What is 'Insurance Coverage'
Insurance coverage is the amount of risk or liability that is covered for an individual or entity by way of insurance services. Insurance coverage, such as auto insurance, life insurance – or more exotic forms, such as hole-in-one insurance – is issued by an insurer in the event of unforeseen occurrences.
BREAKING DOWN 'Insurance Coverage'
Insurance coverage helps consumers recover financially from unexpected events, such as car accidents or the loss of an income-producing adult supporting a family.
Insurance coverage is often determined by multiple factors. For example, most insurers charge higher premiums for young male drivers, as insurers deem the probability of young men being involved in accident to be higher than say, a middle-aged married man with years of driving experience.
Auto Insurance Coverage
Auto insurance premiums depend on the insured party's driving record. A record free of accidents or serious traffic violations typically results in a lower premium. Drivers with histories of accidents or serious traffic violations may pay higher premiums. Likewise, because mature drivers tend to have fewer accidents than less-experienced drivers, insurers typically charge more for drivers below age 25.
If a person drives his car for work or typically drives long distances, he generally pays more for auto insurance premiums, because his increased mileage likewise increases his chances for accidents. People who do not drive as much pay less.
Because of higher vandalism rates, thefts and accidents, urban drivers pay higher premiums than those living in small towns or rural areas. Other factors varying among states include the cost and frequency of litigation; medical care and repair costs; prevalence of auto insurance fraud; and weather trends.
Life Insurance Coverage
Life insurance premiums depend on the age of the insured party. Because younger people are less likely to die than older people, younger people typically pay lower life insurance costs. Gender plays a similar role. Because women tend to live longer than men, women tend to pay lower premiums.
Engaging in risky activities increases insurance costs. For example, a racecar driver faces increased risk of death and, as a result, may pay high life insurance premiums or be denied coverage.
A person's medical records help determine insurance rates. A history of chronic disease or other potential health issues with an individual or family, such as heart disease or cancer, may result in paying higher premiums. Obesity, alcohol consumption or smoking can affect rates as well.
An applicant typically goes through a medical exam to determine whether he has high blood pressure or other signs of potential health issues that may result in premature death for the applicant and increased risk for the insurance company. People in good health typically pay lower life insurance premiums.
A person pays more for insurance coverage for a longer policy term and a larger death benefit. For example, the risk of dying for a person with a 30-year policy is greater than the risk of dying for a person with a 10-year policy.
Personal Lines Insurance
Property and casualty insurance products for individuals. Personal insurance lines help protect individuals from potential losses they couldn’t afford to cover on their own and makes it possible to do things like drive a car and own a home without risking financial ruin. Personal lines insurance and commercial lines insurance each make up about half of the overall insurance market.
BREAKING DOWN 'Personal Lines Insurance'
Personal lines insurance include products such as homeowners insurance, flood insurance, earthquake insurance, renters insurance, automobile insurance, life insurance, disability insurance, umbrella insurance and health insurance. These products protect individuals and families against potentially crushing financial losses caused by fire, theft, natural disasters, death, accidents, lawsuits and illness.
Some types of personal insurance, such as automobile liability insurance and, under the Affordable Care Act, health insurance, are required by law. Others, such as comprehensive and collision automobile insurance and homeowners insurance, can be required by lenders when property is used as loan collateral. The amount of insurance coverage available generally depends on how much the individual is willing to pay in premiums; the more someone is willing to pay, the more insurance they can obtain. However, individuals may be unable to purchase a policy for a particular risk if they pose too great of a risk to the insurance company. For example, someone with a history of cancer might not be able to purchase life insurance. In other cases, high-risk individuals can still purchase insurance, but will have to pay above-average premiums to compensate the insurer for the extra risk. An example is high-risk auto insurance for drivers who have been at fault in multiple accidents over a short time.
Personal lines won’t cover every risk an individual might face, but they can dramatically reduce the dollar amount of potential losses. Individuals can usually tailor each policy’s coverage and deductibles to strike the right balance between the amount of coverage and the cost of premiums.
Insurance Premium
An insurance premium is the amount of money that an individual or business must pay for an insurance policy. The insurance premium is considered income by the insurance company once it is earned, and also represents a liability in that the insurer must provide coverage for claims being made against the policy.
BREAKING DOWN 'Insurance Premium'
The amount of insurance premium that is required for insurance coverage depends on a variety of factors. Insurance companies examine the type of coverage, the likelihood of a claim being made, the area where the policyholder lives or operates a business, the behavior of the person or business being covered, and the amount of competition that the insurer faces.
Actuaries employed by an insurance company can determine, for example, the likelihood of a claim being made against a teenage driver living in an urban area compared to one in a suburban area. In general, the greater the risk associated with a policy the more expensive the insurance policy will be.
Policyholders are often given a number of options when it comes to paying an insurance premium. Some insurers allow the policyholder to pay the insurance premium in installments, for example monthly or semi-annual payments, or may require the policyholder to pay the total amount before coverage starts.
Insurance premiums may increase after the policy period ends. The insurer may increase the premium if claims were made during the previous period, if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.
Insurers use the insurance premium to cover the liabilities associated with the policies that they underwrite, as well as to invest the premium in order to generate higher returns. Insurers will invest the premiums in assets with varying levels of liquidity and return, with the amount of liquid assets often set by state insurance regulators. Regulators want to make sure that policyholders will be able to have their claims paid for, and thus require insurers to retain adequate reserves.
