If you have an insurance policy, you’ve likely heard of premiums, deductibles and limits. But do you know what each of these terms means? Each of these concepts helps determine both how much you’ll pay for your insurance (homeowners, auto, boat or life, for instance) — as well as how much you may receive after a covered loss.
Here’s a quick guide to these important terms:
Premiums are the amount you pay to your insurer regularly to keep a policy in force. You may be able to pay premiums monthly, quarterly, every six months or annually, depending on your insurance company and your specific policy.
Many factors may affect premium prices. For instance:
Your homeowners insurance premium may be based on the limits (the maximum your policy will pay after a covered loss) you choose; your home’s age and condition; your claims history; your credit rating; optional coverages you select and the amount of your deductible, explains the National Association of Insurance Commissioners (NAIC).
Auto insurance premiums may be calculated based on a combination of factors such as your age, driving record, age of your car, types of coverage you choose, the limits (the maximum your policy will pay after a covered loss) you select, where you live and drive, how much you drive and your credit score, says the Insurance Information Institute (III).
Life insurance premiums, explains the III, are usually based on the amount and type of life insurance you select as well factors like the length of your policy, your age, health and life expectancy.
Your deductible is the amount you pay out of pocket before your insurance will help pay for a covered loss, explains the III. Example, if you carry a $500 deductible and have $10,000 in damages after a fire in your home, you’ll likely pay $500 before your insurance covers the remaining $9,500. (The amount of coverage you have depends on the limits you choose.) Deductibles may be required for certain parts of or types of insurance policies but not for others, says the III.
Unlike health insurance, where you usually have to meet a single deductible for an entire calendar year, deductibles for other types of insurance policies generally apply each time you make a claim, says the III.
In some cases, your insurance company may set deductibles for particular policies. In other cases you may be able choose your deductible. In general, the higher your deductible, the lower your ongoing premium will be. For example, if you choose a $1,000 deductible on your auto policy, you will likely pay less in monthly premiums than you would for a policy with a $250 deductible.