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The Basics of Understanding Insurance



Article  
The Basics of Understanding Insurance
[12/9/2004]

Source: Sylvia M. Olberding for LIFELines


Only one in three Americans actually understand their insurance policies, according to the National Association of Insurance Commissioners. Policies may appear complicated, but by understanding the basic types of life, health, homeowner's, and renter's insurance, it will help you choose the right options for you. 


Life Insurance
Life insurance protects your family from financial difficulties in the event of your death. Even though Servicemembers’ Group Life Insurance (SGLI)
provides a maximum benefit of $250,000 for beneficiaries, this may not be enough. For example, after calculating your insurance needs, you may discover additional coverage is necessary to help pay for existing debt.


Two basic types of policies are term and permanent (or whole) life insurance.


Term life provides coverage for a specified period and pays the benefit only if you die during that period. This type of plan is intended to provide security in early stages of life when debt is likely to be a heavy burden on survivors. Premiums are lower than permanent insurance, and when the term is over, you can choose whether to renew.


Permanent policies provide protection throughout your life, as long as all premiums are paid. Premiums are higher and have a small percentage going to a built-in savings program. Cash value, which is the money you receive if you cancel your policy, includes the savings portion minus any adjustments, such as late fees or loans taken on the policy. The cash value may be low if you cancel in the first few years.


Health Insurance
Two basic health insurance plans include indemnity and managed care.
 
Indemnity plans allow you to choose any provider and require you to pay an annual deductible which may range from $250 to $1500, depending on the plan.  Once the deductible is met, the insurer pays a percentage, typically about 80 percent of predetermined “usual and customary charges,” for the care you receive.


Managed care, such as TRICARE, is run by health maintenance organizations (HMO). HMOs charge a monthly fee and assign you to a primary care physician who coordinates all your care, including referrals to specialists within a network.


Preferred provider organizations (PPOs) combine both indemnity and HMO-type plans and allow you to choose from an approved or “preferred” list of providers from primary care to specialists. Each visit to a provider requires a small co-payment. Depending on the plan, the insurer may cover up to 90 percent of the charges. Should you choose a non-network provider, your co-payment may be higher, and the amount paid by the insurer may be less.


When selecting health insurance, it is important to understand how supplemental insurance works with your TRICARE coverage.


Homeowner's and Renter's Insurance
Whether you own or rent your home, standard packages offer protection for structural damage, personal property, liability, and additional expenses.


Structural damages or loss of property caused by fire, hail, lightning, vandalism, burglary and specific other causes are normally covered. Damage caused by floods or earthquakes require additional premiums or separate policies.


Personal property includes items such as furniture, clothing, and hobby equipment.


Liability coverage helps you pay lawsuits to others for injury or property damage that was caused by you or your family because of negligence on your part.


When it comes time to make an insurance claim, understanding your insurance policies is your best protection. Before purchasing any policy, don't be afraid to ask questions about anything you don’t understand. For more information on insurance policies and to request a free brochure, contact the NAIC.


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