(MONEY Magazine) – Spending money on insurance is a curious act of faith. You are buying promises that you hope will never have to be kept. And yet in the soap opera called life, no one can count on uninterrupted health or freedom from accidents. That's why you need to protect your assets and your family from risks by getting the proper insurance policies.

Because agents talk in jargon and policies are loaded with legalese, few people feel comfortable shopping for them. But don't let ignorance prevent you from acquiring the six most important types of insurance: auto, homeowners or tenants, excess liability, life, disability and health. Your home-study course in Insurance 101 should begin with a lesson covering the terms deductible and premium and the relationship between them. A deductible is the maximum amount you must pay before your insurance kicks in. If, for example, you accept a $500 annual deductible on a health insurance policy, your insurer will not pay any of your medical bills until you have shelled out $500 for them during the year. Insurers often let you choose among a range of deductibles. As a rule, the bigger the deductible, the smaller the premium -- which is the price you pay for a policy. Before you buy any type of insurance, be sure you can answer these four essential questions: -- How much insurance do I need? -- What kind of policy is most suitable? -- Whom should I buy it from? -- How much should I pay? Starting with the first question, let this overriding principle guide you: insure only against losses you couldn't absorb without wrecking your financial plans. Paying high premiums for costs you can easily handle is a waste of money. For example, you can probably afford that $500 a year in medical bills, but a catastrophic illness would wipe you out financially. So you are well advised to take a $500 deductible, rather than a $100 deductible, because you can then get coverage at a more affordable price. Before addressing the second question -- what kind of policy to buy -- let's answer the final two. When choosing an insurance company, satisfy yourself that it is financially capable of paying your benefits when necessary. It doesn't matter whether you use an independent agent who can sell policies from a variety of companies or an agent who works for just one insurer. Either way, tell the agent you want policies only from companies rated A+ for the past 10 years by Best's Insurance Reports, a publication from A.M. Best, a financial rating service. As for price, one rule of economy applies as much to insurance as to most other commodities: save money by buying in bulk. That means taking the most comprehensive coverage and spurning narrow policies such as flight insurance, credit insurance, burial insurance and health plans that cover only single diseases such as cancer. Premiums for those policies may look small, but they usually mask extremely high rates per year or per $1,000 of coverage. You can also keep down your insurance costs by looking for ways to reduce life's risks. If you smoke or overeat, shed tobacco or pounds. Equip your house with smoke detectors, dead bolts and burglar alarms. These steps can reduce your premiums by 5% to 20%. Now let's take up the question, What kind of policy is most suitable? Answering it is the most vexing task when buying insurance. But the following descriptions of common policies will help. Along the way, we give you tips on cutting your premium costs too.

Auto Insurance

Since auto insurance premiums are rising at double-digit annual rates on average and some companies have stopped selling policies altogether in a few states, smart shopping for this variety of coverage has become mandatory. According to a survey by A.M. Best, the average motorist paid $486.50 in 1987 to insure a car -- $656 in Massachusetts, the most expensive state. Annual premiums in big cities such as New York and Chicago often exceed $1,000, as do those for teenage boys in many suburbs. You should capitalize on premium- paring discounts by asking your agent whether you qualify for the savings listed in the table on page 58, which can lighten premiums by 5% to 60%. To get the most for your dollar, be sure you are familiar with the anatomy of a policy. Car insurance comes in a package that consists of the following provisions: -- Liability protection. This is the main reason for buying auto insurance. Liability coverage protects you against claims for injury and property damage brought by other drivers, pedestrians or property owners who allege that you were at fault in an accident. Your insurer will defend you in or out of court against any claims. The insurance company pays the legal expenses and, if necessary, the damages up to the dollar limits set in your policy. Policies may either have a single limit for all liability or three separate limits for: each person injured in an accident, all people injured in the same accident, and property damage. In industry shorthand, a policy covering $25,000 of liability per person, $50,000 per accident and $10,000 for property damage is referred to as 25/50/10 coverage. Those are typical minimum limits in the 38 states that require car owners to carry liability coverage. Laws in the other 12 states strongly encourage such coverage for most people. The cost of buying 25/50/10 liability coverage for a 45-year-old driving a mid-size automobile can range from $120 a year in Bloomington, Ind. to about $840 in Los Angeles. You probably should buy liability protection of at least 100/300/ 50, which will cost only about 20% to 30% more than the minimum coverage. -- Uninsured motorist coverage. This provision means your insurer will pay if you or a passenger in your car is hurt by either a motorist without auto insurance or by a hit-and-run driver. You can buy as much coverage as you carry under the liability section of your policy. The premium for coverage of $25,000 of liability per person and $50,000 per accident is often $20 to $30 a year. You can also buy underinsured motorist coverage, which protects you if the other driver's liability coverage is inadequate. It generally costs an additional $30 to $50 a year. -- Collision and comprehensive coverage. If you carry these, your insurer will reimburse you for repair costs resulting from a crash (collision) or from fire, storm, vandalism or theft (comprehensive). Collision is expensive -- it typically represents about a third of your total premium -- but comprehensive is far less costly. Ordinarily, banks and finance companies require you to buy collision and comprehensive coverage before approving you for a car loan. You usually will be responsible for annual deductibles of at least the first $100 of repairs under both collision and comprehensive coverage. By raising your deductibles to $500, you can cut your collision premium by about a third; $1,000 deductibles slash the cost about in half. Increasing your comprehensive deductible will have a smaller effect on your premium. Unless you deliberately smash or torch your car, your insurer will pay your claims up to the amount of your car's resale value. Once that value falls below $2,000 or so, consider dropping collision and comprehensive coverage. Otherwise you can wind up paying more for the insurance than you could get in benefits. -- Additional types of coverage. Some extra protections cost only a few dollars a year. One is medical-payments coverage, which will commonly pay up to $5,000 to anyone in your car who is hurt in an accident. A less desirable option is towing coverage, which pays as much as $75 for getting your incapacitated car to a repair shop. This coverage violates the rule against buying insurance for small losses. And if you belong to an auto club, you probably already have towing coverage. -- Personal injury protection (PIP). Residents of the 14 states with no-fault automobile insurance must buy this type of coverage. With PIP, if you are driving anywhere in the U.S. and are injured in an accident, your insurer will pay your medical expenses whether or not your driving contributed to the smashup. In return, unless your injuries are severe or your medical expenses exceed a threshold amount set by the state, you can't sue the other driver for additional compensation for pain and suffering. The best shortcut for finding a suitable, affordable automobile policy is to decide what coverage you want. Next get a price quote from an agent for State Farm, the nation's largest auto insurer, advises Robert Hunter, president of the National Insurance Consumer Organization, a nonprofit group. While State Farm's policies are not necessarily the cheapest, they set a standard for the industry. Then call other agents to see if you can find a better deal elsewhere.

Homeowners and Tenants Insurance Like car policies, homeowners and tenants plans have liability protection. But your prime concern should be coverage of your personal possessions against theft and of your property against damage by fire and other perils. Expect to pay $200 to $3,000 a year for a policy with a deductible of $100 to $1,000. The premium depends on a multitude of factors including the value of your house, its age, whether the area is prone to hurricanes or earthquakes, the local crime rate and the type of construction of the house. Wood-frame houses, for example, cost more to insure than ones made of fire-resistant brick or stone. Homeowners insurance comes in standard versions, known as forms. Like the nursery rhyme about ''The House That Jack Built,'' they recite progressively longer litanies of covered perils: -- Basic covers damage by fire, lightning, windstorm, hail, explosion, riots, aircraft, other people's vehicles, smoke, vandalism and volcanic eruption. The basic form also pays for theft and glass breakage. -- Broad adds these perils to the ones included in the basic form: falling objects, the weight of ice or snow, water or steam escaping from the plumbing, heating or air-conditioning systems, the freezing of those systems and home appliances, and damage from short circuits or power surges. -- Special is the most popular. In addition to the perils covered by the basic and broad forms, it guards your house against all others not specifically excluded by the policy. Among the common exclusions are damage from floods, earthquakes, sewer and drain backups, war and nuclear accidents. (To get the same coverage for your personal property, you may have to buy what's known as an endorsement.) Some companies add exclusions in certain locations. For example, if you live on the Gulf of Mexico, your house might not be insured against hurricane damage. You can usually insure against such assaults by nature at extra cost, however. No homeowners policy includes flood coverage. So if you want flood insurance, ask your agent about policies supervised by the federal government's National Flood Insurance program. -- Tenants forms generally cover only furnishings and personal possessions. -- Condominium and cooperative apartment forms provide the same coverage as tenants policies. Also, they insure home additions and alterations that are not covered by your homeowners association's insurance policy. The tricky thing about homeowners insurance is setting the correct dollar figure of coverage. It should, of course, be large enough to pay for rebuilding your house if it is leveled by fire or storm. It should also fully cover much likelier partial losses. Insurers will typically pay you the cost of repairing any structural damage up to the dollar limit of your policy, as long as that limit equals 80% or more of the cost of rebuilding your house. Should your policy turn out to be too small (say, the coverage is only 60% of the replacement value of your home), the insurer will pay a portion of the cost to replace the damaged property (in this case, 75%) or its depreciated value, whichever is more. If you buy a feature called guaranteed replacement cost, which will add no more than a few dollars to your annual premium, you can be sure of recovering almost the full cost of repairs. When you get this option, the insurance agent will make sure that you buy enough insurance to cover any damage by appraising the replacement value of your house on a special estimating form developed by his company. Moreover, your coverage and its price will rise yearly with inflation. ''Every homeowner should try to get a guaranteed replacement-cost contract. It's crazy not to have it,'' says Harvey Goodman, a public insurance adjuster with the Goodman-Gable-Gould Co. of Rockville, Md. Not every house is eligible for guaranteed replacement-cost coverage, though. Some insurers won't provide the benefit for homes that are more than 35 or 40 years old or so. One reason: it may be quite expensive, if not impossible, to replace the handiwork in old houses. Owners of such homes must settle for lesser coverage. All standard policies will cover your home's contents for half the dollar limit you place on the house. But that doesn't mean you can collect enough to replace any piece of furniture. If a five-year-old couch, say, is destroyed in a fire, you may get only the cash value of a used couch. For this reason, pay a little extra for replacement-value coverage on the contents of your home. Then if your old couch burns up, your insurance will pay for a new one. The extra coverage will cost about $1 to $2 per $1,000 each year. You can buy additional insurance for valuables such as jewelry, furs or silverware beyond the standard policy limits of $1,000 to $2,500. These so- called floaters generally cost roughly $8 a year for $2,500 of coverage on silver and about $90 to $270 to cover $10,000 of jewelry. If you have a collection of, say, stamps or coins with no single item of great value, consider buying a blanket policy. The typical cost is about $60 to $70 a year to cover collectibles for up to $1,000 or $2,000 apiece and the entire set up to a total of $5,000. The standard homeowners insurance package also provides $100,000 of personal-liability protection for members of your household and up to $500 of compensation for damage to trees and shrubs. If your credit cards are stolen, your policy will protect you against $500 or more in charges run up by the thief.

Excess Liability Insurance If you have substantial assets and are therefore an easy target for a big lawsuit, you may want to supplement your auto and homeowners insurance with an excess liability policy, also called an umbrella policy. This coverage, sold by homeowners and auto insurance companies, provides $1 million to $5 million in protection for you and members of your household for claims because of negligence as well as such wrongs as libel, slander or defamation. & The premium for an excess liability policy depends on where you live and factors such as the number of cars, homes and boats you own, says Calvin Sammons, director of national underwriting for Aetna. A suburban family with two cars and a typical house might pay $150 a year for a $1 million policy, $225 for $2 million in coverage, and $350 for $5 million. You may have to increase your liability coverage to high levels on your homeowners and auto insurance policies in order to buy excess liability coverage. By getting your auto, homeowners and excess liability insurance from one company, however, you may be able to knock 15% off your umbrella policy premium.

Life Insurance You may have heard that life insurance can be a terrific tax shelter or a wonderful way to force yourself to save. Both statements are true. But the prime reason for insuring your life is to protect your dependents financially if you die prematurely. That's doubly true for two-income families. ''If both spouses work, both should be insured,'' says Dede Pahl, an insurance instructor at the College for Financial Planning in Denver. Fully protecting your family -- which means ensuring that their present standard of living can be sustained and their financial goals met if you die -- can cost a bundle. Take the case of a husband, 42, and a wife, 40, who plan to send their two children, now 4 and 6, to college. Assume the father earns $55,000, the mother $45,000, and both work for companies that provide group life insurance equal to their salaries. Finally, assume the parents have $50,000 in savings and investments and expect to retire comfortably at 65. By a conservative estimate, the husband should buy $300,000 in additional life insurance and the wife needs almost as much extra coverage. They could pay between $850 and $10,000 a year for the two policies, depending on the kind that they buy. How much life insurance do you need? That's such a difficult question that you shouldn't try to answer -- unless you are handy with a compound-interest calculator and understand such concepts as the present value of future cash flows. Furthermore, you should ignore simplistic rules of thumb such as the one that says you should insure yourself for five times your annual income. Instead, meet with a life insurance agent or financial planner who will do the calculations to match your situation. The National Association of Life Underwriters, a group that represents 139,000 agents across the country (202-331-6034), can direct you to a local association, which will give you names of members in your area. If you're married and the only breadwinner, your life insurance policy's death benefit, together with your other ready assets, should be large enough to deliver lifetime income for your spouse. If you have children, you'll need to provide income for them too until they leave home, as well as a tuition fund if you intend to send them to college. But if you're single and have no dependents, you need only enough in savings or insurance coverage to pay your final expenses at death. There are essentially two types of life policies: term insurance and cash- value insurance. One is not necessarily better than the other. With both, a portion of your premium pays the agent's commission and the company's overhead and profit. In a term policy, the rest provides a guaranteed death benefit for your survivors. With cash-value insurance, part of your premium goes toward the death benefit and a large slice goes into a tax-deferred investment fund; you can borrow against your balance and sometimes withdraw your cash value. In the early years of the policy, term insurance has the advantage of being by far the least expensive, per $1,000 of coverage, regardless of your age. The most common form of term insurance is called annual renewable term. Its premium rises each year as you age, but you generally cannot renew the policy after age 70. If, for instance, the 42-year-old man in our previous example were to buy a $300,000 annual renewable term policy, he'd pay about $550; when he reaches 50, his annual premium might double; and by the time he is 60, it would be roughly $3,000. Term insurance, however, can be made to conform to the typical pattern of coverage that families usually need. While the premium rate for term keeps rising, the amount of coverage a family should carry levels off and declines. As the children grow up and savings accumulate in pension and retirement funds and outside investments, people typically need to own less insurance, not more. They can then cut back on their term coverage. By contrast, the much higher premium for a typical cash-value policy stays the same each year, and the insurance can be kept in force until you're at least 95. At that point, the insurer will pay you the money your beneficiaries would have received if you had died.

A cash-value policy can be invested in a variety of securities. A whole life policy, the traditional form of cash-value insurance, invests in bonds and mortgages and earns a fixed, modest rate of return -- about 7.5% in early 1989. Universal life policies let you adjust your premium and death benefit each year to suit your changing circumstances. Part of your premiums are invested in short-term securities similar to those in money-market mutual funds. In early 1989, such policies yielded 8% to 9%. Variable life invests your cash value in your choice of stock, bond or other funds. Returns fluctuate according to the markets and the fund manager's investing skill. Some variable life portfolios have paid better returns than mutual funds with similar objectives.

Disability Insurance The need for six-figure amounts of life insurance is a reminder that your earning power is an enormous asset. Insurance experts recommend that you carry enough disability coverage to pay you 60% of your gross income while you are laid up by a long illness or injury.

Your emergency reserve fund in a savings account or money-market fund should cover short periods of disability. Sick-leave benefits and employer-sponsored disability insurance may help too. Social Security offers disability benefits, but only if you can prove you won't be able to work for more than a year or that your disability will result in death. Even then, you'll have to wait five months for the first check. In 1989 the maximum Social Security disability benefit for someone age 45 with two children is $1,475 a month, or less than $18,000 a year. But the benefits rise annually to keep pace with inflation. Disability policies are sold by many, but not all, life insurance companies. Be sure to buy the highest-quality coverage you can get -- benefits that will continue until you can work full time again or reach age 65. The costliest policies define as a disability any medical condition that keeps you from performing your own occupation. You can keep receiving benefits -- even if you earn money doing something else -- as long as you are under a doctor's care. By taking disability insurance that will pay benefits if you are unable to work at an occupation suitable to your training and experience, you can save 5% to 15% in premiums. The basic premium for disability insurance depends on your age, occupation and how much income you want replaced. In a 1989 MONEY survey of the five largest sellers of topflight disability plans, the maximum benefit available to a 40-year-old, nonsmoking, $40,000-a-year corporate manager was about $2,300 a month. Annual premiums for a policy that had a 30-day waiting period -- the time between the day you are laid up and the day benefits start -- ranged from roughly $1,000 to $1,500. You will pay less by shouldering a longer waiting period. For example, you can cut your cost by 30% or more if you accept a 90-day waiting period. In some other areas, however, you probably shouldn't economize. Among the options you should seek are the following: -- Noncancelable contract. This means that the company must insure you as long as you pay the premium. Equally important, the insurer cannot raise your premium. -- Residual benefits. This policy feature means that while you are recuperating, you can return to work part time for partial pay and collect some benefits. -- Annual cost-of-living adjustments. If you become disabled, your benefits will rise, preferably in step with the consumer price index.

Among other valuable options are a $500-a-month supplement to your disability income until your Social Security benefits begin, periodic opportunities to boost your insurance coverage in line with salary increases, and lifetime benefits. These add-ons can raise your premiums by 4% to 33%.

Health Insurance Count yourself lucky if you belong to a group health insurance plan at work or through a professional or fraternal association. For an average $600 annual fee, such policies typically pay 80% of your medical expenses, after you pay an annual deductible of, say, $100. Many group plans limit your annual share of the bills to $1,000. There is often no annual or lifetime maximum on the amount the insurer will pay. If you don't have group coverage, you may have serious trouble finding affordable health insurance. Look first at policies sold by associations you belong to or could join, such as religious, professional or college alumni groups. Their coverage is often far more comprehensive and less expensive than what you could buy on your own. Should you be forced to buy an individual health insurance policy, try to find one that follows the group plan model. The premium for a family of four whose parents are 35 and 40 can range from $1,200 to $4,600 a year. This cost may seem exorbitant, but it is less than what you would pay for the average hospital stay. Such a plan would cover 80% or more of your expenses above an annual deductible of $500. Avoid indemnity policies, the kind often pitched on TV that pay a fixed amount per medical procedure or a flat dollar amount for each day in the hospital. The benefits from such policies can fall woefully short of your actual health expenses and don't protect you against medical-cost inflation, running at about 12% a year. One alternative to traditional medical insurance worth considering is a health maintenance organization (HMO), a medical group that provides services for a flat annual fee, typically between $2,500 and $3,600 for a family of four. This charge may exceed what you'd pay for a health insurance policy. But you won't have to pay much more than your annual fee for medical treatment covered by the HMO contract.

BOX: Discounts That Will Cut the Cost of Your Car Insurance

You can slash your total auto insurance premiums dramatically if you can qualify for discounts by, for example, insuring two cars with the same company or taking driver-training or defensive-driving courses. Insurance company rules vary on who qualifies for some discounts, such as the ones for good students and senior citizens. The price cuts listed below generally apply to charges for each type of auto coverage. Usually, however, there are no discounts for uninsured motorist coverage.

Qualification Premium for discount discount

Air bags in front seats 30 to 60% Automatic front-seat belts 10 to 30 Farmer 10 to 30 Multicar coverage 10 to 25 Car pool participant 10 to 20 Good student 5 to 25 Senior citizen 5 to 20 Student away at school 10 to 15 High school course in driver training 5 to 15 Auto antitheft devices 5 to 15 Defensive-driving course 5 to 15 Female, age 30 to 64, as only driver 5 to 10

Source: Insurance Information Institute