Comprehensive insights into how works and how it can benefit you.
is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an company. The company pools clients' risks to make payments more affordable for the insured. policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.
There are many different types of policies available, and almost any individual or business can find an company willing to insure them. The most common types of personal policies are auto, health, homeowners, and life. Most people in the U.S. have at least one of these types of , and car is required by law.
Businesses require special types of policies that insure against specific types of risks faced by a particular business. For example, a fast-food restaurant needs a policy that covers damage or injury that occurs as a result of cooking with a deep fryer. An auto dealer is not subject to this type of risk but does require coverage for damage or injury that could occur during test drives.
Understanding key concepts can help you choose the policy that best suits your needs.
A policy's premium is its price, typically expressed as a monthly cost. It is determined by the insurer based on your or your business's risk profile, which may include creditworthiness.
For example, if you own several expensive automobiles and have a history of reckless driving, you will likely pay more for an auto policy than someone with a perfect driving record.
The policy limit is the maximum amount an insurer will pay under a policy for a covered loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over the life of the policy.
Typically, higher limits carry higher premiums. For a general life policy, the maximum amount is referred to as the face value, which is paid to a beneficiary upon the insured's death.
The deductible is a specific amount the policyholder must pay out-of-pocket before the insurer pays a claim. Deductibles deter small, insignificant claims.
Policies with higher deductibles are typically less expensive because higher out-of-pocket costs result in fewer small claims.
People with chronic health issues or those needing regular medical attention should look for policies with lower deductibles, even if the annual premium is higher.
Less expensive access to medical care throughout the year may be worth the trade-off.
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