Planning for emergencies

"My friend's new bike was stolen yesterday. It costs her $200".

"Gee, that's too bad. $200 is a lot of money."

"Yeah, but fortunately for her, she was insured. In fact, she is out look­ing for a new bicycle right now."

Theft is only one of the daily risks of life. Accident, sickness, and natural

disasters are some of the others. Just as we do our best to avoid the physical consequences of these perils, we can also protect ourselves from their financial cost. We do this by sharing the risk of that loss with others through insurance.

Insurance Enables People To Share Risk. Suppose you lived in a neighbourhood in which 100 people owned bicycles. The average cost of the bikes was $200. Past experience in your community has shown that one bike will be stolen per year. Of course, no one knows which bike that will be, but we do know that it will be one of them.

Let's also suppose that each of the 100 bicycle owners put $2 into a common fund. Now when a bicycle is stolen the person who suffered the loss could be reimbursed (up to a total of $200) out of the common fund.

Insurance is based on the principles contained in this example. Insur­ance companies calculate the odds of a particular event occurring (like fire, accident, earthquake, etc.). This enables them to compute how much will be needed to pay those who have losses. Then they add an amount to cover administrative expenses and profits. The total cost is then divided among the group in accordance with how much risk each faces. This charge, or pre­mium, is the price paid to be covered by the insurance.

Almost everyone in the United States is covered by some form of insurance. Most common of these are life, health, property, and liability insurance. Let's take a look at each of them.

Life Insurance. The principal purpose of life insurance is to provide money for a family when a wage earner dies. There are three types of life insurance policies: term, whole life, and endowment.

* Term insurance. Term insurance provides coverage for a specific period of time (usually 1, 5,10, or 20 years), and is the least costly form of life insurance. When the term ends, so does the insurance (though it can be renewed at a higher rate).

Whole life. Whole life enables those insured to pay the same pre­mium throughout their lifetime. It also accumulates a "cash value". This is a kind of savings account that increases in value over the years.

Endowment insurance. Endowment insurance protects the insured for a specific number of years. At the end of that time the full amount is paid to the policyholder. If the policyholder should die some time before the matu­rity date, the amount is paid to the beneficiary.