How does an insurance policy work?

 Insurance policies are often in place for a specific period of time. This can be

referred to as the policy term. At the end of that term, you need to renew the policy

or buy a new one. With some types of insurance, you choose a beneficiary, the

person you want to receive the policy’s benefits or payments.

When you buy an insurance policy, part of your responsibility includes paying

a fee called a premium. Some premiums are paid monthly, like health insurance.

Others may be paid once or twice a year, like auto or homeowner’s insurance.

The cost of your premium generally depends on how much of a risk you are to the

insurance company.

In addition to the premiums, most insurance policies include a

deductible. That’s the amount you have to pay first, before the

insurance company pays their share. For example, if you have

a $500 deductible on your homeowner’s policy and a storm

causes $3,000 in damage, you will pay $500 and your insurance

company will pay $2,500. With some policies, you can choose

your deductible. Usually, a higher deductible means a lower

insurance premium.

TIP

A good rule to live by is to

try to have an emergency

savings fund to cover the

cost of a deductible should

an accident occur.

What are common types of insurance?

There are many types of insurance, but some common types are described here.

§ Health insurance: Helps you pay for doctor fees and sometimes prescription

drugs. Once you buy health insurance coverage, you and your health insurer

each agree to pay a part of your medical expenses — usually a certain dollar

amount or percentage of the expenses.

§ Life insurance: Pays a beneficiary you select a set amount of money if or when

you die. The money from your life insurance policy can help your family pay

bills and cover living expenses. There are different types of life insurance.

One is term life insurance, which pays a benefit only if the insured person dies

during the term of the policy (usually from one to 30 years). Another is whole

life insurance, which pays a benefit whenever the insured person dies.

§ Disability insurance: Protects individuals and their families from financial

hardship when illness or injury prevents them from earning a living. Many

employers offer some form of disability coverage to employees, or you can

buy an individual disability insurance policy.