What is Insurance in Nigeria, Terms Used in Insurance

Insurance is a risk management tool that compensate a person or an entity on event of uncertainty leading to loss. The company offering the service of insuring a person or an asset is called the insurer. The insured or policyholder is the person or an entity who buys insurance.

How Insurance Works?

Insurance distributes personal risk over a large number of people. Insurance therefore relies on large population to function smoothly.

The insured pays a small amount of money known as premium to the insurer, this amount is collected together from many insured persons or entity and used to pay for any claim made by some on an event of loss. The premium is paid periodically as stipulated on the insurance policy.

Terms Used in Insurance

To better understand Insurance it is important to know the components that makes it up. The crucial terms are premium, policy limit, and deductible.

Premium

We already mentioned that premiums are small amounts payed by the insured or policyholder to the insurance company periodically, usually on monthly or yearly bases. The amount required will be stated on the insurance policy. Premiums are usually evaluated by an Underwriter.

Insurance Policy

This is simply the agreement between the insurer and the policyholder, it contains information such as the premium, coverage of the insurance, deductible and other important details.

Here are some of the information contained in typical insurance policy.

• Insurance policy number
• Insurance coverage
• Policy limits
• Premiums
• What’s covered and what’s not
• Your deductible
• Definitions of insurance terms

Insurance Coverage and Policy Limits

Insurance Coverage is the amount of risk or potential loss that is covered by an insurance policy. The maximum amount payable for each covered loss is known as Policy Limits (or limits of liability).

This amount depends on the insurance policy purchased, normally higher Jnsurance Coverage Limits will warrant higher premiums.

Two Types Of Insurance Coverage Limits

Per-occurrence Limits: This is the amount the insurance policy provides for each specific insurance claim.

Aggregate Limits: The total amount payable by the insurance company for all claims while the insurance policy is effective.

Deductibles

Deductibles is the amount you’re required to pay before your insurance policy begins to take effect, Deductibles are different from premiums.

What’s the difference between Premiums and Deductibles?

• Unlike premiums, Deductibles must be completed before an insurance coverage becomes effective, So even if you pay premiums but haven’t payed up the agreed deductible the insurer won’t pay for any insurance claim.
• Usually higher deductible will have you paying lower premiums. On the other hand higher premiums comes along with lower deductible. A deductible can be either a specific amount or a percentage of the total amount of insurance on a policy.

Copay

Copay is a fixed amount payed by the policyholder for the covered claim. For example for an insurance claim of ₦100,000 with a Copay of 20% the insured pays ₦20,000 while the insurance company pays the rest.

It’s important to note that copay doesn’t count towards deductible and only payed after the deductible is completed.