Know how insurance works

Insurance helps you manage risk by passing some of the costs along to a third party — an insurance company. The insurance company charges a fee (known as a premium) for accepting this risk on your behalf. The premium is a small percentage of what may be paid when you make an insurance claim.

For example, you might pay $100 each year to protect your belongings, which are valued at $10,000. If you are robbed, the insurance company might pay up to the $10,000 limit. This seems like a no-win situation for the insurer (the insurance company), but here is what really happens:

• Insurers calculate the odds of each customer’s potential payout needs.
• Only a portion of insured customers will require a payout.
• In addition to yearly premiums, customers making claims pay a small amount of the claim (a deductible) before the insurance company will pay a claim, thereby sharing the financial burden.

Insurance transfers some, but not all risk. You take part of the cost by paying premiums and deductibles. To save on insurance costs, you may consider accepting a higher level of risk (e.g., a higher deductible).

 

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