The terms of the insurance industry do seem so complex majorly due to jargons that often tag along with it. This calls for a proper understanding of most common insurance terms in ensuring you make an informed decision regarding your insurance cover. Health, auto, house, or business insurance cover becomes so confusing unless you have an idea of the most fundamental terms to settle on the most suitable policy for your needs.
In this article, we will break down some common insurance terms, explain how they are important, and provide you with tips so you better understand the world of insurance.
Why Insurance Terms Matter
Reviewing an insurance policy requires clarity. Misinterpreting terms may lead you to getting the wrong coverage, being overpaid on premiums or over-insured when circumstances in life call for it badly. Understanding insurance terms will help in avoiding all these mistakes; thereby, you will:
You make informed decisions.
- You do not get any hidden costs or exclusions.
- You opt for coverage that caters to your specific risks.
Insurance Terms You Need to Understand
Premium
Premium is the money you pay to your insurance company, usually monthly, quarterly, or annually, to keep your policy current. Premiums differ depending on a number of factors, such as coverage limits, deductibles, and level of risk.
- Tip: A higher deductible can reduce your premium but increase your out-of-pocket cost at claim time.
Deductible
A deductible is the amount you agree to pay upfront, before your insurance coverage kicks in. For example, as shown in the illustration above, the car insurance policy has a $500 deductible; your repair cost is $2,000. You pay the $500 and the remaining $1,500 is paid by your insurer.
- Tip: Understand how your deductible impacts your overall cost, and therefore choose one that suits your pocket.
Policy Limit
Policy limit is the maximum an insurer is willing to pay for covered losses within any term of the policy. Limits are applied in a different manner based on whether it is a per incident limit or an aggregate limit.
For instance, the liability policy may be covered under a $100,000 per occurrence and aggregate annual limit of $300,000.
Key Terms by Policy Type
Auto Policy Terms
Liability Coverage You are protected from other people’s injuries or damages to their properties.
- Collision Coverage: This covers your bill for repairing your car with any collision.
- Comprehensive Coverage: This covers any damage except collision. Examples include loss by theft, floods, etc.
Health Insurance Terms
- Copayment (Copay): the amount you would pay for once-off services, be them medical or pharmacy, as agreed.
- Coinsurance: the percentage at which you share your eligible bills of a covered benefit as agreed by your plan
- Out-of-Pocket Maximum: the maximum payable during a policy term, following which your insurance company covers 100% of the costs
Home Insurance Terms
- Replacement Cost: a cost to replace your property without depreciation.
- Actual Cash Value (ACV): This includes the value of your property minus the depreciation.
- Rider (Endorsement): A supplement to your policy, including additional coverage such as jewelry or art.
Business Insurance Terms
- General Liability Insurance: It covers claims for damages to or loss of property or bodily injury resulting from your business operations.
- Professional Liability Insurance: A safety net of funds in case of professional negligence or error in the service provided.
- Business Interruption Insurance: Compensates for loss of income and expenses if your business is interrupted.
Reading and Comparing Insurance Terms
1. Read the Policy Carefully
Every insurance policy comes with tremendous amounts of paperwork. But though long, the time spent reading through it is well worth your time to understand all coverages, limits, and exclusions.
- TIP: Always look for “Definitions” and “Exclusions” as they generally are the fine print in most cases.
2. Ask Questions About Anything You Are Unsure Of
Never be afraid to ask your insurance agent to clarify anything you don’t understand. A professional can break down insurance terms and explain how they may apply to your individual situation.
- Example Question: “How does my deductible affect the premium, and what’s the best balance for my budget?”
3. Leverage Online Resources
Most of the insurance companies provide the list of common terms at their website. They might be helpful to you for deciphering the terms which you hear but do not understand them.
4. Comparison of Policies
It is wonderful when you are purchasing an insurance while comparing side-by-side. You can compare the premium, deductibles, and limits for coverage to know which is good for you.
- Pro Tip: Use online tools that enable you to compare side-by-side policies of different providers.
5. Independent Agent
Independent agents will provide you with unbiased advice and help you navigate choices available between insurance companies.
Avoiding Common Errors
1. Not Accounting for Exclusions
Exclusions are risks or perils not covered under your insurance policy. For instance, normal homeowners insurance will typically exclude flood damage coverage.
- Solution: Attach riders or separate policies on the excluded risks, such as flood insurance, earthquake coverage, etc.
2. Poorly Understood Limitations
If your limits are too low, you may get sucker punched during the claim to a large out-of-pocket payout. Or if your limits are too high, you may be overpaying for unnecessary protection.
- Solution: Review your coverage periodically to assure it is adequate for your needs and assets.
3. Ignoring Renewal Terms
Policy terms and premiums can change upon renewal. Make sure you review your policy each year to avoid being surprised.
- Solution: Shop around before renewing to ensure you are getting the best bargain.
Conclusion
Understanding of insurance terms makes it very convenient and quite an important means of protecting one’s financial well-being. Knowing what to look for in a policy or jargon can help you to make bold decisions that can save you from certain insurance types.
Such issues should be known in the right way, as it will help one understand the insurance landscape without confusion on what to choose. One needs to take his or her time reading through the policies and ask questions when needful.