Money has been the most talked about topic for centuries. The reason is clear: to live a better life. So, I believe managing your money is more important than your income. Just enjoy and manage what you have already. You will find thousands of tips to save money, but the most difficult part is being consistent in your practices.
Here is an insight on where your money is going and how to keep more of it.
What Is Insurance?
Insurance is one type of financial product. An insurance product might help you manage risk, but when you buy an insurance policy, you are paying a fee called the premium to an insurance company. That fee buys you the promise of whatever risk that the company agrees to cover.
For example, if you have health insurance, it can pay for your doctor visits and hospital stays. If you have auto insurance, it can pay for the cost of damages if you are involved in an accident.
Types of Insurance Policies
Life Insurance:
Image: Investopedia
Nowadays, people buy life insurance policies online. The reason is simple: It saves a lot of time, and the price is lower on the internet. But sometimes, it is hectic, as the companies quote only through e-mail or phone.
Even in many cases, the price mentioned is only a guide, and most of your premium goes to the broker. So, it is good to do technical research before buying an online insurance policy.
Auto Insurance:
The law requires everyone to have auto insurance, and that is a good thing, too. But sadly, in many cases, the insurance regulations favor the insurance companies. Though you have adequate insurance of your own, in some cases, you may be left with no options. So do not go for cheap; rather, choose the right insurance policy for your vehicle. Better bundle up your insurance policies.
Health Insurance:
I hope you all have had little experience with your insurance company refusing to pay for your medical bill. Getting health insurance is not as easy as it seems, as there is no standard coverage when it comes to health care. In many cases, premiums do not always cover additional services such as emergency services, check-ups, etc.
Even the lowest premium does not always end up being the cheapest. So check the coverage area and the actual premium before you shop for one.
Home Insurance:
Before you select one for your dream home, you must read carefully the home insurance policy being offered. And be aware of all the terms and conditions mentioned. Do not question your insurer about minor damage. It may go against you. In case of regular claims, the company may flag you as a high risk and drop you. So, always examine the policy carefully before signing it and claiming the damage.
How does the insurance company make money?
The idea behind insurance companies is risk management. The company collects premiums from numerous policyholders and then uses that money to pay claims. Here is how it goes for the most part:
Collecting Premiums: You pay a premium each month or year. That money pools with premiums from many, many other customers.
Payment of Claims: Whenever someone makes a claim, the company pays through the pooled premiums. It also needs to ensure that it has sufficient funds for all other claims.
Investment: Insurance companies do not just sit on money and do nothing with it. They invest in equities, bonds, and other related assets, thus recovering more money that could be used to pay claims.
Operating Costs: Every business has costs, including salaries, office space, and technology. Your premium contributes to a share of those costs.
Where Does Your Money Go?
Image: Investopedia
The premium you pay feels like a big chunk for something you only hope you never need. Let us break it down:
Claims Payments: It has one of the highest utilization rates in terms of premiums paid out to claims. If a lot of policyholders have claims in any given year, especially following a natural disaster, the claims payments will sink very deep into the company’s bottom line.
Administrative Costs: These costs include employees, technology for managing claims, and customer service. Companies must pay these costs by paying their staff and keeping their systems running.
Reserves: An insurance company should hold a reserve, which represents the money put aside to service future claims. This way, they are sure to be ready for a claim since the reserve accounts for money that the business will need in the future.
Profit Margin: Finally, insurance companies have to produce a profit. What is left over after processing the claims and operating, in general, is their profit. It is for this reason that sometimes premiums have to be increased after a few years; they have to ensure they will cover the bill for the expected claims and make a profit on top of this.
Why You Should Care
Knowing how your money is spent can help you be more astute about the choices you make regarding insurance:
Choosing the Right Coverage: You will be able to make the right decision about what kind of policy to buy by getting an understanding of the costs. You will do this by selecting what coverage will serve you best and settling for a policy within your budget.
Shopping Around: Insurance companies are different, and if you compare policies and their costs, you can get a company that offers the best value.
Avoid Surprises: If you know how claims work and where your premiums go, you will be surprised the least when you have to file a claim. That’s how you make things easier on yourself when times get tough; you have an understanding of what is coming your way.
Adjust Your Coverage: If you determine that you are spending too much money on certain coverages that are not necessary, you can always adjust your policy and save some of the money. You might not need to have comprehensive coverage on a car that’s not worth much to you.
Conclusion
The right insurance policy is a basic need for any financial plan. There are many uncertainties in life, and they come unsaid. It is the right insurance policy that shields you from financial losses. But many ignore it.
It may seem impossible to start or stick to a budget and pay some monthly regular premiums, especially when your expenditures are more than your income each month.
But it is not impossible at all, no matter how tough the situation is. It is the best of times; it is the worst of times; what you need is a little patience and determination. George Eliot truly said, “It is never too late to be what you might have been.”