Insurance World

What is insurance?

Insurance is a means of providing protection against financial loss in a great variety of situations. It is a contract in which one party agrees to pay for another party’s financial loss resulting from a specified event.

Insurance works on the principal of sharing losses. If you wish to be insured, against any type of loss, agree to make regular payments, called premiums, to an insurance company. In return, the company gives you a contract, the insurance policy. The company promises to pay a certain sum of money for the type of loss stated in the policy.

History

Insurance is thousands of years old. The Code of Hammurabi, a collection of Babylonian laws of 1700BC, is believed to be the first form of credit insurance. A borrower did not have to repay a loan if personal misfortune made it impossible to do so. Insurance as we know it today can be traced to the Great Fire of London in 1666, which devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings.

Types of Insurance

Insurance generally covers situations involving pure risk – that is, situations in which only losses can occur. Such situations include fire, floods and accidents. People also buy insurance to cover unusual types of financial losses like, a dancer might insure her legs against injury. There are mainly three types of insurance policies sold:

1. Life Insurance

A life insurance policy provides that the insurance company will pay a certain amount when the person dies. This may be paid in a lump sum or in installments to the beneficiary [people named by the policyholder to receive the death benefit]. Some types of life insurance policies also enable policyholders to save money. Such policies have a cash value. A policyholder may borrow money against the cash value or surrender the policy for its cash value.

Annuities

These are savings plans sold by insurance companies to provide a fixed and regular retirement income. If the annuitant [owner of the annuity] dies before receiving the guaranteed number of payments, the insurance company must continue the payments to the beneficiary.

Dividends

Some insurance policies refund part of the premiums in the form of dividends. Such policies are called participating policies. An insurance company pays dividends if the money it collected in premiums exceeds the amount needed to pay benefits and administrative costs. Dividends may also include a share of the profits the company earned on investments made with premium funds. Dividends are most commonly paid on life insurance.

2. Private Health Insurance

Health insurance pays all or part of the cost of hospitalization, surgery, laboratory tests, medicines, and other medical care. The rising cost of medical care has increased the need for adequate health insurance. You could suffer a major financial hardship without such coverage, especially in case of a serious illness or accident.
Dental insurance is one of the fastest-growing types of health insurance. It helps pay for a wide variety of dental services.

3. Property & Liability Insurance

Individuals and businesses buy property and liability insurance to protect their assets against financial loss. Property insurance provides direct compensation if a policyholder’s possessions are damaged, destroyed, or lost as a result of perils. Liability insurance protects individuals and businesses against possible financial losses if their actions result in bodily injury to others or in harm to property owned by others.

The main types of individual coverage are:

• Homeowners Insurance

This provides protection against losses from damages to an owner’s home and its contents.

• Automobile Insurance

This is the most widely purchased and most important kinds of insurance. Drivers are legally responsible for any costs arising from accidents they cause. This insurance protects a policyholder against financial losses from accidents.

Financial viability of Insurance Companies

Financial stability and strength of the insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool with less attractive payouts for losses).

How Insurance Is Sold

Most insurance companies sell policies through agents. Exclusive agents are employees of an insurance company who sell only that company’s policies. Independent agents sell policies for several companies.

Here’s an estate-planning technique that allows you to lower the tax sting to your heirs, and that reduces your retirement income in case you don’t think you will need all of your Individual Retirement Account funds in retirement. It’s called a “stretch IRA,” or “Multi-generational IRA,” a complex investment tools that allow you to extend the tax-deferred status of your IRA long after your death.

By naming your children and grandchildren as the beneficiaries of your retirement assets, you enable them to stretch out the annual distributions of that IRA over the course of their lifetimes.

Structuring the stretch
There are four primary approaches to structuring a stretch IRA; the traditional, spousal-rollover, participant-direct and the mixed, or combination, approach.

In the traditional set-up, your spouse is the primary beneficiary and your children or grandchildren are the contingent beneficiaries, however distributions and income tax deferral are extended only through the life expectancy of the oldest beneficiary. By using the Spousal Rollover Approach instead, your spouse remains the primary heir and children or grandchildren become the beneficiaries with their own IRAs. This strategy allows the distributions and income tax deferrals to extend through-out the lifetime of the beneficiaries you name. That, in turn, provides significantly more tax deferral and a much longer opportunity for that IRA investment to grow.

If neither you nor your spouse need to dip into the IRA during your lifetime, you could also consider structuring your multi-generational IRA using the Participant Direct approach, which can provide the greatest tax benefit of all.

Using this strategy, you’ll be asked to break up your retirement assets into several different IRAs like the spousal rollover-except that your children and grandchildren, not your spouse, are listed as the primary beneficiaries, so you can lower the amount of the minimum distributions you are forced to take out once you hit age 70-1/2, and leave more money behind for your heirs.

Lastly, there’s the Mixed approach. A combination of strategies from the stretch IRA, it is structured as a spousal rollover with the remainder under the participant direct category. You may want to give this strategy a closer look if the surviving spouse does not need the IRA assets, but reigns while he or she is still alive. Consult a qualified financial planner experienced in Stretch IRAs for more specifics on these plans and which approach is right for you and your family.

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