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Insurance Policy Features and Limits

Insurance companies are professional risk takers that provide protection against financial losses caused by illness, death, accidents, natural disasters, and other destructive or damaging events. When you purchase insurance, you pool your risks and premium dollars with other people. You pay (or your employer pays for you) a premium to an insurance company that, in return, pays you (or someone else) for the damaging effects of a loss, should one occur.

Evaluating your insurance needs is an important part of financial planning. This includes determining how much coverage you need and what type of policy you should buy. When selecting insurance, you should:

• Choose a company with a strong financial rating
• Select enough coverage to adequately insure your income (e.g., disability insurance) and assets (e.g., liability and property insurance)
• Select the highest deductible you can afford
• Pay annually or semi-annually rather than quarterly or monthly (to reduce premium costs)
• Avoid duplicating coverage
• Ask about available discounts (e.g., price break for having all property coverage with one insurance company)
• Follow "The Rule of Three" and compare at least three competing insurers
• Take the time to read a policy and understand it, preferably before signing a contract

It is also important to understand the following policy features that specify coverage limits:

• Benefit Coordination Clauses--This feature is designed to prevent people from collecting from two insurance policies for the same expense, especially in the case of two-worker families with employer-provided health coverage.
• Deductible--This is a dollar figure, usually a flat dollar amount (e.g., $200 or $500) that an insured person must pay out-of-pocket before their policy reimburses them for the remainder of a loss. For example, with a $500 deductible and a $2,000 loss, the insured would pay $500 and their insurance company, the remaining $1,500.
• Elimination Period--With some types of policies (e.g., disability and long term care), the policy states a certain number of days (e.g., 30, 60, or 90), starting from the start of an insurable event (e.g., injuries from an accident), before benefits are paid.
• Co-Payment--Co-payments are commonly used with prescription drug coverage and office visits to health maintenance organization (HMO) plan doctors. They are the amount (e.g., $5 per office visit or $10 per prescription) that an insured person must pay out-of-pocket. The remainder of the cost is covered by their medical plan.
• Co-Insurance--This is the amount (usually stated as a percentage) of a loss than an insured person is expected to pay out-of-pocket. For example, some health insurance policies pay 80% of approved charges and the insured is responsible for the balance. Generally, there is a limit (e.g., $2,000) on the amount you must co-pay per year. This limit is called a "stop-loss limit."
• Policy Limit (a.k.a., Lifetime Maximum)--This is the highest dollar amount that a policy will pay. For example, an auto insurance policy with a $300,000 liability limit will not pay benefits greater than $300,000. Some health insurance policies only pay benefits up to $250,000, sometimes for an entire family. A much better policy limit is a maximum of $1,000,000, or no policy upper limit, for each family member.