How Does Insurance Work?
Sunday, May 6, 2012
Insurance is a means for individuals, groups and businesses to mitigate the financial risks associated with unforeseen negative circumstances, damage, loss of property, bodily injury, medical issues and even death. Instead of taking on the potentially tremendous financial burden that can result from these types of situations, parties shift the responsibility for payment to their insurance company. In return, they pay monthly or annual premiums for the coverage provided.
How can insurance companies afford to pay what can sometimes be very expensive claims? The premiums the company collects from all of its customers are pooled so that when a claim arises, funds are available to cover it. Since insurance premiums are calculated based on historical statistics that predict the likelihood and dollar amounts of claims, the insurance company is able to not only pay any claims but keep the company moving forward.
From your side of this equation, insurance can be a vital element of personal financial security. E nsuring that you have the funds to cover accidents, major illnesses and property loss is important; without insurance, one major event could devastate your financial wellbeing.
While some types of insurance are mandatory such as; auto liability insurance, for example – others are available at your option. In addition to car insurance, you can purchase home, life, health, long-term care, business, pet and other types of insurance. Each policy has its own specific conditions and coverages but, in general, here is how the insurance process works:
You determine the type and amount of coverage you want or need. You may do this by discussing your needs with a licensed insurance professional, or, if you’re buying insurance online, by exploring your options and making choices that make sense for your personal situation.
The insurance company provides a quote of your annual premium. This figure factors in a number of variables, from your coverage limits and deductible, any discounts for which you qualify, your driving record (for auto insurance), neighborhood theft history (for homeowner’s insurance) and other factors specific to the type of insurance you are buying. If the premium amount does not align with your budget, you can reduce it to some extent by raising the deductible and/or lowering the coverage amounts. Just be certain that you will be able to afford the higher deductible and that the coverage amounts will be adequate should a claim arise. To ease your budgeting, most insurance companies offer you the option of paying your premium annually or monthly.
You purchase the policy. Once you sign the policy, which details what is covered, the financial limits of your coverage, the effective dates of your policy and so on, the bulk of the financial risk shifts from you to the insurance company. You will receive an electronic and/or hard copy of your policy, which is a legally binding contract provided you continue to pay your premiums in a timely manner.
When you file a claim, the insurance company pays. If you are involved in an accident, become ill, experience damage to your home or encounter another situation that is covered by your insurance policy, you pay your deductible amount and then your insurance company pays the remainder of qualified expenses up to the limits of your policy.