Insurance basics

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Key Points

Basic insurance terminology

When you buy insurance, you receive an insurance policy, that is, a document that spells out exactly what is covered and what is not covered. The items covered by your insurance are called your benefits. The amount you pay for the insurance is called the premium. When you have costs and submit bills to your insurance company, this is known as filing a claim. Your insurance company will typically pay only a portion of your costs. The amount of a claim that you must pay before the insurance company will cover the rest is called the deductible; the amount you pay toward each medical bill is called the co-pay.

How deductible impacts premium

Typically, the higher the deductible amount, the less expensive the insurance premium. So a good strategy is to get a policy with the highest deductible that you’d be able to comfortably afford if you had to. This will minimize the cost of your policy.

Your credit score

Your credit score could impact how much insurance companies charge you in premiums. To learn more, see the topic Using Credit to Your Advantage.

“Save” on health insurance?

If you’re young and in good health, you may be tempted to “save money” by not buying health insurance. A general rule of smart money management is to never insure something you can afford to pay for yourself. But with today’s high costs of medical care, taking your chances that you’ll stay healthy is a strategy that may have serious financial consequences. You may be able to handle the expense of minor health problems, but one serious illness has the potential to financially wipe out you – and your family. Keep in mind that the younger and healthier you are when buying a health insurance policy, the less expensive it’s likely to be.

Consider long term care

As you evaluate your health insurance picture, consider whether long term care insurance (LTC) is right for you. This is coverage that, under specified conditions, provides skilled nursing, intermediate care, or custodial care for a patient (generally over age 65) in a nursing facility or his or her residence following an injury. In some cases, adult children purchase this coverage for their parents. When shopping for LTC, be sure to read the fine print. Work with an advisor who understands LTC. Coverage and costs may vary widely depending on your age, health, and other factors. Also, consider that in future years you may want to adjust your living situation to suit your changing needs. Do you anticipate living with family members or on your own? Some senior communities now offer healthcare and assisted living as part of a complete package of services. Explore some of these options in advance so that you have a realistic understanding of the potential benefits and costs.

Benefits of life insurance

Regardless of your family circumstances or your age, you should consider life insurance. While its primary purpose is to ease the financial burden of an untimely death, it can be an effective tool for both asset protection and wealth accumulation. Some types of life insurance can be used as a source of retirement income or to fund a child’s education. Many financial planners consider life insurance to be an important part of sound financial planning. Click on The Library icon for an article about life insurance and consult a professional to learn more.

Before you buy

Before you buy insurance, always check the "financial strength rating" of the insurance company. This is a measure of their financial soundness and how capable they are of handling the claims of their customers. The highest rating is AAA, followed by AA. Avoid companies without at least an A rating. You can research these ratings on the Web. There are several companies that rate insurers, including AM Best, Moody’s and Standard & Poors. The most reputable insurers receive consistently high ratings from all of these companies.

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Protect your assets The value of insurance Insurance basics The growing cost of healthcare Three plans for your future a. Investing plan b. Financial plan c. Estate plan