Key Terms to Understand Insurance

 
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Insurance can be quite confusing. Many people aren’t taught anything and have to learn how insurance works while they are stumbling through selecting their first health or car insurance plan. This can cause a lot of stress, or even result in people selecting an insurance plan that doesn’t actually meet their needs.

There are a number of different types of insurance and they all work a little bit differently. But there are a few common things that they all generally include.

  • Premiums
  • Deductibles
  • Copays

You’ll also likely encounter a couple of different insurance types.

  • Health Insurance
  • Car Insurance
  • Renters Insurance
  • Homeowner’s Insurance

What are premiums, deductibles, and copays?

The premium is the monthly fee you pay to your insurance company. The company uses this money to run their business and pay out any claims made against a policy. To ensure that there is sufficient capital, they typically invest in highly liquid assets that they can convert to cash quickly, in case they need to make a large payment, or even a series of large payments. When selecting an insurance plan, your premium influences not only the level of coverage you receive, but also the deductible you will be responsible for.

The deductible is the amount of money you will need to pay out of pocket before your insurance begins to pay for a claim. As previously indicated, the size of your deductible will be determined by the level of coverage you receive and the value of your premium. The lower your premium and the better your coverage, the higher your deductible. This is because lower premiums means you are contributing less to the pool of money to pay for claims and better coverage increases the likelihood that the insurance company will have to pay out for a claim for you.

After you’ve met your deductible, your insurance company will generally cover the majority of the costs associated with your claim, and potentially any other claims you make that year. You may still be responsible for a copay however. A copay is a fixed, often small, amount of money that you’ll be responsible for as part of the insurance claim, often after your deductible has been met.

Some insurances also have an out-of-pocket maximum. This is the maximum amount of money you’ll be required to pay during the length of your insurance policy. Normally, once you reach your out-of-packet maximum, your insurance company will cover any other expenses related to claims for the duration of your policy.

How does health insurance work?

Health insurance is different from other types of insurance in that it cover routine checkups. Typically, insurance doesn’t cover things like routine maintenance. You can get health insurance through a variety of channels, your employer, the marketplace created by Obamacare/Affordable Care Act, or directly from a private insurance company or broker. Frequently, health insurance companies require you to get a physical and submit your previous medical records prior to ensuring you. They need to know your general level of health and level of risk for various diseases when they set your rates, premium, deductible, etc. After they have your information, you’ll find out your rates and be able to pick a level of coverage.

While all health insurance policies include deductibles, copays, premiums, etc., they can get quite complicated. Different types of services, like medical visits and prescription drugs, have different copays. Certain insurance companies might give you the choice between having better coverage for prescription drugs in exchange for less coverage elsewhere, or the reverse. Some doctors and hospitals only accept certain brands of insurance, so it’s vital that you verify that your provider accepts your insurance. You should also verify that the specific procedure you need is covered by your insurance and how much you’ll be expected to pay out of pocket.

How does car insurance work?

Car insurance is much more straightforward than health insurance. As with health insurance, you’ll need to decide your level of coverage, deductible, premium, etc. The value of your car, the make and model, the type of driving, and types of drivers will all have an influence on what your car insurance will cost. It’s important to note that when you purchase a new car, you’ll need to get insurance prepared for it prior to accepting it from the dealer, as drivers are required to carry insurance. There are a few things you’ll need before you can get car insurance:

  • Driver’s License
  • Social Security Number
  • Vehicle Information

Car insurance companies use this information to help set your rates. If you have a history of moving violations or accidents, insurance companies will likely quote you a higher rate. This is because insurance companies expect you to be more likely to make a claim.

What is renter’s insurance?

Renter’s insurance is like homeowners insurance in that it covers property in your home. However, it doesn’t cover the structure of the home, only your possessions. It’s designed specifically for renters, as their landlord’s insurance will cover the physical house.

What is homeowner’s insurance?

Like renter’s insurance, homeowner’s insurance covers the possessions in your home. There are two major differences however. First, homeowner’s insurance policies are carried by the person who owns the home. Second, the structure of the home is covered. This means, if you suddenly find yourself in need of a new roof due to hail damage, the insurance company will cover the costs.

People who don’t ask how insurance works until they need it put themselves at risk of making costly mistakes. For example, they could purchase the wrong policy and not be covered when something happens. Now you should have a basic understanding of not only how insurance works in general, but also how a few of the more common types of insurance function.

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