Insurance Basics

Obtaining insurance coverage for the first time can seem like a daunting task. In the insurance world there is a lot of complex terminology that can seem overwhelming if you don’t know where to start. While you don’t need to be an expert to purchase insurance. Having a foundation of basic knowledge can help when obtaining coverage. It can give you peace of mind and confidence when going through the process. In this post we will cover some basic insurance terms that are important to know when shopping for coverage.

What is a Loss?

In insurance, a loss is defined by the Insurance Training Center as “the financial damage one suffers due to an insurable event”. Basically, a loss is something that happens to you or your property that is going to cost money to fix or replace.

What is a Cause of Loss?

A cause of loss is a specific event that leads to property damage or injury and is covered by your policy. A fire would be an example of a cause of loss. When choosing coverage, there are three different forms to choose from that include different causes of loss: basic, broad, and special. Basic and broad cause of loss forms list what is covered by your policy. If it is not listed under these forms, it will be excluded and you will not have coverage. The special cause of loss form is the opposite, meaning it lists the things that are excluded and everything else is covered. Choosing a special cause of loss form is the most expensive but also has the broadest coverage.

What is an Insurance Carrier?

A carrier is an insurance company. You may have seen these companies on TV commercials, sponsors for sports teams, and many other forms of advertising in your day to day life. Some of the companies you have likely seen are Liberty Mutual, Progressive, and Allstate.

Premium

Premium is typically what consumers are most concerned about. A premium is the amount that you pay for your insurance. Simply put, it is your bill that you must pay to maintain coverage.

An insurance policy is a contract between you and the carrier. In this contract, the carrier is promising to cover damages (that arise from agreed upon causes of loss), while you are promising to pay the premium. If you quit paying your premium (bill), the carrier is no longer contractually required to pay for your losses because you did not hold up your end of the contract.

Deductibles

A deductible is another basic term that is important to you as a policyholder. This is the amount that you will pay to put your policy into action after a loss. For example, let’s say you were rear ended in traffic. You need to have your bumper replaced and want your policy to pay for it. You will have to pay a specific, previously agreed upon amount out of pocket for your insurance company to “kick in” and cover the remaining cost of the damages. This out of pocket cost is referred to as a deductible. In this scenario, let’s say your bumper is going to cost $2500 to fix, and your deductible is $500. You will first have to pay the $500 deductible out of pocket and then your insurance company will cover the remaining $2000 in damages.

There are several reasons for deductibles. First of all, they help keep premium costs down due to the insurer not having to bear 100% of the cost. If they had to shoulder all of the cost they would be forced to raise premium rates to compensate for the extra expense. Secondly, if policyholders know they have to pay something out of pocket to have their property fixed or replaced, they are more likely to take care of their property and prevent it from damage. Lastly, deductibles allow policyholders to be able to add another layer of customization to their policies. Higher deductibles usually result in lower premiums, and vice versa.

Coverage Limits

Understanding what coverage limits are is another important piece of basic knowledge to have. A coverage limit is the amount that the carrier will pay up to. Each policy has set coverage limits, and they can vary greatly depending on what type of insurance it is. While carrying a policy with the minimum required limits may be the cheapest option in terms of premium, you are more likely to hit your limit if they are too low. The policyholder is responsible for paying any expenses that exceed coverage limits. Due to the increased costs of repairs, the amount you are responsible for covering could be tens of thousands of dollars or more, so adequate coverage limits are crucial.

Exclusions

Exclusions are things that will not be covered by the policy. These are explicitly listed out in the “Exclusions” section of the policy. It is important to be aware of what your policy does not cover.

These are some common exclusions:

• Intentionally causing damage
• Wear & tear from regular use
• Earthquakes, floods, & natural disasters
• War & terrorism

Endorsements

Endorsements are modifications to a policy. These modifications can change the terms, conditions, and coverage of the original policy. Endorsements can add, remove, or change coverage to be more customized to the customer.

Conclusion

Insurance can seem like a completely foreign world to most people. At Narrows Insurance, we understand that not everyone is an expert, so we take the time to communicate the details of your policy in a way that makes sense to you. Our goal is for you to feel comfortable and confident that you understand your policy, coverages, exclusions, and limits so that you are prepared during a time of need.