World 10 · Taxes, insurance & financial systems · Lesson 6 of 12

Premiums, deductibles and coverage

The three words that decide what an insurance policy costs and what it actually pays.

6 min read · Level: Foundation · Free — no account needed to read

The idea

Three words decide what an insurance policy costs and what it actually does. The premium is what you pay — monthly or yearly — to be covered. The deductible (sometimes called the excess) is the amount you pay yourself on a claim before the insurer pays anything. Coverage describes what is included, up to what limits, and — just as importantly — what is excluded.

These three trade against each other. A higher deductible usually means a lower premium, because you carry more of the small losses yourself. Wider coverage usually costs more. Choosing well means picking a deductible you could comfortably pay from savings, and making sure the coverage actually includes the events you most need protecting from.

Why it matters

Many people only discover what their policy does and does not cover when they make a claim. Reading these three parts first avoids that shock.

A real example

The situation

After a pipe bursts, Lucas claims on his home insurance, expecting the full repair to be paid.

What happened

He learns his policy has a large deductible and excludes gradual leaks. Only part of the repair is covered. When renewing, he compares policies by their exclusions, not just their price.

The takeaway

The cheapest premium hid terms that mattered more than the price.

How people actually behave

People compare insurance mostly by premium, because it is the easiest number to see, and rarely read coverage details or exclusions.

Common mistakes

• Choosing a policy by premium alone.
• Setting a deductible higher than you could pay from savings.
• Never reading what the policy excludes.

Questions to think about

• Do you know the deductible on each insurance policy you have?
• What is excluded from the policy you would most need to rely on?

Try it: Read one policy

1. Pick one policy you pay for.
2. Find its premium, deductible, coverage limits and main exclusions.
3. Check that the deductible is affordable and the key risks are covered.

Words in this lesson

• Premium — The amount you pay, monthly or yearly, to be covered by insurance.
• Deductible (excess) — The amount you pay yourself on an insurance claim before the insurer pays anything.
• Coverage — What an insurance policy includes, up to what limits, and what it excludes.
• Insurance policy — The contract setting out what an insurance covers, its limits, exclusions, premium and deductible.