Consumers are constantly bombarded with the message they should purchase insurance to protect their homes, credit cards, health, families and even consumer goods such as electronic equipment. Though certain types of insurance, such as car and home insurance, are necessary because they are required by your state or by contract, other types of insurance are optional. There are advantages and disadvantages to most types of insurance.
Most states require that drivers carry a minimum amount of car insurance so they will be able to compensate an injured party in the event they cause physical or property damage. Beyond required minimums, consumers have the option to purchase full coverage, which covers repairs to their vehicles even if they were at fault, as well as “limited tort” or “full tort” options. In most states, limited tort options allow a driver to recover actual injuries such as medical expenses, damage to the car and lost wages. The full tort option allows recovery for intangible injuries such as “pain and suffering.” The advantage of purchasing additional coverage is the consumer will not have to pay large amounts out of pocket for medical bills or property damage. The disadvantage is a driver will incur higher premiums for additional insurance options.
Homeowner and Rental Insurance
If you purchased a home and took out a mortgage, you were probably required to obtain homeowner's insurance as a condition of the mortgage. Similarly, many landlords are requiring tenants to obtain renter's insurance as a condition of their lease. For homeowners who own their homes outright (with no mortgage or lien attached) and renters who are not required to obtain rental insurance, insurance is optional. With this type of insurance, the advantages tend to outweigh the disadvantages. The main disadvantage is the added expense of insurance premiums. However, if your home or rental is destroyed or badly damaged by a fire, natural disaster or other occurrence, you will have no way of recouping your loss if you neglected to purchase insurance.
Health insurance helps individuals and families pay for doctor bills and other medical expenses on an as-needed basis. Health insurance is provided in several forms: state-funded health plans for low-income residents, employer-provided group plans and individually purchased plans. Individuals who qualify for state-funded plans should enroll if they cannot afford an alternative. The main disadvantage of these plans is services and choice of doctors are often limited. Employer group plans often have lower premiums than individually acquired plans. However, your coverage choices with employer plans are typically limited to the offerings in the specific plan that your employer has selected.
Life insurance provides a specific amount of money to a beneficiary (usually a family member or spouse) when you die. Life insurance is generally offered in two forms: term and whole life. Term life insurance provides a specific amount of coverage for a limited amount of time. For example, you could purchase a term life policy for 25 years at a set premium per month. At the end of the 25 years, you would be re-evaluated and your premium would likely increase. Whole life insurance provides a specific amount of coverage at a set premium rate that does not expire. Policy holders also have the option to redeem the amount they have paid into a whole life policy while they are still alive. Term life policies provide the benefit of acquiring a greater amount of insurance at a reduced premium.
Consumer warranties are a form of insurance that is offered by the manufacturer or retail seller of a consumer product. When you purchase a computer, television or kitchen appliance, for example, it is likely you are offered an “extended warranty plan” at checkout. The benefit to this type of insurance is your product will be repaired or replaced at no charge if the product malfunctioned because of a design defect. Generally, these types of warranties will not cover accidents or damages caused by you or a third party. The major disadvantage is the cost of the warranty may not be justified in light of the product’s purchase price and expected useful life.
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