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WalletPrep worksheet · Protect yourself

How does insurance work?

Name ____________________ Date __________

Key ideas

  1. Insure the losses you could never pay. A crash, a lawsuit or a hospital stay can cost more than years of savings. Small repairs belong to your emergency fund.
  2. The deductible is your share of each claim. In the example, Nia pays the first $1,000 of a $3,200 repair and the insurer pays $2,200.
  3. The limit is the most a policy pays. Anything above the coverage limit is yours to pay, so check the limits before you buy.

Vocabulary

Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Liability coverage
Insurance that pays for injuries or damage you cause to other people, up to your policy's limits.
Insurance deductible
The amount you pay yourself on a covered loss or medical bill before your insurance starts to pay.

Work it out

Nia has an example auto policy with a $1,000 collision deductible. She pays a $90 monthly premium. A crash leaves her car with a $3,200 repair bill.

  1. Repair bill
  2. Nia's deductible
  3. Insurer pays
  4. Monthly premium
  5. Premium for the year (90 × 12)
  6. Plus her deductible
  7. Nia's cost this year

Check yourself

  1. You have a $500 deductible and a covered $2,000 claim. How much does the insurer pay?

    • A. $500
    • B. $2,000
    • C. $2,500
    • D. $1,500

  2. What is a premium?

    • A. The price you pay to keep a policy active
    • B. The most the insurer will pay
    • C. The amount you pay first on a claim
    • D. A form you send after a loss

  3. Which cost is best covered by your emergency fund instead of insurance?

    • A. A lawsuit after a car crash
    • B. A two-week hospital stay
    • C. A $150 phone screen repair
    • D. A house fire

Your turn

Find the declarations page for each policy you have, often in the insurer's app or website. Write down the premium, deductible and limits for each, and check that your emergency fund could cover the largest deductible.

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Answer key

How does insurance work?

Work it out

  1. Repair bill$3,200
  2. Nia's deductible− $1,000
  3. Insurer pays= $2,200
  4. Monthly premium$90
  5. Premium for the year (90 × 12)$1,080
  6. Plus her deductible$1,000
  7. Nia's cost this year= $2,080
  1. Nia pays the first $1,000 of the repair from her emergency fund. The insurer pays $3,200 − $1,000 = $2,200.
  2. Her premiums for the year are $90 × 12 = $1,080. Add the deductible and her total cost is $1,080 + $1,000 = $2,080.
  3. That is more than half the repair. The policy earns its keep on the rare big crash, like hurting someone, where costs can reach tens of thousands.

Check yourself

  1. D. $1,500 You pay the deductible first. The insurer pays $2,000 − $500 = $1,500.
  2. A. The price you pay to keep a policy active The premium is the regular payment that keeps your coverage in force. The deductible and the limit apply when you make a claim.
  3. C. A $150 phone screen repair Small, common costs are cheaper to cover yourself. Insurance is for losses too large for your savings.