Insurance is a deal: you pay a regular price, and the insurance company agrees to pay for certain big losses. Knowing the key words, especially premium, deductible, copay, and limit, helps you compare policies by what they really cost in a year.
👪When to teach it: Watch from about 12, help from about 15, do it alone from about 18.
Tick each step as you go if you like; ticks stay on this device.
Math
How it works: Comparing deductibles by total yearly cost
Insurance spreads risk. Many people pay premiums, and that money pays for the few who have big losses in a given year. That's why a premium reflects the losses the insurer expects.
Choosing a deductible is a trade-off: a higher deductible lowers your premium, but you pay more when you have a claim. You can compare plans by figuring the total you'd pay in a year.
Worked example with made-up numbers for car collision coverage: Plan A has a $500 deductible and a $1,200 yearly premium. Plan B has a $1,000 deductible and a $950 yearly premium. With no claims, A costs $1,200 and B costs $950. With one $3,000 claim, A costs $1,200 + $500 = $1,700 and B costs $950 + $1,000 = $1,950. With two such claims, A costs $2,200 and B costs $2,950.
Plan B saves $250 a year in premium but costs $500 more for each claim. So B comes out ahead in a year with no claims, and A comes out ahead in any year with at least one claim. Which is better depends on how likely a claim is and whether you could pay the higher deductible.
yearly cost = premium + (deductible × number of claims), when each claim is larger than the deductible
Try it: Roll a die once for each pretend year; a 1 means you had one claim. Track the total cost of Plan A and Plan B over 10 years. Which plan cost less in your game? Play again with a claim on a 1 or a 2 and see if the answer changes.
Free how-to guides for families, with nothing to earn, pass or send in. They follow U.S. rules and sources; your owner's manual, product labels and state and local rules come first. This guide explains how things work; it isn't personal financial, tax or legal advice.
🛡️ Insurance Basics
Name ____________________ Date __________
You'll need
Your state insurance department's website
Written quotes from several insurers
A calculator
A list of what you want covered
Steps
Learn the key words. The premium is what you pay for coverage. The deductible is the part of a loss you pay before the policy pays. A copay is a set dollar amount you pay for a medical service, such as $15 for a doctor visit. The limit is the most the policy will pay.
Find out what your state requires. Most states require some kind of car insurance to drive legally, but the rules vary. Your state insurance department can tell you what's required and whether your state uses a fault (tort) or no-fault system.
Know the main car coverages. Liability pays for injuries and damage you cause to others. Collision pays for damage to your car from a crash. Comprehensive covers things like theft, hail, fire, and hitting an animal. Uninsured motorist coverage helps when the at-fault driver has no insurance.
Look past the state minimum. State minimum liability amounts can be too low to cover you if you cause a serious crash. Higher limits often don't raise the premium much.
Choose a deductible you could pay. A higher deductible usually means a lower premium. Pick one you could afford to pay after a loss.
Compare quotes the same way. Get quotes from several insurers using the same coverages, limits, and information, and get them in writing.
Compare the total yearly cost. Add the premium to what you'd likely pay out of pocket. A lower premium can mean higher costs when you actually need to use the insurance.
Ask about discounts. Ask about savings for things like insuring more than one car, bundling home and auto, safety devices, or a defensive driving course.
Check the company and review each year. Make sure the company and agent are licensed through your state insurance department. Review your options each year instead of renewing automatically.