Basic Insurance Terms
Let’s get started with some essential terms that you must know to understand insurance and effectively manage risk in your life.
Insurance is a contract or policy provided by an insurance company through which an individual or entity receives financial protection against losses. There are many types of insurance that can protect you against losses in different aspects of your life. Some of these include life insurance, car insurance, home insurance, travel insurance, and pet insurance.
Insurance policies have policy limits! This means that each policy has a maximum amount of money that the insurance company will cover when paying for a financial loss. It is important to do you research into these limits when purchasing a plan.
An insurance premium is the price of an insurance policy. It is usually expressed as the cost of the policy per month. Insurance premiums can vary from person to person. Premiums are calculated by taking a base price for everyone, and then subtracting money from that base price based on the individual’s personal information. The money subtracted from the base price is called a discount. Several factors are used to determine the price of a premium, including the type of coverage needed, age, the area lived in, and any insurance claims filed in the past.
An insurance claim is a formal request to an insurance company made by a policyholder. The policyholder requests money for an event covered by their insurance policy. For example, if you are in a car accident, you will make a claim to your car insurance company so that they pay for the repairs to your car.
Two people may have different premiums for the same policy. For example, imagine two teenagers who drive the same car and have the same driving record, but one of them lives in an urban area while the other lives in a suburban area. Since the person in the urban area has to navigate through more traffic, they are more likely to get into an accident and need to file a claim. Therefore, the insurance company will charge a higher premium to the teenager who lives in the urban area.
An insurance deductible is the amount of money you will have to pay in an insurance claim before the insurance company will pay. Once you pay the deductible, the insurance company will pay up to the policy limit. Suppose your health insurance deductible is $2,000. If you get a medical bill for $10,000, you must pay $2,000 and the insurance company must pay the other $8,000.
Usually, a lower monthly premium, corresponds with a higher deductible. This means that the less your insurance costs, the more you will have to pay out-of-pocket if something happens.
A copayment, or copay, is a fixed amount of money paid by a patient when she receives a healthcare service. The rest of the bill is paid by the health insurance company. Deductibles and copays are both fixed amounts of money that you are expected to pay. Deductibles are usually larger than copays, and for healthcare, they only have to be paid once per treatment. Once you have paid your deductible, you don’t have to pay it again. Copays, on the other hand, must be paid every time you receive a healthcare service, like every time you go to see the doctor.
Insurance coverage is the amount of risk that is covered by an insurance company. Within each type of insurance, there are several different coverage options. You should mix and match these options to build a policy that meets your needs.
Auto insurance companies offer: collision coverage for damage caused by an accident, comprehensive coverage for damage not caused by an accident, emergency roadside service coverage, rental car coverage that will cover the cost of a rental car if your car is in the shop, and loan/lease gap coverage for accident protection for leased or financed vehicles.
Renters insurance companies offer: personal property coverage for damage of your belongings, liability coverage for a guest’s medical bills or for accidental damage to someone else’s property, and additional living expenses coverage if your rental property is damaged and uninhabitable and you must pay for hotel bills or other fees.
Homeowners insurance companies offer: house coverage for damage to the house, other structure coverage for damage to other structures or buildings, personal property coverage for damage or loss of personal property, additional living expenses coverage if your house is damaged and uninhabitable, and liability coverage for a guest’s medical bills or accidental damage to someone else’s property.
There are also additional coverage options that can be added to a policy. It is important that you know your risks so that your policy does not have too much or too little coverage.
Insurance policies are there to give you protection against financial losses. These policies aren’t free, however, and insurance companies will charge you a premium every month for your policy. If you suffer a loss covered by your policy, you must file a claim to your insurance provider. After you pay the deductible, your insurance provider will pay for the rest, up to the policy limit. And if your policy involves some sort of routine checkup, like seeing the doctor, you will usually be required to pay a copayment, or copay, for this service.