutual trust. It is your responsibility to disclose all the relevant facts to your insurer.

Normally, a breach of the principle of utmost good faith arises when you, whether deliberately or accidentally, fail to divulge these important facts. There are two kinds of non-disclosure:

* An innocent non-disclosure relates to failing to supply the information you didn't know about.

* Deliberate non-disclosure means providing incorrect material information intentionally.

For example, suppose that you are unaware that your grandfather died from cancer and, therefore, you did not disclose this material fact in the family history questionnaire when applying for life insurance - this is innocent non-disclosure. However, if you knew about this material fact and purposely held it back from the insurer, you are guilty of fraudulent non-disclosure.

Action Taken by Insurer Against a Breach

When you supply inaccurate information with the intention to deceive, you insurance contract becomes void.

* If this deliberate breach was discovered at the time of the claim, your insurance company will not pay the claim.

* If the insurer considers the breach as innocent but significant to the risk, it may choose to punish you by collecting additional premiums.

* In case of an innocent breach that is irrelevant to the risk, the insurer may decide to ignore the breach as if it had never occurred.

Principle of Waiver and Estoppel

A waiver is voluntary surrender of a known right. Estoppel prevents a person from asserting those rights because he or she has acted in a such a way as to deny interest in preserving those rights.

Presume that you fail to disclose some information in the insurance proposal form. Your insurer doesn't request that information and issues the insurance policy. This is waiver. In the future, when a claim arises, your insurer cannot question the contract on the basis of non-disclosure. This is estoppel. For this reason, your insurer will have to pay the claim.

Endorsements

Endorsements are normally used when the terms of insurance contracts are to be altered. They could also be issued to add specific conditions to the policy.

Deductible

A deductible is the amount you pay in out-of-pocket expenses before your insurer covers the remaining expense. Therefore, if the deductible is $5,000 and the total insured loss comes to $15,000, your insurance company will only pay $10,000. The higher the deductible, the lower the premium and vice versa.

Coinsurance

Coinsurance refers to the sharing of insurance by two or more insurance companies in agreed proportion. For the insurance of a large shopping mall, for example, the risk is very high. Therefore, the insurance company may choose to involve two or more insurers to share the risk.

Coinsurance can also exist between you and your insurance company. This provision is quite popular in medical insurance, in which you and the insurance company decide to share the covered costs in the ratio of 20:80. Therefore, during the claim, your insurer will pay 80% of the covered loss while you shell out the remaining 20%.

Reinsurance

Reinsurance is the insurance bought by an insurance company. Suppose you are a famous rock star and you want your voice to be insured for $ 50 million. Your offer is accepted by Insurance Company A. However, Insurance Company A is unable to retain the entire risk, so it passes part of this risk - let's say $ 40 million - to insurance company B. Should you lose your singing voice, you will receive $50 million from insurer A ($10 million + $40 million) with insurer B contributing the reinsured amount ($40 million) to insurer A. This practice is known as reinsurance.

Generally, reinsurance is practiced to a much greater extent by general insurers than life insurers.

Conclusion

When applying for insurance, you will find a huge range of insurance products available in the market. If you have an insurance advisor, he or she can shop around and make sure that you are getting adequate insurance coverage for you money. Even so, a little understanding about insurance contracts can go a long way in ensuring that your advisor's recommendations are on track.

Furthermore, there may be times when your claim is canceled because you didn't pay attention to certain information requested by your insurance company. In this case, lack of knowledge and carelessness can cost you a lot. Go through your insurer's policy features instead of signing them without delving into the fine print. If you understand what you're reading, you'll be able to ensure that the insurance product that you are signing up for will cover you when you need them most.

Understand Your Insurance Contract

Almost all of us have insurance. When your insurer gives you the policy document, generally, all you do is glance over the decorated words in the policy and pile it up with the other bunch of financial papers on your desk, right? If you spend thousands of dollars each year on insurance, don't you think that you should know all about it? Your insurance advisor is always there for you to help you understand the tricky terms in the insurance forms, but you should also know for yourself what your contract says. In this article, we'll make reading your insurance contract easy. Read on to take a look at the basic principles of insurance contracts and how they are put to use in daily life.

Essentials of a Valid Insurance Contract

* Offer and Acceptance: When applying for insurance, the first thing you do is get the proposal form of a particular insurance company. After filling in the requested details, you send the form to the company (sometimes with a premium check). This is your offer. If the insurance company accepts your offer and agrees to insure you, this is called an acceptance. In some cases, your insurer may agree to accept your offer after making some changes to your proposed terms (for example, charging you a double premium for your chain-smoking habit).

* Consideration: This is the premium or the future premiums that you have pay to your insurance company. For insurers, consideration also refers to the money paid out to you should you file an insurance claim. This means that each party to the contract must provide some value to the relationship.

* Legal Capacity: You need to be legally competent to enter into an agreement with your insurer. If you are a minor or are mentally ill, for example, then you may not be qualified to make contracts. Similarly, insurers are considered to be competent if they are licensed under the prevailing regulations that govern them.

* Legal Purpose: If the purpose of your contract is to encourage illegal activities, it is invalid.

Find the Value in Indemnity contracts

Most insurance contracts are indemnity contracts. Indemnity contracts apply to insurances where the loss suffered can be measured in terms of money.

Principle of Indemnity: This states that insurers pay no more than the actual loss suffered. The purpose of an insurance contract is to leave you in the same financial position you were in immediately prior to the incident leading to an insurance claim. When your old Chevy Cavalier is stolen, you can't expect your insurer to replace it with a brand new Mercedes-Benz. In other words, you will be remunerated according to the total sum you have assured for the car. (To read more on indemnity contracts, see Shopping For Car Insurance and How does the 80% rule for home insurance work?)

Additional Factors

There are some additional factors of your insurance contract that also need to be considered, including under-insurance and excess clauses that create situations in which the full value of an insured asset is not remunerated.

* Under-Insurance: Often, in order to save on premiums, you may insure your house at $80,000 when the total value of the house actually comes to $100,000. At the time of partial loss, your insurer will pay only a proportion of $80,000 while you have to dig into your savings to cover the remaining portion of the loss. This is called under-insurance, and you should try to avoid it as much as possible.

* Excess: To avoid trivial claims, the insurers have introduced provisions like excess. For example, you have auto insurance with the applicable excess of $5,000. Unfortunately, your car had an accident with the loss amounting to $7,000. Your insurer will pay you the $7,000 because the loss has exceeded the specified limit of $5,000. But, if the loss comes to $3,000 then the insurance company will not pay a single penny and you have to bear the loss expenses yourself. In short, the insurers will not entertain claims unless and until your losses exceed a minimum amount set by the insurer.

Not all insurance contracts are indemnity contracts. Life insurance contracts and most personal accident insurance contracts are non-indemnity contracts. You may purchase a life insurance policy of $1 million, but that does not imply that your life's value is equal to this dollar amount. Because you can't calculate your life's net worth and fix a price on it, an indemnity contract does not apply. (For more information on non-indemnity contracts, read Buying Life Insurance: Term Versus Permanent, Long-Term Care Insurance: Who Needs It? and Shifting Life Insurance Ownership.)

Insurable Interest

It is your legal right to insure any type of property or any event that may cause financial loss or create a legal liability to you. This is called insurable interest.

Suppose you are living in your uncle's house, and you apply for homeowners' insurance because you believe that you may inherit the house later. Insurers will decline your offer because you are not the owner of the house and, therefore, you do not stand to suffer financially in the event of a loss.

This example demonstrates that when it comes to insurance, it is not the house, car or machinery that is insured. Rather, it is the monetary interest in that house, car or machinery to which your policy applies.

It is also the principle of insurable interest that allows married couples to take out insurance policies on the lives of their spouses - they may suffer financially if the spouse dies. Insurable interest also exists in some business arrangements, as seen between a creditor and debtor, between business partners or between employers and employees.

Principle of Subrogation

Subrogation allows an insurer to sue a third party that has caused a loss to the insured and pursue all methods of getting back some of the money that it has paid to the insured as a result of the loss.

For example, if you are injured in a road accident that is caused by the reckless driving of another party, you will be compensated by your insurer. However, your insurance company may also sue the reckless driver in an attempt to recover that money.

Doctrine of Utmost Good Faith

All insurance contracts are based on the concept of "uberrima fidei", or the doctrine of utmost good faith. This doctrine emphasizes the presence of mutual faith between the insured and the insurer. In simple terms, while applying for life insurance, it becomes your duty to disclose your past illnesses to the insurer. Likewise, the insurer cannot hide information about the insurance coverage that is being sold.

Doctrine of Adhesion

The doctrine of adhesion states that you must accept the entire insurance contract and all of its terms and conditions without bargaining. Because the insured has no opportunity to change the terms, any ambiguities in the contract will be interpreted in favor of the insured.

Conclusion

When purchasing insurance, most of us rely on our insurance advisor for everything - from choosing a policy for us to filling in the insurance application forms. Most people try to stay away from the boring legal terms of insurance contracts, but it is always handy to be familiar with these words and phrases and to become familiar with the terms of the policy you are paying for.

Basic of Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurer is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Principles of insurance

Commercially insurable risks typically share seven common characteristics.

1. A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
2. Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
3. Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
6. Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.