Insurance can be intimidating. Jokes about avoiding insurance salesmen are many. The joke seems to poke fun at a salesman who is “pushing” a product you don’t want to buy. The fact is more likely it is a product you don’t understand.
Insurance can be confusing; a web of jargon and costs that are unclear. It keeps some people from even listening to insurance “pitches” or perhaps, not filing on legitimate claims. Understanding the terminology can reduce the stress and make you a better consumer of the insurance product or help you decide not to purchase what is pitched.
Do not feel anxious if insurance terminology is beyond your understanding. You are certainly not alone. The objective of this article is to make you smarter than most – even if it does not make you more interesting to your friends.
Actuaries are the analytical professionals who specialize in quantifying risk and uncertainty for insurance companies. Their goal is to minimize losses for their employer while making the policy pricing as fair and competitive as possible. In simple terms, actuaries predict the likelihood of an event happening. Most often it deals with when someone is statistically likely to die which makes it possible to price life insurance, so all claimants get paid and the company selling the insurance makes a profit. Similarly, by examining historical data, they can analyze a wide range of insurable risks such as auto accidents.
An adjuster will verify the incident and its circumstances when you make a claim. Once they certify that specific damages have occurred, they provide a check or other payout options, based on how your policy compensates you for the loss. Adjusters may handle “property claims” involving damage to buildings and structures, or “liability claims” involving personal injuries or third-person property damage from liability situations, such as motor vehicle accidents, slip and falls, dog bites, or alleged negligent behavior.
When you experience damage or loss with insured property, you make a claim with your insurance company. A claim provides the company with information about the incident and asks for funds to address the loss. For example, if you’re on the road and someone rear-ends you, you might make a claim with your insurance company to cover the repair costs.
You may still have to pay some of your service costs even if you meet your deductible. The portion you pay is known as coinsurance, which is the percentage you owe versus what your insurance provider pays after you meet the deductible limit. For example, you may have a 15% coinsurance policy, meaning you’re responsible for 15% of costs after you pay your deductible. Your insurance company pays the remaining 85%.
As with coinsurance, a copay means you pay for part of your services. However, a copay differs because it’s a flat fee you almost always owe whether you have paid your deductible or not. It is technically a form of coinsurance but is defined differently in health insurance where a coinsurance is a percentage payment after the deductible up to a certain limit. It must be paid before any policy benefit is payable by an insurance company.
Across insurance types, the deductible is the amount your insurance company requires you to pay before stepping in to meet expenses. This means that you’ll pay a specific amount on your own without the help of insurance.
Deductibles are normally quoted as a fixed quantity and are a part of most policies covering losses to the policy holder. The insurer then becomes liable for claimable expenses that exceed this amount. Depending on the policy, the deductible may apply per covered incident, or per year. For policies where incidents are not easy to delimit (health insurance, for example), the deductible is typically applied per year.
For an example of a deductible, let’s say you are looking for health insurance and have found a policy. It has a $150 premium and a $1,500 deductible. So, you will pay $150 a month and must spend $1,500 of your own money for services before insurance helps with expenses. Every year, the deductible resets, so even if you met your deductible last year, you’d need to pay the $1,500 in the current year for your insurance policy to cover costs.
Exclusions are certain situations in which losses may not be covered. Insurance policies can have several exclusions, which are important to know when comparing policies and coverage. Common exclusions include damage resulting from earthquakes, floods, nuclear incidents act of terrorism and war.
Insured (or Named Insured)
The named insured is the person, party, or company the policy insures. A person or entity who buys insurance is known as a policyholder, while a person or entity covered under the policy is called an insured.
Loss is the damage that the insured property suffers, usually from perils (hazards, risks).
Specific kinds of loss (for example, flooding) may or may not be covered, depending on your insurance policy.
Most often associated with health insurance policies, the out-of-pocket maximum limits the amount you pay annually for covered services. Your deductible, copay, and coinsurance expenses apply to your out-of-pocket maximum. The out-of-pocket maximum helps control the amount you pay for health care, meaning your insurance company will pay in full for many services once you meet the out-of-pocket maximum.
Insurance for your property often pays out in the event of perils (hazards), including fire or theft. If you have specific perils that you’d like coverage for, you can add a rider.
A person or entity who buys insurance is known as a policyholder.
The premium is another word for the payment for your policy or the cost of being insured. Premiums do not count toward deductibles or out-of-pocket maximums.
Replacement cost is the value of your insured property without accounting for depreciation or damage. For example, if you were to total your vehicle, your auto insurance policy may provide money to replace your vehicle instead of the current cash value of your vehicle. In other words, you can purchase a policy that specifies full replacement of the vehicle rather than the depreciated value – at a higher cost, of course.
Rider or Endorsement
An insurance rider/endorsement is an amendment to an existing insurance contract that changes the terms of the original policy. An endorsement/rider can be issued at the time of purchase, mid-term or at renewal time. Insurance premiums may be affected and adjusted as a result. An example might be a specific piece of jewelry the loss of which would be limited by the terms of the policy (typically $1,000). You can cover it to the full value with the purchase of a rider.
Underwriting is an insurance company’s risk calculation that determines whether they will insure you and how much they will charge. Your personal information will impact the result of underwriting. That information is contained in your application. The questions on the application are designed to give the insurer the information needed to make a decision.
With these terms in mind, you can hold your own in most conversations with those explaining or selling you insurance.