3 Essential Terms You Need to Know When Shopping for Insurance

There are many different kinds of insurance that consumers may need to shop for at some point during their lives. Whether buying home insurance, auto insurance, or some other kind of policy, getting the right coverage may be complicated because of the industry-specific lingo used in the insurance world.

In order to make sure insurance buyers know exactly what they are getting, and how their finances will be affected, there are three key terms to know. Here's what they are, and why they're important.

1. Premiums

The first big thing to know is what the policy premiums will be. Premiums refers to the amount paid to buy the policy. For example, if an insurance plan costs $1,800 a year, then $1,800 would be the annual premium. Many policies are paid for on a month-to-month basis, so when shopping for coverage, the insurer might quote the policy as having monthly premiums of $150.

Premiums vary based on many things, including whether a consumer chooses to bundle coverage or to buy multiple types of insurance from the same carrier. For example, Progressive indicates that consumers average 4% savings by bundling coverage.

Other factors affecting premiums include the level of risk the policyholder presents. The more likely it is the insurer will have to pay out a claim, and the higher the potential payout, the higher the premiums.

There's actually a lot of variation in premium prices between insurance companies as well. This is why any consumer who is shopping for insurance should think about getting several premium quotes so they can compare prices. The easiest way to do this is shopping online and getting quotes from several companies offering pricing within minutes after providing basic details like an address for home insurance or a VIN number for car insurance.

2. Deductible

Deductible is another term to know. The policy deductible is the amount of covered losses a policyholder is responsible for paying for when a claim has been made. Insured policyholders typically have to meet their deductible, or pay out their required amount, before insurers will pay the rest.

There are no deductibles for life insurance policies, but there are for other kinds of insurance plans including home and auto coverage. If a policyholder chooses a $1,000 deductible and then they suffer covered losses that require $5,000 to fix, the policyholder would pay the first $1,000 in repair costs and the insurer would pay the other $4,000.

Higher deductibles mean lower insurance premiums, since an insurer isn't taking on as much risk -- the insured pays out a big portion of most covered losses. But, they come with more unpredictability, since a policyholder has no way of knowing when a loss will happen and they'll have to pay out thousands.

For most people, it's best to choose the highest deductible they can comfortably afford. This way, they benefit from more affordable premiums. It's smart to save the money to cover a deductible using the savings that come from lower premiums.

For example, a policyholder who saves $40 a month by choosing a $1,000 deductible instead of a $500 deductible would want to set aside the $40 for 12.5 months. Then, they would have enough to pay the extra deductible should something happen. If no covered loss occurred, they can keep that money ready to go to pay for potential future losses, while continuing to enjoy the $40 a month savings going forward.

3. Coverage limits

Finally, policyholders need to be aware of what coverage limits mean and how their policy limits impact them. Coverage limits are the maximum an insurer will pay. So, if a policyholder had a maximum of $50,000 in liability coverage and caused more than that amount of losses to others, they might have to pay out-of-pocket for any damages above $50,000.

Think about how much risk to take on when deciding on coverage limits, and err on the side of caution. A person with a lot of assets who is vulnerable to being sued for causing substantial damages would definitely want to opt for higher coverage limits on their insurance plans.

By knowing these three terms, insurance buyers can make the smartest, most informed decisions about what insurance coverage to buy. It's worth the effort to learn them, as an insurance purchase is a very important financial decision.