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Understanding Premiums and Deductibles

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Before you had insurance, did you ever hear the words “premium” or “deductible”? Probably not. Those are words that generally apply to insurance, and for whatever reason, it’s easy to get the two terms confused. In this article, we’ll try to clear up any confusion.

The amount of money you pay for your insurance is called a premium. The more coverage you have, the higher your premium will likely be because that means the insurance company will potentially have to pay out more if a claim is made. The amount of your premium is solely determined by the likelihood of a claim being made. Factors that determine your premium can include:

  • Your driving record
  • Your age
  • What you drive

You may be talking to a friend about car insurance, and your friend might have a completely different premium for what seems to be the same kind of car, but you may have a better driving record and drive an older vehicle than your friend. You may also be getting discounts that your friend may not be getting. Let's look at two drivers, Joe and William, who are both 24 years old, both male, and both drive the same kind of 4-door sedan. Joe has had two speeding tickets, but Keith has a clean driving record. Both have good credit, but Keith just bought a house and has insured it with the same company that insures his car. Who do you think pays a higher auto insurance premium? Most insurance companies would consider Joe a higher risk due to his speeding tickets; therefore, his premiums are probably higher than William’s. In addition, William probably gets a discount for insuring both his car and his home with the same company.

That example was for auto insurance, but you'll find a similar pattern with homeowners insurance. Homeowners insurance also bases the amount of your premium on your likelihood of a claim. In fact, homeowners insurance is a lot like real estate—location matters! It just matters in a different way than it does in real estate. If you live in an area that could be at risk for wildfires or other natural disasters, your insurance company might have higher rates. In addition, if you have a pool, a trampoline or anything else that could put you at higher risk for a claim, your rates may be higher. Ask an insurance agent to help you find ways to minimize your risk that might help lower your rates. While you’re at it, ask about any discounts you may qualify for.

Your policy states that the deductible means an amount of money deducted from the total amount paid for covered property damage claims. . Basically, it's the amount you agree to pay if you make a claim. For instance, if your vehicle is damaged in a hailstorm and sustains $2,500 in covered damage. If you have comprehensive coverage and your deductible is $500, you will pay $500 and your insurance company will pay $2,000, which is the remaining amount that is covered under your policy.

The amount you choose for your deductible has an impact on the amount of your premium, too. The higher your deductible is—or the more you're willing to pay for damages out of your own pocket—the lower your premium is likely to be.

If you have questions about deductibles and premiums, visit with your insurance agent. They can help you determine what’s best for your financial situation.

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