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Insurance

Insurance is the business of providing protection against financial aspects of risk, such as those to property, life and health. The insured makes payments called "premiums" to an insurer, and in return is able to claim a payment from the insurer if the insured suffers some kind of loss. For example, a shipowner could insure a ship, and receive payment if the ship is damaged or destroyed. In the case of a pension the terms 'risk' and 'loss' are somewhat inappropriate, they concern the chances of living at future times and the need for money because of still being alive.

Insurance reduces risk by pooling together a large number of risks. For example, many individual people purchase health insurance[?] policies. They each pay a small monthly or yearly premium to the insurance company, and then when a policy holder gets ill, the insurance company will provide money to cover medical treatment. For some individuals receiving insurance benefits, this may total far more money than they have ever paid into the insurance policy themselves. Others may never make a claim. When averaged out over all of the people buying policies it evens out. Insurance companies set their premiums based on their calculated payouts, aiming to take in more money than they pay out in the long run to cover expenses and make a profit.

An insurance agreement or "policy" will set out in detail the exact circumstances in which a benefit payment will be made and the amount of the premiums.

There are a number of different types of insurance:

  • Property insurance[?], which provides protection against risks to property, such as fire, theft or weather damage;
  • Liability insurance, which covers legal claims against the insured. For example, a doctor may purchase insurance to cover any legal claims against him if he were to make a mistake in treating a patient;
  • Financial loss insurance[?], which protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover failure of a creditor to pay money it owes to the insured;
  • Title insurance[?], which provides a guarantee on research done on public records[?] affecting title to real property, usually in conjunction with a search done at the time of a real estate transaction, such as a sale, or a mortgage;
  • Health insurance[?], which covers medical bills;
  • Life insurance[?], which provides payments which depend on the individual being alive or dead at certain times. In one typical form the benefit is paid to the decedent's family, to make up for their loss of his or her income). Another form is a pension.
  • Boiler insurance

A single policy may cover risks in one or more of the above categories. For example, car insurance would typically cover both property (covering the risk of theft or damage to the car) and liability risk (covering legal claims from say, causing an accident).

Potential sources of risk that may give rise to claims are known as perils[?]. Examples or perils might be fire, theft, earthquake, hurricane and many other potential risks. An insurance policy will set out in detail which perils are covered by the policy and which are not.

Table of contents
1 Abuses by the Insurance Industry

Life insurance and saving

As well as paying out a sum of money on death, many life insurance contracts also pay out a sum of money after a given time (in which case it is known as an endowment policy), and may also pay out a cash value if the policy is cancelled early. In many countries, such as the US and the UK, tax law provides that the interest on this cash value is not taxable.

This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death. Wealthy individuals buy life insurance policies as a means for avoiding income taxes and estate taxes.

If the tax benefit exceeds the fees charged by the insurance company for maintaining the policy, then the policy serves as an Life insurance tax shelter. There is much controversy surrounding this practice, and the financial industry is deeply divided about whether or not these practices work as advertised.

Abuses by the Insurance Industry

Fear/Ignorance by Policyholders

A lot of policyholders, especially poorer ones, do not understand all the fees included in a policy. As a result, many people buy policies at unfavorable terms. People feel obligated to have some insurance. In many jurisdictions car owners are obligated by law to be insured.

Redlining

Location is one of the variables used to set rates. This is considered unfair by many. Insurers are also starting to use credit "scores" to set rates.

Health Insurance

Health insurance is one of the most abused forms of insurance. The problem is that the insurance company does not know in advance how much it will be obligated to pay out. For a life insurance policy, the face amount and conditions for payment are clearcut. For health insurance, there tends to be disputes over what is covered and what is not covered. By the time you are sick and in a dispute with your health insurance plan, you are unable to shop around. Before you are sick, you won't know if the insurance company is going to deny converage for something you thought was included.

  1. Insurance companies do not normally announce their health insurance premiums more than a year in advance. This means that, if you get sick, you may find your premiums raised a lot. This defeats the purpose of having insurance in the first place.
  2. If insurance companies try to charge different people different amounts based on your health, people will feel they are unfairly treated. Some states require that insurance companies cover all who apply at the same cost; this rule has the effect (called adverse selection[?]) that healthy people subsidize sick ones, and thus only really sick people buy insurance and the premiums are very expensive.
  3. By the time a claim is made, it is in the best interest of the insurance company to use lots of paperwork and bureaucracy to attempt to deny the claim. Some percentage of people will give up, leading to lower costs for the insurance company.
  4. Health insurance is only available at a reasonable cost through an employer-sponsored group plan. This means that unemployed individuals and self-employed individuals are at a big disadvantage.
  5. Investigational treatments are generally not covered.

See also Insurance of terrorism.



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