1. How Insurance Works

Now that you understand the basic concept of insurance and how it works, let’s explore specific types of insurance. Here’s a list of the most common types of insurance. We discussed these briefly in the Money Management unit and will explain each type in more detail later in this unit.
 

Types of Insurance
Life	Provides financial protection to a family when the insured dies
Health	Protects against financial loss caused by the costs of illness or accident
Homeowner's	Protects the homeowner from loss caused by fire, theft and storm damage to the structure and the possessions within the structure (A liability-insurance feature protects the homeowner from loss when someone is injured on the homeowner’s property and sues.)
Renter's	Protects the renter from loss of personal possessions because of such risks as fire, theft or storm damage
Automobile	Provides financial protection to the owners, operators and occupants of an automobile in case of accidents or damages
Disability	Provides income during a specified period when a person is unable to work because of illness or an accident
Property and Casualty	Offers insurance coverage in the event that the actions or non-actions of an insured result in damage or destruction to another's property.

Often, people are not able to purchase all types of insurance, so that have to choose what types of insurance they need most. Their decision will depend on their situation. The next exercise will help you start to make choices about the types of insurance you might need most.

T.J. is 25  years old, single, and has a good paying job, a car and a house. He’s self-employed and must buy his own health insurance. He has $5,500 to spend on all of his insurance for the year.

Look at the table below, and choose the insurance coverage types you think T.J. should purchase.

Type of Insurance	Annual Premium	Average Loss	Probability of One Claim
Automobile	$1,400	$2,500 per claim, but actual loss could be $350,000 to $500,000 if you are liable for injuries of others	3 out of 10 during covered year
Health	$3,600	$1,500 per year per claimant, but maximum loss depends on illness and could run into hundreds of thousands of dollars	8 out of 10 during covered year
Disability	$500	$20,000 per year for rest of life if disabled during covered year	1 out of 40 in age and occupational brackets during covered year
Jewelry valued at $5,000	$115	Loss is value of jewelry: $5,000	1 out of 18 during covered year
Homeowner's	$500 for house and furnishings valued at $150,000	$3,000	2 out of 10 during covered year