Some readers of this note may already have used insurance to reduce economic risk. In many
places, to drive a car legally, you must have liability insurance, which will pay benefits to a person
that you might injure or for property damage from a car accident. You may purchase collision
insurance for your car, which will pay toward having your car repaired or replaced in case of an
accident. You can also buy coverage that will pay for damage to your car from causes other than
collision, for example, damage from hailstones or vandalism.
Insurance on your residence will pay toward repairing or replacing your home in case of damage
from a covered peril. The contents of your house will also be covered in case of damage or theft.
However, some perils may not be covered. For example, flood damage may not be covered if
your house is in a floodplain.
At some point, you will probably consider the purchase of life insurance to provide your family
with additional economic security should you die unexpectedly. Generally, life insurance provides
for a fixed benefit at death. However, the benefit may vary over time. In addition, the length of
the premium payment period and the period during which a death is eligible for a benefit may each
vary. Many combinations and variations exist.
When it is time to retire, you may wish to purchase an annuity that will provide regular income to
meet your expenses. A basic form of an annuity is called a life annuity, which pays a regular
amount for as long as you live. Annuities are the complement of life insurance. Since payments
are made until death, the peril is survival and the risk you have shifted to the insurer is the risk of
living longer than your savings would last. There are also annuities that combine the basic life
annuity with a benefit payable upon death. There are many different forms of death benefits that
can be combined with annuities.
Disability income insurance replaces all or a portion of your income should you become disabled.
Health insurance pays benefits to help offset the costs of medical care, hospitalization, dental care,
and so on.
Employers may provide many of the insurance coverages listed above to their employees.
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