jim.shamlin.com

Types of Insurance Policies

Within the industry (and the public at large), the term "insurance" is used as an abbreviation of "insurance policy" to refer collectively to the coverages provided under the terms of a specific policy contract.

It is possible for insurance to be entirely customized: a policy can be written to include any type of coverage to any type of asset (or to indemnify against loss in general). However, common practice has led to the evolution of specific "types" of insurance policy, generally named for the asset they are designed to insure (a house, a car, a business, etc.).

Also, it is worth noting (to avoid having to note it repeatedly in the material that follows) that policies vary. If I slip up and note that a given type of policy "covers" something, that's a general statement: an individual policy may or may not cover anything.

Automobile Insurance Policies

Auto insurance is the most common type of policy, largely because virtually everyone who operates a motor vehicle on public roads is required by law to carry certain coverages.

An auto policy is generally specific to a vehicle (or multiple vehicles) and certain individuals ("named drivers") identified in the policy document. Some policies have an "omnibus clause" that extends coverage to any driver who uses the automobile with the permission of an insured driver, and/or a clause that provides coverage for named drivers when they are operating other vehicles.

Types of Coverage

Automobile insurance policies typically include a bundle of coverage, which is generally divided into six categories:

1. Bodily Injury Liability - Coverage for injury to third parties in a collision in which an insured driver was at fault. Through the legal system, such people can demand recompense for costs of treatment, lost wages, pain and suffering, rehabilitative treatment, funeral expense, survivorship loss, etc., and all such costs are covered.
2. Personal Injury Protection - Coverage for injury to the driver and passengers of an insured vehicle. Note that this coverage will sometimes be extended to cover the named insured from any auto accident, including when they are a passenger or are struck by a vehicle that is not insured.
3. Property Damage Liability - Coverage for damage done to property (vehicles, real estate, physical assets) as the result of a collision in which an insured driver was at fault. Unless otherwise specified, this coverage provides for anything the insured might be sued for by the property owner.
4. Collision - Coverage for damage done to the insured vehicle resulting from a collision with another vehicle. The difference between collision and comprehensive tends to be whether the vehicle was being driven at the time. (Note that single-car accidents, hitting anything other than another vehicle, are covered instead by comprehensive).
5. Comprehensive - Provides property coverage for the automobile, insuring against lost by theft, vandalism, weather, or other forms of damage not related to a collision with another vehicle. Sometimes, glass breakage may be excluded.
6. Uninsured/Underinsured Motorist - Provides additional coverage for a vehicle/driver/passengers in the event that another at-fault driver does not have insurance, or the limits of the other driver's policies are insufficient to compensate for the damage done. Also covers damage from hit-and-run accidents. The insurer pays the difference between what is received from the driver at-fault and what is necessary to cover the insured's costs as the result of the accident. However, since this is a contractual agreement, some companies cover out-of-pocket costs only and will not compensate for lost wages, pain and suffering, or other costs.

Some language that is often used to describe the coverages is:

• Combined single limit - A single sum represents liability coverage for bodily injury and property damage
• Split Limits - Liability coverage for bodily injury and property damage are covered by separate sums (and usually in different amounts)
• Full Coverage - A policy that includes comprehensive and collision coverage

This language generally corresponds to state requirements: some states will require specific levels of coverage in specific categories.

Mandatory Insurance: Legal Requirements

In virtually all states, drivers are required by law to have automobile insurance to operate a vehicle on public roads. The justification is that such coverage is a "public good" to protect citizens against the behavior of others. The precise amount and kinds of coverage required vary from state to state, but are generally legislated as minimum amounts.

Some specific exemptions to the insurance requirement are Virginia (where motorists may pay a $500 annual fee in lieu of insurance) and Wisconsin (a driver who demonstrates they have the means to pay out of pocket may obtain an exemption from insurance requirements).

Since vehicle owners are compelled by government to purchase auto insurance, it is an area in which government becomes highly involved. Insurers have limited ability to set coverages and premiums, and are often left with the choice to do business as mandated by the state government or to cease doing business in that state at all - and to prevent insurers from fleeing, states with stringent requirements may mandate that a company must offer auto insurance to sell any other kind of insurance at all.

Mandatory Insurance: Contractual Requirements

It is common for banks that provide auto loans to require drivers to carry collision and comprehensive coverage as a condition of the loan - since the auto itself is collateral for the loan and any damage decreases the value of the vehicle (as it technically belongs to them until the loan is paid off).

In such cases, the finance company is a party to the insurance contract, and has control over the disbursement or disposition of any funds received as a result of a claim, to ensure that the vehicle owner doesn't pocket the settlement and abandon the vehicle, sticking them with damaged collateral.

Determinants of Premium

The auto insurance premium is primarily determined by financial matters. In general, the greater the value of the risk the insurer assumes, the higher the premium it will charge. Factors include:

• The value of the vehicle - Determines the amount the insurer will have to pay in an event of a total loss. Higher-value vehicles also tend to have higher repair costs.
• The types of coverage - Each type of coverage presents the prospect of an expense to the insurer
• The amounts of coverage - Policy limits set the maximum cost to the insurer in the event of a loss
• The deductible - The greater the amount the insured will pay, the less the insurer will pay (and the more likely minor accidents will cost the insurer nothing at all)

In addition to the primary determinants, there are a number of additional factors that have been found to be statistically significant in predicting the likely incidence and cost of losses:

• Vehicle type, make, and model - Some vehicles are more prone to accidents, may have higher repair costs, may inflict more damage on passengers, etc.
• Location - Certain locations have higher incidence of accidents, theft, and weather damage to vehicles than others.
• Number of Miles Driven - The more the vehicle is on the road, the greater the exposure to risk of accident or collision
• Demographic Data - Age, gender, and marital status have been found to be statistically significant
• Driving History - Drivers who have past tickets and accidents are more likely to have/cause accidents in then future.
• Credit Score - There is correlation between credit score (fiscal responsibility) and driving habits.
• Insurance History - As credit score is controversial, a handful of different companies are attempting to replace it with an "insurance score" that records history of claims and premium payments on insurance only. Choice Point sells an "attract" auto insurance score and a CLUE (comprehensive loss underwriting exchange) score. The insurance services office (ISO) offers an "A-Plus" score, a "passport" score, and a "credit loss history" score.

Because risk varies, insurance companies seek to charge a premium that is appropriate to a specific driver and vehicle. Insurers argue it is fair to charge each customer according to their individual risks, individuals who are made to pay higher rates argue otherwise, and politicians see opportunity to cash in on both sides.

Determinants of Discount

There are also a number of factors that may be considered by insurers to lower the cost of premiums:

• Multiple Vehicles - There is some cost in investigating a household to insure a vehicle, and some insurers will rebate some of these save costs to consumers
• Driver's Education Courses - Younger drivers may receive a discount for taking an approved course. Drivers who have had a ticket or accident may be required to pass such a course as a prerequisite
• Good Student - Also for younger drivers, this reflects the statistical evidence that responsible and attentive youth who do better in school also tend to get in fewer accidents
• Safety Devices - Seat belts, air bags, anti-lock brakes, and other such devices have been found to decrease the severity of injury (hence the cost of treatment) in vehicular accidents
• Anti-Theft Devices - Various devices that are intended to deter theft or aid in recovery decrease the overall expense of theft and vandalism to vehicles
• Low Mileage - The fewer miles a car is driven, the less it is on the road and at risk for an accident.
• Good Driver - An individual with a clean driving record often receives a discount with an insurer, generally upon renewal
• Auto/Home- This is more in the nature of marketing, but some insurance companies offer a "package" discount

The rationale for these discounts is to provide an incentive for future behavior, or to justify a discount offered to those whose behavior has statistical correspondence to a decreased risk factor.

Fault

In instances of collision (the most common cause of loss), identifying the driver whose behavior or negligence caused the collision (driver "at fault") is important for two reasons:

1. Different kinds of coverage apply depending on the cause of the damage (compare "personal injury liability" and "bodily injury" coverages)
2. Since both drivers are insured, there is some argument over whose insurance company must pay for the loss

Also, being "at fault" for an auto accident may be grounds for policy cancellation, and may result in the driver paying higher rates for insurance in the future.

At one time, "no-fault" insurance was popular among regulators, stipulating that each driver would be paid by their own insurance company regardless of which driver was at fault. This decreased the strain on the judicial system (hearing cases where fault was contested) - but to garner the support of citizens, it also packaged additional restrictions and limitations to effect a decrease in insurance premiums in a state - and as a consequence, coverage decreased as well. Additional information is documented under "controversies."

Unless specified by the policy verbiage or state law, an insurer must pay its own insured according to the terms of the policy regardless of fault. The insurer may then collect from the other company to recover its costs. However, legal or policy requirements may compel a driver to deal with the other person's insurance company to collect damages directly, which can be a very hostile encounter.

Consumer tip: deal with your own insurance company whenever possible, as they will consider the value of retaining your business and work harder to indemnify you against a loss and compel the other insurance company to pay up. Failing that, threat of a lawsuit can motivate an insurance company with whom you have no business relationship - the risk of having to pay court costs in addition to damage generally motivates them to be more cooperative.

Repair or Replacement

In cases where damages exceed the value of a vehicle, an insurer will consider the vehicle a "total loss" and will write the driver a check for the value of the vehicle.

This is often a cause of much grief, as the amount that the vehicle is worth is assessed on a wholesale or dealer value rather than the price the insured would have to pay to replace the vehicle on the retail market. "Gap" insurance can be obtained to cover the difference between the vehicles' wholesale value and the amount of an outstanding loan, but the difference between wholesale and retail value of a vehicle is not generally covered by most insurers.

When a vehicle is totaled, the insurance company generally takes possession of the wreckage after paying off the insured. In some states, the driver may have the option of keeping the wrecked car, and in others, either option may be required or prohibited.

Two problems may precipitate for a driver who retains their wreck: First, the insurance company will deduct the salvage value of the wrecked vehicle from their settlement. Second, the vehicle's title may be cancelled, and a "salvage title" issued, which prevents the driver from being able to obtain registration or insurance for the vehicle until it is repaired (and the repairs inspected) by the state DMV. This can be a massive inconvenience.

Additional Coverages Provided

In addition to providing coverage for the vehicle and drivers named in the policy, auto insurance may cover:

• Trailers or Towed Vehicles - Coverage for items attached to a vehicle will vary. In some instances, no coverage is provided (it may not be mentioned, or it may be specifically excluded), in others, it is included (specifically mentioned, and specific types of coverage extended)
• Leased/Borrowed Vehicles - Coverage may be provided for named insured when then are operating other vehicles (With the permission of the owner), such as a rental vehicle or a borrowed vehicle
• Other Drivers - An "omnibus" clause may be included to provide coverage for a vehicle regardless of who is driving it at the time of an incident.

Consumer tip: be wary of policies that provide a lot of "extra" coverage, as extra features also mean extra premium cost, and unusual coverages tend to have higher premiums, and many of them are unneeded (if your car doesn't have a trailer hitch, why pay to insure towed items?)

State and National Boundaries

State insurance regulations apply to drivers who are legal residents of a given state or vehicles that are registered in that state. When a driver takes his vehicle across state lines on a temporary basis, he is generally not subject to the insurance requirements of the state he is visiting or passing through.

Some attempts have been made to extend the authority of states to impose requirements on individuals who drive in their state, but are residents of another. Since any case involving plaintiff and defendant from different states is settled in federal court, the point should ultimately be moot, though it's possible states may have laws on the books that have not yet been challenged in court.

When it comes to crossing national boundaries, the situation is a little different: most automobile insurance policies are, by the terms of the policy, valid only within the United States and provide no coverage overseas. Drivers may be required to purchase foreign insurance to drive in other countries, and will be subject to foreign laws (civil and criminal) for any incidents that occur in other countries.

Should an incident occur overseas, it is generally handled under the jurisdiction of the foreign nation. Some attempts have been made to escalate issues to the Hague, but the Hague is essentially toothless.

Specific to neighboring countries:

• Canada is generally amenable to American insurance and upholds the provisions of the original policies. Most domestic insurance policies specify their terms as being within the U.S. and Canada
• Mexico is generally unfriendly to American insurance and requires drivers to have Mexican insurance to bring a car over the border. Agencies that sell Mexican insurance often have highly visible offices near the border for drivers to obtain the necessary coverage.
• Alaska, Hawaii, and U.S. Territories are generally included in domestic policy terms, though there may be issues if a vehicle is damaged in international water/airspace or foreign nations while in transit to the continental U.S.

Consumer tip: if you're planning to drive a car abroad (including a rental car) or ship a car through foreign nations or international spaces, contact your insurance company to inquire about details about your coverage and advice on obtaining additional coverages.

Auto Insurance Dividends

In some instances, an automobile insurance company may pay "dividends" to its policyholders, in accordance with their own policies, a spontaneous fit of generosity, or government requirements.

Generally, dividends are paid in years when there have been fewer than the expected number of claims and the company has made a profit that might be considered exorbitant. The dividend may be required by law, or it may be an attempt to decrease its profit to stay below the radar of consumer advocacy groups.

These dividends are considered a refund of premium payments, and are not taxable income.

(This seems a little too general - could use more reliable info, or confirmation that it really is this wishy-washy)

Cancellation and Nonrenewal

Cancellation and nonrenewal apply to all forms of insurance, but are particularly common with auto insurance, as a company will want to dump a driver (or jack up his rates) if he seems to get into a lot of accidents or accrues traffic violations.

While the consequences of cancellation or nonrenewal have the same net effect for the insured (they have lost their coverage), and laymen use the term "cancelled" indiscriminately. However, there is a significant difference:

An insurer typically has the option to refuse to renew a policy after expiration at its own sole discretion - the renewal event is the completion of the original agreement and an "opportunity" to enter a new agreement (even if it's according to the same terms as the expired one), with the option of not entering a new agreement. Moreover, an agreement entered into under duress or compulsion is void by the terms of common law - so it seems unlikely that this will change.

Cancellation of a policy nullifies it immediately, even for the dates for which it was supposed to be effective. An insurance company cannot do this at its own discretion, as the dates of coverage are a term to which they are contractually bound. However, the terms of the policy itself may specific conditions that give the insurer the opportunity to cancel coverage immediately.

Typically, legitimate reasons for cancellation are failure to pay premiums (at all, not just being late with a payment), fraud or misrepresentation by the insured, or the revocation/suspension of an insured's driver's license.

Other Coverage Types

Automobile insurance policies may also provide other kinds of coverage, such as:

• Gap Insurance - Covers the difference between the "blue book" value of the vehicle (which is generally the limit of the policy) and the amount owed on a loan (which may be more than the blue-book value, especially if the vehicle is new). This may be attached to a loan agreement rather than the auto insurance policy - but it is cheaper in the latter case.
• Rental insurance - If insurance for operating rented/borrowed vehicles is not included, it may often be purchased as an endorsement or separate policy.
• Roadside assistance - Coverage that pays the cost of towing a vehicle that is involved in a covered collision
• Personal Effects Coverage - Provides coverage for personal property stored in the vehicle that is lost or damaged as the result of a covered risk (theft, vandalism, collision, etc.)

Consumer Advice

Auto insurance policies are often referred to as "standard" to compel customers to purchase a bundle of coverages, including some that the customer may not want or need and discourage the customer from requesting coverage that the insurer does not want to sell. Everything is negotiable.

However, if an insurer indicates coverage is "required," this implies a requirement that is in accordance with state law. If an insurer claims that something is required when it is not, this is a deceptive trade practice. The customer may seek legal remedy, and the state insurance board will happily spank the insurer.

One source recommends that drivers carry $100K/$300K limits (per person/per accident), even if their state requires a lower amount, and that individuals with net worth higher than $300K should carry additional liability insurance on their auto policy. In some cases, a high-net-worth individual should obtain an umbrella policy if they can't get enough coverage on their auto policy. I'm, not sure whether this is sound advice or an attempt at marketing.

If a vehicle is not driven at all (it is owned as an investment, or will be garaged for an extended period of time), it is not necessary to carry most forms of insurance an auto policy covers, and it may be cheaper to get property insurance to cover the value of the vehicle rather than insuring it under an auto policy.

Rental car coverage tends to be worthwhile: it typically adds only a dollar or two per month to the cost of insurance, which pays for itself if you get in one accident over the course of many years, and is a much better deal than you get from the rental car companies. Multiple sources have echoed this advice.

Drivers seeking to save money on insurance premiums are typically given the following advice:

• Shop Around - Different companies offer different rates (however, some companies will offer lower rates for less coverage)
• Choose Your Vehicle - Certain vehicle types, makes, and/or models cost more than others to insure.
• Safety and Antitheft Devices - Insurance companies offer premium deductions for vehicles with air bags, antilock brakes, alarm systems, and other such features
• Raise Deductibles - Significant savings can be achieved merely by raising the deductable (amount you will pay out of pocket before drawing on insurance)
• Reduce Coverage - On older vehicles, or others with low resale value, it may not make sense to continue to cover collision and comprehensive coverage, as the total of these premiums, over time, will be more than the cost of replacing the vehicle
• Use a single provider - Some companies offer discounts for purchasing multiple policies (home and auto) or having multiple vehicles under one policy
• Seek out discounts - Some insurers offer discounts for low-mileage drivers, safe drivers, accident forgiveness, etc.
• Isolate high-risk drivers - Especially in a family with one teenage driver, or a particularly reckless spouse, it may be more economical to get the high-risk driver his own policy rather than bundle him (and his vehicle) with the rest of the family's risk on all vehicles.
• Debate "standard" coverages - Read the insurance policy and redline coverages that are not needed, then ask for a revised estimate. However, be aware some coverage is dictated by state law
• Beware of bargains - When a company competes on price, it is often offering a stripped-down policy, so compare coverages as well as rates. Also, discount tactics are often used to draw customers to firms that may not be financially sound.

Drivers who have trouble obtaining insurance (due to a history of claims or a bad driving record) are generally good and well hosed. There isn't much legislative support for reckless drivers, people with high-performance automobiles, etc. and companies that provide coverage for such drivers generally charge much higher premiums (to account for underwriting much higher risks).

Commercial Auto Insurance

Standard auto insurance policies exclude damages or claims that arise from the use of the vehicle for business or commercial purposes, and standard business insurance does not include coverage for vehicles the business owns The gap between the two is filled by commercial auto insurance, which insures vehicles that the business owns.

Commercial auto insurance works in much the same way as standard insurance, the key difference being that the "drivers" are the employees of a business (rather than residents of a household), and coverage is provided only when the vehicle is being used for business reasons.

A mixed-use vehicle must be insured as both a private vehicle and a business vehicle, and a claim is made against the appropriate policy, depending on the use of the vehicle at the time of the event that precipitated the claim. However, a pure-use vehicle, driven only for business purposes, may be insured to the company (rather than an individual).

Insurance is also available to cover the use of personal vehicles by employees for business purposes - as the business is liable to third parties for damages caused by their employees in the course of the business (even if the employee was using their own vehicle at the time), and may also be liable to the employee for damage to their vehicle (even if an accident was the "fault" of the employee, it was in the course of business for the employer).

Other Vehicular Insurance

Automobiles are the most common type of vehicle, but insurance is available (and in some cases required) for other types of vehicle:

• Aviation Insurance - Covers aircraft, both personal and commercial
• Boat insurance - Covers personal watercraft below a certain size and speed
• Marine Insurance - Covers watercraft, both personal and commercial
• Motorcycle Insurance - Covers motorcycles and ATVs
• Personal Watercraft Insurance - Covers jet-skis and other motorized watercraft
• RV Insurance - For recreational vehicles.

Also, specialty insurance is available for individuals with high-value automobiles (sports cars, antique cars, etc.) - their particular needs are not adequately addressed by "normal" auto insurance coverage.

Homeowners Insurance Policies

Homeowners' Insurance is the second most common forms of insurance, largely because mortgage lenders require it as a condition of the loan. In many cases, the mortgage company, rather than the home owner, may be the beneficiary of the policy, as the structure is an asset used as collateral for the mortgage loan until such time as it is paid off.

Homeowners' insurance policies have been modified to cover apartment renters and condominium owners as well - it is not strictly limited to owners of single-family residences. While these derivative policy types are sold under different labels (renters insurance, condo insurance, etc.) the same principles (and laws) apply.

Also, unlike auto insurance, homeowner's insurance is not required by law in most states (note: source didn't name any state in which it's required - are there any?). Some homeowners choose to drop insurance coverage once the mortgage is paid off, though this is not advised, as it the home is a substantial asset.

Coverages Provided

In addition to providing coverage against loss or damage to the structure, homeowner's policies provide a broad range of coverages:

In addition to the structure (the house), coverage is provided for other structures on the property (a gazebo, tool shed, detached garage, etc.) as well as damage to landscaping (shrubs and trees). In principal, the policy covers anything on the property that, if damaged, would decrease the value of the property as a whole.

Coverage is provided for the personal property contained in the home or stored on the property. Some items are specifically exempted from this coverage, such as vehicles and "valuable" items (generally, over $500), as the insured is expected to purchase separate policies to cover them.

Homeowner's insurance policies cover and liability coverage for accidents occurring on the property, as well as general personal liability for residents and visitors. In addition to providing coverage for accidents on the property, the insurance also covers certain acts regardless of location, on the basis that one's home may be treated as an asset by the courts and subject to seizure. Generally, liability that arises from auto accidents or business activities is excluded.

Medical payments are also provided for injuries and accidents on the property, even when there is not a cause for which the homeowner might be held liable.

Coverage for the cost of temporary living arrangements while the home is being repaired as the result of a covered event may also be provided.

Extent/Limits to Coverage

Historically, there were separate policies for separate perils (fire, flood, theft, etc.), but these were bundled into a single policy. As a result of this evolution, most homeowner's policies cover specific named perils - the difference in the homeowner's policies of different companies (or different levels of coverage offered by a single company) is often the result of the kinds of coverages that are bundled in the policy. However, general coverage policies against all risks (called "all risk" policies, as the fellows who sell insurance for a living are boxing clever) are gaining popularity.

Most insurance policies EXCLUDE damage from explosions, flood, earthquake, war, nuclear accidents, landslides/mudslides, sinkholes, and "acts of god." In certain areas prone to specific natural disasters (earthquake, volcano, hail, windstorm, etc.) these may also be specifically excluded, as the insurer excludes some common and expensive risks to mitigate their own costs and keep premiums competitive. The homeowner may need (or be required) to purchase a rider or an additional policy (sometimes from another insurer) to provide excluded coverage.

In areas prone to certain types of disaster (hurricanes on the southeast coast), there may be other coverages that are excluded from a standard policy, for which homeowners need to seek riders or additional policies. In general, this is done to meet government restrictions on premiums or to appear competitive on cost with other companies that have made such exclusions.

Maintenance costs are also not covered by homeowner's insurance, nor are any damages caused by a homeowner's neglect. Such provisions seem reasonable enough; there are often arguments over what a reasonable standard of maintenance is, or whether "neglect" is an actual cause. Often, the ambiguity or uncertainty of a kind of damage leads to specific clauses in the terms of a policy (for example, exclusions of termite damage, mold damage, or foundation shifting).

Policy Types

The Insurance Services Office has defined some basic types of homeowners' policy:

• HO-1: Also called a "limited coverage" policy, this covers against the basic threats that can destroy a property completely. It is no longer sold in most states.
• HO-2: Also called a "broad form" policy, this form of policy covers against a wider array of named perils than an HO-1 policy.
• HO-3: Also called an "all-risk policy," this form of policy covers the home against any threat, except for anything that is specifically excluded.
• HO-4: Often called renters' insurance, this policy protects the occupants and their possessions, liability to the landlord for property damage, and liability to visitors within the premises.
• HO-5: This is a more extensive form of the HO-3 policy (?)
• HO-6: Also known as "condo coverage," this covers the portion of a multiple-family dwelling owned by the insured.
• HO-7: Insurance for trailers (mobile homes, manufactured homes)
• HO-8: Often called an "older home" policy, this enables high-value homes to be insured at the lower market-value rate

It is not clear whether these terms are standard to the industry, but it's a convenient enough way to differentiate between the various types of policies that fall into this genre.

Consumer Advice

Random advice given to consumers purchasing homeowners' insurance:

While it's possible to drop homeowner's insurance once a mortgage is paid off, it's not wise to do so. Consider whether you have the financial resources to replace the home (or repair major damage) out of your own pocket if disaster should strike.

Review your coverage periodically to ensure that it is sufficient to rebuild your home at current market prices. Especially since a home is a long-term asset, the effects of inflation can be dramatic over a decade or more.

By default, insurance companies provide coverage for personal belongings that is 50% of the price of the amount for which the structure is covered. This may not be enough to replace your belongings, or it may be too much, and lowering it should also lower your premiums. Best practice: do a "home inventory" and buy the appropriate amount of coverage.

For personal property, there is a significant difference between policies that pay the "actual cash value" versus those that pay" full replacement value" (explained above): it is suggested (by an industry association) that the difference in premium is worth having the extra coverage.

Check the terms of the policy to see what may not be covered. Some policies insure only the structure of the house - not a tool shed, gazebo, swimming pool, or other features of the property that may also need to be insured. Even landscaping (trees and shrubs) can be insured.

Check the exclusion on property coverage. A policy may have coverage limits on some items (such as jewelry) or specifically include others (works of art). If they cannot be added to the homeowner's policy, it may be wise to take out a separate policy for "valuable personal property".

Check the coverage provided by liability insurance. If it is less than your net worth, you may need to obtain more coverage. If homeowner's insurance limits do not cover it, consider obtaining an umbrella policy.

Taking an inventory of your possessions, and having evidence that you actually owned the items (receipts, photos, or video), can expedite the process of collecting an accurate claim. Without proof, an insurance company may be very reluctant to pay (due, in large part, to fraudulent claims that are made). A home inventory takes the doubt and argument out of the process.

Life Insurance Policies

Life insurance provides a monetary benefit on the death of an individual, referred to as the "cestui qui vit" or CQV. It's a handy euphemism, but more importantly it is specific to that person (why may not be the policy holder and certainly isn't an insured in the traditional sense).

In most cases, life insurance is a company-provided benefit to employees, and the purchase of separate policies by individuals has largely dried up, though some percentage of the population still take out life insurance privately.

Life insurance is sometimes referred to as life assurance, the difference being that "insurance" deals with uncertain events, whereas "assurance" deals with certain ones ... and death is assured.

Settlements

Since life insurance covers a very narrow type of loss (death) in a predefined amount, claims and settlements are fairly straightforward, though there are a few minor bumps in the rug:

The insurer may require acceptable proof of death (a death certificate) to pay out a claim. Most policies will also pay off when a person is presumed dead, or has been missing without a formal declaration of death for a long period of time (several years), or is missing under circumstances that make it likely that they are actually dead (building collapse, plane crash, etc.). If the policy terms are unclear, beneficiaries may need to file a lawsuit to compel an insurer to settle.

In instances in which the amount of payment is large, an insurer may conduct an investigation prior to paying the claim to rule out instances of fraud - however, life insurance fraud is much less widespread in the present day than it had been prior to the information age (see "fraud" for more details).

Settlements involve payments to beneficiaries named in the policy. There is generally a primary beneficiary (first to be paid) and a secondary beneficiary (to be paid if the primary cannot be located or has died) - and failing both, the proceeds become part of the CQV's estate. Beneficiaries can also be named in "sets," dividing the proceeds among a group rather than leaving them to a single person.

There's a long passage that's very convoluted, but I think I understand it to mean that the funds provided to life insurance beneficiaries are less subject to being legal contestable than those in one's estate, and can generally be disbursed a great deal more quickly, especially if there are arguments among the heirs of an estate.

However, the wording of the policy may be subject to interpretation: Does "the wife of the insured" mean the current spouse, or one to whom he was married when he took out the policy, but subsequently divorced? If benefits are to be divided equally among his children, does an illegitimate child (or someone claiming to be such) get a share? The letter of the policy can itself create some conflicts.

Underwriting Life Insurance

To underwrite a life insurance policy, an insurer must estimate the life expectancy of the CQV. While there are many factors that could be considered, most life insurance companies base their estimations on age, gender, and tobacco use. For higher amounts of coverage, an insurer may consider additional health and lifestyle factors, and require a medical exam to determine if there are any unusual risks.

Currently, some life insurance companies are beginning to consider additional criteria, such as body mass index (height and weight), blood pressure, and cholesterol levels, in setting life insurance premiums. There is some argument over whether this is objective, as these are relatively recent areas of medical interest and there is currently little long-term data to establish the accuracy of these theories.

Whatever criteria are taken into account, the insurer will set a premium amount according to risk - or in some cases may decline to provide coverage. There is presently no law requiring a life insurance company to provide coverage to anyone, with the exception of Civil Rights Act compliance (to prohibit the unfair exclusion of individuals based on age, race, or gender).

Generally, insurers classify a CQV as falling into one of four categories:

• Preferred Best - For individuals who have no adverse medical history, is in top physical condition, and no family history of cancer, diabetes, or similar conditions
• Preferred - For individuals with minor glitches in their medical history, but is in generally good health.
• Standard - Individuals with a one or more issues, such as obesity, high blood pressure, previous drug abuse, a parent who died at an early age, etc.
• Tobacco - Individuals who have used tobacco within the past 3 years, regardless of their health condition otherwise

The "lower" a person's status, the higher their premiums will be for the same amount of coverage. Likewise, the later in life a person purchases an insurance policy, the greater their premiums - both on the insurer's estimation of the amount of premium they will be able to collect before having to pay the settlement.

Marketing Life Insurance

Life insurance is meant to insure the policy's beneficiaries against the loss of income they will suffer on the death of a CQV. Traditionally, a family had only one breadwinner, and his family would be destitute if he died. Even in the modern two-earner family structure, the loss of a wage-earner can be a serious setback. There are also instances in which the loss of an unrelated individual may have a financial impact (a business partner with skills of knowledge critical to the success of an endeavor).

Most commonly, an individual will take out a life insurance policy on himself to provide a death benefit to others - however, this need not be the case: in theory, anyone can take out a policy on anyone else, though insurance companies may require the policyholder to demonstrate their "insurable interest" (the fact that they would suffer a financial loss at the death of the other person) in the CQV to prevent misuse and fraud, but this is not a strict requirement.

Life insurance is also flogged to cover the "final expenses" (corpse disposal) of the elderly and children, or to enable young people to lock in lower rates and begin building policy value. It is not clear if this insurance is worthwhile.

Term Life

Term life insurance is limited to a specific period of time. If the individual dies during that period, the benefit is paid. If not, the company pays nothing and keeps the premiums paid by the policyholder. The term may be as short as one year, but it is not uncommon to have terms up to 30 years.

According to the III, 97% of life insurance purchased in 2003 was term insurance. This is presumed to be because most life insurance is purchased by employers as a benefit for their employees.

Permanent Life

Permanent life insurance (also called a "Cash Value" policy) is a policy that remains in effect throughout a person's entire life. The insurer may not cancel the policy at any time, unless there was fraud in the application process or the policyholder neglects to pay their premiums (even in the latter case, the insurer may still pay a benefit, albeit a lesser one than if the policy premiums were paid in full).

Since death is inevitable, the payout is seen as a certainty, so a permanent life insurance policy accumulates value over time. The value of a policy can objectively be assessed as the net present value of the death benefit, discounted according to the number of years remaining until the expected age of death.

Because of this value, the policy can be treated as an asset. Lenders may allow the policyholder to borrow against it, and the insurer will often allow the insured to withdraw funds or surrender the policy in exchange for a payment (generally less than the net present value of the benefit at a reasonable interest rate).

Also, some permanent life insurance policies will "endow" - i.e., they will pay the benefit out to the CQV if they live beyond their projected date or expiration, or after a period of time specified in advance.

Whole vs. Universal vs. Variable

Whole, universal, and variable life are varieties of permanent life insurance.

A whole life policy has a fixed premium and death benefit. The primary disadvantage is that inflation will erode the value of the death benefit over the course of many years, such that the present value of a settlement fifty years in the future does not merit the cost of monthly premiums.

Universal life is a relatively new product that provides more flexibility, in that the policyholder has the ability to increase the death benefit and pay a corresponding increase in premium to counter the effects of inflation. In some instances, the insurer may require certain qualifications of the policyholder or CQV in order to increase coverage.

Variable Life Insurance does not have a specified payout, but ties its cash value and death benefit to the performance of specific investments (the ten-year T-Bill, the S&P index, etc.) The rationale is that pegging the value of the benefit to an index preserves its value over time. The danger is that the value of the benefit can decrease (or disappear) if the investments perform poorly.

To mitigate this, some variable policies offer a guaranteed minimum death benefit in exchange for an extra premium. In reality, the policy is then a blend of whole and variable life: a whole life insurance policy for the guaranteed amount and a variable life insurance policy for the variable amount.

Taxation

The tax ramifications of life insurance can be complex, and are probably beyond the scope of the present document, except to mention that disbursements/endowments from life insurance policies may be tax-exempt if certain conditions are met.

Accidental Death

An accidental death policy differs from a life insurance policy in that it only pays out if a death is from "accidental" causes. They are often bundled with coverage for dismemberment, as "Accidental Death and Dismemberment" (AD&D) policies.

It is noted that accidental death coverage very seldom pay a benefit at all because the terms are very stringent. As such, they are a wonderful moneymaker for insurance companies, and are often attached as a rider to a term life insurance policy.

Other Life Insurance Products

Life insurance policies are often "productized" under different names. Here's what some of them mean:

• Joint Life - A policy that covers two persons (typically a married couple) and pays out if either of them dies
• Survivorship (second-to-die) Life - Also covers two persons, and pays when the last of them dies.
• Single premium whole life - A policy with one premium, paid as a lump sum at the start of the policy
• Modified whole life - A whole life policy whose premiums start low and increase over time
• Group Life - A term life insurance policy in which the same terms are extended to all members of a group (employees of a company, members of a trade organization, etc.)
• Preneed insurance (also "final expense insurance") - Provides funds to cover funeral expenses, paid to a beneficiary or direct to a funeral home
• Annuity - An investment product that mutated from life insurance policies (see "related topics")

Consumer Advice

To decide how much life insurance coverage is needed, if any at all, consider the financial needs of the survivors (spouse and children), funeral expenses, and the effects of estate taxes. That's all.

Specifically, some companies market life insurance as an "investment" to convince individuals to purchase more coverage than they need by the criteria above. Life insurance is a very poor investment when compared to other alternatives.

Not everyone needs life insurance: older people who do not already have life insurance probably don't need it, professional couples without children probably don't need it, and wealthy individuals with sufficient financial resources to provide for survivors probably don't need it.

The earlier in life a person purchases a permanent life insurance policy, the lower the premium, and because premiums are "locked" for the duration of the policy (unless coverage is increased), the cost will not increase over time. (This seems more like marketing than advice - the math is not worked out to substantiate it).

Term life insurance has lower premiums than whole life insurance - however, term life pays off only if you die. Since a permanent life policy builds value, and you receive cash back should it be surrendered, it is suggested that it is a better value in the long run. (Sounds like more marketing - need to see the math, especially how it is adjusted to net present value).

When naming beneficiaries, be very specific to avoid squabbles. It is advised a policyholder indentify beneficiaries by name, provide a social security number, and indicate their benefit as a specific amount.

When buying permanent life insurance, seek out an established firm, one that has been around a long time and is likely to be around for a long time: it may be decades before the benefit must be paid out.

Dropping an insurance policy and buying a new one to get more coverage can be costly, as the premiums in the new policy will reflect your current age and state of health (generally older and less healthy), and premiums tend to increase as companies dream up new ways to estimate risk, so the premiums may be much higher. Buy additional policies, or additional coverage as a rider, rather than dropping and re-writing.

Settlement and Reappearance

An issue of some curiosity is what occurs if a CQV is presumed dead, a settlement is paid, and the person is later discovered to be alive. In cases where fraud is intentional, the courts generally side with the insurer and find the CQV liable to repay the settlement. In other instances, the decisions of courts have varied.

There is no standard answer for "what happens," as it largely depends on the amount of time that has passed, the nature of the disappearance, the terms of the policy, and other factors. The courts look to similar cases as precedent for a decision, but generally consider the facts of each case and attempt to derive a just settlement.

FWIW, instances of settlement and reappearance that are anything other than blatant fraud are extremely rare. Not really worth researching further.

Health Insurance Policies

Health insurance policies cover the cost of medial treatment. In most cases, employers provide this coverage to their employees as a benefit, with Medicare and Medicaid providing coverage for pensioners and the unemployed. It is rare for an individual to seek out health insurance for themselves.

Governmental intrusion into the health insurance industry has caused a wide range of permutations.

• Traditional Health Insurance - Covers an insured's need for medical care from the healthcare provider of their choice
• Health Maintenance Organizations - Covers an insured's need for medical care from any healthcare provider who has entered into an agreement with the insurance company
• Preferred Provider Options - Similar to an HMO, but a single provider (usually a general practitioner) is the insured's primary "provider" and must approve treatment by others (except in cases of emergency) in order for the insured to be compensated
• Prescription Drug Plan - Separates coverage for the cost of prescription drugs from that for medical treatment

Dental and vision care are other forms of health insurance that provide for dental care and corrective lenses, respectively, as these are excluded from most health insurance policies. It's worth noting that dental insurance providers have shifted toward the HMO/PPO option, with much the same consequences, whereas vision care is so rarely provided that it remains an oddity and is not as heavily regulated.

Disability insurance is another form of health insurance that seeks to provide the policyholder financial support to replace income in case of disabling illness or injury. Details on this form of insurance are provided separately, but the coverage is often included in a health insurance policy.

Finally, accidental death and dismemberment policies are often bundled with health insurance policies. More details on AD&D policies are provided under "life insurance," as they are often bundled with that form of insurance as well.

Disability Insurance Policies

Disability insurance provides a monetary benefit to a policyholder as a means of compensating them for future income lost as a result of their becoming unable to earn money due to disability. Typically, the "disability" is the result of an on-the-job injury, though coverage may be extended to non-workplace incidents and other health conditions that would render an individual unable to work. The policies may also bundle some health and/or life insurance coverages as well.

There are various forms of disability policy:

• The federal government provides disability coverage through the social security administration for those who are uninsured or underinsured. (Regarding VA insurance, this is the fed acting as an employer through a separate program).
• Disability insurance is provided by the social security administration. A portion of paycheck deductions are considered "premiums" for this coverage.
• The payments from federal insurance are generally insufficient to make up for lost income (and often provide an income below the poverty level), so commercially-available "supplemental" insurance remains popular
• Most employers provide insurance for employees injured while on the job (or on the premises), commonly known as "workers' compensation" - largely because they are required to do so by law
• Employers often offer, as a benefit, disability insurance for injuries sustained outside the workplace.
• Individuals may also purchase policies for themselves

In most instances, disability insurance protects specific parties and seeks to pay settlements over long period of time rather. Individuals covered by disability insurance generally consent (explicitly, implicitly, or compulsorily) rather than bringing suit against an employer.

To discourage fraud, these policies generally pay significantly less than the individual would make by working. However, fraud is still widespread because the insurance is widely held, and because a "disability" is a fairly simple matter to fake.

The most familiar type of disability coverage is for "total permanent disability," in which an individual is completely messed up (unable to work at all) and will not recover during their lifetime. However, there is also "partial" disability insurance, when an individual's injury prevents them from continuing in their current profession, but is capable of working in another profession, albeit for less income.

Business Insurance Policies

Businesses buy a great deal of insurance, and policies are often written to the peculiar needs of a specific business. However, there are fairly standard policies that provide generic forms of coverage to small business owners.

Coverage

Typical small business insurance policies include ...

• Property Insurance - For buildings and equipment
• Business Interruption Insurance - To compensate for lost profits if the business is temporarily unable to operate due to a catastrophe
• Liability Insurance - To provide coverage against third-party claims against the business, covering compensatory damages (financial loss directly related to damage), general damages (non-monetary losses, such as pain and suffering, etc.) and punitive damages (cash charged to the defendant to punish them for misconduct)

Standard policies do not cover professional liability, auto insurance for company vehicles, or any form of insurance provided as a benefit to employees.

There are three categories of business insurance:

• Basic Form - Covers loss from basic perils: fire, lightning, windstorm, hail, and explosions
• Broad Form - Adds several forms of coverage to the basic form.
• Special Form - Covers all direct physical losses from all causes except those specifically excluded in the policy

Home-Based Businesses

A separate species of policy has been created to address workshops and offices in residential homes, as most homeowners policies specifically exclude damages or claims that arise from the use of the home for business or commercial purposes.

Commercial Auto Insurance

Covered in more detail under "auto insurance," a commercial auto insurance policy provides coverage for vehicles used for business purposes.

Bonds

Bonds are most common for tradesmen, particularly those in the construction business.

A fidelity bond provides insurance to remunerate customers who have suffered a loss from the fraudulent or dishonest acts of the employees of a business.

A surety bond provides insurance to remunerate customers in the even a business is unable to fulfill its obligations. It's generally used in long-term projects, such as construction, to repay any moneys paid in advance if the company later becomes unable to meet its obligations.

Insurance Benefits

Many businesses purchase insurance for their employees as part of the employee's compensation. The majority of health and life insurance sold in the U.S. is purchased for employees as a benefit.

Historically, such insurance was provided by guilds, and later by trade unions, to provide for workers who were injured or killed in dangerous professions (mining, factory work, etc.). The unions demanded that employers pay the cost of such insurance, and the business agreed to do so if it were able to manage the insurance.

And so, insurance as a "benefit" was not a gift of generosity, but a settlement in labor negotiations, or a defensive move on the part of other businesses that feared employees might unionize.

Liability Insurance Policies

Liability coverage indemnifies an individual from claims by third parties that arise from losses by others that are caused by an insured (directly, indirectly, or negligently), for which the other parties may be entitled to collect damages from the insured.

Liability coverage is provided in many forms of property insurance policies - auto policies cover liabilities from accidents, homeowners' policies cover liability for accidents in the household, etc. - but it is also possible to purchase liability coverage as a separate or additional policy to cover liability in general.

Personal Liability Insurance

These policies provide coverage for individuals for liability they may incur in their private lives (specifically, not as part of their business endeavors). This is often purchased to have coverage above and beyond what is provided in another policy, especially by individuals with high net worth who may be the target of litigious individuals.

An "umbrella liability" policy is a specific kind of policy that provides broad coverage that "covers" other policies, but does not kick in until a loss exceeds the liability limits of other policies.

Professional Liability Insurance

Separate policies are provided to cover liability that may arise from an individual's professional life. It is purchased by individuals in private practice to cover losses for conduct that is not protected by business insurance.

One of the main differences between professional and personal liability policies is that, in addition to providing compensation for loss (such as physical injury or damage to property), professional policies often cover economic losses of claimants: revenue they lost because the professional failed to fulfill his obligations or added costs claimants had to undertake to compensate for performance, as they may sue to recover these economic losses.

Probably the best known form of professional liability insurance is the malpractice insurance that covers medical professionals. Errors and omissions (E&O) policies are also common in the real estate industry to cover honest mistakes made by professionals.

Organizational Liability Insurance

In addition to policies that provide coverage for the acts of individuals, there are also policies that are purchased by corporate entities, to protect them from loss arising from the activities of the business, use of its facilities, use of its products, defense against claims by employees, etc.

Credit Insurance

Consumer credit insurance (also called "credit life insurance") is often sold with a big-ticket purchase such as an automobile. This insurance pays the balance of a loan should the borrower die or become permanently disabled (the payment is issued to the creditor). It may be offered as an option to a loan contract, and is seldom a good deal (it protects the lender's interest rather than the borrower, and is generally at an unfavorable rate when compared to life insurance).

A common form of credit insurance is mortgage insurance (PMI), which protects the lender in cases where the borrower owes more than the value of real estate that serves as collateral. A lender generally requires their debtor to purchase PMI in cases where less than a 20% down payment is made. Note that government mortgage loan products (VA/FHA mortgages) include a mortgage insurance premium (MIP) - different acronym, essentially the same thing. However, neither is the same as credit life insurance (which pays the balance if the borrower dies) - they merely pay the difference between loan and market value if the borrower defaults.

Credit card companies have also nosed into credit insurance. In addition to paying the balance of a credit card if the insured dies, it will also make the minimum monthly payment if the insured is unemployed or disabled. This may be billed as a periodic fee, an additional increment of interest on purchases, or a combination of the two. It's generally considered to be a rip-off.

Trade credit insurance covers the payment risk faced by vendors when supplying goods or services on credit to another commercial customer. If the customer's company becomes insolvent or declares bankruptcy, the vendor is paid by the insurance firm. This is generally purchased by the vendor, who may in term charge it to his customer.

Travel Insurance

Travel insurance is provided to cover risks incurred while traveling, which may include:

• Property coverage for lost, theft, or damage to personal possessions and money, plus funds for "emergency" replacement for lost items (even if the loss is temporary - delayed baggage)
• Accidental death and dismemberment
• Health coverage for injuries sustained while traveling
• Compensation for emergency evacuation or repatriation
• Automobile insurance for rented vehicles
• Compensation for legal expenses
• Compensation for curtailment, delay, or cancellation of passage

Travel insurance generally excludes pre-existing medical conditions, activities with a high element of risk ("vacation" sports and activities), acts of war or terrorism, specific criminal acts, and alcohol and drug use.

In general, travel insurance is considered a "bad" deal - the premiums are high (5-7% of the total cost of a trip), and the terms of the contract define risk in very particular terms - though in rare cases (travel to high-risk countries), it may be worth considering.

It's also worth noting that some credit cards provide benefits similar to the coverages provided by travel insurance, for which the cardholder pays no direct premium (though "premiums" may constitute a part of an annual fee or a slightly higher interest rate on purchases).

Specialty Insurance

There are a broad range of other types of insurance, collectively referred to as "specialty" insurance: fundamentally, a person may seek insurance for anything, against any peril - and if a company can think of a way to make a profit for underwriting, it will write a policy. If a demand is widespread, or perceived to be marketable, an insurer may coin a term and hope it catches on.

Some of the less unusual forms of specialty insurance are:

• Builder's Risk Insurance - Insures property during construction
• Crop Insurance - Provides coverage for crops against disasters as well as fluctuations in market value
• Inland Marine - Provides coverage for merchandise in inventory (whether the policyholder owns the goods, or is storing them for others) - even in a warehouse well away from the water (the name reflects its origin as an extension of marine insurance for cargo vessels).
• Liquor Liability Insurance - Purchased by restaurant and bar owners as well as event organizers, to protect them from liability as a consequence of the behavior of others to whom they have served alcoholic beverages
• Pet insurance - Provides health insurance, life insurance, and liability insurance related to pets. Working animals are generally excluded.
• Political Risk Insurance - Protects individuals or (more often) businesses from the risks of doing business abroad (foreign governments being overthrown, confiscating foreign businesses, refusing to assist foreigners in collecting debts from its own citizens, etc.)
• Terrorism Insurance - Provides protection against loss or damage caused by terrorist activities, as they may be excluded from coverage provided by other policies as an "act of war"
• Wedding Insurance - A policy that compensates the organizers of a wedding (or other major event) for funds expended on an event that must be postponed for unforeseen reasons (illness, natural disaster, military service obligation, etc.).

Specialty insurance generally has a bad reputation, especially when it is aimed at individual consumers, but there are instances in which such policies are of interest to individuals with specific needs not covered by standard insurance.