Demystifying Insurance Jargon: A Beginner’s Guide
The world of insurance is filled with confusing terms and jargon that can be intimidating for beginners. However, it’s important to understand these key insurance terms and concepts when shopping for coverage or filing a claim. This beginner’s guide will explain the most common insurance lingo in simple terms to help you navigate the complex insurance landscape.
What is Insurance?
Insurance is a contract between an individual and an insurance company where the insurer promises to pay for potential future losses in exchange for premium payments from the insured individual. Insurance protects policyholders from financial hardship in the event of illness, damage, injury or other covered scenarios.
There are many types of insurance including health insurance, life insurance, home insurance, car insurance and business insurance. Each policy spells out what types of losses are covered and the amount the insurer will pay if a covered loss occurs.
Key Insurance Terminology
Here are some of the most common insurance terms and what they mean:
Premium: The amount paid periodically (usually monthly) by a policyholder to keep insurance coverage active. Premiums are based on factors like age, location, policy type and amount of coverage.
Deductible: The amount the policyholder must pay out-of-pocket before insurance coverage kicks in. For example, if you have a $500 deductible, you must pay the first $500 of covered expenses before your insurer pays anything. Higher deductibles mean lower premiums.
Copay: A flat fee paid by the insured when receiving a covered service. For example, you may pay a $20 copay when visiting the doctor or filling a prescription. Copays are common with health insurance.
Coinsurance: After meeting your deductible, you may still be responsible for paying a percentage of covered expenses. This cost-sharing amount is known as coinsurance. An 80/20 coinsurance means the insurer pays 80% while you pay 20%.
Out-of-pocket maximum: The most you’ll have to pay in deductible, copay and coinsurance costs per year. Once you hit the out-of-pocket max, the insurer covers 100% of additional covered expenses.
Grace period: The time you have to pay a late premium before your policy is cancelled. Grace periods are usually 30 days but can vary by state and policy type.
Rider: Additional or supplemental insurance you can purchase to enhance a policy. Common riders include coverage for earthquake damage or rental car reimbursement.
Claim: Formal notice to an insurer that a covered loss has occurred. The claim process involves filing proof of loss and any other required documents.
Beneficiary: The person or entity entitled to receive payout from a life insurance policy or annuity after the death of the insured. Policyholders name their beneficiaries.
Liability insurance: Covers claims from third parties for losses caused by the insured, such as bodily injury or property damage. Home and auto policies include liability coverage.
Subrogation: The right of an insurer to legally pursue a third party responsible for a claim paid by the insurer. For example, if someone hits your car, your insurer will subrogate to recover from the at-fault driver.
Health Insurance Lingo
Health insurance terminology can be especially confusing. Here are some key health insurance terms decoded:
In-network: Doctors, hospitals and providers that participate in an insurer’s network and provide services at negotiated rates. Seeing in-network providers will save you money.
Out-of-network: Doctors, facilities and providers that don’t participate in your health plan’s network and can charge higher rates. Out-of-network care costs more.
HMO: A Health Maintenance Organization plan that requires you to see in-network providers and get referrals from your primary care doctor to see specialists. HMOs offer lower premiums but less flexibility.
PPO: A Preferred Provider Organization plan allows you to see any doctor without a referral. You’ll pay less when using in-network providers on a PPO plan.
POS: A Point of Service plan is like an HMO but allows limited out-of-network care subject to higher costs and reduced benefits.
HDHP: A High Deductible Health Plan has a higher deductible than traditional insurance but lower premiums. You must pay out-of-pocket until reaching the deductible.
Co-insurance: Your share of healthcare costs after meeting the plan’s annual deductible. You may pay 20% while the insurer covers 80%.
Pre-authorization: Some plans require pre-approval or pre-authorization before receiving certain services such as a hospital stay. Failing to get pre-authorization can lead to coverage denial.
Explanation of Benefits (EOB): A statement showing how much the provider billed, how much the insurer paid, and the amount you owe based on your deductible, coinsurance and copays.
Auto Insurance Terms
Drivers must understand key auto insurance terms when buying a policy or filing a claim after an accident:
Liability coverage: Pays for injury or property damage you cause others while driving. Liability insurance is mandatory in most states.
Collision coverage: Optional coverage that pays to repair or replace your vehicle after an accident regardless of fault.
Comprehensive coverage: Optional coverage for damage to your vehicle from theft, fire, floods, hail, vandalism and falling objects like tree limbs.
Uninsured/underinsured motorist coverage: Pays if you’re in an accident caused by a driver with no insurance or insufficient coverage. Required in some states.
Gap insurance: Covers the difference between what your vehicle insurance pays if your car is totaled and what you still owe on the loan. Prevents being “upside down” on the car loan.
Aftermarket parts: Cheaper replacement parts that are not made by the original manufacturer. Using aftermarket instead of OEM parts may reduce your claim amount.
Betterment: Insurance concept where your repaired vehicle is considered to be in better condition than before the accident so you must pay a deductible amount to account for the improvement.
Diminished value: The loss in resale value due to an accident even after repairs. Extensive damage can diminish value so insurers may reduce payouts accordingly.
SR-22: A form required for high-risk drivers to prove they have liability insurance. Required after convictions like DUI or frequent accidents.
Homeowners/Renters Insurance Lingo
Protecting your home or rental property requires fluency in key homeowners insurance terms:
Dwelling coverage: Pays to repair or rebuild your residence after covered damages like fire, storms or falling objects. Covers the house structure.
Personal property coverage: Replaces contents of your home that are stolen or damaged by covered perils. Includes furniture, appliances, clothes, electronics and other belongings.
Loss of use: Provides additional living expense reimbursement if your home is uninhabitable due to damage. Covers hotel, restaurant and other costs above normal living expenses.
Flood insurance: Homeowners policies don’t cover flood damage, so you must buy separate flood coverage through the National Flood Insurance Program.
Replacement cost: The amount needed to rebuild your home or replace belongings at current prices without deduction for depreciation. Exceeds actual cash value.
Actual cash value: The depreciated value of your damaged home or personal property. Pays the depreciated cost less your deductible.
Endorsement: Written amendment that alters the coverage or terms of an insurance policy by adding or limiting coverage.
Rider: Adds extra coverage not included in the basic policy, like jewelry or flood protection, for an additional premium.
Liability insurance: Covers injury to others that occurs on your property. Also pays for damage caused by you to others’ property.
Back up of sewers and drains: Covers damage from overflow of water or sewage from outside the home due to heavy rain or blocked drains.
Navigating Life Insurance Lingo
Life insurance has its own unique set of terms and concepts to grasp:
Beneficiary: The individual(s) or entity designated to receive the life insurance payout upon the insured’s death.
Death benefit: The guaranteed amount paid to beneficiaries upon the insured’s death, generally income tax-free.
Cash value: Permanent life insurance policies build cash value that the policyholder can borrow against or withdraw. Term life has no cash value component.
Face value: The death benefit amount payable listed on the policy declaration page. Face value doesn’t include interest or dividend accruals.
Insurable interest: The financial loss someone would suffer from your death required to take out a policy on you. Spouses and business partners have insurable interest.
Variable life insurance: Offers investment options for the cash value to grow tax-deferred. Death benefit and cash value fluctuate based on performance.
Universal life insurance: Offers flexible premiums and death benefit options. Earns interest at a variable fixed rate with excess going to cash value.
Whole life insurance: Offers guaranteed death benefit, fixed premiums and lifetime coverage. Builds cash value at a guaranteed fixed rate of return.
Term life insurance: Provides coverage for a specified period like 10 or 20 years. No cash value accumulation. Offers pure death benefit protection.
Rider: Supplemental benefits like waiver of premium for disability, accelerated death benefits or accidental death coverage. Riders increase policy cost.
Business Insurance Vocabulary
Running a business comes with myriad insurance needs and terminology:
General liability insurance: Protects against claims from customers, clients and vendors for bodily injury or property damage caused by your business operations or employees.
Professional liability insurance: Covers claims alleging failure to perform your professional duties or providing negligent professional advice. Key for doctors, lawyers and consultants.
Product liability insurance: Important for manufacturers, retailers and distributors to cover injury or damage caused by a defective product.
Workers compensation: Provides medical, disability and death benefits to employees injured on the job as required by law. Also covers lost wages.
Cyber liability insurance: Increasingly critical coverage that protects against data breaches, hacking and online identity theft.
Commercial auto insurance: Covers vehicles used for business purposes including company cars, work trucks and fleet vehicles.
Business interruption insurance: Replaces income lost and operating expenses incurred when disaster shuts down your business temporarily.
Key person insurance: Covers financial loss your business would suffer if an important employee or owner dies. Proceeds maintain stability until replacement is found.
Umbrella insurance: Provides additional liability coverage above and beyond other policies like auto and general liability for added protection.
Final Tips on Insurance Lingo
Learning common insurance terminology is key to successfully shopping for policies and understanding your existing coverage. Here are some final tips for navigating insurance jargon:
- Always ask your agent to explain unfamiliar terms when considering a policy or filing a claim.
- Use context clues from the words before and after an unknown term to help discern the general meaning.
- Jot down unfamiliar words and research them later to improve your insurance vocabulary.
- Check your policy declarations page for definitions of key terms specific to your coverage.
- Take advantage of online insurance dictionaries and glossaries from reputable sources like insurers or regulators.
The world of insurance has a language of its own full of unique lingo and concepts. But by mastering some of the most common insurance terms, you can be better equipped to protect your assets and make informed decisions regarding your coverage. With this beginner’s guide, you now have a firm grasp of the basic insurance terminology needed to navigate policies with greater confidence.