Stop Loss
“The higher the stop-loss, the lower the premium will be.”
Remember stop loss is the point the loss stops for the consumer and the insurance company pays the bills from then on. Sometimes, when I take these tests in my head, I take them to a ridiculous extreme to help. Here’s how I would think about it.
- Scenario 1: Someone buys a policy with a $270 stop loss. The insurance company pays and eats any claims after someone hits $270 in claims. If they fall of their bike in January or February, or even if they get blood pressure medicine every month most people will probably have $270 in medical claims so the insurance company is going to be writing checks to pay claims.
- Scenario 2: An insurance company offers a policy with a $2.7M dollar stop loss. Not many people are going to have over 2 million dollars in claims, the insurance company is pretty safe in most years they will not need to write a check so this would be the less expensive policy.
Now you may be thinking “If I need a lung transplant, I’m going to buy that $2.7M policy …. and I’m going to be at the mercy of the insurance company, they can charge whatever they want and I’m gonna buy it.” If that is your thinking you put more into the question then was there. You are right but you put in more than the question had.
In other words if you think about pricing a policy with a $5,000 stop loss vs pricing a policy with an $8,000 stop loss. The consumer is going to pay a higher premium to get to stop paying claims after they hit $5,000. Consumers who are willing to pay the first $8,000 of their claims before the insurance company has to write a check will get a discount. If you have the $5k policy and I’m willing to eat the first $8k of claims shouldn’t I get to pay a lower insurance price then you? You have a much better chance of costing the insurance company money than I do… more likely to hit $5k in claims than $8k. More likely to hit $500 I claims than $5k … do you see how as the number goes down more risk is on the insurance company of having to stroke a check and therefore the premium is higher?
Recommended: Gold
The GOLD Course is ALWAYS the recommended class series for all students as it teaches the material in more depth. Over 30 hours of the most in depth classes with a more intensive teaching of the topic. Learn more about L&H GOLD
Share the Post
Click to share the post to your network