Everyday Finance and Economics with the Siglers

EP 13: An Introduction to Insurance

May 23, 2022 Glenn and Christina Sigler
Everyday Finance and Economics with the Siglers
EP 13: An Introduction to Insurance
Show Notes Transcript Chapter Markers

Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.


This episode is a short insurance primer, covering topics like what is insurance, why and how much should you have of it and more! Tune in next episode for guidance on how insurance is protected and typical warning signs for scams.

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Intro music: 

Coffee & Lullabies R&B mix by J.Lang (c) copyright 2020 Licensed under a Creative Commons Attribution Noncommercial  (3.0) license. http://dig.ccmixter.org/files/djlang59/62099 Ft: CrazyLittleAsian aka SHA


Coverart by Karina Ng @karina.ng on instagram

Speaker 1:

Hello, and welcome to everyday finance and economics with the sticklers, the podcast where we discuss what you need to know about personal finance and economics, and give you practical advice on how to get started and be smart with your money.

Speaker 2:

We're your host, Glen

Speaker 1:

And Christina

Speaker 2:

Siegler. So Christina, what's going on in the economy this week.

Speaker 1:

There's so much to talk about this week. This month, this year, you may have noticed things are getting more expensive, uh, groceries, gas, baby formula, transportation in general prices are in fact rising, not in a transitory or passing way, but as a result of continuing supply chain issues, Russia's invasion of Ukraine and the lingering boost of the government stimulus gave the economy. Inflation is here to stay at 8.1%, according to April's numbers, which is actually a decrease from marches. You can expect prices to say high for some time as wages rise to meet worker standards. And as long as Russia prevents Ukraine from its very vital role of providing things like grain to a significant portion of the world, Russia and Ukraine together actually make up a quarter of the world's wheat supply. The markets are not liking this at all. So today's economic term is bear market, which is when a stock index or individual stock falls more than 20% from recent high. The S and P 500 has been dipping in and out of bear market recently, which shows that investors are uneasy to say the least about recent events. All right, dad, I think it's time to get into this week's topic. What are we talking about today?

Speaker 2:

Today? We're talking about a very broad topic. Mm-hmm<affirmative>, we're just gonna do some introductory stuff and we're gonna talk about insurance.

Speaker 1:

Wow. I don't even know what that is. I just know that I have it. Um,<laugh> so a quick definition insurance is a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss damage or death and return for payment of a premium. So I'm pretty sure everyone's heard of car insurance, life insurance, health insurance. So you pay a little bit in to the system, right? And then if something happens to your health, to your car, to your house under certain circumstances, the insurance company will cover for that damage. Is that correct?

Speaker 2:

That is correct. And, and there, there is insurance for a whole host of things. There's

Speaker 1:

So many types

Speaker 2:

And so many different types. And

Speaker 1:

For this episode, I haven't even heard of the things that they have insurance for.

Speaker 2:

That is true. And there's one insurance company that will, you know, even, uh, ensure I think it's called it's Lloyds of London that, you know, okay, you're you played a piano, they'll ensure your hands from damages.<laugh> your late. So,

Speaker 1:

I mean, actually that's kind of smart. Yeah.

Speaker 2:

Yeah. So, yeah, but, but, you know, insurance has been around for a long time. Mm-hmm<affirmative> uh, there, uh, there, uh, is evidence that insurance was around, uh, in ancient maritime, uh, economies, uh, uh, ancient FIA mm-hmm<affirmative> uh, um, in, in, in ancient middle Eastern countries. Yeah. And it dealt a lot with trade, uh, especially sea trade where people would, uh, would, would try to, you know, offset the risk of transporting the goods or losing the goods.

Speaker 1:

Yeah. Cause if your boat goes down, you're done for that's it

Speaker 2:

AB absolutely.

Speaker 1:

Absolutely. Yeah. No, it makes sense. Because if you have something that's like really valuable or that costs a lot of money, not everybody has the cash on hand at that moment to pay for like a really big

Speaker 2:

Surgery for, to really pay for that entire loss. Mm-hmm<affirmative>. And so the basic principle is that you get a lot of people who, you know, who are in similar business or have similar, similar characteristics mm-hmm<affirmative> um, and they all pay mm-hmm,<affirmative> a little bit of money and, uh, say you have a hundred people. And so they'll all pay a few dollars in, but you're not expecting everyone to have the bad thing happen to them. Yeah. Maybe one or two will have the

Speaker 1:

Best, not at the same time, at

Speaker 2:

Least at the same time. Mm-hmm<affirmative>. And so the, the pool of money from the 100 can pay for the, the bad thing happening for the one or two yeah. Each year. Okay. And, and, and so, and then the administrative, uh, expenses can be paid for and, and, and, uh, and, and things can keep going. So that's the basic principle of it. Uh, but to make that happen, uh, the insurance companies themselves, um, have to evaluate whether you had all have the same kind of risk. Mm. And that's part of the underwriting process. So they're gonna they're

Speaker 1:

Oh, wait, wait, wait, pause, pause, pause, underwriting. What is that?

Speaker 2:

Explain that. Okay. UN underwriting is the evaluation of, of your riskiness for this type of insurance contract.

Speaker 1:

Oh. So that's why when sometimes you sign up for life insurance or health insurance, they have, you take a medical exam first. Yeah. That's part of the underwriting

Speaker 2:

And part of the underwriting they're gonna, they're gonna see, you know, do you fit the profile yeah. For this risk, because if you are more risky mm-hmm<affirmative> then they're gonna charge you more. They're either gonna charge you more premium. Yeah. Or they might not even allow you to be in that insurance

Speaker 1:

Pool. Oh, wow. Right. That's kind of cutthroat,

Speaker 2:

Uh, it, it, it, it can be mm-hmm<affirmative>, uh, but you know, they're in, they're in a business to make money too. They're not, they're not there just to give away money

Speaker 1:

<laugh> and yeah. I mean, okay. But that makes sense. But then we get into the question of, do I have to have it cuz if you do, then that seems kind of wrong, doesn't it?

Speaker 2:

So there are certain insurances that you need mm-hmm<affirmative> that you have to have and you know, and, and have

Speaker 1:

To have by what, like by law, you

Speaker 2:

By by law. So typically if you are going to drive on a public road,

Speaker 1:

Which is every road,

Speaker 2:

Which is every road. Yeah. Uh, and, and you're going to share the road with other people in the public. Yep. States you typically mandate that you must have insurance

Speaker 1:

Mm-hmm<affirmative> car insurance,

Speaker 2:

Car insurance. Yeah. If you buy a house and you have a mortgage mm-hmm<affirmative>, which means you borrow money from somebody else, the, the mortgage, lender's gonna say, Hey, uh, get some insurance because if your house burns down, we want our money back

Speaker 1:

<laugh> yeah. Yeah. That makes sense.

Speaker 2:

So there are certain situations where, um, depending on, you know, who's, uh, who's taking the risk mm-hmm,<affirmative>, they're going to, uh, mandate that there be some guarantee mm-hmm<affirmative> for them to get their money back. And, and at, at the end of the day, as you said, earlier, insurance is a way to, uh, mitigate against risk. Yeah. And that, and that's what the, and, and, and the contract, the insurance contract determines the terms of how much you pay mm-hmm<affirmative> and, and, and under what conditions the risk will be paid. Okay. The money will be paid for assuming that risk.

Speaker 1:

Right. So like not every disaster that happens or not every bad thing that either destroys my house or ruins my car is gonna be covered by

Speaker 2:

Insurance. Right. And, and the more things that you get covered,

Speaker 1:

Mm-hmm,

Speaker 2:

<affirmative> probably the more you're gonna pay. Yeah. Yeah. And, and so, and so you talked about, Hey, this, this could be very expensive. And so you, as the consumer are going to shop for the terms and conditions, mm-hmm,<affirmative> that best fit you and, and, and insurance companies say, well, you can have a little more insurance. You can have a little less insurance, you will pay for these features. You don't pay for those features. Mm-hmm<affirmative>, and, and you're able to, uh, sort of essentially customize the terms of what's gonna be covered and what's not gonna be covered. And therefore you can fit something into your budget.

Speaker 1:

Mm. Okay. What about health insurance though? That's been a pretty hot topic recently.

Speaker 2:

Well, again, that that's pooled risk. Yeah. And so it, when you are,

Speaker 1:

But do you have to do, do you have to have health insurance?

Speaker 2:

Well, so you don't have to have health insurance in a lot of conditions. Now there'll be some jobs.

Speaker 1:

So that make it feel like they make it out to feel

Speaker 2:

Like they do so well, that, that got changed with the, the, the ACA

Speaker 1:

Ah, the affordable care act also known as Obamacare.

Speaker 2:

And then some, some later adjustments to the ACA for young people, they're usually generally very healthy. And so things aren't going to, you know, things aren't gonna happen to them very often for the, for the vast majority of, of them. And so, you know, in, in, in many respects, those are the people that could take the risk and not get health insurance. Mm-hmm<affirmative>. And so, again, by not having health insurance, you are bearing all the risk yourself. Mm-hmm<affirmative> so if you get sick

Speaker 1:

Yeah. You gotta pay that costs

Speaker 2:

Full costs. All, all, all health costs costs gets paid by you.

Speaker 1:

You gotta pay that full cost of the ER, visit. Yeah. Full cost of the urgent care, whatever.

Speaker 2:

Right. And so, yeah, that's expensive. That is very expensive. And so like that that's insurance as a, as a risk tool, now you get the insurance and to prevent people from free writing, say I've got great health insurance. Yeah. All right. And so there'll be terms and conditions in your, in your insurance and say, Hey, this is insurance for everything you do, except if you go skydiving. Mm. We don't, we, we are not ensuring you for skydiving. Right. Or we're not gonna ensure you for driving if you're driving race cars. Mm-hmm<affirmative>. So they're gonna be things that are off limits. Yeah.

Speaker 1:

Okay.

Speaker 2:

And, and to help you realize your part in the risk mm-hmm<affirmative>, there are things called copays. And besides your premiums, it's it's, there are things that you're gonna pay mm-hmm<affirmative> to bear some of the financial burden mm-hmm<affirmative> of the actions that you're you're taking insurance is sometimes about modifying your behavior. Mm-hmm<affirmative> assuming less risky behavior. So they're saying, Hey, no, skydiving, you don't skydive. So in order to incentivize you to not engage in that risky behavior, mm-hmm,<affirmative>, they're gonna make you pay for some of that emergency room visit.

Speaker 1:

Yeah. Mm-hmm<affirmative>

Speaker 2:

All right. Or, or you'll get lower premiums. Mm-hmm<affirmative> if you, if you, uh, have a healthier lifestyle and your annual pH physicals come back with better numbers.

Speaker 1:

Okay.

Speaker 2:

Okay. So those are some of the, some of the things that are, that can be involved mm-hmm<affirmative> in, in some of the, the arrangements for insurance.

Speaker 1:

Okay. Well, we just said a lot of terms, so I think we should just run through the real quick. Okay. Because, uh, so premium mm-hmm<affirmative> is what you pay to have insurance to be insured, right? Yes. Yes. And you pay that on a monthly

Speaker 2:

Whatever. Well, you can pay it on a monthly, annual, quarterly, there are certain contracts where you can pay the whole premium front.

Speaker 1:

Really.

Speaker 2:

Yeah. Interesting life insurance

Speaker 1:

Type stuff. Oh yeah. That makes sense.

Speaker 2:

You know, you, you work out the terms, you know, and of course pay it annually. You probably get cheaper terms. Mm-hmm<affirmative> or if you have it automatically direct deposited, you get cheaper terms. Mm-hmm<affirmative> there there's all sorts of things like

Speaker 1:

That. Okay. Mm-hmm<affirmative> okay. Okay. And then a copay.

Speaker 2:

All right. So copay is, are, you've got a contract for, um, for, uh, services, your doctor to go visit your doctor. That's, that's something that's, uh, part of your health insurance company, uh, visit mm-hmm<affirmative>, but to make sure you understand your, your part, your financial interest in this, that this is, this, isn't just a free item. Mm-hmm<affirmative> that, um, negotiate it in, in, in, in a lot of insurance, um, contracts there'll be a copay or the part that you pay, the insurance company pays part of it. Mm-hmm<affirmative> and you pay part of it. Okay. To make the, the doctor or the service provider whole

Speaker 1:

Mm-hmm<affirmative> okay. That makes sense. Yeah. And then a claim.

Speaker 2:

All right. So, uh, a claim against your policy is, Hey, I've had an accident. Mm-hmm<affirmative> I need to get paid mm-hmm<affirmative> so I'm going to file a claim. Mm-hmm<affirmative> against the policy to, to, to, to my insurance company to get paid.

Speaker 1:

What do you mean by, against the PO against the policy? As in like

Speaker 2:

The policy says it will pay under certain conditions. And so the claim is the way to document yeah. That the conditions were met. Okay. And that, that you are justified to receiving that payment. Okay. And usually there's some, you know, some investigations, Hey, what happened? Who was at fault mm-hmm<affirmative> depending on, you know, what kind of charge

Speaker 1:

You had, like for a car accident, if you were at fault. Right. Right. Might be

Speaker 2:

Different if at fault, if the other person was at fault and people, you know, fall asleep with cigarettes and burn down houses and do all sorts of other stuff.

Speaker 1:

Yeah. So they won't pay for that.

Speaker 2:

Well, they, they, they can, but you

Speaker 1:

Will, they just pay less or,

Speaker 2:

Um, no, but it, it's gonna be harder for you to get

Speaker 1:

Insurance. I see the next time. Well, this seems a little, like, it doesn't cover every single thing that happens wrong. So what am I paying for then?

Speaker 2:

Well, again, you're, you're trying again, you're trying to cover mm-hmm,<affirmative> the things that are probably most likely to

Speaker 1:

Happen. I see. Okay. Right.

Speaker 2:

The, the accidents that most likely

Speaker 1:

Happen because they can't cover everything.

Speaker 2:

They can't, they can't cover every everything. And so that, that's why you've gotta full try to fully understand mm-hmm<affirmative>, what's in that insurance contract,

Speaker 1:

What's in that insurance contract and what you need to be covered. Right.

Speaker 2:

But, you know, fires usually covered in, in homeowners insurance, but what's what may not be included in your mm-hmm<affirmative>, uh, homeowner's insurance is flood.

Speaker 1:

Oh yeah. If you live in an area that floods or

Speaker 2:

Hurricane.

Speaker 1:

Yeah.

Speaker 2:

And, and so, you know, those are, those would be, uh, you know, additional mm-hmm<affirmative> coverages mm-hmm<affirmative> outside the basic

Speaker 1:

Home insurance. Yeah. Cause fire is pretty basic. Okay.

Speaker 2:

Yeah. Right. And, and so, you know, the, the there's, there's an national flood insurance program. Mm-hmm<affirmative> that people, so that's not, that's, that's one, that's not covered by the insurance companies. Oh, wow. That's one where you have to get government insurance.

Speaker 1:

Oh,

Speaker 2:

Okay. To, to cover losses. Uh, if you are, if you're, uh, if there's risk of flood mm-hmm<affirmative> and, and that won't, that may not pay for a complete loss.

Speaker 1:

Oh,

Speaker 2:

Oh. So, you know, if your house is worth 250,000 mm-hmm<affirmative> and the flood insurance only pays a hundred thousand and again, and you lost your house and a flood, you're only getting a hundred thousand

Speaker 1:

You're only. Oh, wow. Man. That's tough. Yeah. Okay. So what constitutes good insurance out of like, just generally out of all the types of insurance,

Speaker 2:

That is a very loaded question.<laugh> mm-hmm<affirmative> so

Speaker 1:

It seems like it, cause there's a bunch of different things you have to consider.

Speaker 2:

So, so things that, that I would look at, you know, for good insurance, does it cover the things that I need it to cover,

Speaker 1:

Right. Yeah. That makes sense. And

Speaker 2:

That does that, am I getting, am I getting what I want am and does it cost too much? Mm-hmm<affirmative> are my premium super high because, you know, insur, if, if I can't afford the insurances, you know, it may not be worth it to mm-hmm<affirmative> mm-hmm<affirmative> um, and, and then the other aspects of it are, what are the claims paying ability of the insurance company that I'm, that I'm, uh, getting the contract

Speaker 1:

With? So the ability for them to pay you in a timely manner,

Speaker 2:

That that's exactly right. So there's a service aspect of it. There is a financial strength and health aspect of it. And, um, and, and then a, and as alluded to a service reputation, part of that, mm-hmm<affirmative> now do they, how do they treat you? Well,

Speaker 1:

Yeah. Yeah. All right, guys, that's it for now, we are going to be covering things like what to look for in insurance policy and much more in part two of this episode, but for now, um, if you have any questions, you can email us EF EES podcast, gmail.com and follow our Instagram at EFS podcast. Thank you so much for listening guys. Okay. So how much insurance do I need?

Speaker 2:

Okay. Can I tell so for assets mm-hmm,<affirmative> your house. Yes. Your car.

Speaker 1:

Yes. All right. So, well for your car, it's illegal to go without it. Right.

Speaker 2:

So

Speaker 1:

They're gonna drive

Speaker 2:

Anywhere that that's exactly right. So they're gonna be, um, minimums for various types of insurance for your car. Mm-hmm<affirmative> uh, so like, you know, uninsured, motorists and things of that nature. They'll they'll have, oh, here's, here's what the standard, so there'll be minimums there. Um, and, and, and that leads into some of those issues. We'll talk about it at another time. Mm-hmm<affirmative> but for assets, you know, are you looking to replace it?

Speaker 1:

Mm-hmm

Speaker 2:

<affirmative> so if your car is 10,000 and you have an accident and, and, and the car is new mm-hmm<affirmative> well, you don't wanna check for$2,000. Mm-hmm no, that's, that's not gonna help. That's not gonna help you. If your house costs, you know,$200,000 a check for 10,000, if your, as, as your house burns down with all your stuff and it isn't gonna cut it. So no, for those assets you're looking for, um, you're, you're going to get insurance to help you replace that asset. Mm-hmm<affirmative> so you're looking at something at, or close to replacement value.

Speaker 1:

Okay.

Speaker 2:

All right. Now what you're, what you're mostly talking about is life insurance. Mm-hmm<affirmative> how much life insurance do I need? Mm-hmm<affirmative>. And, and so,

Speaker 1:

Hey, real quick, though. What is, what is life insurance like?

Speaker 2:

What is life insurance is a contract in essence to pay the beneficiary that you designate. Mm-hmm,<affirmative> a, a certain amount of money if you all, if you die.

Speaker 1:

Okay. Okay.

Speaker 2:

All right. And, and so that is typically something that someone with a family would, do you have small children, family, you have, you know, you have spouse that, you know, that works or doesn't work. Um, and, and, and you have financial obligations. Like you wanna pay for college, you wanna pay for the house mm-hmm<affirmative> um, you are going to, you know, you're going to get enough insurance to pay either for all those things or, or substantially contribute to paying for those items

Speaker 1:

After, after you, after,

Speaker 2:

After you're gone. Okay. And, and so how do people figure that out? Yeah. And so there, there there's various calculators. You can, you can either do it and say, oh, uh, um, I've gotta, you know, pay for my kids college education. Well, you can calculate what that, you know, my kid wants to go to state university, you know, and my child is 10 years old now what's that gonna cost when they're ready for college, mm-hmm<affirmative>, you can calculate what that is. And they say, okay, I need a, I need, I need that much money. Plus some living expenses in my insurance policy, my, my child wants to go to, you know, elite school U right. That costs, you know, a zillion dollars a year.

Speaker 1:

Yeah, yeah,

Speaker 2:

Yeah. Then you need a different level of insurance. Mm-hmm<affirmative> um, what people often do is they, um, figure that the insurance, uh, policy should be a multiple of their income.

Speaker 1:

Yeah.

Speaker 2:

Okay. And so makes sense. The, the standards are in, in the order, you know, 5, 10, 12 times income mm-hmm<affirmative> depending on what stage you are in life mm-hmm<affirmative>. And, and, and, and, um, and, and, and, and the other aspects of how expensive your life may be, right.

Speaker 1:

Uh, now, and how many people are dependent on,

Speaker 2:

Or how many people now, okay. Just because I want a$20 million policy, right. Doesn't doesn't mean the life insurance is gonna get for a company is gonna give me a life insurance policy of 20 million,

Speaker 1:

Or the, you will be able to afford cuz the premium for that must be high.

Speaker 2:

The, the, the, the premium could be high mm-hmm<affirmative>, uh, you know, so, um, you know, those are all things that go into those considerations. Mm-hmm<affirmative>, if you're looking at, you know, something around the norm, uh, five to 10 times salary, there's usually some way to, to afford some of it. And, and even if you can't afford 10 or 12 X right now, mm-hmm,<affirmative> because your, your salary is lower. Um, you could afford five and then get some more later on. Now that's that that's, I've talked about, um, getting your own private insurance mm-hmm<affirmative> versus getting insurance at work. And those are two different things, uh, insurance that you pay for out of your own pocket that you went to get, um, that if, if you die, the, uh, the, the benefits out of that would come to your, uh, beneficiaries tax free, because you paid with it, paid it for, with mm-hmm<affirmative> paid with after tax money. Mm-hmm<affirmative> if you participate in a group policy at work mm-hmm<affirmative>, it is usually a benefit or perk at work and they deduct, they typically deduct money pre-tax

Speaker 1:

Oh, yeah.

Speaker 2:

From that. And so therefore the benefit that comes to you from a group policy would have to be taxed.

Speaker 1:

Yeah.

Speaker 2:

Now the group policies are much cheaper. Mm-hmm<affirmative> much, much cheaper than an individual

Speaker 1:

Policy. You have to pay tax on it.

Speaker 2:

Well, well, no, no, just, just in rate. And so to get like a quarter million dollars through work may cost you I'm, I'm making, this may cost you$10 a month.

Speaker 1:

Really? Okay.

Speaker 2:

Yeah. Whereas a quarter million dollar policy for you at insurance company X that you went out and you got, and they underwrite it just, you under wrote just, you may cost instead of that$10 a month may cost 25 to$30 because it's specific to you instead of the group, uh, of folks that are all work at company. Y

Speaker 1:

Ah, yes. Okay. I see. Mm-hmm<affirmative>, we're gonna have to Rob this up. We are ready outta time. Um, but for, um, can I, can I ever change my insurance really quickly?

Speaker 2:

And the answer is yes. Mm-hmm<affirmative>, you know, look, life, life circumstances, change over time, you change jobs, right? You have kids, you get married, you get divorced. You, you know, you get raises, you get new jobs, you move, you can change your insurance. As you go along that's car insurance, car insurances, every, you know, year to year, every six months, health insurance, usually at work, you go through that every year, life insurance, you can, you can stop the contract anytime, essentially, anytime you want and get a new contract or just add more to it. Mm-hmm<affirmative> and, and, and same with homeowners insurance. So there, there you can, you can change those things, um, as your situations change

Speaker 1:

Changes. Mm-hmm,<affirmative> surely there are a lot more things we could discuss with insurance. Uh, but that is all the time that we have for today.

Speaker 2:

Okay.

Speaker 1:

Yeah.

Speaker 2:

Well, I wanna thank everybody for, uh, listening to us this week. Mm-hmm<affirmative> and stay tuned for next week. Uh, when we will continue our discussions on insurance. And I think we might have a surprise guest who actually knows a whole lot more about insurance than we.

Speaker 1:

Yeah. Yeah, he sure does. All right. Yes. And you ha, if you have any questions for us, you can email us EFS podcast, gmail.com and follow our Instagram EES podcast. Thank you so much for listening.

Speaker 2:

Take care, everybody.

Speaker 1:

All right.

Introduction
Economic News
Economic Term of the Episode
Insurance definition
Basic Principle of Insurance
Do I have to have insurance?
Health insurance
Insurance Terminology
What are you paying for?
What constitutes good insurance?
Outro and contact information