You probably have an intuitive understanding of what insurance is and how it works. You may even have had extensive experience in buying insurance and in dealing with insurance companies. But few people-expert or novice-stop to ask themselves what insurance actually is. So what does it mean to buy insurance, really?
Buying insurance is paying someone to assume risk for you.
Risk is… well, risky. Everyone is willing to assume some risk in their lives. After all, it’s difficult to imagine life without a little risk. But some risk is too great to bear. Insurance is a way to manage these types of risk by shifting the burden to somebody else in exchange for money. This may sound a bit abstract, but understanding how insurance works at this level gives us a solid foundation for addressing the issues and answering the questions that we’ve laid out for ourselves in this chapter.
Key Terms
Before we proceed, let’s review some key insurance lingo that will help us make sense of the different types of car insurance and the way they differ.
Policy: Your policy is the legal contract you sign with the insurance company. In exchange for premium payments, the insurance company promises to pay for claims that fall within the terms of the contract.
Policy limit: Your policy limit is the maximum amount that the insurance company is obligated to pay under your policy.
Premium: Your premium, in short, is the cost of a policy, which is usually specified in a certain dollar amount over a given period of time. As you might expect, purchasing a policy with a higher limit will mean paying a higher premium.
Coverage: Coverage guarantees that the insurance company will pay for a certain type of claim. Any given policy usually contains multiple coverages, e.g., Theft, liability, fire. If you are “covered” for it, you can expect the insurance company to pay if it were to happen.
Policyholder: The policyholder is the person who purchased the policy.
Insured: The insured is the individual or individuals who are covered under a particular insurance policy contract. The insured is in many cases the policyholder, but others-the policyholder’s family, for example-may also be the insured under the terms of the policy.
Deductible: With certain types of insurance, the policyholder-that’s you-will have to pay a certain amount before your insurance will pay the rest. This amount is referred to as a “deductible.” High deductible policies are less expensive because you’re assuming more financial risk. Likewise, low deductible policies will mean higher premiums as a way of compensating for the fact that the insurance company is promising to pay a greater amount of money in the event of a claim.
Claim: A claim is a demand that a policyholder makes to the insurance company for payment. The payment must be for expenses or losses that fall within the terms of the policy, resulting from something for which the policyholder is covered.
Why Buy Car Insurance?
There are three reasons. The first is that a minimum amount of insurance is required by New Jersey law, and in virtually all other states. The second is buying insurance is smart. For most of us, our car is the single greatest source of risk in our lives. Because driving is such an integral part of our day-to-day experience, it’s easy to forget what driving actually entails: conveying a steel box at high speeds filled with explosive liquid, and on roads filled with other such vehicles operated by other very, very fallible human beings.
More than anything else you own, your car is by far the most likely cause of significant injury to yourself or others, and the most likely reason why you’d be sued for significant sums of money-in most cases far more than you’d be able to afford. A sound principle to abide by is to only risk what you can afford to lose. For the vast majority of people, the type of losses that are commonly the results of car accidents represent risks that are too great to assume themselves. Nobody wants to be a victim, and buying insurance soundly is one of the best means of ensuring that this doesn’t happen.
The third reason is a matter of our duty as responsible citizens. Insurance isn’t just about protecting ourselves. It’s also about protecting others from us. We all make mistakes, but, unfortunately, driving means that seemingly minor errors-momentary lapses in judgment and attention-can irreversibly alter another’s life, and even end it. I believe that we must be responsible for our actions and accountable for our mistakes. Buying insurance is the best means of ensuring that we are able to take full responsibility for any mistakes we make on the road.
If you or someone you care about has been in an accident, we’re here to talk.
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