Insurance is a contract between the insurer, the company, and the insured, you or an entity to protect your financial loss in the event of a major occurrence. The guideline or the rule of the insurance company is they must make you whole. In other words, you can do two versions of insurance. There’s either agreed value or there’s actual cash value. The actual cash value is the easiest one to remember because that’s typical car insurance.
Your car loses value over time in most cases. So in this situation, if you had a total claim, the cost of your car three years from today is probably a lot less than you would get if you sold it today. In that scenario, the actual cash value that you’re insuring goes down over time. The agreed value is just an agreed amount. More of your classic type cars were a 1969 Ford Mustang is probably worth, let’s just say $20,000.
And if that car got an accident, the actual cash value would only be about $800. So in that scenario, you’re not going to claim it for that or you’re not going to insure it for that. You’re going to insure it for the agreed amount. For the agreed value, just like a baseball card or a basketball card. The collector ability that it’s getting rarer and there’s fewer of them out there, it’s going to have a higher value and you’re going to do an agreed value policy for home insurance.
It’s really based on the square footage that you have of a home and the cost of materials. How much does it cost for us to rip all the debris, to pay someone, to take it away, and to buy the same materials and put the house back? How do we make you whole? And that’s how an insurance company is going to base the type of policy. There are some exclusions that you may or may not need to learn about.
And in this channel, we’ll go into more depth of them. We actually have a one on one on auto and on home insurance. So you can get more in-depth with that as well. When you’re agreeing to purchase a policy, you are pulling your money with everybody else. That’s getting a policy with that company, and that’s how that risk is able to be paid for.
You’re essentially borrowing money from other people, and the insurance company is making a profit off of the premiums. The premium is what you pay for that policy. When you write that contract or that declarations page and you sign that paperwork, you’re agreeing to pay them a specific amount or the agreed amount for that type of risk. They build in a little bit of profit on that risk because they’re going to turn around and try to invest and make more money based on that. If you have a loss or a total loss in that scenario, it’s pulling from all of the people that have bought a policy to pay off your claim.
There’s two documents with a policy which is the policy documents, that’s the whole thing. Everything combined into one. If you say, I want my policy documents, that’s everything you can think of. If you just want the declarations page, that’s essentially the page. Sometimes a couple of pages that declare what your coverages are.
In this scenario, most companies want to know what you carried before to getting a new policy. If you’re switching companies that declarations page, list your vehicles, list your drivers, list your coverage, and all of the main things that they would need to prove that you have insurance, what limits you’re carrying, and how high of a risk you would be coming from one company going to the next. There are a few different pieces that most people hopefully never get to find out, but there are a ton of jobs in the industry and making up what insurance is and there’s a lot more to it. We have adjusters, we have service people and we have tons of actuaries and different job titles that deal with the parts of your policy. Essentially what there is there’s a lot of specialty departments and if you’re new to the industry and you’re just trying to figure out what’s what definitely subscribe to this channel, we’re going to go over that if we haven’t already which we likely have in most of our topics.
So go ahead and check the site out for most of that information. If you have a claim, you’re going to call a claims adjuster. They’re going to assess the risk. They’re going to send an Inspector sometimes to check the car out or check the house out and if they agree on the amount, they’re going to just write you a check or whatever the policy agreed amount or agreed action is taken. Different coverages offer different premiums so there’s a ton of different things that you can choose from.
If you want to learn more about the specifics and the coverages of the policies, I have two topics that you should check out. Either the insurance 101 for car insurance or the insurance 101 for home insurance. Go ahead and check either one of those out. We’ll get very detailed and quickly show you what a policy looks like.
I’ll see you in the next one.