People obtain insurance coverage to safeguard themselves and their properties from potential risks. By getting insurance coverage, policyholders intend to make a loss manageable by reducing financial uncertainty. The amounts paid in insurance premiums are minimal compared to the compensation the insured would qualify for in the event of a loss. Insurance terms and definitions can get quite confusing for people outside the industry. Knowing the meanings of the terms the insurers use is critical to help you understand what your policy covers and doesn’t. Below, we explain some standard insurance terms and definitions.
Premium
An insurance premium refers to the money a person or business pays for an insurance policy. The amounts paid as premiums vary from company to company and are also influenced by the kind of coverage given. Some companies require a lump sum payment before providing cover, while others might give you the option of monthly, quarterly, or semi-annual installment payments. Since it’s central to an insurance contract, “premium” is one of the most critical insurance terms and definitions.
Insurance premiums cover a broad range of insurance including life, health, and auto insurance, among others. When an individual or business enters into an insurance contract with an insurance company, they must pay the amounts agreed on at contract initiation. Failure to pay the agreed premium could lead to a revocation of the policy and removal of cover.
The amounts paid for insurance premiums vary depending on several factors. First, a comprehensive cover results in higher premiums than a limited cover because the insurer assumes a more significant risk. Secondly, the insurance company will examine the applicant’s insurance and claims history to determine the probability of a claim and the premium amount payable. Other factors determining the amount of the premium include the applicant’s age, credit history, and, in the case of health coverage, the applicant’s medical history.
Deductible
The primary purpose of insurance covers is to indemnify the policyholder. The insurer reimburses the policyholder by restoring them to their position before the loss. When an insured person claims a loss, the amount payable is arrived at after removing the deductible amount that the parties to the contract agreed on.
In insurance terms and definitions, deductibles refer to the amounts the insured must pay toward the insured loss. Deductibles show how risk is shared between the insurer and the insured. If, for instance, your house is damaged after siding installation and you lodge a claim with your insurance company, a deductible is the amount that the insurer will deduct from your insurance before settling the claim.
You could use either a percentage or dollar amount deductible when entering into an insurance contract. If, for instance, you have an insurance policy that has a $5,000 deductible and you lodged a $10,000 claim, you’ll be required to pay $5,000 while your insurer will pay the difference. The amounts paid as deductible are generally determined by the amount the insurer pays in premiums. When the amount paid as a premium is high, the deductible is lower, and vice versa.
Claim
A claim is a formal correspondence from the insured to the insurer requesting payment after an incident covered by the insurance policy. A claim is based on the terms specified in the insurance policy, and the insurance company will usually review a claim’s validity before making payments. Claims are usually a matter of contention between insurers and the insured and are central to understanding insurance terms and definitions. Payments are intended to cover the insured for the expenses that arise from an incident. Since the details on the insurance policy determine the amounts paid, the insurance company will only pay the person or entity named on the policy document or a specified beneficiary.
Insurance policies cover specific circumstances, and a claim will arise when loss or damage occurs. For example, if you have a homeowners insurance cover, a claim could arise when your home or property gets damaged. Should your property suffer after a water incident, your rain insurance policy could get you indemnified. The insurance company should also indemnify the homeowner in the event of injuries suffered by visitors on the premises or when the house is robbed.
When you’ve insured your car, a collision repair services claim could arise when your vehicle is involved in an accident that damages the car, other people’s cars, or property or causes bodily harm or fatalities. While the terms in the insurance policy will usually determine the types of claims that arise after an incident, life insurance claims are exact as the policy document sets out the person to be paid in the event of the insured’s death.
Actual Cash Value
When insuring your properties, you have the option of either insuring for actual cash value (ACV) or replacement cost value (RCV). For most people obtaining insurance for the first time, ACV and RCV are confusing insurance terms and definitions. As the latter term implies, the RCV of a product or property is the amount you would require to replace what you’ve lost with a new product. If, for instance, your car suffered extensive damage in an accident, the cost you would incur to get a brand-new vehicle is the RCV.
ACV refers to the cost of reimbursing the policyholder at the property or product’s current value. Continuing with the example of the car above, the car’s ACV is the amount required to replace the damaged car, less the depreciation at the time of the accident. The ACV will consider the car’s age and other expenses incurred for auto body collision repair.
While the car in our example could have been in sound condition before the accident, it could have also lost substantial value due to natural wear and tear or age. To arrive at the car’s ACV, insurance companies usually rely on assessments from insurance loss adjusters (see more below). Similarly, suppose contractors from your black mold removal company damaged your patio furniture. In that case, the insurer will use ACV to reimburse you for the value of the items as they were before the damage rather than what it would cost you to get new furniture.
In-Network
In insurance terms and definitions, In-Network is widely used in the medical field. When purchasing your health insurance policy, this is one term that you should pay close attention to as it will significantly influence the amounts you pay. Most people opt for In-Network covers to get quality health services without spending too much money. The term refers to the arrangements in some health plans that connect the insured with a network of healthcare facilities, pharmacies, and healthcare professionals. To be admitted into a network, healthcare facilities and professionals usually go through rigorous credentialing. Most health insurance plans have networks, and the people they insure must use the doctors and facilities in the network.
Using the services of professionals in a network helps consumers save money. Patients can enjoy discounted prices When they visit an in-network professional or facility. The fundamental importance of using the services of a network is best appreciated during an emergency. Should you need to make medical visits for emergency surgery or get admitted to a hospital after a severe injury, the expenses you might have to pay for doctors and facilities not covered in your network could prove astronomical. Operating within a network also means that your health insurance provider will refer you to known specialists ensuring that you get the best service at a minimal cost.
Out-of-Network
Out-of-Network is the exact opposite of in-network in insurance terms and definitions. While your health insurance provider could have a network of professionals and facilities you need to visit, sometimes you might be forced to seek help from providers out of that network. If, for instance, you visited a destination far away from home and suddenly fell ill, you might have no option other than visit the nearest facility, which could be out of your health insurance provider’s network.
Whenever you visit an out-of-network facility, you’re likely to incur expenses that you might have avoided if you used the in-network facilities. While your insurance coverage will pay for the costs in the contract, you’ll have to pay for any additional expenses. If you travel a lot, it helps to clarify with your health insurance provider the kind of benefits and reimbursements you qualify for if you might be forced to use out-of-network facilities.
Adjuster
An insurance adjuster, also known as a claims adjuster, is employed by the insurance company to investigate insurance claims. When the insured lodges a claim, the insurer contracts the adjuster, and the latter examines whether the insurance company should pay and, if so, how much should be spent. If, for instance, you are a firm of roofing contractors and lodged a claim with your insurer for compensation after rain damage on a site you’re working on, the adjuster will look at the policy documents to decide if you might qualify for storm damage reimbursement. In other instances, such as car accidents, the adjuster could interview the people present to determine how much you could get indemnified. Other insurance terms and definitions synonymous with an adjuster are investigator and claims agent.
Broker
The terms insurance broker and agent are confusing in insurance terms and definitions. The confusion in the terms arises from the fact that both agents and brokers sell insurance. An insurance broker works for a commission and can sell insurance policies from different insurers.
A broker is a trusted professional who analyzes a client’s needs and, based on the broker’s knowledge of the market, recommends the insurance company that’s ideal for the customer. An insurance agent represents an insurance company and can conduct the insurance transaction from the beginning to the end. While independent agents could work for several companies, there are captive insurance agents who work for only one company. The factor distinguishing a broker from an agent is that the former’s primary objective is to serve the client, while the latter primarily aims to help the insurer. Suppose you were looking for a church insurance policy, for example. In that case, a broker will not be in a hurry to recommend a particular insurance company but will research all the insurers providing such cover and finally put you in touch with a provider who seems best fitted to give the cover.
Co Pay
One of the least understood and confusing insurance terms and definitions is Co-Pay. The term is used in health insurance and refers to the arrangement where the insurer pays a portion of the medical bill while the client has to pay the remainder out of pocket. Some people can’t appreciate why they might be required to pay for a portion of medical expenses when they already have a cover.
The amounts the insured pays under a Co-Pay arrangement are minimal and will usually not exceed 30%. When insurance companies give a policyholder the Co-Pay option, what this means is that the insured will pay less in premiums but be willing to meet a proportion of the expenses out of pocket. When you’re in reasonably good health, you might not see the logic behind a colossal premium payment and might be content to co-pay for an emergency when the need arises. By using a Co-Pay arrangement, you get lower premiums, and, in a year, you could save up to 30% in premiums. This is the kind of arrangement some employers, such as HVAC contractors and others who hire relatively young and healthy workers, find beneficial.
Dividend
Regarding insurance terms and definitions, dividends are confusing because some people equate them with stock dividends. When somebody takes a life insurance policy, the money paid to the insurer is usually invested. As a result of improved economic conditions, the insurer could get good returns and might decide to share the accruing profit with the permanent life insurance and disability policyholders. That is when the insurance company declares a dividend.
In a way, the insurer is returning some of the money obtained from the premium as a dividend. While every insured person would like to receive an annual dividend, these payments are not guaranteed. Since the ability to earn surplus income depends on the prudence of the investing company, it helps to carefully research an insurance company before taking an insurance policy with it. A dividend could be received as a cash payment or used for future premiums.
Understanding insurance terms and definitions is crucial if you’re to obtain a cover that will serve you well. Since you’re paying to protect yourself, your loved ones, and your property from potential risks, failure to understand what the terms mean might mean that you’ll saddle yourself with a plan that doesn’t meet your needs. You’ll undoubtedly appreciate the importance of understanding insurance terminology when you see the wide range of unusual insurance covers today, such as alien abduction insurance, rain insurance, and cold feet insurance.
