Insurance premiums
Insurance companies use math, specifically probability and statistics, to figure out how likely it is that someone will have a loss that they need to help pay for. They look at information about a person, like their age, where they live, and other factors, to estimate how likely it is that they’ll experience a covered loss. Then, they use this information to set the premium price. The higher the risk, the higher the premium.
Insurance terminology
There are a few important terms that are used in insurance:
- Premium: the amount the insured pays to the insurance company in order to have coverage
- Deductible: the amount the insured must pay out of pocket before the insurance company will pay for a claim
- Co-pay: a fixed amount the insured must pay each time they receive a service that is covered by their insurance policy
- Policy limit: the maximum amount the insurance company will pay for a claim
- Claim: when you ask the insurance company to help pay for a covered loss, you’re making a claim.
- Benefit: the amount of money the insurance company agrees to pay when you make a claim.
Examples of how insurance terms are used
Different types of insurance policies use these terms in different ways.
For example, a home insurance policy might have a policy limit of . This means that if someone’s house is damaged in a fire, the insurance company will only pay up to in claims.
Another example is with health insurance. A policy might have a co-pay of for specialist visits. This means that every time someone goes to see a specialist, like a dermatologist or cardiologist, they have to pay out of pocket, and the insurance company will cover the rest.
Also, a car insurance policy might have a deductible of . This means that if someone gets into an accident and their car is damaged, they have to pay the first out of pocket before the insurance company will step in and pay the rest.
Lastly, a life insurance policy might have a premium of per year. This means that the person must pay each year to the insurance company in order to keep the policy active.