Insurance basics: everything you need to know
Insurance is primarily a form of risk management that protects one from financial losses that may result from ad hoc events. Furthermore, figuring out which insurance fits you, might be pretty important. Want to know more about Insurances? Read all about it in this article!
Basic concepts of insurance
Insurance is a contract that involves two different parties. The first party provides insurance and is known as either an insurance company or an insurance carrier. The other party, known as the insured or policyholder, buys the insurance.
In this contract or insurance transaction, the policyholder or insured will be required to pay an agreed particular amount of money monthly or yearly on a regular basis. In exchange for the insurer's or insurance company's promise to provide financial assistance for the specific coverage the insured purchased for a particular loss, through an insurance agent or directly from the insurance company.
There are, however, a few cases in which the loss may not be financial. In such cases, the insurer will convert the loss to financial terms to meet their promise.
The contract between the policyholder and the insurer is called an insurance policy. The insurance policy usually contains the terms, conditions, and circumstances that regulates and controls when and how the coverage of an insurer or insurance company will financially protect the policyholder.
Components of insurance policy
Three crucial components govern an Insurance policy between policyholder and insurer. These components include premium, deductible and policy limits.
A premium is the price of a policy, in which the policyholder will be obligated to pay per month on a regular basis. The premium plays a significant role in determining the policyholder's state of coverage. Viz. No Policyholder will benefit from any insurance company's promise of compensation during unforeseen events if they refuse to pay their premium regularly.
For instance, if a policyholder purchases a life insurance coverage, and refuses to pay their premium charge as agreed when they pass, the death benefits that their insurance company promised to give the beneficiaries they chose will not happen.
However, there is no standard premium rate because all insurance companies have a different and unique premium formula that will consider a few factors, such as age, location, and lifestyle, before determining the premium rate of a policyholder.
A deductible is the particular amount of money a policyholder will be expected to pay out of pocket for a specific period of time towards an insured loss before their insurer kicks in and pays a claim.
For instance, if a policyholder with health insurance is experiencing a severe medical condition that demands medical attention, the health insurance company will "deduct" the policyholder's deductible from their claim payment. An increase in the deductible of an insured will result in a lower premium rate.
A policy limit is the maximum amount of money an insurance company will pay for a policyholder's claim for a specific policy. For example, if a health insurance policy may have a policy limit of $3,000. It means that the insurance company will not pay above $3,000 if the insured makes a claim.
Type Of Insurance policies
There are plethoric amounts of insurance options in the market that offer coverage for several losses and damages, which results in the financial protection of their policyholders. The fear of ad hoc predicaments that no one is clairvoyant enough to foresee usually make people apply for several redundant insurance policies for thorough coverage. However, among the numerous types of insurance policies, it is always advisable to apply for only those that are requisite.
There are several types of insurance that are considered necessary because they also offer coverage for other stand-alone insurance. They include:
- Health insurance
- Car insurance
- Homeowner insurance
- Pet insurance
- Travel insurance
Health insurance is a type of insurance that offers coverage for the medical and surgical expenses a policyholder may incur. They cover these expenses by either reimbursing the policyholder or directly paying the care provider.
There are several types of health insurance plans which may fall into two categories based on who is controlling them. These categories include government-controlled health insurance programs, such as Medicare and Medicaid, which are free of charge (no monthly premiums). The other type is private health insurance that usually requires their policyholders to pay a specific premium charge in order to benefit from the coverage they offer. Read more about these health insurances.
Car insurance, which is also called auto insurance, is a type of insurance that financially protects drivers from events like accidents and theft. In exchange for their monthly premium charges. They also offer coverage to third party property damages caused by the car of an insured person.
In a nutshell, the overall car insurance coverage includes property, liability and medical coverage. Want a more detailed explanation? Have a look here.
Homeowner insurance is a form of property insurance that offers four different kinds of coverage to the insured. This coverage includes exterior damage, interior damage, damage or loss of the policyholder's personal property and liability coverage for damage and injuries that occur on the property or in the home.
Pet insurance is a type of insurance that covers the cost of veterinary care of pets, such as the treatments and tests for accidents and illnesses. They are similar to human health insurance except that they reimburse funds to the pet parent rather than the care provider. Furthermore, Pet insurance is also called veterinary health insurance.
Travel insurance is a type of insurance that offers coverage for losses and damages the insured may incur from travelling domestically or internationally. Travel insurance coverage primarily includes flight accident coverage, baggage & personal effect coverage, trip interruption coverage and medical coverage. However, some travel insurance may cover ransom requests and rented equipment. You can find more information about this in our travel insurance article.
Factors to consider when looking for a good insurance company or insurer
You can be a beneficiary of financial protection from unforeseen events that may result in damage and losses of life and properties. This is the primary benefit of insurance; however, finding the right insurance company that suits your requirements is a bit challenging. The difficulty one may face in discovering the right insurance company is primarily due to the innumerable amount of insurers in the market with persuasive promises.
However, there are a variety of factors you must consider in order to sieve away various insurance companies that do not suit your needs, leaving you with the best amongst all insurance companies. These factors include:
- The reputation of the insurance company
- Availability of discount
The reputation of the insurance company
The history and reputation of the insurance company are some of the most significant factors you must consider to find the right insurance company. After doing research on this factor, you will get a few essential pieces of information that include:
Experience: how long the insurance company has been in business, which tells their level of expertise. Irrespective of how convincing a new insurance company with little experience may be, it is always risky to choose them.
Financial strength: the financial strength of an insurance company will determine if the policyholders will get their compensation should the need arise. If the insurer is not financially buoyant, you may not get the level of compensation your insurance policy states when you request a claim.
Licensing:- It is always advisable to cross-check and do thorough research about any insurance company in your scale of preference license. If this happens to skip your mind and you applied to an insurance company that is not licensed, you will not be able to file a case against them in the court of law should they fail to offer their promised coverage.
This is also one of the most significant factors you will have to consider primarily because various insurance companies may provide the same insurance coverage. Still, they usually differ in their premium charges or rate. The difference in premium rate in the competitive market is because all insurance companies have their distinct set of factors they consider, such as age, location and gender, before giving the insured their premium cost.
It will be beneficial to compare and contrast as many insurance quotes as you can find (at least three different insurance quotes) to be safe. Although, you should not let lower prices blindfold you from quality.
Availability of discount
The competitive nature of the market makes various insurance companies attract more customers by promising them discounts. One of the most popular discounts is that which the policyholders will get by bundling two or more coverage. Most insurers usually give policyholders the chance to mitigate their premium cost but letting them increase their deductibles.
There are a few insurance companies that have limited insurance coverage; hence, you will have to check the coverage an insurance policy offers. If they do not offer the coverage you need, you should check another insurance company.
References are primarily the feedback of the insurance company's past or current customers. As you go in search of an insurer, you should always request their references in which most new insurance companies with less experience do not have. In most cases, no insurance company will want to shoot themselves in the leg by showing you a complaint filled references list; hence, asking around about the insurance company will forestall you from falling into the wrong hands.
You can purchase an insurance policy offline via a licensed customer care representative or online, Irrespective of the type of insurance you wish to purchase, such as health, car, pet or travel insurance. It would be best to research the insurance company that may suit your needs before deciding to invest in their insurance policy.