Over the next few weeks, we’ll revisit our multi-part series on risk management and the basics of different insurance plans! This week, we’ll being the discussion on common insurance terms
For the next two weeks, we’ll discuss some common insurance terms and why they matter, before moving on to discuss specific insurance policies starting in Part IV.
You’ve probably heard terms like premium, deductible, co-payment, co-insurance, and elimination period thrown around but maybe you’re not 100% what they mean. Let’s talk about it!
What are premiums? Premiums are the amount of money you pay to have an insurance policy. This can be payments made annually, semi-annually, or monthly, depending on the insurance policy. Some of these insurance premiums may be made automatically – your employer may withhold some of your paycheck for your health insurance, and your homeowner’s insurance is often included in your monthly mortgage payment paid from your escrow account.
What are deductibles? A deductible is the amount of money you’re required to pay on any loss before your insurance policy will make payments. For instance, your car insurance policy may cover you for the damage of your car during a collision, but if you have a $500 deductible, you’ll be expected to cover $500 of the cost before your insurance covers the rest.
The final term we’ll discuss today is elimination period, or waiting period. This is the time between when a risk or loss occurs and when your insurance will pay for it. This is most common for disability insurance and long-term care insurance. While a serious injury may prevent you from working, certain disability policies won’t provide you your periodic payments until the end of the policy’s elimination period.
If you recall from last week, we discussed the four different risk management strategies. Having an insurance policy and paying the premiums would be an example of risk transfer or insuring against risk, while having a deductible and having an elimination period would be forms of risk retention. As such, they typically have an inverse relationship – the higher the deductible or the longer the elimination period, the more risk you retain, and therefore the lower your premium will be, because you’re transferring/insuring less risk. With that said, while higher deductibles and longer elimination periods may keep your premiums down, don’t set them so high that you won’t have enough in savings to cover those losses!
Next week, we’ll return and discuss a few more common insurance terms.
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