Explain how property, liability, health, disability and life insurance manage risk, and take steps to safeguard personal financial information

Learning goal: Explain how property and liability insurance protect against risks associated with use of property; how health, disability and life insurance protect against risks associated with increased expenses and loss of income; and what steps can be taken to safeguard one's personal financial information and reduce the risk of loss.

Risk and how insurance works. Risk is the possibility of a loss. People can manage risk in four ways: avoid it (not driving), reduce it (driving carefully, installing smoke detectors), retain it (paying small losses yourself) or transfer it. Insurance transfers risk. Many people each pay a premium, a regular payment, to an insurance company, which pools the money and pays the relatively few who suffer covered losses. Insurance works because large losses are rare for any one person but predictable across a large group. Key terms: the policy is the contract; the deductible is the amount the insured pays on a claim before the insurer pays; the coverage limit is the most the insurer will pay; a claim is a request for payment. A higher deductible usually lowers the premium, because the insured retains more of the risk.

Property and liability insurance: risks from using property. Property insurance pays to repair or replace your own property when it is damaged, destroyed or stolen. Homeowners insurance covers a house and belongings; renters insurance covers a tenant's belongings (the building is the landlord's to insure); auto insurance collision and comprehensive coverage pays for damage to your own car. Liability insurance pays for harm you cause to other people or their property while using your property: a driver who damages another car, a homeowner whose guest falls on an icy step. Liability losses can be far larger than the value of the property itself, because injuries and lawsuits can be very costly. Ohio, like most states, requires drivers to show proof of financial responsibility, which most drivers meet with auto liability insurance; the required minimum amounts are set by state law. If a claim exceeds the policy limit, the person who caused the harm can be personally responsible for the rest.

A fully worked model. A hypothetical renter has a renters policy with a 500-dollar deductible. A burglar steals a laptop, a bicycle and a phone worth 2,300 dollars in total. Assuming all three items are covered, valued at 2,300 dollars under the policy and within its limits, the insurer pays 2,300 − 500 = 1,800 dollars; the renter bears 500 dollars. Without insurance, the renter would bear all 2,300 dollars. Separately, the same person, driving a car with 25,000 dollars of property-damage liability coverage, causes an accident that does 30,000 dollars of damage to another vehicle. The insurer pays up to the 25,000-dollar limit, and the driver may be responsible for the remaining 5,000 dollars. Higher limits cost more in premiums but transfer more of this risk.

Health, disability and life insurance: increased expenses and loss of income. Health insurance protects against the risk of large medical expenses. Beyond the premium and deductible, many plans use coinsurance, a percentage of costs the insured pays after the deductible, and an out-of-pocket maximum, the most the insured pays in a year for covered care. For a hypothetical plan with a 1,500-dollar deductible, 20% coinsurance and a 4,000-dollar out-of-pocket maximum, a 6,000-dollar covered, in-network bill (the plan's allowed amount), for a patient who has paid nothing toward the deductible yet this year and owes no separate copays, costs the patient 1,500 + 0.20 × 4,500 = 2,400 dollars (premiums never count toward the maximum), and the insurer pays 3,600 dollars. A 30,000-dollar bill would cost the patient 1,500 + 0.20 × 28,500 = 7,200 dollars except that the maximum caps it at 4,000 dollars.

Disability insurance protects against the risk of losing income because illness or injury prevents a person from working. It typically replaces a portion of income, not all of it, often after a waiting period. A hypothetical policy replacing 60% of a 3,000-dollar monthly income pays 1,800 dollars a month. Life insurance pays a benefit to named beneficiaries when the insured dies, protecting dependents against the loss of the income the insured would have provided. Term life insurance covers a set number of years; permanent life insurance lasts for life and costs more. A single person with no dependents has less need for life insurance than a parent whose family relies on their income.

Safeguarding personal financial information. Personal financial information includes Social Security numbers, account numbers, card numbers, PINs, passwords and dates of birth. If stolen, it can be used for identity theft: opening accounts, making purchases or filing tax returns in your name. Steps that reduce the risk of loss: never share a Social Security number or account password in response to an unexpected call, text or email (legitimate institutions do not ask for passwords this way); use strong, unique passwords and turn on two-factor authentication; shred documents with account information; use secure, private networks for financial transactions; review bank and card statements promptly; check credit reports regularly; and place a credit freeze with the nationwide credit bureaus, which federal law has made free since September 21, 2018 (the Economic Growth, Regulatory Relief, and Consumer Protection Act). A freeze restricts access to your credit report; because lenders check that report before opening an account, the Federal Trade Commission explains that while a freeze is in place nobody, including you, can open a new credit account in your name. It does not stop misuse of accounts you already have, which is why statement reviews still matter. If information is stolen, act quickly: contact the institutions involved, change passwords, place a fraud alert or freeze, and report the theft to the Federal Trade Commission at IdentityTheft.gov, because loss limits often depend on how fast you report.

The misconception. "Insurance is a waste if I never file a claim." Insurance buys protection against a loss you could not afford; paying for protection you did not end up needing is the cost of transferring the risk, not a mistake.

Worked example 1 — a property claim: Renters policy, 500-dollar deductible. Loss: 2,300 dollars of stolen belongings, all covered and within the policy limit. Insurer pays 2,300 − 500 = 1,800 dollars. If the renter had chosen a 1,000-dollar deductible to lower the premium, the insurer would pay 1,300 dollars. The choice of deductible is a cost-benefit trade: lower premiums against a larger share of each loss.

Worked example 2 — a health insurance bill: Hypothetical plan: deductible 1,500, coinsurance 20%, out-of-pocket maximum 4,000. Covered, in-network bill of 6,000 dollars, nothing yet paid toward this year's deductible, no copays: patient pays 1,500 plus 0.20 × (6,000 − 1,500) = 900, total 2,400; insurer pays 3,600. Covered bill of 30,000 dollars: 1,500 + 0.20 × 28,500 = 7,200, but the maximum caps the patient's share at 4,000; insurer pays 26,000. Without insurance, the patient would face the full bill.

Worked example 3 — responding to a suspicious message: A student receives a text that appears to be from her bank: "Your account is locked. Reply with your PIN and card number." Steps: do not reply or click the link; contact the bank using the number on the card or the bank's known website; if any information was shared, ask the bank to block the card, change passwords, check recent transactions, and consider a credit freeze. Reporting quickly matters, because federal limits on debit card losses depend on how soon the loss is reported.

Risk management record: Make a table of five risks a young adult faces (theft of belongings, a car accident, an illness, an injury that prevents work, identity theft). For each, name the method of managing it (avoid, reduce, retain, transfer), the type of insurance or safeguard, and one step the person can take now.

Independent performance: Write a risk management plan for a hypothetical 22-year-old who rents an apartment, drives to work and has no dependents. Success criteria: you explain premium, deductible and coverage limit; you recommend which types of property, liability, health, disability and life insurance the person should consider and explain the risk each protects against, including why some may be less needed; you compute one claim using a deductible and one health bill using coinsurance and an out-of-pocket maximum; you list at least five steps to safeguard personal financial information; and you describe what to do in the first 24 hours after discovering identity theft. Do not name specific insurance companies or products.