Purchasing Insurance
So How Does It Work?
When you complete an insurance application, you will normally pay an initial amount of money with the application. In legal jargon, the money that you pay in exchange for insurance
coverage is called the consideration. In insurance jargon, it is called the premium. Actually, the statements that you make in the application along with payment of the initial premium are part of the consideration. Of course, your statements must be truthful
The premium amount is set by the insurance company and is based on a number of factors related
to what is being insured. In return for the premium, the insurance company agrees to pay for losses
according to the terms of the insurance policy.
Deductible
While the agent is discussing coverage details with the applicant, various deductible amounts will be
presented to the applicant. As the deductible, the lower the premium will be.
A deductible is the portion of a covered loss that is not paid by the insurance company. Therefore,
the insured is responsible for any deductible amount at the time of loss. The insurance company will
pay the remaining portion of any covered loss up to the policy limits.
The insurance company is accomplishing two objectives by requiring a deductible:
1. Deductibles help minimize frequent claims; and
2. Deductibles help eliminate small claims.
By having a $250, $500, or even a $1,000 deductible or higher, an insured will not usually report any
claims up to the deductible amount.
Binder
After completing the application for insurance, the agent should issue a binder to the applicant. A
binder is an oral or written agreement that provides temporary evidence of insurance until a
policy can be issued. Note, that a binder does not guarantee that a policy will be issued. It only
provides temporary coverage while the application is underwritten at the home office. No
binder can be valid beyond the issue date of the policy or beyond its effective date, whichever
periodis shorter.
Once completed, the agent will forward the application and any initial premium to the insurance
company for underwriting. Insurance underwriting is the process of classification, rating, and
selectionofrisks.Inotherwords,it's theprocessofdeterminingwhethertoacceptariskornot.Ifthe
riskisacceptable,theunderwriterswilldeterminetheamountofcoveragetoissueandthepremium
amounttocharge.
WhoAreInsured’s
It's important to know who is insured underthe policy.
The person or entity that is listed first on the declarations page is referred to as the first named
insured. The first named insured is the primary insured and holds the highest rank among all insureds
and has broader rights and obligations under the contract than any other insured.
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