BIES - Specialty Insurance Lesson

Specialty Insurance

Life insurance, health insurance, homeowner's insurance, worker's compensation, disability insurance, auto insurance...is there anything left to insure? Insurance companies would say, YES! Here are some additional types of insurance available.

  • Accidental death insurance - Also known as double indemnity, this insurance pays twice the face value of the policy if the covered insured dies by accident.
  • Deposit insurance - Provided by the Federal Deposit Insurance Corporation (FDIC) at no cost to the depositor, this insurance protects up to $250,000 of deposits per depositor per bank in the event of bank failure.
  • Credit Card insurance - This insurance protects the cardholder against financial loss that results from a lost or stolen credit card.
  • Identity theft insurance - Protects the policyholder from the financial loss from identity theft that comes with trying to repair credit records.
  • Title insurance - This is purchased when buying a house or other property to protect from financial loss related to not having a clear title to a property.
  • Malpractice insurance - Insurance purchased by medical personnel and other service providers to protect from financial loss due to liability from errors and mistakes.
  • Credit life insurance - This type of policy pays off a loan or credit card in the event of the death of the borrower.
  • Medigap insurance - This insurance pays for medical expenses not covered by Medicare.
  • Travel insurance - If you have paid for a trip and there is no refund for cancellation, travel insurance would reimburse you if you had to cancel your trip for specific reasons.
  • Dental insurance - This insurance pays for a specific list of dental procedures.
  • Vision insurance - Insurance that pays a preset amount for vision care, glasses, and contacts.
  • Pet insurance - Depending on the policy, this insurance may pay veterinary bills and burial costs for your pet.

There is a reason we don't insure every risk. The reason can be discovered when we do cost/benefit analysis. Cost/benefit analysis requires us to add all of the positive (benefit) factors related to coverage and subtract all of the negative (cost) factors. If the result is positive, then we would purchase insurance, because we have more benefit than cost. If, however, the result is negative, we would not purchase the insurance because we would have more cost than benefit. Let's look at our Risk Matrix to see how this applies to insurance.

Risk Matrix

Let's take an example from each quadrant of the matrix, and see how the cost/benefit analysis would apply.

Quadrant 1 - Would you insure against losing your socks in the washing machine? No? Why? Socks are cheap and the possibility of losing the socks is low. So rather than giving the insurance company money, you would probably just accept the fact that you will have to periodically replace your socks. So you would retain the risk.

Quadrant 2 - For your birthday you received a $500 jacket that must be dry cleaned and can be ruined if it gets wet. For $50 a month you can insure the jacket against rain damage. Would you spend $600 a year to protect the jacket against rain or would you check the weather before leaving home in it and thereby reduce the risk?

Quadrant 3 - Speed kills and it also drives up insurance premiums. A speeding ticket can increase your insurance premium by as much as 30%. If you consistently speed, you run a high risk of a speeding ticket or worse. A much better choice would be to drive the speed limit and avoid risk.

Quadrant 4 - Statistically, the chances that your home would be damaged by fire are low. However, in the event that disaster did strike, replacing or rebuilding your home could be very expensive. This is an appropriate reason for purchasing insurance to transfer risk.

To do a cost-benefit analysis properly you need to make sure you carefully consider all of the benefits as well as all of the costs. This includes the opportunity cost of making one decision over another. Remember, that insurance costs money, and there will always be other uses for that money. The choices you make will often depend on what you value.

Self-Assessment

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