If you have an insurance policy, you’ve probably heard of premiums, deductibles, and limits. But do you know what each of these terms means? Each of these concepts helps determine how much you’ll pay for your insurance (home, auto, boat or life, for example), as well as how much you can receive after a covered loss.
This is a guide to help you understand these terms.
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WHAT IS AN INSURANCE PREMIUM?
An insurance premium is the amount you pay your insurer on a regular basis to keep a policy in force. You may be able to pay premiums monthly, quarterly, every six months, or annually, depending on your insurance company and your specific policy. If you don’t pay your insurance premium, your policy will be canceled and you won’t have financial protection for claims.
HOW IS THE COST OF AN INSURANCE PREMIUM CALCULATED?
Many factors can affect the price of an insurance premium. These are some of the factors that can affect how much you will pay for a policy. The price you’ll pay will be different if you’re buying homeowners insurance, auto insurance, or life insurance.
Factors that can affect your homeowner’s insurance premium with PPC.
- The coverage limits you choose
- The amount of the deductible
- The optional coverages you select
- The age and condition of your home
- Your claim history
- your credit rating
- The type of construction of the house
- local fire protection
- Discounts for security locks, alarms or insurance packages
Check with your insurer to see if you qualify for home insurance discounts to help lower the cost of your policy.
Factors that can affect your auto insurance premium
- Your age
- your driving record
- The type of car you want to insure
- the age of your car
- The types of coverage you choose
- The insurance coverage limits you select
- where you live and drive
- how much do you drive
- your credit score
You can take advantage of auto insurance discounts to help lower your premiums. Check with your insurer to see what discounts are available to you.
Factors that can affect your life insurance premium
- The amount of life insurance coverage you purchase
- The type of life insurance policy you select
- The duration of your policy
- Your age, health and life expectancy
WHAT IS AN INSURANCE DEDUCTIBLE?
The insurance deductible is the amount of money you pay out of pocket on a covered claim.
For example, let’s say you select a $500 deductible when you purchase homeowners coverage on your homeowners insurance policy. A fire subsequently causes $10,000 in damage to your home. If your claim is covered, you would pay your $500 deductible for the repairs, and your insurance would pay the remaining $9,500.
When you meet your deductible, it means you’ve paid the full deductible amount for your coverage, and your insurance will help cover the remaining costs of your covered claim up to your coverage limit.
You likely have multiple deductibles on the same insurance policy. This is because each coverage may have its own separate deductible. Unlike health insurance, where you typically have to meet a single deductible for an entire calendar year, deductibles for other types of insurance policies typically apply each time you make a claim.
In some cases, your insurance company may set deductibles for certain policies. In other cases you can choose your deductible. You may be able to save money on premiums by choosing higher deductibles. In general, the higher your deductible, the lower your premium will be. For example, if you choose a $1,000 deductible on your auto policy, you’ll likely pay less in premiums than you would for a policy with a $250 deductible.
Check your policy or contact your insurance agent to find out what deductibles apply to your policies, or to adjust your deductible amount.
WHAT IS AN INSURANCE LIMIT?
An insurance limit is the maximum amount of money an insurer will pay for a covered claim. The higher your coverage limit, the higher your premium will be. Limits often apply to different types of coverage within a policy. For example:
You may want to consider a number of factors when choosing your homeowners insurance coverage limits. These may include:
- The amount it may cost to rebuild your home based on current construction costs ( homeowners coverage )
- The value of your belongings ( personal property coverage )
- The amount of liability coverage that can assist you if you are found legally responsible for a guest’s injuries or damage to someone else’s property
An insurance agent can help you review what specific types of coverage may be available to fit your situation.
Typical auto insurance policies include separate limits for different types of coverage, for example:
- Auto Liability Coverage: Each state sets minimum liability limits that all drivers are required by law to purchase. However, it’s a good idea to increase your liability insurance coverage limits to help protect you from the unexpected.
- Uninsured/Underinsured Motorist Coverage : Like auto liability coverage, some states require these coverages and set minimum limits of coverage you must purchase. You may be able to increase your coverage by selecting higher coverage limits.
- Personal Injury Protection (PIP): In “no-fault” states, this coverage may be mandatory or optional. When PIP is required, states set mandatory coverage limits that drivers must purchase. You may be able to purchase higher coverage limits.
- Medical payments coverage : This coverage is usually optional. You may be able to select your coverage limits up to a certain amount specified by your insurer.
- Comprehensive coverage: The limit of your comprehensive coverage is usually the actual cash value (that is, the depreciated value) of your car.
- Collision Coverage: Your collision coverage limit is typically the actual cash value of your vehicle.
Your insurance agent can help make sure you meet state requirements for coverages and limits.
Read your policy or contact your insurance agent to understand your policy premiums, deductibles, and limits.