10 Insurance Terms You Should Know Before Signing a Policy
When looking at insurance options, you’ll come across a lot of complicated words you might not be familiar with. Here’s a breakdown of some common insurance terms you need to know before signing a policy.
Insurance is essentially a contract between two parties: an insurance company (the “insurer”) and a person or entity (the “insured”). The insured pays a premium to the insurance company, and in exchange, the insurer agrees to pay for certain losses or expenses.
There are many different types of insurance, and each has its own set of terms and conditions. You might have car insurance, homeowners insurance, health insurance, and more. You pay into each of these programs and get benefits in return. For example, when you go to the doctor, your health insurance covers some or all of the cost for you. If you get in a car accident, your auto insurance covers some of the damage.
Insurance agreements often contain a lot of complicated or confusing terms. And if you’re not sure what they mean, it’s pretty difficult to make an informed decision. Here are 10 standard insurance terms that you should understand before signing a policy.
The policy is the agreement document that outlines your terms and conditions. It includes information about your insurance plan, like the amount of coverage, your premium, your deductible, the types of losses or expenses covered and not covered, and the process for making a claim.
A claim is a formal request for payment from your insurance company. It includes information about the loss or expense, including when and where it happened and how much damage occurred. With health insurance, the claim is often submitted by the healthcare provider. For other types of insurance, you might have to manually file a claim.
The premium is what you pay the insurance company for the coverage. It might be a monthly or annual fee, but if you don’t pay the premium, you’re not covered. It might seem like wasted money if you never have an accident or make a claim — but ultimately you’re paying for peace of mind.
The deductible is the amount you have to pay “out of pocket” before the insurance company starts paying. For healthcare, the deductible is an annual amount you need to hit before the insurance takes over.
For car insurance, it’s usually an amount per accident or per claim. Often a higher deductible goes with a lower premium, and vice versa. So if you choose the lower monthly payment, you’ll have to pay more out of pocket if you get into an accident. But if it’s the other driver’s fault, they could end up paying for your damages with their insurance while you owe nothing.
Your coverage is how much money the insurance company will pay on a claim — in other words, the amount of liability or risk that the insurer is willing to take.
This term can also refer to the type of insurance you have, such as auto insurance, health insurance or life insurance. Within car insurance there are also different types of coverage, like comprehensive, collision, personal injury and uninsured motorist coverage.
An exclusion is what’s not covered in your policy. For example, it’s common for a policy to exclude losses due to “acts of God,” like lightning strikes or natural disasters. So homeowners insurance might cover floods from broken pipes, but not floods caused by a torrential downpour or overflowing river.
Other common exclusions are losses or damage caused by war, acts of terrorism, nuclear hazards, power failure, government action, mold and mildew, wear and tear, or willful damage.
Liability is the legal responsibility to pay for someone else’s losses. For example, if you’re driving a car and cause an accident by hitting another car, you might be held liable for the other driver’s vehicle damage, medical expenses, pain and suffering, or lost wages.
Liability insurance covers injury or losses to other people when the damage is caused by your actions or neglect. But it usually doesn’t cover your own injury or property damage.
Underwriting is the process an insurance company uses to evaluate someone when determining whether to offer coverage and what the terms will be. Depending on the type of insurance, underwriting takes a range of factors into consideration, such as age, health conditions, driving record, and even credit history to figure out whether or not you’re a good risk.
This data helps determine your coverage amount, premium, deductible, and other details. For example, an older person might pay higher premiums on health insurance because they typically have more health issues, whereas a younger person might have higher premiums on car insurance because they usually have less driving experience.
An endorsement — also known as a rider — is an amendment or modification to your insurance policy that changes the terms and conditions. Endorsements can add or remove coverage, increase or decrease coverage limits, change your deductible or premiums, add or remove people from the policy, and more.
Often an endorsement will be issued when you purchase a policy or at renewal time, but it can also be done mid-term or when conditions change. For example, if you buy a new car, you might add it to your auto insurance coverage. If you get married or divorced, you may change your health insurance to add or remove your spouse.
An agent is a licensed professional who sells insurance policies on behalf of one or more insurance companies. Agents can help you choose the right policy based on your budget and coverage needs. They can also assist you with filling out the paperwork, or completing the process if you need to file a claim. While agents represent the insurer, an insurance broker is an independent professional who represents you, the policyholder.
Always read your policy carefully before you sign it, and don’t hesitate to ask your agent or broker any questions you may have before committing. But understanding these common words and phrases helps you make a more informed decision about which policy is right for you, with the best coverage for your needs.