To answer your questions:
1. Your customer will pay what your post office will charge so you must know that information to enter it as the cost of the insurance in your listing or store
2. You pay auctiva insurance for either domestic if it is within your country or international if it is outside of your country, not both
3. If the item is lost or damaged, file a claim and you will receive what you insured the item for, in your example that would be $500
4. You must be sure you purchased the insurance within a day, typically this is automatic when they pay through auctiva checkout, or and you have 90 days from shipment to file the claim
I hope this clears it up. If you still have trouble, go ahead and post, then I can help or someone else may come along.