How it all started
The history of the insurance business dates back to the ancient era when popularly known Bottomry contracts were used by merchants of Babylon in 4000-3000 BCE.
Also practiced by Hindus and Greeks, the Bottomry contracts saved the merchants from the loss of shipments at the sea by transferring the risk to lenders, who used to forego the loan repayment in the event of shipment getting lost at the sea. The interest in the agreed loan acted as the premium for the insurance.
Then came the fire insurance companies after the great fire of London, which destroyed a large part of the City of London.
The concept has evolved quite a bit from ancient times but the basic premise has stayed the same. It is the transfer of risk from one party to the other for a fee.
The modern business of insurance
The world of insurance has come quite far since the ancient era Bottomry contracts and the modern ecosystem comprises of insurance companies and reinsurance companies, which act as insurers for the insurance companies.
An insurance company takes on the risk from you for an agreed upon sum in premium. These companies collect premium from a huge number of people creating a pool of funds. They then pay the damages (claims) to the insured in event of loss.
An insurance company earns profits when the total amount paid in losses is less than the total amount collected in premiums.
Why is Insurance important?
When we talk about insurance, we talk about the transfer of risk.
When we talk about the importance of transfer of risk, we must understand the risks first.
Continuing from our earlier case, in ancient times merchants entered into the Bottomry contracts because losing a shipment meant losing profits from their several other shipments. A lot of hard work, business efforts, and financial capital would go down the sea with a loss of one shipment.
To safeguard the merchants’ interest, paying an interest cost (though at higher rates), seemed and proved to be a better alternative than risking a large part of business without the Bottomry contracts.
It’s the digital age
We, as individuals or small businesses also get exposed to such risks day in and day out. There are risks related to our lives, our health, our properties, our contingent third party liabilities, our travels or even the risk of an investment loss. (Yes, we had credit default swaps for them – a different animal altogether in the world of finance).
In the digital age, businesses are also exposed to newer threats like cyber-crimes, which have the ability to take down entire businesses.
To mitigate the losses from such risks we need insurances.
While it might not be possible to make a life loss or a health concern less painful for the people going through such devastating periods, it helps tremendously when these losses are not accompanied by strain on the sufferer’s financial resources. This is where insurance does the heavy lifting for its individual takers.
Businesses also have too much at risk to leave things to chance. At stake are their financial resources, their reputation, the livelihood of the people it employs, the property they own, the shipments they send and receive, etc.
The list is pretty long and risks are high, which is why they need to use insurance to safeguard themselves against losses that are beyond their control.
Finally, nothing sums up the importance of insurance than the following statement.
“The second last thing you would want in your life is to be subjected to significant damage due to factors beyond your control. And the last thing you would want in life is to pay for those damages yourself”.
Important things to know before you buy insurance
While shopping for any kind of insurance, you must take quotes from multiple insurers and multiple channels. It is quite likely that you will get the same kind of damage protection by paying different premium amounts at different insurers. With a little research you can easily find the cheapest quote for the same level of benefits.
Buy insurances that you truly need:
Don’t go on buying any insurance that the salespeople keep pitching to you. You probably don’t need a cybersecurity insurance if you only go online to check Instagram and Facebook. Keep it simple, keep it basic, buy only what is necessary and not what just looks necessary.
Read what’s being offered and “What’s not”:
Introducing exclusions, things/damages that your insurance policy does not cover. Ask your insurer explicitly to explain the exclusions thoroughly. Make a note of it and compare them with other insurance companies.
Club multiple policies with single insurer:
Getting a good deal on health insurance from insurer? check for property insurance with the same insurer. Possibilities are that you will get an even better deal when you buy multiple policies from the same insurer. Yet, don’t forget to look around for the best deal.
Review your insurance needs from time to time. Each change in your life and career alters the protection needs. Make sure you are covered appropriately when you enter different phases of life.
Pay on time:
Maintain a good premium payment track record. It builds your credibility and also makes you eligible for better rates. Intimate your insurance provider in advance when your set to not renew your insurance coverage. Don’t terminate your insurances mid-way to avoid penalties.
5 insurance policies everyone should have
Personal Accident / Long-term Disability Insurance
Personal Accident or Long-term disability insurance is an important element of everyone’s financial planning. The policies in this kind of insurance cover the policyholder’s disability in the event of an accident.
The policy promises to bear the expenses of the policyholder for a certain number of years in case he/she is not able to work after a mishappening. The policies also pay a lump-sum to the nominee in case the policyholder dies due to the accident.
This policy should not be overlooked in any case because it takes care of the financial needs in the event of disability for a short or long period of time. It does not come expensive and with some research, you should be able to get a great deal for yourself. Make sure you read the exclusions before signing up for any policy.
“A man who dies without adequate life insurance should have to come back and see the mess he created” – Will Rogers
To access the importance of life insurance, think how difficult is it going to be for your loved ones and dependents to survive with you not being around.
Find the best answer to this question and quantify the answer by putting a dollar figure to what your dependents will need to maintain the current lifestyle and achieve the decided goals like college education, wedding etc.
Once you have the dollar number, proceed to choose a suitable insurance policy for yourself. You can choose from the following kind of life insurance policies to get the stated payoff:
In terms of life policies, the policyholder would pay a premium each year, which could be fixed or variable based on the contract, and the nominees/dependents will get a lump-sum called death benefit in the event of the death of the policyholder.
These policies are called pure protection policies and have a fixed term, wherein the policyholder pays premium up to a certain age and if she remains fit till that age, the contract gets expired and the insurer pays nothing.
We will discuss pure protection policies that are generally less expensive than whole life policies below.
Unlike term life policies, Whole Life policies have an inherent investment element with them and the policyholder pays the premiums till death. A part of the policyholder’s premium goes towards investments and the value accumulated from those investments is termed as cash value.
The policyholder can borrow against the cash value of the policy. The policyholder’s nominees also get death benefit in the event of the death of the policyholder.
Such policies are generally more expensive than the term life policies due to the cash value or investment component in the policy. These policies also charge an investment management expense making the policy even more expensive.
The best practice while buying life insurance is not to mix investment and insurance. Choosing life insurance as an investment vehicle will almost always be more expensive than other modes of investing.
Term insurances come cheap and they serve the purpose very well for an average policyholder.
Your health insurance would not be much of a concern if you have employer-funded health insurance. However, if you feel that your employer’s health insurance limits the choice of doctors, you can look out for other health insurance providers from outside networks.
The insurance from the outside network will be more expensive than the employer-provided insurance because employers are bulk buyers and generally negotiate lower rates with insurance companies.
While buying health insurance, you need to check a few basic details mentioned below:
The network of doctors:
the bigger the better. In-network care is less expensive in health insurance. Insurance policies that have wider doctor coverage are generally expensive. But you will be better of paying a higher premium if you are getting access to your preferred doctors in the enlarged network
Referrals required for procedures and specialist consultation:
Many policies require you get referrals from the primary doctors to see a specialist. These policies are less expensive than the ones in which you have direct access to specialists. If you need these restrictions to go away, you may have to shell out higher premiums.
Out of pocket costs:
the cheaper your premium, the higher will be your out of pocket expenses. You must assess your need for medical attention to take a wise decision here. If your healthcare and medical needs are higher due to any reason, it is better to pay a higher premium.
Alternatively, if your doctor visits are minimal and you are in good health, you can choose a plan that lets you pay a lower premium and still be reasonably covered for illness.
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An automobile insurance is required for two reasons.
First, to comply with a regulatory requirement in most states that require motorists to take some form of liability insurance to compensate damages to the third party.
Second, to pay for the damages to the driver, passengers, and vehicles in case of accidents and any other form of loss.
The liability insurance comes cheap and should be bought at all costs to satisfy the regulatory requirement and have a backup for the liability arising due to a third-party loss caused by you.
Another most important cover should be personal injury protection, which covers the medical expenses for the driver and passengers.
Or one can take a comprehensive cover, which will cover third-party liability, medical expenses of drivers and passengers, and damage to the vehicle in an accident or due to any other cause provided the claim remains valid under the policy.
We suggest AAA as the best vehicle insurance. Get it here!
Homeowner Insurance / Renters Insurance
Homeowner insurance covers your property/home from damages and thefts. You may need to pay extra premiums to enlarge the cover and include natural disasters, like flooding, earthquakes, and wildfires.
Renters insurance covers you from damages and thefts in your rented accommodation.
Because home is one of the biggest assets many individuals own, homeowner insurance becomes an extreme necessity. You must ensure to buy adequate cover after the risk of maximum possible damage.
If you do not have too much at risk in a rented apartment, choosing renters insurance will not be tricky as it is most probably going to be a very low-cost affair and you would be okay not buying it at all.
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The Final Word
Insurance is more of a “better be safe than sorry” thing. The insurances we discussed above are worth every penny you pay for them. Though it is painful to see a hefty sum leaving your account every year without any tangible reason.
All it takes is one mishap to put you years behind in your financial planning. This would not happen if you have an insurance company backing you up.
To review your insurances and coverages periodically to ensure that you are adequately covered is a wise idea. Too much or too little coverage is not good. So spend some time determining the optimum coverage for you, your family and your business.
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Read also our article on 5 Investments you should go for | Expert’s Choice.