When choosing a policy, it is important to understand how insurance works. A solid understanding of these concepts will help you to choose the policy that best fits your needs. There are three components (premium, policy limit, and deductible) for most insurance policies which are very important.
The policy premium is the price, usually expressed as a monthly fee. Premiums are determined by the insurance company based on your or your business’s risk profile, which may include creditworthiness.
For example, if you own several expensive cars and have a history of reckless driving, you will likely pay more for an auto policy than someone with a mid-range sedan and impeccable driving record. However, different insurance companies may charge different premiums for similar policies. So finding the right price for you takes hard work.
The policy limit is the maximum amount the insurance company will pay under the policy for the losses incurred. The maximum amount can be set per period (for example, annual term or policy), per loss or injury, or during the term of the policy, also known as the maximum lifetime.
Usually, a higher limit carries a higher premium. For general life insurance policies, the maximum amount to be paid by the insurer is referred to as nominal value, which is the amount paid to the recipient after the death of the insured.
A deduction is a certain amount that must be paid by the policyholder from his own pocket before the insurance company pays a claim. Deductibles serve as a deterrent to small and insignificant claims in large volumes.
Deductibles can be applied per policy or per claim depending on the insurance company and policy type. Very high deductible policies are usually cheaper because high out-of-pocket costs generally result in fewer small claims.
With regard to health insurance, people who have chronic health problems or need regular medical attention should seek out a policy with a lower deductible.
Although annual premiums are higher than comparable policies with higher deductions, cheaper access to year-round medical care may be worth the compromise.
And that’s our article about the Components of an Insurance Policy, hopefully it can help develop your knowledge in the world of insurance. Please read our next article to find out the importance of insurance for your life and future security.