Insurance terminology

Welcome to our guide on insurance terminology! If you’ve ever been puzzled by key insurance terms, you’re in the right place. We’ll break down common insurance words in a simple way, helping you understand and navigate your insurance needs better.

Basic Terminology of Insurance

Every discipline has unique terminologies, and insurance is no different. Understanding insurance terminology, including “social security,” is akin to holding a key that unlocks a door to making informed decisions. Let’s dive into some standard terms:

• Premium: This is the amount you pay to your insurer in exchange for insurance coverage. Picture it as a subscription fee that keeps your insurance policy active. For example, you might pay a monthly premium of $100 for your car insurance.
• Deductible: This is the amount you’re responsible for paying before your insurance coverage kicks in. For instance, if you have a $500 deductible on your health insurance and incur $2000 in medical bills, you’ll need to pay the first $500 before your insurer covers the rest.
• Claim: A request made by the insured to the insurer to cover a loss. Suppose your car is damaged in an accident. You would file a claim with your insurance company to cover the repair costs.

Terms Used In Insurance

As you navigate the insurance world, you’ll encounter several terms that may initially seem perplexing. Let’s demystify some of them:

• Underwriting: This term refers to the process insurance companies use to assess risk and determine the premium for an insurance policy.
• Rider: A rider is an addition or amendment to an insurance policy that alters the coverage or terms. For example, a homeowner might add a rider to their insurance policy to cover a newly built swimming pool.

The Five Parts of Insurance

Knowing the structure of insurance – the five parts – can give you a solid foundation to understand your policy better. These are:

• Declarations: This is part of your policy that contains personal information, including your name, address, and a description of the property or risk of being insured.
• Insuring Agreement: This outlines the insurance company’s promise to pay for losses. It defines what is covered and under what circumstances.
• Exclusions: These are specific conditions or circumstances for which the policy will not provide benefits.
• Conditions: You must follow these rules to maintain coverage and receive benefits.
• Endorsements: These are written changes to the original terms of the policy.

Property and Casualty Insurance Terminology

Property and Casualty Insurance also referred to as P and C insurance, protects against losses and liabilities from accidents or other unforeseen events. Some key terms here include:

• Actual Cash Value (ACV): This term refers to the amount an insured item is worth, considering its age and condition at the time of the loss.
• Replacement Cost: This is the cost to replace lost or damaged items with new ones of similar kind and quality without deducting for depreciation.

Other Terminologies Used In Insurance

Here are some less commonly known insurance terms that also will be helpful.

Actuary

• Definition: A professional who uses statistical methods to assess risk and calculate various insurance industry standards.
• Context: Actuaries ensure insurance companies set premiums at the right level to cover claims made by policyholders.

Captive Agent

• Definition: An insurance agent who only sells policies from a single insurance company.
• Context: Captive agents, often employees of the insurance company, may have in-depth knowledge of that company’s policies.

Exclusion

• Definition: Specific situations, conditions, or circumstances that are not covered by the insurance policy.
• Context: For instance, a home insurance policy might exclude damage caused by certain natural disasters.

Float

• Definition: The amount of money an insurance company has from collected premiums but has not yet paid out in claims.
• Context: Insurance companies often invest the float to generate additional income.

In-Force Policy

• Definition: An insurance policy that is active and has not expired or been canceled.
• Context: Policyholders must continue to pay premiums to keep the policy in-force.

Loss Ratio

• Definition: The loss ratio represents the proportion of earned premiums that an insurance company spends on claims and adjustment expenses.
• Context: A heightened loss ratio could signal that the insurance company is either underpricing its policies or experiencing a surge in claims, which might impact its financial stability.

Peril

• Definition: Specific events or situations that are covered by the insurance policy, such as fire, theft, or natural disasters.
• Context: Policies detail the perils they cover and may offer additional coverage for specific perils at an additional cost.

Risk Class

• Definition: The categorization of policyholders based on their level of risk.
• Context: Different risk classes determine the premiums for policyholders based on factors like age, health, and occupation.

Surrender Charge

• Definition: A fee charged if a policyholder cancels a policy before a specified period.
• Context: Often found in life insurance and annuity policies, surrender charges discourage policyholders from canceling policies prematurely.

Underinsured

• Definition: Having insurance coverage, but the limits may not be high enough to cover the full extent of a claim.
• Context: An underinsured motorist might have some coverage, but not enough to cover the costs of a major accident.

Next Steps

Navigating the intricate maze of insurance terminology might seem daunting at first. However, once you understand an insurance policy’s essential terms and structure, you’ll be more confident and empowered to make informed decisions. Remember, insurance is designed to protect you and your assets, so understanding its language is helpful and essential. Whether you’re exploring property and casualty insurance or other types, your newfound understanding of insurance terms will be a valuable tool.

Request Help

Get help from a licensed financial professional. This service is free of charge.