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Insurance is a contract with an insurance company that promises to pay for certain financial losses you suffer if you pay a premium. Many include a deductible which you must pay before the company begins to pay for the loss. You want to choose a deductible that is large enough to reduce premiums but small enough to prevent financial hardship when loss occurs.

Every day we are exposed to many risks, which can cause financial loss. Accidents, property damage, illness, and death are risks we often consider. However, other risks, such as the possibility of being sued or becoming disabled and unable to work, are also important. We each have to decide how we will protect ourselves should a risk become a reality. If you do not have a plan, you might have to go into debt or use funds set aside for other financial goals in the event of financial disaster.

Appropriate risk management strategies protect against catastrophic financial losses, regardless of the cause. Good comprehensive insurance coverage against severe setbacks is essential. Areas for coverage include life, health, homeowner’s or renters, auto, disability, and liability. Smart consumers can obtain this coverage at a cost that allows them the financial flexibility to accomplish other goals without being insurance poor. Note that this type of risk management should not be confused with investment risk, which is a different financial concept.

To determine when you need to purchase insurance, consider the best way to handle each of your risks. Because risks change over a lifetime, evaluate your situation every few years and make appropriate changes. Can your savings cover a financial loss so that you don’t need to buy insurance? Increasing the deductibles (the portion of loss you pay) on your policy usually saves you money as well. However, when self-insuring or carrying high deductibles on policies, you must set aside the necessary funds in your emergency cash reserve to pay for those expenses in case of a loss.

Risk management strategies can be combined with savings and investments to achieve financial goals (e.g., buying cash value life insurance): However, be careful to ensure that your strategies provide the best return on the money involved. Determine if insurance protection can be purchased less expensively so that you can invest the savings for a greater overall return.

Five Main Types of Insurance

  1. Automobile Insurance: Most states require all car owners to have auto insurance. It includes different coverage for different losses. These are losses that may occur in the operation of a car.
  2. Property Insurance: This is an important part of risk management. Property could be real property, such as your house and other structures such as fences or tool sheds. Or it could be personal such as furniture, clothing, and appliances. The type of policy you have determines which perils you will be protected against and to what dollar amount that protection will be.
  3. Life insurance: The primary reason to buy life insurance for yourself is to protect others. There are many types of life insurance choices such as term, whole life, universal, variable, and variable/universal. All but term have an investment component. A policy specifies an amount of money to be paid to beneficiaries when the insured dies.
  4. Health Insurance: Health insurance can be discussed as two groups. Medical and disability. Basic medical insurance takes care of the initial hospital surgery and supply costs. Some employers provide medical insurance. Disability income protects your earning power and income.
  5. Liability Insurance: This protects you from personal and financial loss that may result from lawsuits against you. Liability implies that you have a legal responsibility to someone and must pay for personal injury or property damage caused by neglect on your part.

Insurance Resources

Useful Websites

  • Meeting Your Insurance Needs: A comprehensive insurance review will help you determine whether you have adequate or perhaps too much insurance coverage. A guiding principle should be, how would a change in coverage affect the health and wellbeing of my family?
  • SD Division of Insurance: Their mission is to protect the public and make insurance available and affordable by efficiently providing quality assistance, providing fair regulation for industry, and promoting a healthy, competitive insurance market.

Related Topics

Family Finances, Health