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Your Risk and the Insurance Company’s Risk

When you pay your insurance premiums month after month, it might start to feel like you are just giving money away for no good reason. And if you’ve ever had a claim denied because the damage to your property was no higher than your deductible, you might really feel like you’re getting the short end of the stick.

But insurance is all about risk for you AND the insurance company. While the insurer gets to spell out all the terms of the contract, and you just agree to the terms by making payments, when it comes to risk, you and the insurance company are equal partners because you both assume some risk when you have an insurance policy.

Your risk is broken up into three things: deductibles, limits and premiums. Deductibles serve as some risk to you because if your insurable event costs as much as your deductible is, then you will be required to pay for it.

Limits expose you to a bit of risk because, if your claims damage exceed the limits of your policy, you will not get any insurance company reimbursement for the amount and will need to pay them out of pocket. Of course, you can avoid this if you have an umbrella policy.

Insurance premiums are a sort of risk because it is possible that you may pay your premiums, year after year after year, and never actually have a claim. To many individuals, this makes insurance a “waste.” But the risk is what you need to pay for protection against what COULD happen. This is not a waste; it is simply the way that insurance works.

Coverage is the mainstay of insurance company’s risk. For example, let’s take a look at auto insurance. Your auto insurance coverage may go so far as to offer you reimbursement for a car that is totaled. That means that after just a few small auto insurance premiums, your insurer could be responsible for buying you a brand new car.

April 6, 2011

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