Characteristics of Insurance Coverage
Unexpected events like an auto accident, house fire or illness can result in large financial losses. Insurance is a type of financial service that protects people against these types of unpredictable events. There are many types of insurance coverage that pay for losses related to different types of events, such as auto insurance, homeowner's insurance, life insurance and health insurance. All types of insurance share a few basic characteristics.
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Premiums
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Insurance policies include a fee called a premium that you must pay periodically (usually monthly) to keep your insurance coverage. If you fail to pay your premium, your insurance coverage may lapse, meaning you will no longer be eligible to receive compensation if a loss previously covered by the plan occurs. Short-term insurance plans, such as insurance for rental cars, may be paid in full up front and have no recurring premium.
Deductibles
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Deductibles are up-front payments that an insurance policyholder must make toward losses before an insurance company will give out compensation. For example, if you have a $2,000 deductible on your health insurance for surgery and you get an appendectomy that costs $15,000, you must pay the first $2,000 for the operation out of your own pocket and the insurance company will cover the remaining $13,000. If you set a higher deductible, you may pay lower premiums.
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Coverage Limits
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All insurance policies include limits as to how much money the insurance company will pay out if losses occur. For example, an auto insurance policy might have a $25,000 limit on property liability. If you crash into another car and cause more than $25,000 of damage to the other vehicle, your insurance will not cover the full extent of the damages. Raising insurance coverage limits will result in higher premiums.
Scope of Coverage
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Every insurance plan covers a specific type of loss or set of losses, which will be spelled out in detail in an insurance contract. Covered losses may differ from what you expect. For example, you might assume that homeowner's insurance will compensate you for any damage that befalls a home, but damage that arises from certain types of events like floods or earthquakes may require extra coverage. It is important to thoroughly read insurance contracts to understand what specific losses are covered.
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