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Sep 04, 2019

3 Principles of Insurance

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As consumers, most of us likely have insurance policies for our cars, home and personal items. We’ve all been brought up to understand how important insurance is, but understanding the ins and outs of insurance details can get a bit muddy. Putting money into an insurance policy is no fun, but we assume it’s what will keep us safe in the event of an emergency. However, a surprising amount of people don’t know the fine print of their policies. Understanding the principles of insurance is essential to get the most out of your policy.
Principle #1 - What Is an Insurance Score? Before you get an insurance quote, you should consider your risk to the insurance company. Insurance companies use a combination of credit score and insurance history to determine your insurance score. This score determines your rates and, for some companies, may prevent you from getting insurance if your risk is considered too high.
  • Credit Score. Your credit score can affect your rates, or whether you qualify at all for an insurance policy. Some companies won’t issue policies to someone with a poor credit score since it can be an indication of difficulty managing responsibility. It’s good to check your score before you apply for insurance. If you can work on any issues and quickly improve your score, you will be in a position to save money for months or years to come. The rate you are given when the policy is instated will stay with you for the policy term so this can be quite impactful.
  • Insurance History. Your insurance score is based in part on claim history; your new insurance company wants to determine how careful an individual you are. They will find out about previous claims filed with different companies. For example, if you had homeowner’s insurance and your basement flooded, your insurer will look at what caused the flooding. If it’s a natural occurrence such as a storm, your rates will likely not be affected. However, if your basement flooded because of a broken pipe, that could impact your insurability. Insurers may claim negligence on your part if, as an example, the pipes were overdue for maintenance.
Insurers don’t want to lose money on irresponsible people. And consumers don’t want to pay more than they have to for their policies.
Principle #2 - What Insurance Do I Need? What do you possess that needs to be covered? Also, what do you own that doesn’t? Not every risk is worth the cost of insurance. In most cases, the two possessions that you need to insure are your home and your automobile(s). The law requires that every vehicle be insured. Also, without insurance, recovering from a loss that involves your home is unimaginable for most of us. There may be other needs for insurance policies like personal items so explore these options with your agent.
If you have a number of different policies of significant value, it may be worth looking into an umbrella policy, too, which can help provide additional liability coverage. This is something you can look into with your insurance agent.
How Much Coverage Do I Need?
Home - In short, figure how much it would cost to replace your home (if you own) plus the value of all its contents and insure for that much. If you are a homeowner, there are online calculators to help you figure an estimate of what it would take to replace your home. And of course, when in doubt, talk to an insurance agent. Things you should also consider when creating your policy include:
  • Up-to-date building codes (so you won’t have to pay extra for new building regulations).
  • Recent room additions or renovations you’ve made.
  • All of your stuff. Don’t underestimate how much all of your things are worth, which is a common mistake people make.
  • Liability. If someone is injured on your property and decides to sue, you’ll thank your stars that you came prepared with liability insurance
Auto – For auto insurance, the first thing to decide on is your deductible, which is a relatively small payment that you’re on the hook for in the event of an accident.
Typically, if you want to have a low deductible, your insurance company charges you a higher premium because you are considered a higher risk. If you choose a higher deductible, your premium significantly decreases because you’re considered less of a liability to the insurance company.
Additional things to consider with auto insurance are:
  • How long you’ve been driving. If you’re fresh to the road, your rates will likely be higher.
  • Your lifestyle. Make sure your insurance agent knows all about you. For example, if you’re a veteran, you may be eligible for a discount. If your child has good grades or has gone through a driver’s education course, you’ll qualify for a discount. There are many small discounts that your insurance agent may be able to help you obtain depending on your lifestyle. Most insurance companies also offer discounts if you have more than one policy with them.
If you need comprehensive coverage or can get by with just liability. This may be dependent on any loan you may have on the vehicle or what you want covered in the event of an accident. Explore these options with your lender and insurance agent, if applicable.

Did you know...

Your auto insurance may not cover the cost of paying off your loan if the vehicle becomes totaled? Explore adding insurance to your auto loan to help in the event of a major accident.

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Principle #3 – When to File A Claim. Having an insurance policy is one thing, but knowing when to file is another story. Make sure you understand the details of your policy and the repercussions that come with filing a claim.
When it comes to home insurance, know what your responsibility is and what is considered a real financial emergency. For auto insurance, a good rule of thumb is if the damage is less than your deductible (or you can cover the expense yourself), don’t file the claim. Your rates could be significantly impacted if you have many small claims. Instead, wait until something big happens (with the hope that it won’t) to file that claim. 
Becoming familiar with the principles of insurance isn’t difficult but can be an important part of owning a home or vehicle. Your insurance agent is also there to help. All it takes is a little education on your part and excellent communication between you and your agent to create the best policy to protect all your possessions.


Parts of this article were sourced from Your Money, Dwelling Cost,, and
Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.

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