The process of financial planning would be incomplete without providing for insurance cover. There are a multitude of different types of insurance policies available and virtually any individual can find an insurance company willing to insure them, for a price. The most common types of personal insurance policies are auto, health and life insurance policies.
When choosing a policy, it is important to understand how insurance works. Two of the most important components of all insurance policies are the premium and the deductible. A firm understanding of these two components goes a long way to helping you choose the policy that is best for you.
A policy's premium is simply its price, typically expressed as a monthly cost. The premium is determined by the insurance company based on your, or your business', risk profile. For example, if you own several expensive automobiles and have a history of reckless driving, you pay more for an auto policy than someone with a single mid-range sedan and a perfect record. However, different insurers may charge different premiums for similar policies, so finding the price that is right for you requires some legwork.
The second important policy component is the deductible. Whenever you make a claim, you are required to meet a minimum out-of-pocket expense, or deductible, before the insurance company pays for your losses. Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy.
Policies with very high deductibles are typically cheaper because the high out-of-pocket cost means insureds are less likely to make small claims. When it comes to health insurance, for example, people who have chronic health issues or need regular medical attention should look for policies with lower deductibles. Though the annual premium is higher than a comparable policy with a higher deductible, cheaper access to medical care throughout the year may be worth the trade-off.