Talking about insurance can be pretty confusing at the best of times, but it’s especially boggling when you don’t even feel like you’re speaking the same language.
Although you might not need to know what a “betterment” means right now, you’ll find your insurance a lot easier to understand if you know what premiums, deductibles and endorsements are.
A premium is what you pay each year in exchange for coverage. Usually it’s talked about as yearly amount, but you can sometimes pay for it in monthly installments.
You might pay $250 per year for renter’s insurance, which means your premium is $250 dollars. You might pay $100 dollars a month for auto insurance, which would make your monthly premium $100.
A lot of things affect your premium amount; some are in your control, and some are not. For example, think about someone that has multiple speeding tickets. They have demonstrated that they are riskier for the insurance company to insure because, statistically, drivers with tickets are more likely to have to make a claim. Or, let’s say they drive an expensive car (like a sweet Ferrari!). That expensive car simply has a higher replacement cost for the insurance company to pay if the car was destroyed, so they’ll have to pay higher premiums to cover that. Those factors can be controlled: someone could choose to drive slower and safer or they could trade in their Ferrari for a Toyota Corolla.
Other factors are out of your control. For example, men under the age of 25 pay higher premiums, again based on the statistical chances they’ll have a claim. But since young men, on average as a group, are riskier drivers, all young men pay higher premiums. Another factor out of your control is if weather in your area has been particularly bad and hail has damaged many houses. Even if you, personally, have not had a home claim, all home insurance premiums might go up to cover the cost of an increased amount of claims.
A deductible is a specified sum agreed upon by the insurer (like AMA Insurance for example) and insured (that’s you!) that you agree to pay before we cover the rest of the claim. It operates as a way for insurance companies to protect against frivolous claims, which in turn helps reduce the cost of premiums.
Let’s say you’re in a car crash. You take your vehicle to a body shop and find out it will cost $5000 to repair. If you’ve chosen a $500 deductible, it means your insurance will pay the remaining $4500 of your $5000 claim, as long as you pay the first $500. If you’ve chosen a $1000 deductible, you will have to pay $1000 and your insurance will cover the remaining $4000.
You have to pick you deductible before you have a claim. You pick a deductible when you’re signing up for a new insurance policy, but you can typically alter your deductible at any time. However, the deductible will affect your premiums: a lower deductible will result in a higher premium, and a higher deductible will lower your premium.
So why doesn’t everyone choose a higher deductible, so that their premiums are lower? Well, because when you need to make a claim, a $1000 deductible out of pocket might be a real financial strain. Or, you may have a less expensive or older car that isn’t worth (to you) paying $1000 out of pocket to fix in an accident. You may even simply prefer the peace of mind of knowing that you’re more covered for minor damage with the lower deductible.
Although it feels like having lower premiums would be better, if you’re really struggling financially, it might be more detrimental to lose the use of your vehicle and not have the $1000 deductible to pay your part of the claim. Paying a bit more per month might be more manageable than having a high deductible that you have to fork over all at once. However, this choice is totally personal, and your insurance advisor can help guide you to the best choice for your needs.
An endorsement is an amendment or addition added to an agreement between parties (such as an insurance policy) that alters the terms of the agreement. So, it’s an add-on to your policy that changes the coverage, either by adding something or excluding something.
Let’s say you have a car insurance policy. If your car gets damaged and is being repaired, you would be left without a vehicle for that period of time. Even if the repairs are being covered by your insurance, you will not be covered for a rental car to drive in the meantime. However, you can add the endorsement SEF 20 to your auto policy. This is a rental car endorsement. You will pay slightly higher premiums for it, but you’ll have the piece of mind of knowing that now you’ll have a rental car provided if you are even in an accident and your car is in the shop.
Endorsements are the way you customize your insurance to fit your needs. It’s important to be aware of exactly what your insurance policy does and does not cover. We know it can be confusing, but your advisor can explain it all to you and make sure you have the right coverage.
Important things to think about when considering endorsements is if you have out-of-the-ordinary things to cover. For example, do you have an extensive, rare baseball card collection? Do you have an unusually large wardrobe full of designer pieces? Do you own priceless art? These unique things may not be included in a standard policy, so you should chat with your advisor about endorsements for them.
Want to learn even more lingo? Check out our glossary. The more terms you understand, the easier it will be to read your policy and understand your coverage. And, your AMA advisor is always available to help you feel confident in your coverage.