words you should know

Insurance companies use a lot of words you might not understand.

  • Insurance Policy – When you buy insurance, you get a document that tells you exactly what is covered and what is not covered. This is your insurance policy.
  • Benefits – The items covered by your insurance are your benefits.
  • Premium – The amount you pay for the insurance is the premium.
  • Filing a Claim – When you ask your insurance company to pay for damages, losses, or other bills, you are filing a claim.
  • Deductible – When you file a claim, the insurance company will pay a part of your costs, but not the whole thing. The amount of money you need to pay before the insurance company will cover the rest is the deductible.
  • Co-Pay – Health insurance has a special term called a co-pay. A co-pay is the amount you pay toward a medical bill before insurance will cover the rest.

what is insurance?

Insurance is a way for you to lower your risk of financial losses if you have an accident, get sick, or experience some other unexpected event. You pay some money every month (your premium) and the insurance company agrees to help you pay for it if something bad happens.

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types of insurance

There are many types of insurance. Here are a few examples of the most common types of insurance.

  • Health insurance – This helps you pay for doctor visits, medical tests, hospital stays, and sometimes prescription drugs. Some policies will require you to pay a certain dollar amount or a percentage of the costs.
  • Life insurance – You pay the monthly premium, and the insurance company pays a person that you select if or when you die.
  • Auto insurance – You are required by law to have some kind of auto insurance in most U.S. states. Auto insurance helps pay for repairs and medical expenses caused by crashes or other accidents.
  • Long-term care (LTC) insurance – These policies help you pay for the cost of assisted living or other nursing facilities. You can buy it for yourself, or you may purchase it for a loved one.
  • Pet insurance – This is a healthcare policy for your pet that helps pay for certain veterinary bills. It protects you from having to pay a lot of money out of pocket if your pet needs an expensive surgery.
  • Disability insurance – If you get sick or injured and you can’t work, disability insurance helps you pay your bills. Your employer might offer some version of disability insurance as a benefit. You can also purchase it yourself.

how does insurance work?

You pay your premium every month. If something bad happens, you submit a claim to your insurance company. Your insurance company will then give you money to help you pay for whatever that event cost. Depending on your policy, certain things might not be covered, which means the insurance company won’t have to pay for those things. Also, depending on your policy, you might have to pay a part of the costs yourself. Of course, if you had no insurance, you would have to pay for all of the costs yourself. Here are some examples:

  • Auto insurance – You hit a deer and wreck the front of your car. The damage to the car costs $2500. Your deductible is $500. This means you have to pay $500 to get your car fixed, and the insurance company will pay the other $2000.
  • Renter’s insurance – A pipe bursts in the apartment above you, which fills your living room with water and destroys all of your electronics. The insurance company pays for you to replace the ruined items.

what affects your premium?

Usually you will pay a lower premium when you agree to pay a higher deductible. A good strategy is to get a policy with the highest deductible that you’d be able to comfortably afford if you had to. This will keep the cost of your policy low.

Your credit score could impact how much insurance companies charge you in premiums. To learn more, visit the Credit section.

Keep in mind that the younger and healthier you are when buying a health insurance or life insurance policy, the less expensive it’s likely to be.

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common questions

If you’re young and in good health, it might seem like a good idea to “save money” by not buying health insurance. A general rule of smart money management is to never insure something you can afford to pay for yourself. But medical care costs a lot. Simply hoping that you’ll stay healthy is a strategy that may have terrible consequences. You may be able to handle the expense of minor health problems, but one serious illness has the potential wipe out your savings and your family’s future.

Regardless of your family circumstances or your age, you should consider life insurance. The main purpose of life insurance is to ease the financial burden of an untimely death. But it can also be an effective tool for asset protection and building wealth. Some types of life insurance can be used as a source of retirement income or to pay for a child’s education. Many financial planners consider life insurance to be an important part of sound financial planning.

When you’re thinking about health insurance, also consider whether long term care insurance (LTC) is right for you. This coverage provides skilled nursing, intermediate care, or custodial care for a patient (generally over age 65) in a nursing facility or at home following an injury. In some cases, adult children buy this coverage for their parents.

When shopping for LTC, be sure to read the fine print. Work with an advisor who understands LTC. Coverage and costs may vary a lot depending on your age, health, and other factors.

Also, consider that in future years you may want to adjust your living situation to suit your changing needs. Do you think you’ll be living with family members or on your own? Some senior communities now offer healthcare and assisted living as part of a complete package of services. Explore some of these options in advance so that you have a realistic understanding of the potential benefits and costs.

Before you buy insurance, always check the “financial strength rating” of the insurance company. This is a measure of their financial soundness and how capable they are of handling the claims of their customers. The highest rating is AAA, followed by AA. Avoid companies without at least an A rating.

You can research these ratings on the Web. There are several companies that rate insurers, including AM Best, Moody’s and Standard & Poors. The most reputable insurers get high ratings from all these companies.

Note: This information is not intended as legal or financial advice. Please consult your legal or financial advisor for more information.

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