How it Works

• The purpose of insurance is to guard against uncertainty and risk. When a consumer buys insurance, he pays an insurance company a monthly fee called a premium for the promise that he will relieve financial compensation for certain losses and expenses detailed in an insurance contract. The terms of contracts insurance contracts can vary greatly. For example, some insurance protect against damages that result from owning a car, some contracts pay for expenses related to medical care while others cover damages to homes. If you stop paying the premium on your insurance policy, the coverage will end and you will not be able to receive compensation for losses that occur.
  
  

Insurance Claims

• An insurance claim is an official request for money from an insurance company. If you incur a loss or expense that is covered by an insurance plan, you must make a claim to receive compensation. For example, if you get into a car crash, you must contact your auto insurance company to make a claim or else you won't receive compensation.
  
  

The Deductible

• A deductible is a cost that you must pay toward expenses or losses before your insurance company will compensate you. For example, if you have a $500 deductible on your comprehensive auto insurance and your car sustains $800 worth of damage from a hailstorm, you must pay $500 before the insurance company will pay the remaining $300.
  
  

Factors that Determine the Cost of Insurance

• The cost of insurance is determined by a variety of factors. If you exhibit risk factors that are associated with a higher likelihood of making claims, your insurance rates will be higher. For instance, a driver with a history of accidents will pay more for car insurance than drivers who have never been in an accident. Higher deductibles result in lower insurance costs while higher insurance limits lead to higher costs.