For example, suppose you have a
homeowners insurance policy. You pay $1,000 per year in premiums for a policy
with a face value of $200,000, which is what the insurance company estimates it
would cost to completely rebuild your house in the event of a total loss. One
day, a huge wildfire envelopes your neighborhood and your house burns to the
ground. You file a claim for $200,000 with your insurance company. The company
approves the claim. You pay your $1,000 deductible, and the insurance company
covers the remaining $199,000 of your loss. You then take that money and use it
to hire contractors to rebuild your house.
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