The basis of how insurance works is relatively simple. You pay an insurance company money every month so you can get money if something goes wrong. Health insurance makes procedures more affordable, home insurance can pay you thousands of dollars after a storm, and car insurance can help if you’re in an accident.
Although the concept is fairly simple, there is a reason why insurance gets a bad rap. The answer to, “What is insurance?” is much more complicated than it appears on the surface.
Here are 5 things you need to know about how insurance works so you can get the most out of every single one of your policies.
Insurance Relies on Shared Risk
Insurance works because it isn’t about any one individual policy holder. Instead, it’s the combined total of everyone’s payments that enables insurance companies to support their policy holders. When everyone pays a little bit every month, the insurance company is able to pay a lot when someone cashes in on their policy.
This can be a good thing. It means you won’t be responsible for paying out of pocket for things like medical procedures and natural disasters. However, it can be frustrating to pay a premium every month when you never end up using your policy.
Know the Difference Between Premiums and Deductibles
There’s a lot of lingo to learn when you’re trying to figure out how insurance works. Knowing the difference between premiums and deductibles is the most important.
Your premium is the amount you pay every month. The deductible is what you pay if you use your insurance. The money taken out of your paycheck every month to cover health insurance is your premium, while the deductible is what you have to pay before your insurance kicks in. For example, you may be responsible for paying for the first $2,000 of a medical procedure before your insurance will cover the rest.
The higher your premium, the lower your deductible, and vice versa. It’s important to consider how often you think you will submit claims when deciding on both.
Be Aware of Waiting Periods and Special Clauses
When entering into a new policy, make sure you ask about waiting periods and special clauses so you aren’t caught by surprise. For example, there may be a waiting period before your dental insurance kicks in, which means you’ll want to wait to schedule your first cleaning, while a life insurance policy may be subject to a contestability period.
Insurance Only Covers What’s Agreed to in Your Policy
“What is insurance?” may not be the right question. It’s also important to know what it isn’t.
Not everything is covered in every policy. For example, your home won’t be covered in the event of a flood unless you also have flood insurance. Know what you are and aren’t covered for so you aren’t left high and dry when you discover that your policy won’t cover your claim.
You Can Get Someone Else to Compare Insurance Policies For You
Insurance commercials always talk about how much you could save, but most of us don’t have time to compare dozens of insurance carriers to find the right one.
You don’t have to do it alone! A company like DJM Insurance partners with different insurance companies and compares prices so you don’t have to. An insurance provider can bundle services for a lower price, they can answer your questions as you’re trying to figure out how insurance works, and they can educate you on your specific policies.
Have more questions? Click here to learn more about all the different kinds of insurance!