Insurance basics: How to pick the right plan for you
The insurance world can be tricky to navigate. With the varieties of insurance types available, and the confusing vocabulary surrounding them, even experienced insurance buyers might feel intimidated when picking a plan.
If you are on the lookout for a vehicle, health, homeowners, or renters insurance plan, there are some insurance basics you should be familiar with before you buy. Read on to learn everything you need to know about picking the best insurance for you!
Why do I need insurance?
Insurance is basically a contract or policy provided by an insurance company through which a person pays money in exchange for financial protection against losses. There are many types of insurance that can protect you against losses in different aspects of your life, some of the most common being health, auto, life, and homeowners/renters insurance.
If you have insufficient insurance, or no insurance at all, you’re taking on a lot of unnecessary risk that could have serious financial consequences. Uninsured medical costs, for example, can be extremely expensive, with the average cost of a three-day hospital stay ringing in at around $30,000. Without medical insurance, you would have to pay those costs yourself, out-of-pocket.
Hurricanes provide another good example of the consequences of insufficient insurance. Hurricanes can cause significant property damage, sometimes ranging in the tens of thousands of dollars. Homeowners without homeowners insurance and flood insurance would have to pay out-of-pocket for the damages to their homes.
At the end of the day, insurance allows you to transfer risk away from yourself. By paying a little bit each month, or however often your plan requires you to pay, you can greatly reduce the risk to your wallet.
How do insurance premiums work?
Before signing any insurance agreements, you should understand how insurance premiums work. Simply put, an insurance premium is the price of an insurance policy. Most types of insurance policies require you to pay a premium once a month, but some policies may have different pay schedules. Renters insurance, for example, is often paid on an annual basis.
The amount you pay for a premium will also vary, based on both the type of plan and the person buying it. Premiums can vary widely from person to person. Most are calculated by taking a base price for everyone, and then subtracting money from that base price based on the individual's personal information. The money subtracted from the base price is called a discount.
Some factors that are used to determine the price of a premium include the type of coverage needed, the person's age, the area they live in, and any insurance claims they have filed in the past. Certain types of insurance might also factor in things like your height, weight, age, gender, and family history of illness.
Two people may even have different premiums for the same policy. For example, someone in an urban area, who has to navigate through more traffic and is more likely to get into an accident, will likely pay a higher premium than someone in a less urban region.
Understanding your deductible, copay, and policy limit
An important thing to keep in mind is that insurance policies have policy limits! This means that each policy has a maximum amount of money that the insurance company will cover when paying for a financial loss.
An insurance deductible is the amount of money you will have to pay for an insurance claim before the insurance company will pay their part. Suppose your health insurance deductible is $2,000. If you get a medical bill for $10,000, you must pay $2,000 and the insurance company must pay the other $8,000. Once you pay your deductible, the insurance company will pay up to the policy limit.
Usually, a lower monthly premium means an insurance plan will have a higher deductible. This means that the less your insurance costs, the more you will have to pay out-of-pocket if something happens.
Some health insurance plans may also include a copayment, or copay. A copay is a fixed amount of money paid by a patient when they receive a healthcare service. The amount you pay for a copay will probably vary by product or service. A prescription drug copay may be cheaper than a doctor’s visit, for instance. Whatever the case, once you pay your copay, the rest of the bill is paid by the health insurance company.
Deductibles and copays are both fixed amounts of money that you are expected to pay when making an insurance claim. Deductibles are usually larger than copays, and for healthcare, they only have to be paid once per year. Copays must be paid every time you receive a healthcare service.
Getting paid: When and how to file insurance claims
So, it finally happened. You got sick, or your car exploded, or a hailstorm took out your roof. It's finally your insurance policy’s time to shine. In order to see a return on all those premiums you’ve been paying, you’ll need to file an insurance claim.
An insurance claim is a formal request to an insurance company made by a policyholder. The policyholder requests money for an event covered by their insurance policy, like a car accident or hospital stay.
You should really only file a claim if the payout and potential increase in your premium is worthwhile. For example, if you incur a minor dent to your car, it’s probably not worth filing a claim. The out-of-pocket costs of repairing the dent would likely be lower than an increase in premiums that comes from filing a claim. That said, you should always file a claim with your insurance company if someone gets injured, when it's not clear who was at fault, or when you can't afford to pay the damages.
To file a claim, complete the following steps:
If a crime was committed, someone was injured, or there is significant damage, call your local authorities.
Start collecting information about your claim. Pictures, insurance policy numbers, and contact information are all important pieces of information to collect.
Contact your insurance company within 30 days of the incident. Most providers can be contacted online, via an app, or over the phone.
Provide your insurer with an estimate of damage costs, as well as any other information you’ve collected.
After you file a claim, the insurance company may send an insurance adjuster to investigate the accident. The adjuster will make a recommendation for how much the insurance company should pay. Once the recommendation is made, you should receive your insurance payout.