Family Insurance Planning

An insurance program should be a part of every family's total financial plan. Before you can evaluate various insurance programs, you must understand the reasons for buying insurance and how to determine the amount and kind of insurance you need.

Insurance is one way of protecting yourself against the risk of unexpected financial losses. It does not remove the risk, but it can partially compensate for losses incurred. Through the payment of premiums, you transfer the cost of a major loss from you to an insurance company.

Insurance operates on the principle of shared risk. A group of people pay in specified premiums to a common pool. Funds from the pool are used to cover individual losses. The amount of premium each individual pays is based on the frequency of past losses by the group, plus the costs of administration and selling, divided by the number in the group.

There are four basic steps in developing an insurance program to fit your situation:

1. Determine the risks you face.
2. Analyze the financial impact of the risk on your particular situation.
3. Determine how you should handle the risk.
4. Make a plan.

• death of a household member, especially the wage earner.
• total or partial disability of the wage earner or primary care provider.
• loss of job for wage earner.
• illness or accident in the family.
• damage to your home by fire, wind, storm, etc.
• liability for damage by your car.
• liability for damage suffered by someone on your property.
• damage to your car or other personal property.

• What are the chances of the risk's occurring?
• How much of the cost could the family assume?
• If the risks occur, which would be the most difficult for the family to meet financially?
• How can insurance be used to cover the risk?

In block number 1, the probability of the event's occurring is low, and the cost of each occurrence is low. Keep the risk; don't buy insurance.

In block number 2, the probability of the event's happening is high, but the cost is low. Consider keeping the risk; set aside money for this loss in your emergency fund. Don't buy insurance.

In block number 3, the probability of the event is low, but the cost is high. Transfer the risk; buy insurance.

In block number 4, the probability of the event is high, and the cost of each occurrence is also high. No one will sell you insurance, or the cost of such insurance would be prohibitive. You are forced to keep the risk.

• Review insurance policies you already have. Consider the coverage they provide in relation to your current situation and needs. Compare the coverage with the amount of the premiums.
• Assess all of your financial and human resources. What risks can you take action to prevent? What risks can you afford to keep? What risks will you need to transfer?
• Look at the insurance available. In general, when searching for an insurance company, you should choose a financially strong company. You can find Best's Insurance Reports and Best's Life Reports in most public libraries. These publications contain information on the larger insurance companies. A rating scale is used, similar to a school grade scale, with ratings of A+, A, B+, B, C+, and C. A rule of thumb is to choose no company with a rating lower than "A," as its financial strength may be questionable.

You should also consider how quickly claims are settled. The Mississippi Department of Insurance can provide information on a company's financial strength. They can also tell you which firms have the greatest number of complaints registered against them. When comparing the differences in companies' complaint experience, remember to compare the number of contracts the company has in force. A small company with few complaints could actually be the most unsatisfactory when compared to larger companies, on the basis of complaints as a percent of policies.

• Find an insurance agent. A good agent is someone you can talk to, whose judgment you trust, and who explains insurance using terms you can understand.
• Work out a total plan for insurance. A good insurance agent can help you make good decisions. The agent should not decide which policies you should buy or how large they should be.

• Know what insurance you have. Avoid double coverage.
• Avoid narrowly defined coverage such as a policy just for cancer or flight insurance.
• Select the highest deductible you can afford. Higher deductibles usually mean smaller premiums.
• Check out potential discounts, such as good grades for teenage drivers or special rates for nonsmokers.
• Comparison shop for new coverage or at renewal time.
• Consolidate coverage when possible. Fewer policies reduce the company's administrative costs, and the savings can be passed on to the consumer.
• Always read the policy before you buy. Check for exclusions and limitations.
• Buy through group policies when possible. Generally, group policies are less expensive because the insurance company has a contract with the group rather than with individuals.
• Pay premiums annually, if possible. One payment a year usually costs less.
• Review policies annually to be certain you have the coverage you need.

As a consumer you have these rights:

• To cancel a policy or let it lapse at any time.
• To hire your own appraiser to establish the value of lost or damaged property.
• To know the types of personal information the insurance company collects about you and how the information is used.
• To know the reasons for cancellation.
• To correct any misinformation in insurance company files that may affect an underwriting decision.

Contact your agent or group insurance plan representative for questions about your policy. If they cannot handle the problems, contact the Mississippi Department of Insurance, 1804 Walter Sillers Building, P. O. Box 79, Jackson, MS 39205, telephone (601)359-3569.

Westbrook, Etta Mae. Insurance, What Do You Need?, PB1277, University of Tennessee Agricultural Extension Service, 1987.

Weagley, Robert O. Risky Business: Family Insurance Planning, GH 3420, University of Missouri-Columbia, Extension Division, College of Home Economics, 1986.

Money Management Institute, Household Financial Services, Your Insurance Dollar, Prospect Heights, Illinois, 1986.

By Beverly Riggs Howell, Extension Family Economics and Management Specialist

Mississippi State University does not discriminate on the basis of race, color, religion, national origin, sex, age, disability, or veteran status.

Information Sheet 1410
Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture. Published in furtherance of Acts of Congress, May 8 and June 30, 1914. Ronald A. Brown, Director

Copyright by Mississippi State University. All rights reserved.

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