How Does Insurance Work?
Insurance reimburses you for unexpected losses to a specific thing (your life, a car) caused by a specific set of hazards (illness, theft).
Insurers charge you a premium (fee) for taking on this risk, but it is a small percentage of what may be paid to you when you make an insurance claim.
For example, you as the policyholder may pay $200 each year to protect your belongings valued at $20,000. If you experience a loss, the insurance company might have to pay up to the coverage limit of $20,000. This seems like a no-win situation for the insurer (the insurance company), but here is what really happens:
- Insurers calculate the odds of every insurance customer’s potential needs for payouts during the year.
- Each customer pays a premium, but not every customer will require a major payout; many customers will have no claims for the year.
- Customers making claims are required to pay a relatively small amount of the claim, called a deductible. This way, the customer shares the financial burden with the insurance company.
Sometimes there are conditions in the policy that spell out what is not covered or what you must do to get payment. You may be able to purchase riders to cover additional items, such as expensive jewelry or collections. For these valuable treasures, you will want to have an appraisal from a professional source that assigns a value for the coverage amount.
Working with a reputable insurance agent is key to understanding the fine print and designing a policy to meet your needs.