Insurance is a way of protection against potential financial loss due to events outside of ones control. In order to understand how insurance works, it helps to first understand how risk management works. It is basically a form of strategic risk management, primarily employed to mitigate the threat of an unpredictable or contingent loss in certain areas of one’s business. For instance, if there is a chance that a customer will leave your business in the middle of a month, you can plan on two possible scenarios: you can either receive a discount from that customer or you can have him/her pay for damages they cause in their damage-free months of the year. Insurance is one of those tools used for strategic risk management. Thus, understanding how insurance works is crucial to the operation of your insurance agency and its insurance portfolio.
When an insured individual makes a claim against an insurer for a financial loss, the insurer has a number of potential outcomes. The insured may be able to collect on the claim and recover the money lost; the insured may be able to negotiate with the insurer on payment arrangements; or the insured may not be able to make payments on time to cover the monetary loss sustained. Insurance can also be implemented as a tool for other financial loss management purposes.
The premium a person will pay for an insurance policy is determined by two factors: the insurer’s policy limit and the insured’s age and health at the time of application. Policy limit refers to the amount of money the insurer is allowed to charge on a monthly policy term. On the other hand, the life insurance policy term refers to the period of time for which the policy will be in force. If the insured does not die during the specified policy limit, the remaining death benefits are paid to the beneficiary or beneficiaries. Thus, it is important for people to carefully consider the premium for both a life insurance policy and a term insurance policy before applying.
Life insurance policies work through a combination of deductibles, restrictions and premiums. The deductible is the amount that the insured must pay up front before the benefits can be accessed. In most cases, this does not exceed the total of the policy limit. It is important for people to shop for insurance policies carefully to ensure that they are not paying too much for the protection they need. A high premium policy limit can be considered a disadvantage if one does not need the coverage all the time.
The insured’s age and health at the time of application are also factors that influence premium rates on insurance policies. The younger a person is when he applies for insurance, the lower the premium will be. Insurance premiums are also affected by the gender of the person applying. Women generally have less costly premiums than men of the same age.
Another factor that significantly influences premiums is the policy limit. The higher the policy limit, the higher the monthly premium will be. People can get themselves insured beyond the policy limit by paying excess or co-payments. The number of years that the insured has been a smoker also affects the insurer’s rate for his life insurance policy. People who quit smoking after they have been insured will experience significant drop in their premiums.