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As an industry, insurance seems intimidating enough to be considered a country with a completely foreign language. Indeed, numerous complex legal documents together with financial lingo may easily become overwhelming whenever attempting to purchase one of many policies available. Fortunately, knowing how to speak insurance is not a difficult task that requires years of studying. On a basic level, insurance is nothing more than an agreement between several people intended to save one’s financial well-being should an unfortunate circumstance arise.
However, in order to make the proper choice and acquire an adequate form of protection for your belongings, car, or health, it is necessary to be familiar with a couple of basic notions. To illustrate each term by practical examples will help to figure out how insurance works.
Premium – Monthly Subscription
In essence, your insurance premium is similar to Netflix or Spotify subscriptions. The premium stands for the periodic payment that is required from your side in order to continue being covered. Depending on the particular policy, you may have to pay this sum monthly, twice in a year, or once a year. Missing your subscription payments automatically results in cancellation and losing insurance altogether.
Moreover, depending on the perceived danger from your perspective, you may be charged a significantly different monthly rate. For example, a driver with numerous speeding tickets would likely pay an elevated premium for his or her car insurance.
Deductible – Out-of-Pocket Cost
Deductible is a certain out-of-pocket payment you agree to make in case of damage or loss prior to requesting assistance from the company itself.
Should your smartphone accidentally slip from your hands, break down, and be required to be repaired for $600, you will have to pay the deductible upfront. Assuming your insurance for the device had a deductible of $100, the repair company would get paid the rest ($500) from your insurer.
It is essential to remember that there is a certain trade-off:
Large Deductible – Small Premium
Low Deductible – Large Premium
Claim – Request for Compensation
In case an insurance-worthy incident takes place, you may apply to your company with a claim form. It serves as a notice that you want them to compensate the damage according to the agreed terms of your contract.
Assuming you got involved in a car accident or your kitchen suffered from burst plumbing, you have to contact the company through their app, website, or call center and submit the claim. Once you do so, you should provide sufficient evidence of damage (photos, report by a police officer or contractor) that will be thoroughly checked to see whether you actually deserve compensation.
Policy – Rulebook of Insurance Contract
Insurance policy is the contract that exists between the insured party and the insurance provider. It describes all of the aspects of cooperation and provides all necessary information regarding payments and what exactly can be compensated.
The first page of any insurance contract is called the Dec Page because it contains general information concerning the specifics of the policy: who exactly is covered, how much are the premiums, what your deductibles are, and on what date your policy is valid.
Coverage Limit – Maximum Payout
Coverage limit is the largest amount of money you can receive from the insurance provider as compensation for a certain event. As a rule, this sum cannot be exceeded no matter how much the cost of reconstruction or replacement has increased due to rising prices.
For example, you might have an insurance policy that has a coverage limit of $300,000 for the total rebuild of your home should it get destroyed completely. In case of inflation-driven rising costs of building materials, should your rebuilding expenses reach $350,000, you are left to bear responsibility for the rest of the payment on your own.
Exclusion – Noncovered Event
In essence, exclusion means certain events excluded from the list of covered cases. No policy covers absolutely everything. If you are not sure about some specifics of the covered incidents and the amount of coverage provided, check your policy thoroughly before purchasing it.
For example, most homeowners’ insurance policies will not cover the destruction caused by floods or earthquakes. To get protection from these natural phenomena, you have to buy a completely different policy.
Conclusion
Thus, knowing the above-listed terms, the puzzle of purchasing insurance becomes very simple. All you have to do when choosing the best policy is look for one with the premium and coverage limits that are acceptable for you and suitable deductible. By acquiring knowledge of these terms, you can safely discuss insurance with professionals and choose the best option.
Frequently Asked Questions (FAQ)
Question: Health insurance deductible vs Home insurance deductible
As we have mentioned, there is one substantial difference in health insurance deductibles compared to any other kind of insurance deductible. While health insurance deductible is an annual threshold, you have to pay from your pocket until reaching it, other deductibles are per-incident.
This means that each time you file a claim, regardless of the date and number of such claims throughout the year, you have to make the payment equal to the amount of your deductible.
Question: What is liability coverage in insurance?
Liability coverage is one particular type of an insurance contract. Unlike others, liability coverage will take care of you should you damage someone else’s property or injure another person. For example, if you got into a car accident and hit another car, or a guest slipped on the frozen part of your driveway, liability coverage will pay for medical expenses and car repairs of the other party.
Question: What is an insurance rider or endorsement?
As mentioned previously, riders are optional services or protections you can add to an ordinary contract. In case you have some exclusions or low limits you consider inconvenient, you can pay a relatively small additional fee and obtain a rider that provides additional coverage for those situations.
Question: Why my insurance premiums go up even if I’ve never filed a claim?
The prices of insurance are not determined solely by your personal experience. Instead, they depend mostly on the collective danger and economic factors. Thus, should a significant number of accidents happen or prices of certain items increase sharply, insurance companies will change their rates to make sure there will be enough funds to pay their customers.