Insurance Basics

• The insurance company is known as the insurer.
• The protected person or property is called the insured.
• The policy owner is also called the policyholder.

Types of Insurance

• Automobile insurance
• Homeowner’s and renter’s insurance
• Health insurance
• Long-term care insurance
• Life insurance
• Disability insurance

Basic Insurance Terminology

• Agent (or broker or writer): A person licensed in a particular state to sell insurance on behalf of an insurance company.
• Claim: A request for reimbursement that a policyholder files after a qualifying event, an event for which the insured has purchased coverage. The amount a policyholder pays in premiums is based in part on the likelihood that the insured will file a claim—the higher the likelihood, the higher the premium.
• Coverage: A specified dollar amount or type of service that an insurance company covers (reimburses) after a policyholder files a claim for a qualifying event.
• Deductible: A set amount of money excluded from coverage (per incident or per calendar year) before coverage takes effect. For instance, a health insurance policy with a $500 calendar-year deductible will not cover the first $500 worth of services that the insured incurs in a calendar year. Instead, the policyholder will pay this first $500 out-of-pocket. Once the $500 deductible is reached, though, the policy then covers all subsequent claims until the end of that calendar year, when the deductible resets.
• Liability: Your financial obligation to pay for the medical bills or property damage that other people sustain as a result of accidents or other incidents that you cause. For instance, if you hit another car while driving and injure the other driver, your auto insurance policy may cover expenses you incur for having to pay for the other driver’s medical bills and auto repairs.

How to Buy Insurance

• Independent agents: These agents are licensed to sell various types of insurance from several insurance companies. Independent agents usually have contracts with different insurance companies and receive commissions equal to a percentage of the premium you pay. Working with an independent agent can lead to higher premiums, but you’ll have the benefit of an expert’s assistance throughout the entire process of selecting and buying insurance—your agent will do all the necessary research and communicate with the insurance companies for you. In addition, only independent agents will offer you quotes (cost estimates) from various competing insurers.
• Captive agents: Captive agents are independent agents that work with only one insurance company. Major insurance companies that use captive agents include State Farm, Allstate, and Nationwide. Working with a captive agent gives you the benefit of the agent’s advice and guidance at a cost that’s usually higher than buying direct, but lower than working with an independent agent.
• Direct writers: Companies that offer insurance directly allow you to contact the company and inquire or purchase it yourself without an agent. Some of the better-known direct writers are GEICO and Progressive. The fastest and often the least expensive way to buy insurance is to work with a direct writer. This option works best for people who know exactly what type of insurance and amount of coverage they need.