Wednesday, November 17, 2010

The Insurance Premium - The Good, The Bad and The Why

Whatever type of insurance you obtain, it does not come free. Insurance coverage is provided by a company that takes on the risk of the value of what you are insuring. When you buy insurance, you become an insured with the company providing the risk (the insurer) and the contract that is created between you and the company is the insurance policy, thus, making you the policyholder.

When you "buy" insurance, the company charges you a premium that is based on many variables. If you are buying health insurance, the premium is based on your age, your health, the pool of people you are in with, etc., etc. Health insurance is such a different animal that we are not going to discuss it here - too many variables. It tends to make my eyes glaze over! Life insurance is also a different animal and one we'll discuss at a later time.

For my discussion here it's more appropriate to discuss premiums for auto and home, etc. The premium, the amount you pay for the insurance, is based on a set of statistics known as actuarial tables. These "tables" are math formulas that consider the item being insured, it's use, the longevity or how long you'll probably own it or how old it is, the original value, and on and on. The company writing the policy is spreading the risk of damage or loss of the insured item amongst others of like kind, referred to as a "pool".

In the case of an auto policy, some of your premium will be based on your being a good driver (no tickets, no accidents). It may also be based on your occupation. Age may come into play, as well. All elements considered relate to the risk of loss that the company has by insuring you and/or your property.

Remember that the premium charged is a fraction of the value of the risk. If you are one of those people who think an insurance company "gets rich and fat off premiums", you might think again.

Let's say your auto premium for a year is $2,000 for full coverage. One day you have an accident - your fault. Your vehicle damage is appraised at $3,500 and the damage to the other guy's vehicle is $4,000. You sprained your wrist during the accident and go to the doctor for a total cost of $200. The driver and passenger in the car that you hit are claiming injuries and end up having claims worth over $3,000 each. Quick total? $13,700+. Oh, and if a lawsuit is filed? The company hires you a lawyer and pays for your defense! Your two thousand in premiums is only a fraction of what the company has had to pay out. Hopefully, your insurance company has taken some of your premium dollars and invested them wisely and successfully. The earnings from these investments are also used to pay claims and losses.

All States require that insurance companies doing business in their State maintain a very specific level of solvency. That means they require them to show a profit, make money and be financially sound in order to be allowed (licensed) to do business. The states watch them like hawks and those that fail are shut down and the policy holders loose big time. It's ok to shop for low premium rates but you might want to inquire as to the financial health of the company you go with. There are ways to check on the financial health of your insurance company through A. M. Best or Standard and Poors, two financial services companies that rate the financial strength of other companies. I'll discuss that another time.

Finley Keller has spent nearly 30 years in the insurance industry, beginning as a licensed agent with a CLU then moving into claims. Auto, homeowner, worker's comp and other liability-only type policy claims. Casualty and material damage.

Her last ten years were spent in SIU (Special Investigative Unit), working with fraud detection. The last four years she was manager of SIU, responsible for working fraud cases and the training of employees in compliance with state regulations as related to fraud. She is a retired member of NCFIA, Northern California Fraud Investigators Association.

She has a Senior Claims Law Associate (SCLA) designation through the American Educational Institute, Inc.

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