Personal Finance 101: Take Control Of Your Finance - #3 Insurance and Risk Management | Sumeet Sinha, MBA | Skillshare

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Personal Finance 101: Take Control Of Your Finance - #3 Insurance and Risk Management

teacher avatar Sumeet Sinha, MBA, Helping You Make Better Decisions

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Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

8 Lessons (28m)
    • 1. Introduction

    • 2. What is Insurance?

    • 3. Insurance Premium and How Insurers Operate

    • 4. Understanding Insurance Deductible

    • 5. Life Insurance

    • 6. Health, Auto, Home, Pet and Umbrella Insurance

    • 7. Protect your Identity

    • 8. Is There Insurance for Investments?

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About This Class

Welcome to the course 3 of the series: Personal Finance 101: Take Control of Your Finance. In the third course we will focus on Insurance and Risk Management from a personal finance perspective.

You can access the course 2 of the series here:

Here are the topics we will cover in course 3.

  • Introduction to Insurance
  • Where and how you can buy insurance
  • What is Insurance Premium?
  • How do insurance companies operate?
  • What is Insurance Deductible? Explained with example
  • Life Insurance - how to buy life insurance
  • Health Insurance - Medical, Dental, Vision
  • Auto Insurance and its components
  • Homeowners insurance
  • Renters insurance
  • Identity Theft Protection
  • Course Wrap up and Idea to insure investments in stock market

By the end of this course, you will have a sound understanding of your insurance options to protect yourself financially.

Meet Your Teacher

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Sumeet Sinha, MBA

Helping You Make Better Decisions


I am Sumeet, and I started the website – be finlightened (finlightened is a word I coined by combining the two words – finance and enlightenment) in 2019 out of a passion to empower more people with the right knowledge on finance.

The more I talk to people, the more I am shocked to learn the state of financial awareness. I reflected back on my own life and realized that there’s little to no formal education provided in schools (and even colleges) regarding apparently the most important aspect of an adult life – finance!


Holding on to credit card debt at 18% interest rate while keeping cash in savings account at 0.01%?

Not funding your retirement account when employer gives away free contribution match?... See full profile

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1. Introduction: Hello and welcome everyone. This is Part 3 of this series, take control of your finance. In this course, we'll be talking about insurance and how to use insurance for risk management. I'm Summit, I'm an engineer and an MBA. I have worked for multiple years in the corporate world, the latest being at Amazon, have been investing in the stock market for more than 10 years now, one thing I'm really proud of is that I paid off my six-figure student loan in just 26 months. And I'm a very strong proponent of including personal finance and everyone's curriculum. I started writing about personal finance and investing on my blog thin pins. Name fin pins itself is inspired by a personal habit of having important items pinned to my board when it comes to personal finance. These are the four pins I want to have on my personal finance board all the time. The first one is cashflow and budgeting. The second is investment, the third is risk management and the final one is retirement. In this course, we will be focusing on the risk management piece. Here's what to expect in the course. First, we will talk about what insurance is. Then we will look at the various types of insurance available in the market and how and where you can buy them. Then we will talk about what insurance premium is and what are the factors that go into determining insurance premium? We will talk about insurance deductible, what it is, and why it is important to take a look at deductible before buying an insurance plan. We will go over the details of some types of insurance. And in the end, we will also talk about if it is possible to ensure your investment in the stock market. So let's jump right in. 2. What is Insurance?: What is insurance? Insurance is a contract between an individual or an entity and an insurance company or a financial institution. So it can be a contract between a person like you or me with the insurance company, or it can also be a contract between my business and an insurance company. Insurance is a very effective method of risk management and mitigation with the right insurance, you can protect yourself or your business against unexpected financial losses. And you can insure yourself against losses that could be caused due to many factors. Let's take a look at the different types of insurance available in the market. First, there is life insurance, then there is health insurance, which is further categorized into medical, dental, and vision insurance. Then we have insurance for disability, both long-term and short-term. There's insurance for automobiles, cars, motorcycles, and even boats. You can ensure your home if you are a homeowner, if you are renting an apartment or condo, you can get renter's insurance to cover your personal belongings. You can also get insurance against fire and flood in case that is not included in your renters, are homeowners insurance. Identity theft is also a serious issue and you can get insurance against that. Traveling outside your country and in case your health plan at home does not cover that particular geography, you can consider getting travel insurance. If you're running a business, you can get insurance for your business. If you have a bed, you can get pet insurance to cover some of the vet bills. Next stills liability insurance, anyone can get it, but this is more recommended for people who have high net worth and they are always at risk of someone's suing them for something with our without malicious intent. So for high net worth individual $2 make sense to carry some liability insurance. And then there is an umbrella insurance that can cover some cases that might not be covered by all other insurances. So if you think about financial protection in a certain scenario, most likely there is an insurance out there. Now, how do you buy insurance? It is pretty simple to buy insurance these days, almost all of the big companies have an online portal where you can go and fill in some details and complete the entire transaction on line itself. If you're not a fan of buying financial products online, you can go in person to an office and maybe get your questions answered and then buy an insurance. It totally depends on your taste. Some of the popular companies that sell insurance in the United States, our State Farm, geico, all state Liberty Mutual, and there's plenty of other insurance companies that sell insurance. These are just four of the popular ones you should definitely research and see which plan works best for you at which insurance company. 3. Insurance Premium and How Insurers Operate: What is insurance premium? When you try and buy an insurance, you have to pay some money, right? And the cost of buying the insurance policy and keeping the insurance policy enforce is called insurance premium. Depending on the insurance policy or plan you buy, you can pay the premiums either monthly, annually, or sometimes even in a single payment for the entire duration of the policy. So let's say you're getting an insurance policy for ten years. The insurance company might let you pay for the entire 10 years in just one payment. Now how is the insurance premium determined? Insurance companies have statistician's and actuaries who do some risk profiling. So your risk profile is an important factor that goes into computing the premium and the risk profile Good include things like your age, the zip code you live in, and even your educational qualifications. So you would notice that sometimes if you are going to buy a car insurance, they will ask you, are you a high school grad? Do you have bachelor's or a master's degree? And all of this information is kind of a data point that goes into creating your risk profile. The second key factor is the policy limit. And intuitively it makes sense because if you're getting an insurance policy that will be out just 10 thousand in case you need it, versus a policy that will pay you out $1 million in case you need it, then that will definitely determine how much premium the insurance company will charge you. The third key factor is the deductible. And deductible is the initial amount that you are responsible for in case you file a claim, and only over that amount the insurance company will cover any claimed. We will also do an example to understand deductible in detail. So insurance is a great product, right? I pay $100 every month and in case something bad happens to my car, it gets totaled. The insurance company pays me $20 thousand. So have you ever wondered how do these insurance companies operate? Insurance companies want to have a huge client base. They wanted to sell insurance too many people, too many businesses for each plan or policy that the insurance company sells, they collect premiums. And the basic math behind insurance business is very easy to understand. The company collects premiums from sale of insurance policies and in case one of the insured clients fires for a claim, the company pays out the insurance claim. On the right-hand side, we have a very simplified representation of what goes on. So the company collects premium and that is the revenue for the insurance company, but it has to pay out the claims. And there are some other costs such as employee salary and other expenses that the company has to bear or any company to operate profitably, the revenues must be greater than the cost in order to ensure that the revenue stays higher than the cost, the insurance company will employ statistician's and actuaries who would do some calculation. Basically, they will look at all the clients and their risk profile and try and estimate how many of them will file a claim and how much would each claim be on average then based on the estimated claims, the insurance company will pay the back, calculate the premium so they add some margin on top of declaim and they compute the premiums. So essentially this is a game of prediction to ensure that their premiums collected remain higher than the costs. Let's do a quick example of an insurance company that is making a profit. Let's say there is an insurance company that is selling out car insurance. And the premium for ensuring a Honda Civic is $50 a month or $600 a year. This car insurance company has 10 thousand clients. It collects $600 multiplied by 10000 clients, which is a total of $6 million in a year in premiums. Now let's assume that in case a civic owner actually files for an insurance claim, the average cost that the insurance company has to pay out is 5000 dollars. Let's just assume that for the sake of simplicity, let's just say that every claim is 5000 dollars on average. And let's figure out how many claims can this particular company afford to pay in one year. So the company made $6 million in revenue and for every claim they're paying out $5 thousand. So if we do a simple division, 6 million divided by 5000, we know that this company can pay one hundred, ten hundred, two hundred claims in a year. If this company is paying less than one hundred ten hundred, two hundred claims in a year, then this company is making a profit, or let say in this year the company is paying out one hundred, ten hundred claims. So this car insurance company collected $6 million in premium and it is paying out 5000 dollars Berkeley and it is paying one hundred, ten hundred claims. Therefore, it has to make a payment of $5 million in claims. So the math here is this, that they collected 6 million, they paid out five millions. Effectively, they are making a profit of $1 million. Now this is simplified calculation. The company would have other cost also like renting an office and being their employees. But the basic principle is that the premium collected should be higher than the cost of the company. Some important points to remember about insurance. Always read the terms and conditions, understand clearly what is covered and what is not. And always ask clarifying questions in case something is not clear to you. And when you actually need to file a claim, there is generally an insurance card. They will provide you. It could be a physical card or a digital card. Always keep the card ready with you, especially in case of auto insurance, in case you need help or have the documents ready so that you can file the claim in a smooth manner. 4. Understanding Insurance Deductible: Let's take a closer look at insurance deductible. Suppose you're driving and you get distracted and somehow there is a collision, the car gets damaged and correlation you call the cops, you inform the insurance company, and then the insurance company guy tells you that you need to take it to a repair shop and give them the quote for repairing your car. So you take your car to a certified repair shop and they quote you $2500 for the repairs, you contact the insurance company again and give them all the details and tell them that it would cost you $2500 for repairing your car. At this point, the insurance company's sales that they will pay you $2 thousand. You're confused and you ask them, what does that mean? Why not do 1000, 500 violently 2000. The insurance company will remind you that your policy came with a deductible and let's say the deductible is $500 for your policy and the deductible is the threshold only about phage, the insurance company will start paying for claims. So the first $500 have to be borne by you and anything on top of the $500 deductible would be paid by the insurance company. So in this case, the insurance company will pay 2500 minus the $500 needed people. That is $2 thousand for this claim. Now you would be thinking, why should we not keep the deductible at $0 and why should we keep it at 500 or 1000 or a higher number? The simple reason is that that by increasing the deductible on your insurance, you can lower your monthly premiums. So there is some sort of risk balancing that you also get to do in order to keep your premium slow. Some people prefer having the peace of mind and keeping their deductible low, even though that means that their premiums would be high, some people prefer otherwise, it's a choice the user needs to make based on how comfortable they are with paying higher deductible versus paying higher premiums. 5. Life Insurance: A very common type of insurance is life insurance. Life insurance primarily can be of two types. The first is the term life insurance. Term life insurance is the simpler version which covers you for a fixed period, let's say 1020 or 30 years. The second type of life insurance is permanent life insurance. It is more expensive than term life insurance, but it has more features. But permanent life insurance can have an investment component built into it that grows over time. So part of the premium you pay goes for covering your life and the other part goes into an investment scheme. While some people prefer permanent life insurance because it takes care of two things at once. Many others prefer to get derm insurance separately and use the difference in premium to invest on their own. In both cases, the term life and permanent life insurance denominator of the insured person gets financial compensation in case of an unfortunate death of the insured person. Let's quickly go through a process of buying life insurance online. So here for the demo purpose, I have the State Farm Insurance website open, and here I have chosen the life insurance. So let me pick a state. Let's say I live in Florida and I hit Go. Then they will ask me a simple question. Are you seeking a term life quote for yourself? Let's say Yes. Let's say My birthday is 0, 1, 0, 1, 1991. I hit Continue. I am a male. And in the past three years, have you used any tobacco or nicotine products? And this question is part of risk profiling, because people who use tobacco or nicotine, they are at a higher risk. That is why the insurance companies will collect data points like this. I do not use tobacco, so I'll hit know how tall are you? I am 5, 10. I hit Continue. How much do you weigh? Let say I weigh 180 pounds. Continue. Please select the health category you would like us to consider in determining your quote. So let's see what the definition is. So excellent Here is no family history of cancer or heart disease. Frequent vigorous exercise, cholesterol less than 175, blood pressure, less than 115 by 70, and no traffic violations. So I don't really know my cholesterol levels now, but I'll double-check before picking one of these categories. For now, let's be good. And what coverage do you need? So this is the insurance coverage amount and in case something bad happens to me, this is the amount that the insurance company would be paying out. So let's pick $1 million. And let's say I want to ensure for 30 years I hit Continue. And then it gives me a quick summary. So let's review your answers. Birthday, sex, tobacco, help, height, weight, and coverage. So these numbers here have been used to create a risk profile for me, and this is the policy coverage. And then it gives me an option to add a waiver for now lets say no. And let's get a quote. So here it is telling me if I pay monthly, I have to pay $86 and 99 cents per month for the next 30 years, get a coverage of $1 million. And if I pay annually, I have to pay $100 per year for the next 30 years. So they are giving a slight discount when it comes to being annually because if I'm paying $87 amount, it would be close to $140. And if I have being annually, I am being 1, 0, 0, 0. So I'm saving about 40 bucks if I choose to pay yearly rather than monthly. And then here on the right-hand side, they have also given me estimates for 10 years and 20 years. So let's say if I want coverage for the next ten years only I have to be 460 barrier. And if I want coverage for only 20 years, then I have to pay $580 barrier. So here you would notice the coverage length is smaller, so 10 years I am being less than 50 percent of this. And that is because as I'm getting older, I'm getting riskier. There is a higher chance of risk to my life. That is why for the later years the premium is higher and this coverage essentially coerce me from my age of 30 to 60. So it is covering the later stages of my life as well. And if I'm choosing a tenure policy, discovering me from the age 30 to 40, I much likelier to stay healthy and alive during this time and even during this time, as compared to this period which extends up to my age of 60 years. So this is how it is some very basic questions they will ask and then they will give you a quote and then you can send this quote to an agent, then they can do the paperwork and finalize your insurance. So it's a pretty simple process. 6. Health, Auto, Home, Pet and Umbrella Insurance: Health insurance, for the most part is private in the US. According to a Kaiser Family Foundation report, about 49.6% of Americans get health insurance through their employer. Typically, an employer would buy the health insurance from companies such as UnitedHealthcare at now kaiser Blue Cross, Blue Shield humana, etc. And offered to pay a portion of the premium on behalf of the employee. Since big corporations have good negotiating power, they can get great plans at good prices for their employees. And they can offer to pay a portion of the premium on employee's behalf. For example, in medical insurance that cost $800 a month can be covered 75 percent by the employer and 25 percent by the employee. So in this case, the employer will cover $600 every month for the employees premium. And the employee would have to pay $200 every month for having this medical insurance. Because of the private nature of health insurance in the US, it's a great competitive advantage that employers have in terms of retaining their employees by providing great health insurance plans. There are three main components of health insurance, medical, dental, and vision. So vision is basically an insurance for your eyesight. Dental covers the health of your teeth, and medical covers everything else that dental and vision do not. Auto insurance. If you get a car, you have to have insurance to the tech. Auto insurance is broken down into multiple components. The first one is liability. Liability insurance protects the other person, car or property in case you cause an accident and you are held liable for it. Liability insurance is required by law in most, if not all regions of the world. The second component of our insurances coalition. Coalition pays for repairs in case your driver car into an object such as a tree or a lamppost, or your car loses traction and you hit the side rail of the highway. The third component is comprehensive comprehensive base for incidents such as a car Taft, heel damage or other damage that it's not caused due to collision. Another component of auto insurance is uninsured motorist coverage. And this coverage pays for your medical bills when the other drivers at fault and causes the accident. Ideally, the other guy should have liability insurance and their liability insurance should cover your medical bills. But in case the other driver is uninsured and believe it or not, it happens some times then uninsured motorist coverage will protect you and pay for your belts. So this gives you a rough idea of what components go into building an auto insurance. And you can decide how much to limit you want on each component and what deductible you want to set on each BCE while constructing your auto insurance policy. Depending on the insurance company, there might be some other components that they might offer, such as providing you with a rental car coverage and some other things. When you're buying an auto insurance, you will have to provide some information. So let's take a quick look at what kind of information you might have to provide. The first is the information about vehicle. So you're make model body style or if you have the VIN relativity, it makes the process easy because it auto populates all of this information. Then you would have to provide the mileage, that is number of miles the car has already driven. And then you have to tell about the ownership, whether it is least financed or you have fully paid it off, you would also have to tell where you keep your car, whether it's a private closed garage, whether it's a shared garage, whether it is open or whether you are street barking, then obviously they're registered owner's name. And then if you have had any previous insurance, then the details of that, it is important to note that some insurance companies will only sell you insurance if you have had insurance previously. They will also ask you the date of purchase of the vehicle, some basic information about the driver, the name, date of birth, 10 driver's license number, and which state issued ID, and some driving history such as ticket and accident history and if the driver's license has ever been suspended. So by providing these pieces of information, they can generate a quote for you and then you can go ahead and buy an auto insurance. Homeowners insurance will protect your appliances, jewellery, electronics, musical instruments, etc. And it will predict you against damages caused by theft, vandalism, some forces of nature, et cetera, then you are renting an apartment or a condo. The landlords homeowners insurance will not cover your personal belongings. You can get renter's insurance to ensure your clothes, appliances, electronics, furniture, et cetera, against theft or vandalism or fire. Some renter's insurance will also cover any damage caused by you to others property. In some cases, someone comes to her apartment and gets injured. Your renter's insurance can also pay for their medical expenses. We have talked about life insurance. We have talked about auto homeowners and renters insurance. Now, what is Umbrella insurance? Most organized people will buy the appropriate insurance coverage for their home, auto, et cetera. However, sometimes there is a situation that falls through the crack and is excluded by other insurance policies. Umbrella insurance can come in handy in such situations. Umbrella insurance can also protect you in case your other policy limits are exhausted and you still owe money. For example, if you are sued for an amount that exceeds your current auto policies payout limit, the number line insurance can chip in with the difference. So let's say on your auto insurance, you have a liability of $50 thousand and you get into an accident and you are held liable and the bill comes out to $100 thousand. So your auto insurance for the just pay the first 50 thousand and you're on your own for the remaining $50 thousand. However, if you have an umbrella insurance with the higher policy limit, then umbrella insurance will pitch in for the remaining amount that you are liable for. Pet insurance is gaining more and more popularity. Vr love our dogs, cats and other paths that we might have. They are family members and they deserve the best treatment in case of any lesser accident. But insurance helps bed owners with vet bills in case an unfortunate situation arises where the pet need some medical attention. 7. Protect your Identity: Identity theft is a serious issue and you should consider protecting yourself against it. Identity theft can cause serious damage to a person's ability to secure a mortgage or a car loan? Heavier imagined what would happen if someone uses your social security number to do fraudulent activities using your social security number, date of birth, and other details. They can take out a credit card in your name. They can take out a car loan in your name, and then they can default on the loan and you will be responsible for paying all of that off besides being stressful, it can be a very expensive process to reclaim your identity and repair the credit reports. Identity theft protection can help you cover some of the costs associated such as legal fees, lost wages, phone bills, credit reports, et cetera. Where can you buy identity theft protection. There are some popular options such as lifelong experience, identity force, ID shield, and there are many other companies providing the service. You can Google search and read reviews and decide which plan suits best for you. Some of the benefits offered by these plans are Social Security alerts. So if someone tries to use your social security number to take out a loan or a credit card, you get real-time alerts. There will be a credit monitoring mechanism in place. And you can also get access to your credit reports to see if there is any suspicious activity there. And in case you become a victim of identity theft, you can still get your stolen funds are reimbursed if you do not intend to take out a loan or open a credit card or take out a mortgage, you can easily freeze your credit files by doing so, no one including yourself will be able to take out any line of credit, our card or mortgage against your social security number. And in case you want to open a credit card or take out a loan, you can easily unfreeze and then refreeze once you are done. So this can give you great control over the usage of your social security number. And finally, identity theft protection. We'll also cover your legal fees. So in case the process of reclaiming your identity gets lending and expensive, the legal fees would also be covered by the identity theft protection plan. In this age of internet, there are a lot of bad actors who can try and hack your account or steal your identity. I would urge you to take a look at identity theft protection plans as well. 8. Is There Insurance for Investments?: We have talked about multiple insurance plans that can cover your house, your car, your general liability, et cetera. How like insurance should you get? I strongly believe that risk management and insurance is an important pin to be placed on your personal finance board. And getting an insurance is a great way to buy peace of mind at a fraction of the cost you attain. It makes sense to have maximum insurance of each type. Or the problem here is that insurance comes at a cost. So getting maximum insurance of each type is not really financially feasible and you'll have to find a sweet spot so that you're not underinsured nor are you over insure. Because if you are over insured, you are paying too much money in premiums and that might not be the best usage of your money by just paying a lot of premium every month. One more thing to evaluate in your insurance plans is redundancy. What I mean by that is if you have two different types of insurance plans and they cover the same thing, then you are paying twice the premium for same coverage. So try and avoid redundancy in your insurance plans as well. And as I said, the right balance is the key here. Before I wrap up the scores, there's one last topic I want to discuss. A lot of people have this question, can I ensure my investment in the stock market? And the answer is yes and no. If you're buying shares in the stock market, there is a way to ensure your investment and that is via put options. It put option is a contract that guarantees us selling price. So if you own the shares, you can buy put options. And no matter how low the stock price goes, you can still sell your shares at the guaranteed price as specified in the put option contract. If you want to learn more about stock options in detail right here on Skillshare, there is a course by me. The name of the course is Introduction to stock options. You can visit my profile and check the scores out. I'm convinced you will find it very useful for your investment protection as well. Thanks for attending this course, and I hope you found this course valuable and watch out for my upcoming courses on Skillshare. Thank you.