What are insurance premiums?
Being informed about key insurance terms can save you time and money. This will guide you to understand what you are paying, how much the insurance company will pay you and what your part of the expense will be. You will encounter these three words with every insurance policy: premium, limits, and deductible. You’ll come across them when you buy almost any form of insurance. Knowing their meaning will help you be a more informed shopper and save you time and money. Learn more about the definition of each word:
Premium is the price you pay for insurance. Underwriters calculate premiums on a number of clients characteristics such as: building, construction materials, distance to fire protection, historical loss experience, weather, annual revenue, payroll, valve of vehicles, credit rating, motor vehicle record and industry classification. If you want a continuous safety net, always pay your premium on time – typically monthly, quarterly, semiannually, or annually. Often, insurers will offer a discount to business owners who pay their entire premium when a policy is initiated.
If you don’t pay your premium, your insurer will eventually cancel your policy (or in insurance lingo, your policy will lapse). If you want to protect your business, it’s important to pay your insurance premiums on time.
If your business has a covered loss, your insurer will cap how much it will pay to settle your claim. These caps are known as policy limits (or limit of liability). Their size depends on how much insurance you decide to purchase and the types of policies purchased (e.g General Liability, Cyber Risk, Errors & Omissions, Commercial Property, etc.) How insurance limits work depends on the type of insurance. For example, with liability policies there are usually two types of insurance coverage limits, per-occurrence and aggregate.
For Workers’ Compensation insurance, policy limits depend on the type of loss. For example, when employees suffer a work-related injury or illness, they can be compensated for their lost wages and medical bills (“Coverage A”) These payments depend on the particular state where the employee is based and the state’s schedule of benefits.
Your policy deductible, sometimes called an annual deductible, is what you pay out of pocket before your insurance policy pays once the deductible limit is satisfied. In effect, it’s a form of risk sharing between you and your insurance company.
Insurance companies typically offer a range of deductible amounts for small and large business owners. Your premiums will be higher, if you select a low deductible. Conversely, if you don’t mind paying more out of pocket on claims, then choose a high-deductible policy. This will typically reduce your premium.
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PolicySmart’s’ risk management consultants provide independent Group Benefits, Retirement and Commercial Insurance advice by reviewing your current portfolio of policies to improve coverage and reduce cost. By using our proprietary database – The CMR Database® (comprising some 13,000 brokers and specialists globally), we maximize access to the insurance and retirement industry providing greater options that will translate to better coverage and lower cost.
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