Insurance can be a tangled web of jargon and unknown costs. The uncertainty regarding insurance might keep you from filing insurance claims or even trying to purchase insurance. Fortunately, insurance terms usually refer to concepts that are understandable once you see the definition behind them. If you feel that a lot of insurance terminology goes over your head, you’re not alone. This guide should clarify many elements among various kinds of insurance. Let’s explore the insurance terminology consumers need to know to make the right decisions about their coverage.
Across insurance types, the deductible is the amount your insurance company requires you to pay before stepping in to meet expenses. Deductibles are often in the thousands of dollars, meaning that you’ll pay a specific quantity to your service provider on your own without the help of insurance.
If you have a low deductible, your premium (or monthly payment for the insurance policy) will likely be higher, and vice versa. Additionally, deductibles covering multiple people (or vehicles, in the case of car insurance) are more expensive. Premium payments do not count towards the deductible amount. Specific services also don’t count towards the deductible, such as oil changes for car insurance and routine care visits for health insurance.
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.
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. For example, annual checkups with your primary care physician might have a copay of $25, regardless of how much you have paid for medical services over the course of a year.
The out-of-pocket maximum limits the amount you pay annually for covered services. Your policy’s deductible, copay, and coinsurance expenses apply to your out-of-pocket maximum. Federal law caps out-of-pocket maximums, but your policy’s maximum is likely far under the legal limit. The out-of-pocket maximum helps control your out-of-pocket expenses for health care, meaning your insurance company will pay in full for many services once you meet the out-of-pocket maximum.
RIDER OR ENDORSEMENT
A rider or endorsement changes your insurance policy. It may narrow or broaden your coverage, or give you an additional type of coverage your policy lacks. In addition, riders and endorsements can adjust your policy’s cost. For example, if you wanted to increase your life insurance payout and add your child as a beneficiary, a rider would include your child on the policy and increase the premium accordingly.
OTHER INSURANCE TERMS WORTH UNDERSTANDING
Now that you have these five basic insurance terms under your belt, here are a few others to familiarize yourself with. Each term comprises a significant part of your insurance policy.
Underwriting is an insurance corporation’s risk calculation that determines whether they will insure you and how much they will charge. Your personal information can affect the result of underwriting.
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 for the replacement cost instead of the cash value of your vehicle.
The premium is another word for the monthly payment for your policy. Paying your premium is necessary for keeping your policy. Premiums do not count toward deductibles or out-of-pocket maximums.
Insurance for your property often pays out in the event of perils (aka hazards), including fire or theft. If you have specific perils that you’d like coverage for, you can add a rider.
The named insured is the person, party, or company the policy insures.
Loss is the damage that the insured property suffers, usually from perils. As with perils, specific kinds of loss may or may not be covered, depending on your insurance policy.
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.
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.
An adjuster or examiner 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.
Actuaries are professionals who calculate risk using data and statistics. Insurance companies use figures from actuaries to set pricing for their policies.