How Does Insurance Work?

There seems to be a type of insurance for just about everything these days. This is not a bad thing, as you can never underestimate the value of protection. You can insure just about anything that is valuable to you. This could be your house, your car, or even your favorite pair of sneakers.

Even if the policy is being taken out on certain things that are not tangible, it still works the same way. This is the reason that you can get coverage for things like your life.

So what do you know about an insurance company? You probably know of the way you give it a predetermined amount, which recurs at an established interval. Of course, when the time comes, all those payments should come in handy, as they contribute to the assistance that you get when you need it.

Even with that knowledge, you don’t necessarily understand insurance. That’s what this article is here for. It’s time for you to understand and appreciate the workflow of insurance.

What is Insurance?

The most basic way of looking at this is as a service that serves a protective role for you when damage occurs. This can be damage to your property by certain means or damage that you cause to someone else’s property.

No matter which of the two occur, there is a financial consequence that comes into the mix. This consequence must be both addressed and satisfied for recovery from the damage to be successful.

Insurance is a contract that absolves people of the financial responsibility that is associated with both losses and damages. The contract is usually governed by a policy, which has numerous clauses that establish the provisions and boundaries of the said contract.

Of course, there is a financial risk involved; however, insurance transfers the burden of this risk to the insurance provider. This works well because insurance providers have many customers.

Payments are collected from all of these customers, which helps the insurance company to put itself in a position to protect its members. The result is that you get to enjoy the benefit of peace of mind while the insurance company accepts the liability associated with your risk factors. The combined contributions of all the members help the company to be able to meet the needs of each customer.

It does seem like a game of random chance when you think about it. If every single member of an insurance company needed to make a claim at the same time, one can imagine that things would get a bit messy for that company.

While there are many different insurance types available to you, they don’t work much differently from each other. Each of these types has a variety of policy kinds that you can access under them.

For example, consider auto insurance for a moment. This is one of the many types of insurance. Now, there isn’t one way to insure your vehicle, and that is where the different policy kinds come into the equation.

There is comprehensive auto insurance, third-party insurance, and third-party, fire, and theft insurance. All these three policy types can be used to insure vehicles, but the provisions that are outlined in each define what you are entitled to and what you are required to do if you wish to stay in good standing.

For the right price, you can find an insurance provider that is willing to insure your business or personal interests. Some of the most common insurance types are as follows:

  • Life insurance
  • Homeowners insurance
  • Auto insurance
  • Health insurance

Auto insurance is a special case compared to all the others. When you think about any other kind of insurance, there is no requirement that mandates it. You could go through your life with none of these insurance types, and you wouldn’t be penalized for anything.

If you were to try to do the same with car insurance, you could find yourself with a hefty fine on your hands. This is because auto insurance is the only form of personal insurance required by law. The United States records an average of six million auto accidents yearly.

When you have that many going on, there is some level of protection needed for the motorists who are using the roadway. Additionally, every time a vehicle is driven, the possibility exists for it to require the intervention of an insurance company.

There is no other reliable way to ensure that drivers can always get the financial intervention needed when their vehicles get damaged or when they damage vehicles that belong to others.

If you run a business, then you probably need special kinds of insurance based on the nature of your business. Take a restaurant, for example, that owns a deep fryer. This is a common kitchen appliance in the world of fast-food restaurants, but serious injury can occur when it is used. It’s hot and filled with hot oil. What could possibly go wrong?

Not every insurance policy is for something that is so broad. Some policies are taken out for specific reasons. Some examples of this are professional liability insurance, medical malpractice, and kidnap and ransom (K&R) insurance.

Understanding the Workflow of Insurance

At this point, the concept of insurance should be drilled into your brain, so now it’s time to focus on how the workflow proceeds where insurance is concerned. First, you need to understand the components that come together to give said workflow.

Policy Premium

This boils down to the amount that an insurance company charges you to maintain the policy that you decide to purchase. Therefore, you can view this as the cost associated with your insurance.

The premium that you are assigned comes from a base figure that may be modified to give you the amount that you are required to pay towards the insurance. Some of the factors that contribute to the modification are your history, your place of employment, your location, etc. Some of these parameters make you eligible for discounts, which are applied to reduce your final price.

Note that there are also modifications that lead to a higher price. For example, various taxes could be applied to your premium, which results in the cost being elevated. Alternatively, there are some insurance companies that fall under a jurisdiction that mandates the need for service fees.

This premium is paid at an agreed interval. You can pay annually, monthly, or even bi-annually. Not every company offers every interval level, but these are the three that you can almost expect from a provider.

The cost of the premium depends on a few factors, such as the level of risk associated with the insurance type you want and the level of coverage that you are looking for. The formula is very simple to understand in this regard. The lower the risk associated with your desired policy, the cheaper it should be.

Take a person who is purchasing a car, for example. If this person has a ten year old driver’s license, the insurance company is likely to be comfortable with the prospect of that person being in the driver’s seat. What happens if the driver has a license that is only three months old though?

In that case, the perceived level of inexperience would work against the driver. A person with such a driver’s license is a high-risk driver. There is likely to be a significantly higher cost for that person based on that single factor.

The Deductible

No matter what kind of insurance you get, the chances are that there is a deductible involved. Some insurance companies allow you to choose what this figure is for certain insurance agreements.

When something happens that requires you to make a claim, the insurance company takes up financial responsibility, assuming you were operating within the lines of your contract.

Before the company makes any payment, however, you are required to present a deductible. The deductible is a percentage of the cost of the claim that you must pay out-of-pocket. Once you do so, the remainder of the claim’s cost is met by the insurer. Note that a higher deductible tends to yield a lower insurance premium.

Based on the type of insurance being used and the insurer that you do business with, you may find that deductibles are not always applied during claims. Instead, there are instances in which it is applied at the policy level.

Policy Limit

Insurance policy coverage is not infinite. If it were, insurance companies would be setting themselves up to take quite the tumble. Though you are protected in the event of certain occurrences, there is a maximum payment that an insurance company is willing to make to honor your claim.

While this maximum can be imposed on a per-claim basis, there are also cases in which it is applied over the policy’s term. In the latter cases, this is called the lifetime maximum of the policy. The higher a policy limit is, the higher the premium is that you are required to pay.

The Process

By the time you purchase your policy, the three elements above would’ve been established. Northing relevant happens when you don’t have the need to make a claim. When you do, however, is when the insurance company carries out its responsibility of protection.

The process begins when you make a claim. This is usually a statement of intent to receive financial coverage based on what is stipulated by the policy. There is usually a facility provided for you to provide information surrounding the event that leads to the claim.

Before any payment is made, an investigation is carried out to ensure that you were operating within the parameters of your agreement when the incident occurred. Once this is verified, you are then required to provide your deductible. If you do not, then all progress is halted. No action can take place unless the deductible is covered.

After this is taken care of, the insurer takes the relevant action, which can be a payment, a purchase, etc. This is taken based on the limit of the policy. If the amount that is needed is less than or equal to the policy limit, then you have no problem. However, if that number is exceeded, you need to find a way to make up the difference.

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