The_Jazz

As many of you know, I am an insurance professional. I've had enough requests for help to justify starting this thread. I only do difficult corporate liability insurance, but I have a decent knowledge of other types, like home, auto, health, etc. I will not sell you anything, and I doubt that there are more than 1 or 2 members in the entire history of TFP that would need my services. I can not and will not recommend specific companies or products, but I can help decipher terms, general coverage issues, etc. The point of this thread is twofold - to help folks understand what they need and how to get it. Unfortunately, this is pretty much strictly limited to the US, and many times the laws in your state may be different than the rest of the country.

Risk is everywhere. When you cross the street, turn on the stove, press on the gas or buy a new TV, there is risk involved. Whether or not you choose to buy insurance to cover it, you still have the risk.

First let's start with the fact that as an individual, there are no laws that force you to buy any insurance anywhere at any time in the US, regardless of what state you're in. Interesting, eh? That's right, you don't actually have to buy auto insurance. Every state has a mechanism to allow you to cover the risk yourself, generally by posting a bond at least equal to the insurance limit statutorily required. That means that you'd have to give the state at least $20,000 (that may or may not earn interest) to prove your financial responsibility. Obviously, that's not something that most people can do, so it's an (almost) unused option.

Lenders may require you to buy homeowners insurance because they have an interest in your property, and companies are required to buy workers compensation if they exceed a certain number of employees.

First and foremost, you need to decide what's important to you. If cost is the motivating factor, then it becomes a pure numbers game. You can go online and find the cheapest possible coverage pretty easily. Most people, however, want at least a little something more which is where it gets more complicated. You want to contemplate what you want out of an insurance carrier besides the low price. Good service? Extra coverages? Higher than statutory limits?

Service is more important than you think. If you do have to use insurance, you want someone who can be accountable. Online providers aren't necessarily good at customer service. Do your research and make sure that the low cost guys actually pay the claims. Personally, I think that you need an insurance agent involved, whether an independent (the local guys down the street) or a captive (Allstate, State Farm, Farmers, etc.) who can only sell for one company. If a friend or family member already has a relationship with an agent, that can be a good thing. They can advise you on your specific needs. Don't be afraid to say no if that's the right answer for you. Don't be afraid to find a new agent if your cousin's guy isn't treating you well. After I got married, I fired my wife's agent (and her dad's) because he wouldn't return phone calls to add my car or to get higher limits.

Why is service important? Obviously having questions answered promptly and needs being met quickly are nice, but the real reason is why you're buying insurance in the first place: claims. You want someone that will respond when you actually need something. If you have a fire or someone steals your car, you want someone to be out there to help with what you need. That's why having an agent who answers to you can be helpful. If they don't answer, you don't need them. Buying directly from a company doesn't give the same level of accountability in my opinion, but you're certainly welcome to disagree.

You need to at least make an attempt to understand the coverage you're either buying or declining to buy. If you don't understand, ask for an explanation. Anyone that won't explain something should immediately be removed from your list. Anyone that belittles you or makes you feel dumb for asking should be removed from you list. You don't have time for those kinds of people. Uninsured/Underinsured Motorist, for instance, covers YOU in the event that you're hit by someone who either doesn't have any coverage or enough coverage.

Generally speaking, most people get their healthcare coverage through work, so I'm not going to go into the ins-and-outs of it unless someone has specific questions. That said, there are two main coverages that most people will buy at some point in their lives, auto and homeowners/renters.

Both of these have some things in common. They are both written on what are called "dual coverage forms", which basically means that they provide both first party (you) and third party (someone you injure) coverage (the second party is the insurance company). With both, you will not generally be making the decision on the amount of insurance you will buy for the first party coverage. That will almost always be determined by the value of the thing you are insuring, whether it is your home or your car. With both homeowners and auto, there are things that you can do to lower the premium, like raising the deductible (for auto) or your co-payment (for homeowners). There are also things that you can do to the covered item to make it more attractive to the insurance company like alarms, etchings, etc.

When it comes to first party coverage, there is something important to remember: the insurance company is promising to reimburse you for the cost to repair or replace the item. If they say it is a total loss, they are, in effect, buying the item from you at a grossly inflated price based on the current condition. If you can show them how the item will be easily recovered (if stolen) or difficult to damage (if there's a fire), then your price should go down.

Third party coverage is a lot more important than most people realize. You also get to choose how much insurance you want to buy. I always tell people to buy as much as they can afford when it comes to limits. When I say that, I'm referring strictly to liability coverages or what responds when you injure or are accused of injuring someone else. If you hit someone with a golf ball, your dog attacks them or they allege that they slipped on your front stairs (even though you know that they hurt themselves a week before and just have it in for you), you could be liable for the damage. Obviously, high net-worth people need to protect more than those with few assets, but there are lots of uncollectible judgments out there for millions of dollars against folks that just don't have the money to pay them. Plaintiffs can seize assets that arise after the judgment, and the new bankruptcy laws generally won't protect you.

One final thing - whether or not you buy insurance, you still run the risk of bad things happening. If you buy substandard coverage that's cheaper, you may pay for it in the long run. Ultimately, insurance is a roll of the dice and you get to decide how much skin you have in the game.

I am sure that there are more specific questions than what I've posted. If you don't feel comfortable asking them here, then send me a PM or email. I will answer as quickly as I can.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

flstf

Where I live there has been a drought this summer. I read in the local paper that some houses are pulling away from their foundations due to the dry soil. Some are having to pay 10-20 thousand dollars for foundation repair work. Apparently you are supposed to water the soil around the foundation in very dry weather (first time I ever heard of this).

I don't have this problem but I asked my insurance agent if I would be covered in such an event. She said it was a wear and tear issue over time and was not covered. I believe that most people who have this problem would disagree and consider it a result of the drought.

I don't really have a question, just a comment, that I think insurance companies should cover these types of unexpected events. Obvious things like floods I can understand requiring additional premiums but not many people would think to consider drought caused foundation damage.

The_Jazz

It is possible to cover things like this, and I know of a few companies that will - it does cause extra. However, most companies treat this kind of thing the same as they would anything that falls under the "preventative maintenance" heading. If you can prevent it, and most of your neighbors know enough to do it, you should be doing it too. Just because you're "lazy" doesn't mean that you should collect insurance money. The idea is that if you have a small fire and allow it to grow into a big one by ignoring it and not calling the fire department, you void the coverage since you cost the company more than you would have otherwise. The analogy's not perfect by any means, but it still holds true.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Ourcrazymodern?

What I said.
I don't dare say it again.

__________________
BE JUST AND FEAR NOT

Racnad

The Jazz:

Thanks for sharing your knowledge. Here's where I don't understand insurance. I can understand insurance for things like autos. If you have a million policy holders, you can predict that within a year a certain percentage will have accidents, and those claims will average $XXXX. You can base your premiums on that caluculation and add some for expenses and profit.

But what about natural disasters like earthquakes? These events are difficult to predict. The "Big One" probably won't happen in a given year, or even a given decade. But when it does happen, a huge number of people will have claims. So when it doesn't happen, the insurance company is sitting on a huge pile of cash, but you can't pay it as dividends or refund it because the "Big One" can happen at any time. And when the "Big One" does happen, and there are thousands or hundreds of thousands of claims, will there be enough cash to pay them all?

How does the industry resolve this?

Plan9

VOLCANO INSURANCE!

...

Shit, I couldn't resist.

__________________
Whatever you can carry.

"You should not drink... and bake."

n0nsensical

Mathematician's guide to buying insurance: don't bother.

JustJess

Thanks, Jazz! This is awesome.
May I just note what a lovely disclaimer you wrote in the beginning of your post? HAHAHAHAHAA, I can see why you're good at your job! Heh.

__________________
My heart knows me better than I know myself, so I'm gonna let it do all the talkin'.

eribrav

Do a Google on re-insurers. Huge companies, some of them in Buffett's portfolio, exist to let primary insurers "lay off" or spread that risk.

The_Jazz

As eribrav pointed out, there are an entire subset of insurance company called reinsurers who spread risk among many companies. Earthquake insurance is actually something that my company does get involved in quite a bit, so I have a decent working knowledge of it. Earth movement (i.e. earthquakes or landslides) is typically excluded on most Property policies, just like flood insurance. That allows buyers the option of buying it separately because it does represent so much risk in some areas.

Almost every company buys reinsurance at some level, and Berkshire Hathaway (Buffett's company) is probably the largest, depending on what measuring stick you use. Generally speaking though, they lay off a portion of the risk as well to someone else. At the end a large hotel or something with a huge ($500M+) value, you might end up with 5 insurance companies issueing policies to the buyer but another 30 policies issued between the primary insurers and the reinsurers and then between various reinsurers as they promise to pay part of the loss. It gets even more confusing at times when one company acts as a "front" for another, and none of the loss gets paid by the company that issued the policy to the buyer.

Interestingly enough the companies that write stand-alone earthquake coverage are the same ones that write earthquake coverage, and it's almost always the same underwriters doing both.

And Crompsin, earthquake coverage IS volcano coverage unless you somehow had a volcano without the earthquake. In that case, it's just simple fire insurance.

If there is a big earthquake along one of the major fault zones, whether it's the New Madrid near St. Louis or one of the California ones, the insured losses will be in the billions. As a referrence point, the amount of premium for earthquake coverage on average runs around $500M, with some variation year to year. It's the same with hurricane coverage, and there will definitely be occassions where premium dollars paid by Florida folks goes to California folks after a quake.

If it seems complex, it is. Just tell me what I didn't explain well enough.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Plan9

Nice. Thanks for the clarification.

__________________
Whatever you can carry.

"You should not drink... and bake."

MSD

Everyone dies. How do life insurance companies make money?

The_Jazz

There are two different life insurance products out there - whole life and term life. Term life is the simpler of the two. It has an effective date and an expiration date. Basically, the company is betting that you won't die between those two dates. They have actuarial data to back up all sort of contingencies, and the data you give them allows them to pigeonhole you as one specific type of individual. The longer the term and the older the buyer, the higher the premium. Obviously the limit does two. There's one other factor that is important too, and that brings us back to whole life.

Whole life insurance never expires. Basically it will pay out the benefit regardless of when you actually die. It typically costs much more than term (by a factor of about 10 for me, btw), but it has the benefit of never expiring. That said, the pay-in amount is still considerably less than the pay-out. You can also borrow against the payout amount after a certain point, and it can also be used as collateral for loans. It's counted as an asset tax-wise.

If the insurance company wins the "bet" with term coverage, then they obviously make money. However, they could lose it and still come out on top. They definitely do on whole life, although it seems like they don't. Insurance companies, whether they be life, health or property/casualty, take a generous portion of their premium dollars and invest them in a variety of things. Or, as in the case of Berkshire Hathaway, they're owned by parents who make very smart decisions. The funds that we're talking about are in the tens of billions for the larger ones, and they allow them to make huge dollars. It's why companies can afford to underwrite to loss ratios above 100% (in some cases). If they're making huge returns off their investments, those investments take primacy over the underwriting results and the underwriters are encouraged just to bring premium dollars in the door (almost) regardless of the risk. That's what's referred to as a soft market, which is what I'm mired in now.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Jadey

Is it easy to cancel a term life policy before the period of the policy is up?

For example, my fiance and I just got a term life policy for a 20 year period and I was denied coverage for some reason not stated in the notification (I'm sure it was because of my weight, the person that sold us the policy thought it would be fine because I'd just had a checkup with my doctor and my bp/cholesteral, etc. were fine plus I had been gradually losing weight for the last 1 year+) but my fiance was fine. Since we had purchased a policy together can we cancel this and search for someone that may assume liability for my coverage?

Can I just call the agent and cancel the policy?

The_Jazz

First, sorry for the delay in responding. I was travelling all of last week doing insurance stuff.

I can only really answer this in general terms since there's a bit of a situation issue here. If you both applied for the same policy and only you were denied but the policy was put in force for just her, I would expect that 1) the policy should be cheaper than the price you were originally quoted for the two of you and that 2) you should be able to cancel without penalty. Personally speaking, I would keep you and your fiance on separate policies, but that's just my personal preferrence.

If you want to cancel, definitely call the agent and explain why. He should be able to tell you exactly what you need, but I'm certain you will have to put something in writing, basically just stating that you want to cancel it on a certain date and that you do not anticipate any claims being made under it. You don't need to explain why in writing.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

flstf

In most businesses it is illegal to discriminate based on age, sex, race, etc..

Where are the lines drawn for the insurance industry? For instance, if it can be shown that one (race, sex, age) is sicker or has more accidents than another can they charge more? Can they charge you more if DNA shows you to be more likely to be get sick? Do they have studies that show things like blond haired blue eyed people (just an example) are cheaper to insure than others?

The_Jazz

It is illegal to discriminate on race. In insurance, that means denying coverage.

If you offer coverage but at a higher rate, you have to demonstrate to the state why that is. If you have accuarial data to prove your point, you can charge the higher rate. Young drivers, for instance, can easily be shown to be more likely to be in an accident, so every state allows higher rates for them as well as the elderly, who also have higher incident rates.

No state that I know of has tackled the DNA issue yet. Eventually they will, but there's no test for health insurance coverage. When it happens, the conventional wisdom is that there will be a special subset of folks that are charged higher rates at certain times but that states will force-place coverage. Your employer won't be able to discriminate based on your DNA, and they'll have to accept you into their group program.

The human genome hasn't been mapped well enough for insurance companies to start using the data. It will be eventually, and I expect that those will be interesting times in the health insurance industry.

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo