What Insurance Terms Every Policyholder Should Know

1. Premium

Your premium is the amount of money you pay to your insurance company to maintain your coverage. It can be paid monthly, quarterly, semi-annually, or annually. The amount of the premium depends on several factors, including the type of coverage, your risk profile, and the insurance company’s underwriting policies.

2. Deductible

A deductible is the amount of money you must pay out of pocket before your insurance company begins to cover costs. For example, if your auto insurance deductible is $500 and your repair costs are $1,500, you will pay the first $500, and your insurer will pay the remaining $1,000.

3. Policyholder

The policyholder is the person or entity that owns the insurance policy and pays the premiums. If you purchase an insurance policy for yourself, you are the policyholder.

4. Claim

A claim is a request made by the policyholder to the insurance company for payment or compensation based on the terms of the policy. Claims are made after an event or incident covered by the policy, such as an accident, theft, or damage to property.

5. Coverage

Coverage refers to the protection and benefits provided by your insurance policy. Different types of insurance offer different types of coverage, such as liability, collision, and comprehensive coverage for auto insurance, or death benefit coverage for life insurance.

6. Beneficiary

A beneficiary is the person or entity named in a life insurance policy who will receive the death benefit when the policyholder passes away. In some cases, a policy may have multiple beneficiaries.

7. Exclusion

Exclusions are specific conditions or circumstances listed in the policy that are not covered by the insurance. For example, certain health insurance policies may exclude coverage for pre-existing conditions, while homeowners insurance may exclude damage caused by floods.

8. Rider

A rider is an add-on or modification to an existing insurance policy that provides additional benefits or coverage. For instance, a disability rider on a life insurance policy could provide income in case of a disability, or an earthquake rider could extend your homeowners policy to cover earthquake damage.

9. Underwriting

Underwriting is the process by which an insurance company evaluates the risk of insuring an individual or asset. Based on the underwriting process, the insurer decides whether to offer coverage and at what premium rate. Factors such as age, health, driving record, or home location can all influence the underwriting process.

10. Liability

Liability is your legal responsibility for causing injury to another person or damage to their property. Liability insurance helps cover the costs of legal fees, medical expenses, or property damage if you’re held legally responsible for an accident or event.

11. Death Benefit

In life insurance, the death benefit is the amount of money paid to the beneficiary when the insured person passes away. The death benefit is usually tax-free and can be used for various expenses, including funeral costs, debts, and living expenses for the family.

12. Co-Payment (Co-Pay)

A co-payment is a fixed amount you pay out of pocket for certain healthcare services after your deductible has been met. For example, you might have a $20 co-pay for a doctor’s visit, which you must pay even if your health insurance covers the rest.

13. Coinsurance

Coinsurance is the percentage of costs you share with your insurance company after meeting your deductible. For example, if your health insurance policy has 80/20 coinsurance, your insurer will pay 80% of covered medical expenses, and you will pay the remaining 20%.

14. Cash Value

In permanent life insurance policies (like whole life or universal life), cash value refers to a portion of your premium payments that accumulate over time as a savings or investment account. The cash value can be borrowed against, withdrawn, or used to pay premiums.

15. Grace Period

A grace period is the time after your premium due date during which you can still make a payment without losing coverage. If you miss a payment but pay within the grace period, your insurance will remain in force. Grace periods vary but are usually between 10 and 30 days.

16. Term

In life insurance, the term refers to the length of time the policy is in effect. Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years, after which the policy expires or must be renewed.

17. Comprehensive Coverage

In auto insurance, comprehensive coverage pays for damage to your vehicle caused by incidents other than collisions, such as theft, vandalism, natural disasters, or falling objects.

18. Collision Coverage

Also in auto insurance, collision coverage helps pay for damage to your vehicle resulting from a collision with another vehicle or object. It typically covers repair or replacement costs regardless of who is at fault.

19. Peril

A peril is an event that can cause damage or loss, such as a fire, storm, or theft. In property insurance, policies may specify covered perils (such as fire or theft) and excluded perils (such as flooding or earthquakes).

20. Actual Cash Value (ACV)

Actual Cash Value refers to the value of an item at the time of the loss, accounting for depreciation. In contrast to replacement cost coverage, which pays for a new version of the damaged item, ACV only reimburses you for the value of the item as it is currently worth, factoring in its age and wear.

21. Replacement Cost

Replacement cost coverage reimburses you for the cost of replacing damaged or stolen items with new ones of similar quality, without deducting for depreciation. This is common in homeowners insurance for personal property and structures.

22. Subrogation

Subrogation is the process by which your insurance company seeks reimbursement from the at-fault party’s insurance after paying your claim. For instance, if you’re in a car accident and your insurer pays for the damage, they may attempt to recover the costs from the other driver’s insurer.

23. Limit

A limit is the maximum amount your insurance company will pay for a covered loss. There are usually two types of limits: per-claim limits (the most your insurer will pay for a single claim) and aggregate limits (the total amount your insurer will pay for all claims during the policy period).

24. Lapse

A lapse occurs when your insurance policy is terminated due to non-payment of premiums. If your policy lapses, you will lose your coverage and may need to reapply, which could result in higher premiums.

25. Endorsement

An endorsement (also called a rider) is a change or addition made to an insurance policy to modify its terms or coverage. Endorsements allow you to customize your policy, adding coverage for specific items or situations not covered by the standard policy.