Insurance Policy Components
When choosing a policy, it is important to understand how
insurance works.
A firm understanding of these concepts goes a long way in
helping you choose the policy that best suits your needs. For
instance, whole life insurance may or may not be the right type of
life insurance for you. There are three components of any type of insurance
(premium, policy limit, and deductible) that are crucial.
Premium
A policy's premium is its price, typically expressed as a
monthly cost. The premium 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 single mid-range sedan and a perfect driving record.
However, different insurers may charge different premiums for similar policies.
So finding the price that is right for you requires some legwork.
Policy Limit
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,
also known as the lifetime maximum.
Typically, higher limits carry higher premiums. For
a general life insurance policy, the maximum amount the insurer will pay
is referred to as the face value, which is the amount paid to a beneficiary
upon the death of the insured.
Deductible
The deductible is a specific amount the
policy-holder must pay out-of-pocket before the insurer pays a
claim. Deductibles serve as deterrents to large volumes of small and
insignificant claims.
Deductibles can apply per-policy or per-claim depending on
the insurer and the type of policy. Policies with very high deductibles are
typically less expensive because the high out-of-pocket expense generally
results in fewer small claims.
Special Considerations
With regard to health insurance, people who have
chronic health issues or need regular medical attention should look for
policies with lower deductibles.
Though the annual premium is higher than a comparable policy
with a higher deductible, less expensive access to medical care throughout the
year may be worth the trade-off.
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