Types of Insurance
There are three broad categories of insurance that are of interest here: casualty insurance, health insurance and property insurance.
Casualty insurance is a problematically defined term which broadly encompasses insurance not directly concerned with life insurance, health insurance, or property insurance. Casualty insurance is mainly liability coverage of an individual or organization for negligent acts or omissions.
Health insurance is an insurance that covers the whole or a part of the risk of a person incurring medical expenses, spreading the risk over a large number of persons. According to the Health Insurance Association of America, health insurance is defined as "coverage that provides for the payments of benefits as a result of sickness or injury. It includes insurance for losses from accident, medical expense, disability, or accidental death and dismemberment" (p. 225).
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or boiler insurance.
Auto insurance is insurance for cars, trucks,motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage or bodily injury resulting from traffic collisions and against legal liability that could also arise from incidents in a vehicle. Vehicle insurance may additionally offer financial protection against theft of the vehicle, and against damage to the vehicle sustained from events other than traffic collisions, such as keying (vandalism), weather or natural disasters, and damage sustained by colliding with stationary objects. The specific terms of vehicle insurance vary with legal regulations in each region.
Vehicle insurance can cover some or all of the following items:
- The insured party (medical payments)
- Property damage caused by the insured
- The insured vehicle (physical damage)
- Third parties (car and people, property damage and bodily injury)
- Third party, fire and theft
- In some jurisdictions coverage for injuries to persons riding in the insured vehicle is available without regard to fault in the auto accident (No Fault Auto Insurance)
- The cost to rent a vehicle if yours is damaged
- The cost to tow your vehicle to a repair facility
- Accidents involving uninsured motorists
Different policies specify the circumstances under which each item is covered. For example, a vehicle can be insured against theft, fire damage, or accident damage independently.
An excess payment, also known as a deductible, is a fixed contribution that must be paid each time a car is repaired with the charges billed to an automotive insurance policy. Normally this payment is made directly to the accident repair "garage" (the term "garage" refers to an establishment where vehicles are serviced and repaired) when the owner collects the car. If one's car is declared to be a "write off" (or "totaled"), then the insurance company will deduct the excess agreed on the policy from the settlement payment it makes to the owner.
If the accident was the other driver's fault, and this fault is accepted by the third party's insurer, then the vehicle owner may be able to reclaim the excess payment from the other person's insurance company.
A compulsory excess is the minimum excess payment the insurer will accept on the insurance policy. Minimum excesses vary according to the personal details, driving record and the insurance company. For example, young or inexperienced drivers and types of incident can incur additional compulsory excess charges.
To reduce the insurance premium, the insured party may offer to pay a higher excess (deductible) than the compulsory excess demanded by the insurance company. The voluntary excess is the extra amount, over and above the compulsory excess, that is agreed to be paid in the event of a claim on the policy. As a bigger excess reduces the financial risk carried by the insurer, the insurer is able to offer a significantly lower premium.
Basis of premium charges
Depending on the jurisdiction, the insurance premium can be either mandated by the government or determined by the insurance company, in accordance with a framework of regulations set by the government. Often, the insurer will have more freedom to set the price on physical damage coverages than on mandatory liability coverages.
The premium can vary depending on many factors that are believed to affect the expected cost of future claims. Those factors can include the car characteristics, the coverage selected (deductible, limit, covered perils), the profile of the driver (age,gender, driving history) and the usage of the car (commute to work or not, predicted annual distance driven).
A health insurance policy is a contract between an insurance provider (e.g. an insurance company or a government) and an individual or his/her sponsor (e.g. an employer or a community organization). The contract can be renewable (e.g. annually, monthly) or lifelong in the case of private insurance, or be mandatory for all citizens in the case of national plans. The type and amount of health care costs that will be covered by the health insurance provider are specified in writing, in a member contract or "Evidence of Coverage" booklet for private insurance, or in a national health policy for public insurance.
The policy also needs to specify how the cost of the covered services will be allocated between the insurered and the insurer. Allocation a portion of the cost of covered services to the insured is usually recommended since it incentivizes the insured to control his health care costs. In health care parlance, the cost allocated to the insured is called cost sharing. There are various coverage modifications that enable the insurer to allocate cost to the insured:
|Deductible||The amount that the insured must pay out-of-pocke before the health insurer pays its share. For example, policy-holders might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor's visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care.|
|Co-payment||The amount that the insured person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 co-payment for a doctor's visit, or to obtain a prescription. A co-payment must be paid each time a particular service is obtained. Co-pays are frequently applied to services that are prone to over-utilization by the insured as well as to benefits adminsitered by a third party (like a pharmacy benefits manager).|
|Co-insurance||Instead of, or in addition to, paying a fixed amount up front (a co-payment), the co-insurance is a percentage of the total cost that insured person may also pay. For example, the member might have to pay 20% of the cost of a surgery over and above a co-payment, while the insurance company pays the other 80%. If there is an upper limit on coinsurance, the policy-holder could end up owing very little, or a great deal, depending on the actual costs of the services they obtain. In some instances, the insured will be charged, by the provider, the difference between the billed charge, the actual charge for the service, and the allowed charge, the amount the insurer is willing to pay for the service.|
|Coverage limits||Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some insurance company schemes have annual or lifetime coverage maxima. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.|
|Internal limits||Internal limits are coverage limits that only apply to a subset of admissible benefits. Internal limits are commonly applied to benefits related to mental healthy, substance abuse and chiropratic benefits. Internal limits can apply to the frequency of visits (e.g. an insured may be limited to 25 doctor visits per year) and/or can apply to the cost per visit (e.g. $50 limit on each visit).|
Healthcare insurers may decide to establish an agreement with a network of healthcare providers (doctors, hospitals, etc.) which will render services for the insurer's customers. In some cases, the insurer itself may build its own proprietary network. The main rationale for these insurer-network arrangements is to lower the costs for the insurer in exchange for enabling the network to tap into the insurer's established customer base.
Preferred provider organization
Health insurance policies that involve provider networks are generaly referred to as Preferred Provider Organization (PPO) products. A preferred provider organization is a subscription-based medical care arrangement. A membership allows a substantial discount below the regularly charged rates of the designated professionals partnered with the organization.
Preferred provider organizations themselves earn money by charging an access fee to the insurance company for the use of their network (unlike the usual insurance with premiums and corresponding payments paid either in full or partially by the insurance provider to the medical doctor). They negotiate with providers to set fee schedules, and handle disputes between insurers and providers. PPOs can also contract with one another to strengthen their position in certain geographic areas without forming new relationships directly with providers. This will be mutually beneficial in theory as the PPO will be billed at the reduced rate when its insureds utilize the services of the "preferred" provider, and the provider will see an increase in its business as almost all insureds in the organization will only use providers who are members. PPOs have gained popularity because, although they tend to have slightly higher premiums than HMOs and other more restrictive plans, they offer patients more flexibility overall.
PPO products usually have two sets of benefit provisions: one set affecting services rendered by the preferred network and another for services rendered out of network. For instance, a PPO product might implement a copay for services rendered by the preferred network and implement a deductible for services rendered outside the network.
Dental insurance is a form of health insurance designed to pay a portion of the costs associated with dental care. There are several different types of individual, family, or group dental insurance plans grouped into three primary categories: Indemnity, Preferred Provider Network (PPO), and Dental Health Managed Organizations (DHMO).
Generally dental offices have a fee schedule, or a list of prices for the dental services or procedures they offer. Dental insurance companies have similar fee schedules which is generally based on usual,customary and reasonable dental services, an average of fees in an area. The fee schedule is commonly used as the transactional instrument between the insurance company, dental office and/or dentist, and the consumer.
Dental insurance companies divide benefits, services, or procedures into categories and refer to them with American Dental Association (ADA) 3-4 digit code. As an example, Preventative and Diagnostic procedures often include exams (ADA code 0120), x-rays (ADA code 0210), and basic cleanings or prophylaxis (ADA code 1110). Basic procedures often include fillings, periodontics, endodontics, and oral surgery. Major procedures often are crowns, dentures, and implants. Procedures such as periodontics, endodontics, and oral surgery may be considered major, depending on the policy.
Typical policies vary benefits by category: diagnostic and preventative services get the highest benefits while the other categories -- basic services, major procedures and orthodontics -- get more limited benefits.
Some dental insurance plans may have an annual maximum benefit limit. Once the annual maximum benefit is exhausted any additional treatments may become the patient's responsibility. Each year, the annual maximum is reissued. The reissue date may vary as a calendar year, company fiscal year, or date of enrollment based on the specific plan.
Selected Characteristics of Dental Insurance
The existence of insurance coverage in the present or in the imminent future can affect how the insured behaves towards his dental health. The first important characteristic of dental insurance is that of induced utilization. Induced utilization occurs when the choice of treatment for a dental health problem is affected by whether the affected person is insured or not. There are two main ways that an insurer can mitigate induced utilization risk: limit benefits on the more costly alternative services and require preauthorization for the treatment option by the insurer.
Another characteristic of dental health treatments that affects dental insurance risk is accumulated untreated conditions: a patient may postpone treatment(s), sometimes for long periods, anticipating insurance coverage for those treatment(s). To mitigate against this risk, insurers can limit initial benefits while gradually phasing them in over a certain period of time.
Home insurance, also commonly called homeowner's insurance, is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.
Homeowner's policy is a multiple-line insurance policy, meaning that it includes both property insurance and liability coverage, with an indivisible premium, meaning that a single premium is paid for all risks. This means that it covers both damage to one's property and liability for any injuries and property damage caused by the owner or members of his/her family to other people. It may also include damage caused by household pets. The U.S. uses standardized policy forms that divide coverage into several categories. Coverage limits are typically provided as a percentage of the primary Coverage A, which is coverage for the main dwelling.
The cost of homeowner's insurance often depends on what it would cost to replace the house and which additional endorsements or riders are attached to the policy. The insurance policy is a legal contract between the insurance carrier (insurance company) and the named insured(s). It is a contract of indemnity and will put the insured back to the state he/she was in prior to the loss. Typically, claims due to floods or war (whose definition typically includes a nuclear explosion from any source) are excluded from coverage, amongst other standard exclusions (like termites). Special insurance can be purchased for these possibilities, including flood insurance. Insurance is adjusted to reflect the cost of replacement, usually upon application of an inflation factor or a cost index.
Major factors in price estimation include location, coverage, and the amount of insurance, which is based on the estimated cost to rebuild the home ("replacement cost").
If insufficient coverage is purchased to rebuild the home, the claim's payout may be subject to a co-insurance penalty. In this scenario, the insured will be subject to an out of pocket fee as a penalty.
Prices may be lower if the house is situated next to a fire station or is equipped with fire sprinklers and fire alarms; if the house exhibits wind mitigation measures, such as hurricane shutters; or if the house has a security system and has insurer-approved locks installed.
Typically payment is made annually. Perpetual insurance which continues indefinitely can also be obtained in certain areas.
Home insurance offers coverage on a "named perils" and "open perils" basis. A "named perils" policy is one that provides coverage for a loss specifically listed on the policy; if it's not listed, then it's not covered. An "open perils" policy is broader in the sense that it will provide coverage for all losses except those specifically excluded on your policy.
Basic "named perils" – this is the least comprehensive of the three coverage options. It provides protection against perils most likely to result in a total loss. If something happens to your home that's not on the list below, you are not covered. This type of policy is most common in countries with developing insurance markets and as protection for vacant or unoccupied buildings.
Basic-form covered perils:
- Windstorm or hail
- Aircraft or vehicle collision
- Riot or civil commotion
Broad "named perils" – this form expands on the "basic form" by adding 6 more covered perils. Again, this is a "named perils" policy. The loss must specifically be listed to receive coverage. Fortunately, the "broad form" is designed to cover the most common forms of property damage.
Broad-form covered perils:
- All basic-form perils
- Burglary, break-in damage
- Falling objects (e.g. tree limbs)
- Weight of ice and snow
- Freezing of plumbing
- Accidental water damage
- Artificially generated electricity
Special "all risk" – special-form coverage is the most inclusive of the three options. The difference with "special form" policies is that they provide coverage to all losses unless specifically excluded. Unlike the prior forms, all unlisted perils are covered perils. However, if something happens to your home, and the event is on the exclusions list, the policy will not provide coverage.
Special-form excluded perils:
- Ordinance of law
- Power failure
- Nuclear hazard
- Intentional acts
Disability Insurance, often called DI or disability income insurance, or income protection, is a form of insurance that insures the beneficiary's earned income against the risk that a disability creates a barrier for a worker to complete the core functions of their work. For example, the worker may suffer from an inability to maintain composure in the case of psychological disorders or an injury, illness or condition that causes physical impairment or incapacity to work. It encompasses paid sick leave, short-term disability benefits (STD), and long-term disability benefits (LTD). Statistics show that in the US a disabling accident occurs, on average, once every second.
Individual disability insurance
Those whose employers do not provide benefits, and self-employed individuals who desire disability coverage, may purchase policies. Premiums and available benefits for individual coverage vary considerably between companies, occupations, states and countries. In general, premiums are higher for policies that provide more monthly benefits, offer benefits for longer periods of time, and start payments of benefits more quickly following a disability claim. Premiums also tend to be higher for policies that define disability in broader terms, meaning the policy would pay benefits in a wider variety of circumstances thus covering more insurances that the individual was going to purchase.
High-limit disability insurance
High-limit disability insurance is designed to keep individual disability benefits at 65% of income regardless of income level. Coverage is typically issued supplemental to standard coverage. With high-limit disability insurance, benefits can be anywhere from an additional $2,000 to $100,000 per month. Single policy issue and participation (individual or group long-term disability) coverage has gone up to $30,000 with some hospitals.
Business overhead expense disability insurance
Business Overhead Expense (BOE) coverage reimburses a business for overhead expenses should the owner experience a disability. Eligible benefits include: rent or mortgage payments, utilities, leasing costs, laundry/maintenance, accounting/billing and collection service fees, business insurance premiums, employee salaries, employee benefits, property tax, and other regular monthly expenses.
Employer-supplied disability insurance
One of the most common reasons for disability is on-the-job injury, which explains why the second largest form of disability insurance is that provided by employers to cover their employees. There are several subtypes that may or may not be separate parts of the benefits package: workers' compensation and more general disability insurance policies.
Workers' compensation (also known by variations of that name, e.g., workman's comp, workmen's comp, worker's comp, compo) offers payments to employees who are (usually temporarily, rarely permanently) unable to work because of a job-related injury. However, workers' compensation is in fact more than just income insurance, because it compensates for economic loss (past and future), reimbursement or payment of medical and life expenses (functioning in this case as a form of health insurance), and benefits payable to the dependents of workers killed during employment (offering a form of life insurance). Workers compensation provides no coverage to those not working.
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