Insurance is a financial product that individuals and organizations can purchase to protect against unpredictable losses. The average person is likely to carry several different types of insurance, such as health insurance, homeowner's insurance and auto insurance. The basic principle of insurance is that you pay a fee and in exchange, the insurance company will pay for various losses, such as damage to a car or home, if they occur. It is important to understand basic insurance terms when seeking insurance coverage.
Claim
An insurance claim is a notification given to an insurance company that a loss has occurred and that payment for the loss is desired. Any time a loss or expense covered by an insurance plan occurs, the person covered by the insurance plan must make a claim to receive funds from the insurance company. For instance, if you get in a car crash, you must make a claim to your auto insurance company so that they are aware of the crash and will pay you for damage caused to the vehicle. It is important to make claims as soon as possible after losses occur; insurance companies may have policies where losses that are not claimed soon enough are not eligible for coverage.
Deductible
The deductible on an insurance plan is an up-front cost that the insured party must pay before the insurance company will pay for losses. The higher the deductible, the less risky it is for the insurance company. All else held equal, the cost of insurance is usually less when deductibles are higher.
Coinsurance
Coinsurance is a term frequently encountered in the health insurance industry. Coinsurance indicates a sharing of expenses between the insured party and the insurance company at a ratio set out in the insurance plan. For instance, a health insurance plan might require 20 percent coinsurance on surgery, meaning you would have to pay 20 percent of the costs of surgery. Seemingly low coinsurance percentages can still result in high costs. For instance, 5 percent coinsurance might seem low, but 5 percent of a costly cancer treatment can still amount to thousands of dollars.
Premium
The term premium refers to the fee you must pay to maintain insurance coverage. In other words, the premium is the cost of insurance coverage. Premiums are often charged monthly, quarterly, biannually or annually.
Limits
An insurance limit is the maximum amount of money the insurance company will pay you for a loss. For instance, if you purchase collision coverage on a car with a limit of $50,000, the insurance company will pay, at most, $50,000 toward damage done to the car even if the car is worth more than that amount.
