Insurance basics
Insurance 101: the ideas every policy is built on
You don't need to be an expert to buy insurance well. You just need a handful of core ideas — and the confidence to ask the right questions.
How insurance works
Insurance pools money from many people so that the few who have a covered loss in a given year can be paid back. Here's what that looks like from your side:
- 01
Pay a premium
You pay a regular price to keep the policy active.
- 02
A covered event happens
Something the policy lists — an accident, a storm, an illness.
- 03
Pay your deductible
You cover your share of the bill first.
- 04
The insurer pays
Up to your limit, minus anything excluded.
Glossary
12 terms you'll see on almost every policy
Learn these and most policy documents start to make sense. Each hub has more terms specific to that type of coverage.
- Premium
- The price you pay to keep a policy active — billed monthly, twice a year, or yearly.
- Deductible
- The amount you pay toward a covered claim before the insurer starts paying.
- Coverage limit
- The most the insurer will pay for a covered loss, per claim or per year.
- Copay & coinsurance
- Health-plan cost sharing: a flat fee (copay) or a percentage (coinsurance) after your deductible.
- Exclusion
- Something the policy clearly will not pay for, such as flood damage on most homeowners policies.
- Claim
- Your formal request asking the insurer to pay for a covered loss.
- Declarations page
- The summary page of your policy: who and what is covered, limits, deductibles, and the premium.
- Liability coverage
- Pays for injuries or damage you cause to other people or their property.
- Replacement cost
- Pays what it costs to replace an item new today, without subtracting for age or wear.
- Actual cash value
- Pays what an item was worth at the time of loss — replacement cost minus depreciation.
- Rider / endorsement
- An add-on that changes a policy, like extra coverage for jewelry or a home business.
- Underwriting
- How an insurer reviews your details to decide whether to offer coverage and at what price.
Before you buy
Six questions worth asking about any policy
Bring these to any insurer or agent. Clear answers make it much easier to compare offers fairly.
- What exactly is covered, and what is excluded?
- What are the limits and deductibles on each part of the policy?
- How does the insurer pay claims — replacement cost or actual cash value?
- Which discounts might apply to me, and what do they require?
- How do I file a claim, and how long does it usually take?
- What happens to my price at renewal?