How Insurance Works
There are various insurance policy types available, catering to the needs of both individuals and businesses. Common personal insurance policies include auto, health, homeowners, and life insurance. In the United States, most individuals have at least one of these types of insurance, with car insurance being mandatory by state law.
Businesses, on the other hand, obtain insurance policies to mitigate field-specific risks. For instance, a fast-food restaurant’s policy may cover employee injuries resulting from cooking with a deep fryer. Medical malpractice insurance, on the other hand, protects against liability claims arising from a healthcare provider’s negligence. Companies may enlist the services of an insurance broker of record to effectively manage their employees’ policies. In some cases, businesses may be legally obligated by state law to purchase specific insurance coverages.
A policy’s premium refers to its price, typically paid on a monthly basis. Insurers consider various factors when determining the premium. Here are a few examples:
- Auto insurance premiums: Factors such as your history of property and auto claims, age and location, creditworthiness, and other state-specific variables are taken into account.
- Home insurance premiums: The value of your home, personal belongings, location, claims history, and coverage amounts influence the premium.
- Health insurance premiums: Age, sex, location, health status, and coverage levels are considered when setting the premium.
- Life insurance premiums: Factors like age, sex, tobacco use, health condition, and the desired coverage amount affect the premium.
The premium amount is largely based on the insurer’s assessment of the risk associated with potential claims. For instance, if you own expensive vehicles and have a history of reckless driving, you will likely pay a higher premium for auto insurance compared to someone with a single midrange sedan and a clean driving record. However, it’s important to note that different insurers may charge different premiums for similar policies. Therefore, finding the right price requires some research and comparison.
Moving on to policy limits, this refers to the maximum amount an insurer will pay for a covered loss under a policy. These limits can be set per period (e.g., annually or for the policy term), per loss or injury, or over the entire policy duration (lifetime maximum). Generally, higher limits come with higher premiums. In the case of life insurance, the maximum amount the insurer will pay is known as the face value, which is the sum given to your beneficiary upon your death.
It’s worth mentioning that the federal Affordable Care Act (ACA) prohibits ACA-compliant plans from imposing lifetime limits on essential healthcare benefits like family planning, maternity services, and pediatric care.
Lastly, let’s discuss deductibles. A deductible is the specific amount you must pay out of your own pocket before the insurer covers a claim. Deductibles are designed to discourage numerous small and insignificant claims. For example, if you have a $1,000 deductible and your car sustains $2,000 worth of damage, you would be responsible for paying the first $1,000, while the insurer covers the remaining amount.
