Basic knowledge of insurance encompasses understanding the most common types of insurance -- life, health, homeowners, automobile -- and the common terminology used in the industry in reference to insurance contracts. Although the various types of insurance have unique features, there are also a standard set of commonalities among the available products, such as policies, coverage, premiums and deductibles.
The Policy and Coverage
An insurance policy is a contract between an insurer (the insurance company or provider) and the insured, the purchaser, also known as the policyholder. Among the detailed information provided in an insurance policy are who (policyholders), what (auto, home, life) and how much insurance (coverage) is contracted. For example, if the policy states that the lifetime coverage limit is $100,000, it means that regardless of how many claims are made under the provisions of the policy, once the insurer has met the $100,000 obligation, the contract is invalid.
Know the Deductible
The deductible is the out-of-pocket amount the policyholder will be responsible for paying on a claim before the insurance provider will compensate the policyholder. For example, if an automobile policy carries a $500 deductible, and the insured has an accident that results in $5,000 of damage, the policyholder will be expected to pay $500 and the insurance company will pay $4,500.
Outside of the insurance industry, the word "premium" has various meanings. However, in reference to all types of insurance, a premium is the cost of insurance. Generally, premiums are due at specified intervals, and many policies provide the insured with options of paying annual premiums, semiannual (every six months), quarterly (every four months) or monthly.
Homeowners' and Automobile Insurance
Homeowners' insurance coverage is designed to protect our homes against damage and loss resulting from fires, theft and other disastrous events. A homeowner's policy may reflect a split in coverage amounts, a maximum amount for the structure and a maximum amount for contents. Correspondingly, an automobile policy may specify a particular amount of coverage for property and a set amount for bodily injury. Basic auto insurance protects the policyholder against losses resulting from an accident. Liability insurance pays for damage to persons and property that are the fault of the insured driver. Comprehensive insurance also provides coverage for the vehicle of the insured driver.
Health and Life Insurance
We generally purchase life insurance to protect our assets and to provide for dependents in the event of our premature death. A term life insurance policy will pay the beneficiary a predetermined amount and cover the insured for a specific time or until the policyholder attains a certain age, the term of the policy. Whole life policies can be purchased that do not have a time limit, provided of course that premiums are kept up-to-date. Basic health insurance subsidizes the expenses incurred for physicians' fees, medications, treatments, hospitalization and rehabilitation, among other services. Coverage benefits under a health insurance policy vary widely from policy to policy.