Personal Lines Insurance & Risk Management
People face risks in everyday life that carry the potential of economic ruin. Automobile accidents can cause severe injury, loss of property and liability for injury to another. Sickness and personal injuries can cause significant expenses and prevent a person from working, thereby hastening an economic demise. Houses and possessions can be wiped out without warning and can leave a person homeless or an injury on a person's premises can result in life altering legal liability debt. In the face of all these potential sources of disaster, a person can and should manage the risk they face in their personal lives. Judicious use of the personal lines insurance form a powerful set of tools for the individual to manage risk by exchanging a potentially huge and uncertain future expense for the piece of mind and certainty that the fixed premium payment can bring. This article discusses the nature of insurance, the most common types of personal lines insurances and how individuals may use them to effectively manage risk.
Keywords Collective Bargaining Agreement; Deductible; Health Maintenance Organization; Insured; Insurer; Major Medical Insurance; Mutual Company
The normal activities of daily life can carry the risk of enormous financial loss for individuals and their loved ones. While most of these events are relatively rare and uncertain for a particular individual, they are real and often occur without warning. Therefore, most people are willing to pay a small and predictable fixed amount for protection against the occurrence of an unpredictable event that carries catastrophic economic consequences. This is the basic nature of insurance. Personal lines insurance refers to a subset of insurance products that are purchased by individuals for their personal protection. Popular types of personal lines insurance are home, automobile and health insurance. This article will overview the nature and history of insurance as well as the features and benefits of some popular personal lines mentioned.
Insurance is a contract, commonly called a policy, in which an individual or entity makes regular payments, called a premium. In return for premiums, an insurer promises to reimburse or compensate against losses incurred by the insured. Parties involved in an insurance policy are the insured (individual or entity paying premiums), the insurer (usually an insurance company), and the beneficiary (party designated to receive payment under the policy). The insured and beneficiary may be the same person or a different person, as in the case of life insurance where benefits are paid to one person upon the death of another. The range of occurrences that can result in payment by the insurance company under the policy are sometimes called covered events. The terms of the policy determine the amount of the payment and define the range of covered events; therefore, recovery under the policy may be in either whole or in part upon the happening of a covered event.
This insurance arrangement, in a broad economic sense, transfers the risk of loss from an individual to a larger group that is better able to pay for the losses. In fact, the sharing of risk between members of group is the defining feature of an insurance policy. In other words, a contract that distributes risk is an insurance policy. Insurance companies create insurance policies by grouping certain risks together. This grouping provides the uniformity that covered risks which allows insurers to predict their potential losses and set premiums accordingly. For example, drivers that have been in accidents and who have been ticketed for violations of the traffic law may form a high-risk group that are more likely to collect benefits from the insurance company. Therefore, an insurance policy to protect such drivers would be more expensive. The insurance company profits by investing the premiums it receives. A well-developed area of law governs insurance. Insurance policies are subject to the requirements of statues, administrative agency regulations, and the court decisions interpreting both of them.
To satisfy the insurance needs of the American public, the insurance industry is composed of roughly 1600 life and Health Insurance companies and possibly 3000 property and casualty reinsurance companies. The United States is the world's largest insurance market, accounting for approximately 34% of all the 2.3 trillion dollars of premiums paid in world at the end of the twentieth century. Life and Health Insurance in the United States represents approximately 20% of the worldwide market, second to Japan's roughly 29% and far ahead of the United Kingdom's 10% ranked third (Encyclopedia of Business & Finance, 2008).Life Insurance
The life insurance industry reports date back to the colonial times. Early colonists were initially skeptical of life insurance as many considered it a gambling and against their religion. However, the expansion of the United States economy from 1830 to 1837 increased the American need to protect their financial prosperity. Four large mutual companies were founded during that period. The first was the Mutual Life Insurance Company of New York (founded in 1843) and it is currently the oldest practicing insurance company. As the insurance industry became an increasingly important component of the economy, governments began to legislate in the area. Massachusetts was the first state to establish an insurance department in 1855, by 1890 most states had established insurance departments and by 1940 all states regulated insurance (Encyclopedia of American History, 2008).
Life insurance provides financial benefits to a specified person, the beneficiary, upon the death of the insured party. There are several types of life insurance. A major distinction between the types of life insurance policies is whether they are term or whole life. Term life insurance provides benefits for a beneficiary if the insured dies within a specific period of time, or “Term,” such as twenty years. Because a person may outlive the defined term of the policy, payment on the policy is not assured. Premium payments are required throughout and those premiums, once paid, are not refunded even if the insurance company does not pay out on the policy. For this reason, term life insurance is typically far less expensive than whole life.
Term life insurance policies have several important uses related to ensuring adequate financing during a specific period of time. For example, a young person that just starting in the working may be takeout a 20 year term policy to protect young children against the economic losses that would arise if the insured died while the children were still minors. Lenders may also...
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