Demystifying The World of Insurance

February 12, 2019 | by BMI Staff

Insurance can be a confusing and often frustrating part of our everyday lives. Determining which coverage is right and how much of it is appropriate can be impossible without a bit of clarification, which is exactly why we’re here. Scroll through this guide to find answers to your biggest questions about the world of insurance. 

How does my deductible impact my premium?

A deductible is the amount you must pay for each separate claim before insurance will begin to cover the rest. This amount is agreed upon and set at the starting date of every insurance policy.  

The amount of your deductible has a direct impact on the amount of your premium. Your premium is the set amount that you pay for your insurance monthly, semi-annually, or at another agreed-upon interval. The reason this correlation exists is directly related to the entire purpose of an insurance company, which is simply to transfer risk. When you choose to transfer more risk onto your insurance company by choosing a lower deductible, you will pay a higher premium to make up the difference. If you opt to take on more of that risk by choosing a higher deductible amount, your premium will be reduced.  

While companies typically issue some parameters surrounding your minimum deductible, there is some choice regarding how much you would like to add onto it. If you are accident prone, it may be wise to hold onto that lower deductible amount, so you are not constantly breaking the bank with out-of-pocket expenses. If you have gone a long period of time without submitting a claim, it may be wise to increase that deductible amount to save more on your premium. Always consider the out-of-pocket expense you would be able to afford in the event of a claim. 

Actual Cash Value vs. Replacement Cost

When you’re deciding which coverage is right for you, it’s important to know the difference between actual cash value and replacement cost.  

Actual cash value, or ACV, requires a simple formula to understand. It is the price you originally paid for the insured property minus depreciation, defined as the effects of wear and tear over time. For example, when you return a clothing item to the store without a receipt, they might offer you the value of the item as it is on the day you return it. If it has gone on sale since the purchase, you will receive the sale price rather than the original price you paid. A 15-year-old laptop insured for ACV will be worth substantially less money than it was purchased for all those years ago. For “personal property,” or possessions within your home, replacement cost is the most reasonable choice in coverage.  

Replacement cost is the second option for your insurance policy, and this coverage replaces or repairs damaged property with new property of the same like, kind, and quality in the event of a loss.  

While homeowners will typically benefit more from replacement cost coverage, there are some cases in which an ACV policy is more feasible. Older homes fit this unusual circumstance perfectly. Homes that were built in the 1800’s and early 1900’s often feature expensive building accents such as hand-carved oak paneling and crown molding. The cost of replacing such features would be exponentially higher than the cost of rebuilding by today’s standards. Because of this, an insurance premium with replacement cost would be very high. Opting for an ACV policy wouldn’t allow for original replacement, but it would at least offer a way to rebuild the home for a reasonable price. 

Named Perils vs. Open Perils

Though appropriately named, there is much confusion regarding what exactly is covered by named peril and open peril insurance policies. A Broad Form will cover only the perils that are named within the policy. When you choose a Special Form, the opposite is true—you’re signing up for an open perils form. This type of form covers any peril, except for those that are specifically excluded. A common misconception is that an open perils form will be the more expensive option. That seems to make the most sense, because these policies cover several more risks. However, these policies are typically granted to newer houses with fewer hazards, and the small risks associated actually make them more affordable.  

Still have a question or two related to your policy? Give one of our agents a call! They would be happy to talk through your unique needs and explain the coverage options that best suit you.