Insurance offers protection and stability for teens and adults when something terrible happens. This is a contract between an insurance provider and a policyholder that provides a certain level of protection in exchange for premiums paid at contracted increments.
I have been grateful to have insurance three times in my life: when my house flooded during a hurricane, when I got into a car accident with someone towing a wood splitter that wasn’t adequately lit, and during a health scare.
Without insurance, the bill for these situations would have been astronomical, but I had insurance and could pay very little out of pocket, which saved me over $150,000! Let’s cover the basics of insurance to get started.
Why Insurance is Important
Insurance can seem complicated and complex to understand, but it doesn’t have to be!
What is Insurance?
This is a safety net for when bad things happen. We all have ups and downs in life, so this protects you in the downtimes, so those bad times don’t last as long and aren’t as stressful.
When an insured person suffers a loss from health scares, fire, car accident, or burglary, you file a claim with the insurance provider. The insurance provider conducts an investigation or evaluation and pays out to the policy’s beneficiary.
The primary benefit of insurance is peace of mind knowing that you are covered when something bad happens.
Types of insurance include:
- Auto
- Life
- Health
- Vision
- Dental
- Homeowner/Renters
- Long Term Disability
- Long Term Care
- Umbrella
- Identity Theft Protection
- Business
- Pet
- Travel
- Flood
How Insurance Works
Insurance companies are made up of a big pot of money from many policyholders and managed by the insurance carrier. This pot of money is used for the company’s daily operations and to pay for claims.
Keep in mind that the insurance company must maintain enough money in the pot to maintain operations and pay for claims, so sometimes policyholders will receive a notice that their policy rates are going up.
Premiums are raised for policyholders when:
- Crime rate increases in the area of the home (home/renters/auto)
- Multiple claims during a certain period from the policyholder (home/renters/auto)
- Missed policy payments (all)
- Traffic tickets or accidents (auto)
- Adding family members to the policy (all)
- Age of policyholders (life)
- Purchase of newer vehicles (auto) or home
Personal insurance is a policy paid for by an individual and involves policies that aren’t commercial or used for businesses. Sometimes, businesses will take out insurance on behalf of their employees that can be offered as an additional benefit of employment. This needs to be discussed with the employer during the hiring and interview process to know what you are entitled to.
Banks require insurance on collateral-based loans like mortgages on home or auto loans on financed cars. This protects the interests of the banks because they know that the asset will be restored to working condition by the insurance company in the event of an accident in the home or with the vehicle.
Homeowners insurance premiums are usually paid annually or through the escrow account for a mortgage. Small payments are made monthly with the mortgage payment, and the mortgage company pays the insurance once a year.
Suppose the insurance is not maintained on an asset like a home or vehicle. In that case, the bank will add their own insurance if they find out about it and will charge the loan holder for the insurance. Hence, it’s best to keep your own insurance or forfeit the asset if you are unable to maintain it.
The insurance declarations page has the policy’s fine print and should be read and understood by the policyholder. If you don’t understand your coverage, ask your insurance agent for details and clarification.
Read the exclusions to determine what won’t be covered by the insurance company in the event of an accident. If you disagree with an exception, find out if you can add a rider to cover that exclusion.
Next, look for the details on your deductible amounts or percentages. Make sure you have enough money available to cover these deductible amounts in the event you need to file a claim.
As a young homeowner, one huge mistake was not having enough in my bank account to cover my homeowners deductible. My house had a flood unexpectedly after a hurricane. My entire house was underwater for days, resulting in mold growth and severe water damage. The damage was estimated at almost $100,000, and the deductible amount was 3% which meant I needed to have $3,000 to cover the deductible.
I didn’t have the $3,000, so I had to borrow it from my extended family, which was embarrassing and frustrating. My house got fixed up, but that entire time was made more stressful because I didn’t take steps to have the deductible on hand.
Pro tip: if the premiums aren’t paid according to the contract, the policy either lapses or is canceled. This means that if something bad happens, the insurance company won’t cover it because there is no policy in effect at the time.
The Basics of Car Insurance for Teens
When they first start driving with a permit as a home occupant, teens are added to their parents’ policy. Once you receive your license, you are added on as an additional driver and any car you purchase can be added to the policy. A teen can get their own policy, but this will usually cost more.
Premiums for auto insurance are usually paid in monthly, semi-annual, or annual installments.
Auto insurance comes in 3 parts, but you don’t have to legally buy all 3 parts based on your state’s requirements. Keep in mind that the insurance company may not cover a specific type of accident or theft if you don’t have coverage for it, so read the policy carefully.
Types of auto insurance include:
- Property: covers damages or theft
- Liability: covers the legal responsibility associated with bodily injury or damage to property
- Medical: covers injuries from accidents, rehab services, lost wages, or funeral expenses associated with the accident
Discounts to ask for include:
- Good student
- Away-from-home student
- Professional discounts like for military or first responders
- Usage-based
- Defensive driving
- Safe driver
- Low mileage
- Accident free
- Seniors
- Insurance bundling
- Paid in full
- Electronic billing
- Long term loyalty
- Multi-car household
- Vehicle discounts (new, anti-theft, anti-lock brakes, daytime running lights)
Not all insurance providers will offer all of these discounts, so you may need to shop around to ensure you get the best coverage for the best rates with the most discounts available. As your driving history gets longer and your driving improves, you should be eligible for more discounts so be sure to ask right before your policy renews.
How to Ask Your Parents to Teach You More About Insurance
Ask your parents about their current policy and what it would look like for you to be added to their policy. Find out what insurances they have or plan to have in the future.
Learn about deductibles on policies and what riders they have on the policies you can use. An example of a rider is roadside assistance on an auto policy.
Insurance Definitions
- Insurance: A contract between an insurance provider and policyholder that agrees to provide coverage for certain incidents in exchange for premiums
- Insurance Provider: A company that offers coverage to policyholders
- Policyholder: Person that buys insurance from an insurance company
- Premium: Monies paid to an insurance provider in exchange for insurance coverage
- Deductible: The amount paid by a policyholder to cover their part of an accident before the insurance provider pays out the rest of the claim
- Rider: Extra benefits added onto an insurance policy to provide additional coverage options
Resources to Learn About Insurance
- Money Smart for Young People by FDIC. Federal Deposit Insurance Corporation provides personal finance resources for students and teachers for Pre-K to Grade 12 that can be downloaded for personal use. Insurance is covered in these modules.
- Money Geek Resource Guide to Help Teen Drivers Obtain a License and Stay Safe on the Road. This is a walk through for teens to get their license and state-by-state information on insurance requirements as well as necessary coverage with FAQs answered in an easy to understand format.
- MCH Digital Library- Health Insurance Resources. Government resources for kids, teens, and lower income families on health insurance resources and how to apply for services based on your particular situation.
- Consumer Resources- National Association of Insurance Commissioners. Resources and education aimed at helping consumers make smart decisions when it comes to insurance needs. Learn about common insurance terms, finding policies for deceased family members, what small business insurance is, types of insurance, games/quizzes/apps to learn about insurance, report fraud, and learn about common insurance frauds.
- Next Gen Personal Finance- Insurance Activities. Learn about risk management and how to use insurance to reduce risk in everyday life through interactive assignments on premiums, state requirements, coverage amounts, types of car insurance, shopping around for insurance, health insurance, and renters insurance.
