How insurance helps people
Insurance Helps People Stay Financially Stable
In a very obvious and personal way, insurance
makes life better. People who buy insurance gain some very valuable benefits
in terms of financial stability and in the form of help in recovering
from and preventing losses and in obtaining credit. Let's look first at
the benefit of financial stability.
Think of the financial consequences that you (and everyone else) could
face without insurance. Say you have an accident on your way to work tomorrow
and damage your car extensively. Could you pay a $5,000 repair bill right
now? Or, if your home or apartment should burn down today, could you easily
come up with the thousands of dollars you'd need to rebuild and buy new
furniture and personal effects? If you're like most of us, that would
be really tough, if not impossible; it could be disastrous.
But let's look at the bright side. With your car and your home or apartment
insured, you'll get your money back for those losses. So, however unfortunate
events such as these may be in other ways, your finances won't be drained,
and you and your family's financial stability won't be undermined. You'll
be able to keep your present lifestyle, and your future plans--to buy
a newer car or a more expensive home, to send your children to college,
to enjoy a comfortable retirement--can remain intact.
Help In Recovering From
People can benefit from insurance even if they don't own it themselves.
In fact, everyone benefits from insurance.
Here's an example. A fire destroys a local business. The business isn't
insured, so the owners could lose everything. A lot of people depended
on that business. If it no longer exists:
the employees will lose their jobs;
the business' suppliers will lose money, and may have to cut back
their own work forces or drop their plans for expansion;
the community will lose tax revenues that the business and its
employees were paying. Those funds now won't be available for essential
government services such as water and sewer, fire protection, and police
customers won't be able to buy the business' products or services.
If the business supplied essential components to other businesses, those
businesses may have to curtail their operations. Back
Help Recovering From
We've discussed the "ripple effect"
that the loss of a single business can have. Now think of the long-term
and widespread devastation caused by events such as hurricanes or earthquakes.
Imagine the losses that would result from those catastrophes if there
were no such thing as insurance. It would take many years for areas of
the country to rebuild after a natural disaster if it weren't for the
revitalizing power of the insurance money paid to cover those losses.
Meanwhile a region would sink into an economic slump, and even cause a
drag on the economy of the nation as a whole.Back
The insurance industry is constantly working to
prevent losses from occurring. In fact, insurance loss prevention activities
in North America date back to colonial times.
Benjamin Franklin formed the first fire insurance company in the United
States in 1752. He then organized efforts to educate people about the
ways they could keep their homes free of fire. He invented two things
that help reduce the incidence of house fires: the lightning rod and the
Franklin stove. And, he established Philadelphia's first volunteer fire
Insurance companies continue this tradition today. In addition to insuring
businesses, they employ loss control specialists and engineers
to inspect a business' premises and make appropriate recommendations for
improving workplace safety and for preventing crime, fire, or other perils
(a peril is anything that causes a loss). Some businesses buy insurance
as much to obtain loss prevention services as for the insurance coverage.
Some insurance companies also encourage loss prevention by offering discounts
to insureds who have certain safety equipment or fire or crime prevention
devices installed in their homes, cars, or businesses.
Insurance industry trade associations and groups
of companies contribute funds to many organizations that promote safe
products, safe workplaces and safety in the home and on the road. Organizations
devoted to preventing fires and many types of crime also receive funds
from insurance industry sources.
Insurance industry groups participate in campaigns to raise public awareness
about safety and crime prevention and to enact legislation to reduce hazards
such as drunken driving.
Loss prevention contributes greatly to the quality of our lives, since
it spares us not only financial loss but also the accompanying physical
and emotional suffering from events such as an accidental injury or the
loss of a home or other property to fire, criminal act, or other peril.
To Our Economy As An Employer,Taxpayer And Investor
As an employer: Insurance companies, agencies, and service
organizations employ over 2,000,000 individuals in various capacities.
Every year, these individuals earn a total of more than $75 billion. Another
half million people are employed by companies that supply the computers,
office equipment, and other goods and services the insurance industry
needs to conduct business.
As a taxpayer: The insurance industry is a major source
of revenue for both the federal government and the individual states.
Premium taxes paid to the states total nearly $8 billion a year. The amount
of income taxes paid to the federal government fluctuates depending on
changes in tax rules and operating results, but the figure for property-casualty
insurance companies alone has ranged between $1.5 billion and nearly $5
billion in recent years.
As an investor: Without the investments made by the insurance
industry, private companies and governments at all levels would have a
harder time finding the money required to finance their operations. The
insurance industry has over $2 trillion invested in the public and private
sectors of the economy. Of that amount, about $500 billion is invested
in U.S. government securities, and over $150 million is invested in state
and local government securities. Over $1 trillion is invested in corporate
securities, with the remainder in other types of investments, such as
real estate and money market instruments.
Insurance Helps People
Being able to obtain credit is essential if our
economy is to flourish. Without credit, most people couldn't buyhomes
or cars or make other major purchases, and without demand for those products,
our economic engine would stall. Without credit, most businesses couldn't
start, much less expand, their operations, and many jobs simply wouldn't
be created. Without jobs, people wouldn't have the money to buy goods
and services. Credit improves the quality of life and makes it possible
for people to obtain many goods and services sooner than would be possible
if they had to pay cash for them.
How does insurance fit into the credit system? An example will help explain.
Let's say you want to buy a house. It costs $50,000. You only have $10,000,
so you borrow $40,000 from a bank. The $40,000 loan gives the bank a financial
interest in your house. That is, in order to help assure that you
can pay back the $40,000, the bank wants to make sure that nothing happens
to your house. What if your house burned down? The bank would lose $40,000!
When it lends you the money, then, the bank will ask you to insure your
house. The policy will be written so that if the house is destroyed, the
bank will be paid the amount of its financial interest in the house, which
will decrease as you make payments on your loan. You will receive the
balance of the benefits. The insurance policy protects the bank against
loss. The same principle works to help people get car loans and to help
businesses get money to expand. Insurance works hand-in-hand with credit
to maintain our nation's prosperity and standard of living.
Insurance Protects Against
The Financial Consequences Of Death
The financial consequences of death can be very
formidable. We won't dwell on the emotional consequences--the loss of
a loved one and the ensuing bereavement. Nothing can replace a spouse
or life partner, a parent or child, a brother or sister. But the practical
and financial consequences of death are another matter. Without life insurance,
surviving dependents can suffer extreme financial hardships as a result
of an individual's death. There's the possible loss of income as well
as a number of sudden expenses that come as a result of death.
Obligations At Death
We frequently hear about the high cost of living,
but dying can be expensive too. These are
costs that must be met soon after death. How much will they amount to?
That depends upon the individual.
Funeral costs can vary widely depending upon
the type of service, area of the country and other factors. According
to the National Funeral Directors Association, the average cost of
a funeral today is $4,500. In addition to the cost of the funeral,
there are also burial expenses (if separate); expenses of a tombstone,
monument or mausoleum; the cost of the burial plot; the cost of transportation
if death has occurred away from home; florist's fees; and prepaid
expenses for future care of the burial site. Whatever the cost, it
will most certainly increase over time due to inflation.
These include the cost of opening, administering
and closing the decedent's estate. Executor's fees and fees for the
executor's attorney will make up most of this cost. Other expenses
may include court or probate costs; the cost of appraising estate
property; the cost of insuring estate property while the estate is
open; maintenance or repair of estate property, particularly if it
is to be sold; the cost of defending a will if it should be contested
by disgruntled heirs; auctioneer's fees and so on. The larger and
more complex a person's holdings, the larger the administration expenses
will be. But even modest estates may incur significant administration
This could be another major cost. It includes
automobile loan balances, credit card balances, promissory notes,
bank loans, margin account balances with stock brokers and final expenses
of the decedent's last illness--medical expenses that might not be
covered by Medicare or insurance. Accrued taxes may also be considered
debts of the decedent. This would include unpaid income taxes (federal,
state and local), property taxes, and any other taxes that the decedent
had incurred but not paid. How much this all might amount to will
vary. It could be a little; or it could be a lot.
Death taxes--federal and state--are yet another
cost. Such taxes are especially important in large, unplanned (or
poorly planned) estates. The federal estate tax rates are progressive.
The larger the estate, the higher the tax--as much as 55%. This tax
generally must be paid in cash within nine months of death.
State inheritance and estate taxes vary widely. In a small estate,
they may be a greater problem than the federal estate tax.
A Secure Future
These obligations may only be the beginning. In most cases, there are
also obligations that extend into the future--security for those left
behind. There may be a spouse who needs living expenses, mortgage payments
to be made or children to raise and educate. If the deceased was an income
earner, surviving dependents will have to manage without that income.
If the deceased stayed at home with the children, the surviving partner
will likely face substantial increases in expenses to replace the deceased's
contributions to the family lifestyle.
No matter how many or what kind of obligations an individual leaves at
death, there's only one thing that will satisfy them--money. For this
reason, a person who wants to relieve his or her family of these obligations
will plan to leave them with an estate--money sufficient to cover all