Introduction
Insurance can seem like a complex and intimidating topic, especially for beginners. However, gaining an understanding of the key terms can make it much easier to navigate. This glossary aims to explain common insurance terms in simple language to help you make informed decisions when dealing with insurance policies.
1. Policyholder The policyholder is the person or entity that owns the insurance policy. This is the individual who pays the premiums and has the right to make changes to the policy or cancel it. If you buy an insurance policy, you are the policyholder.
2. Premium The premium is the amount of money you pay to the insurance company in exchange for coverage. Premiums can be paid monthly, quarterly, semi-annually, or annually, depending on the terms of the policy.
3. Deductible The deductible is the amount you must pay out-of-pocket before your insurance coverage kicks in. For example, if you have a $500 deductible on your car insurance and you file a claim for $2,000, you will pay the first $500, and the insurance company will cover the remaining $1,500.
4. Coverage Coverage refers to the protection provided by an insurance policy. It outlines what risks or events are covered by the policy and specifies the limits of the coverage. For example, health insurance may cover medical expenses, while car insurance may cover damages to your vehicle and liability.
5. Beneficiary A beneficiary is a person or entity designated to receive benefits from an insurance policy. For example, in a life insurance policy, the beneficiary is the person who will receive the payout upon the policyholder’s death.
6. Claim A claim is a formal request made by the policyholder to the insurance company for payment of benefits under the terms of the policy. For example, if your house is damaged in a fire, you would file a claim to receive financial compensation for the repairs.
7. Policy The policy is the written contract between the insurance company and the policyholder. It details the terms, conditions, coverage, exclusions, and premium requirements of the insurance.
8. Exclusions Exclusions are specific situations, conditions, or types of damage that are not covered by an insurance policy. For example, a health insurance policy may exclude coverage for cosmetic surgeries.
9. Endorsement An endorsement, also known as a rider, is an addition or amendment to an insurance policy that modifies its terms or coverage. For example, you can add an endorsement to your home insurance policy to cover high-value items like jewelry.
10. Underwriting Underwriting is the process insurance companies use to evaluate the risk of insuring a person or entity. Based on this evaluation, the insurer decides whether to offer coverage and at what premium rate.
11. Actuary An actuary is a professional who uses mathematics, statistics, and financial theory to assess risk and uncertainty. They play a crucial role in determining premium rates and ensuring the financial stability of the insurance company.
12. Liability Liability refers to the legal responsibility for causing damage or injury to another person or their property. Liability insurance covers the costs of such damages or injuries.
13. Grace Period The grace period is a set amount of time after the premium due date during which the policyholder can make a payment without losing coverage. This period varies by insurance policy and provider.
14. Reinsurance Reinsurance is the practice of insurance companies transferring some of their risks to other insurance companies. This helps insurers manage their exposure to large claims and maintain financial stability.
15. Term Insurance Term insurance is a type of life insurance that provides coverage for a specific period, such as 10, 20, or 30 years. If the policyholder dies within the term, the beneficiary receives the death benefit. If the policyholder survives the term, no benefits are paid.
16. Whole Life Insurance Whole life insurance is a type of life insurance that provides lifelong coverage. It includes a savings component called cash value, which grows over time and can be borrowed against or withdrawn by the policyholder.
17. Cash Value Cash value is the savings component of certain life insurance policies, such as whole life or universal life insurance. It grows over time and can be used as collateral for loans or withdrawn by the policyholder.
18. Co-Payment (Co-Pay) A co-payment is a fixed amount the policyholder pays for a covered service, such as a doctor’s visit or prescription, while the insurance company covers the remaining cost.
19. Coinsurance Coinsurance is the percentage of costs the policyholder shares with the insurance company after the deductible has been met. For example, if your health insurance has a coinsurance rate of 20%, you would pay 20% of covered costs, and the insurer would pay the remaining 80%.
20. Rider A rider is an additional provision or amendment added to an insurance policy to customize coverage. For example, you can add a rider to a life insurance policy to include critical illness coverage.
21. Lapse A lapse occurs when a policyholder fails to pay the premium within the specified grace period, resulting in the termination of the policy.
22. Surrender Value The surrender value is the amount the policyholder receives if they cancel a life insurance policy with a cash value component before it matures or the insured event occurs.
23. Insurable Interest Insurable interest is a requirement for purchasing an insurance policy, meaning the policyholder must have a financial or personal stake in the insured person or property. For example, you can’t buy life insurance for a stranger because you lack an insurable interest.
24. Moral Hazard Moral hazard refers to the increased likelihood of risk or loss due to the policyholder’s behavior, knowing they are covered by insurance. For example, a person with car insurance may drive recklessly, assuming the insurance will cover any damages.
25. Peril A peril is a specific risk or cause of loss covered by an insurance policy, such as fire, theft, or flood.
26. Hazard A hazard is a condition or situation that increases the likelihood of a peril occurring. For example, icy roads are a hazard that increases the risk of car accidents.
27. Indemnity Indemnity is the principle of restoring the policyholder to their financial position before a loss occurred. It ensures that the policyholder does not profit from an insurance claim.
28. Subrogation Subrogation is the process by which an insurance company seeks reimbursement from a third party responsible for causing a loss after compensating the policyholder.
29. Umbrella Insurance Umbrella insurance provides additional liability coverage beyond the limits of standard policies, such as home or auto insurance. It is designed to protect against significant financial losses.
30. Waiting Period The waiting period is the time the policyholder must wait before certain benefits or coverage become effective. For example, some health insurance policies have a waiting period for pre-existing conditions.
31. Open Enrollment Open enrollment is a specified period during which individuals can sign up for or make changes to health insurance plans without needing a qualifying event.
32. Network A network refers to the group of healthcare providers, hospitals, and facilities that have contracted with an insurance company to provide services at negotiated rates. In-network providers typically cost less for policyholders.
33. Out-of-Pocket Maximum The out-of-pocket maximum is the most a policyholder will pay for covered services in a policy year, including deductibles, co-payments, and coinsurance. Once this limit is reached, the insurance company covers 100% of covered costs.
34. Adjuster An adjuster is a representative of the insurance company who investigates and assesses claims to determine the extent of the insurer’s liability and the amount of compensation owed to the policyholder.
35. Guaranteed Issue Guaranteed issue refers to an insurance policy that is offered to all applicants regardless of their health status, age, or other risk factors. These policies often have higher premiums.
36. No-Fault Insurance No-fault insurance is a type of car insurance where your own insurer pays for your medical expenses and other damages regardless of who caused the accident. It is intended to reduce the need for litigation.
37. Depreciation Depreciation is the reduction in the value of an asset over time due to wear and tear or obsolescence. Insurance claims for property damage may account for depreciation when determining payout amounts.
38. Replacement Cost Replacement cost is the amount it would take to replace or repair damaged property with materials of similar kind and quality, without deducting for depreciation.
39. Actual Cash Value (ACV) Actual cash value is the value of an insured item at the time of loss, calculated as the replacement cost minus depreciation.
40. Appraisal An appraisal is an evaluation of the value of property, typically conducted by a professional, to determine the amount of coverage needed or the compensation owed in a claim.
This glossary provides a foundational understanding of key insurance terms. By familiarizing yourself with these terms, you’ll be better equipped to navigate the world of insurance and make informed decisions about your coverage options.
