Lesson 8: Insurance & Risk

Insurance & Risk Reference

How Insurance Works

Insurance pools risk among many people. You pay a small, certain premium to avoid a large, uncertain loss. Insurance companies profit because most policy holders don't file large claims.

Key Terms

• Premium: amount you pay periodically (monthly/annually).
• Deductible: amount you pay out-of-pocket before insurance kicks in.
• Copay: fixed fee per service visit.
• Out-of-pocket maximum: most you'll ever pay in a year; insurance covers 100% beyond this.
• Coverage limit: maximum the insurer will pay on a claim.

Essential Insurances

• Health insurance: one major illness can cost $100k+. Never skip health insurance.
• Auto insurance: legally required; liability protects you from lawsuits.
• Renters/Homeowners: protects possessions and liability (~$200-800/year).
• Disability insurance: replaces 60-70% of income if you can't work. Most important insurance for working adults.
• Term life insurance: if others depend on your income, get 10-12× income in coverage.

Insurance to Generally Avoid

• Whole life (buy term + invest the difference)
• Extended warranties on small electronics
• Credit card insurance/debt protection plans
• Lottery tickets (negative expected value)