Insurance Terms You Need to Know for Total Protection
Every industry or field has its own lingo and terminology. Sometimes it’s shorthand or slang which has developed over the years to make communication more efficient. Other times it springs from the legal, chemical, economic, or other specifics important to that specific industry or field of study. There are times no one’s sure where a term comes from, but once established, it’s hard to shake.
That’s fine unless you’re trying to learn more about that business or topic and don’t know the specialized vocabulary everyone else seems to use so freely. Chances are they mean well but simply don’t realize normal people don’t spend all day doing what they do or talking the way they talk. (There are always a few, of course, who think it makes them sound smart to throw around “insider” lingo. It’s OK to not like these people.) In the case of something like insurance terms, our different levels of background knowledge are all over the map. Some of you would be quite insulted if an agent started to explain the difference between an HMO, a PPO, or an EPO. Others of us are embarrassed to stop and ask what they mean by “deductible.”
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There’s never a reason to be embarrassed when you’re learning about something – especially when it’s something that involves your finances. Sure, there are others who know more, and that’s OK. I assure you there are just as many people around you who don’t know or understand anything more about it than you do but nod and play along as if they do. They make major decisions based on their best guess and being too proud to ask.
You tell me how smart that really is.
This won’t be a comprehensive list of every term you might come across related to every possible form of home insurance, vehicle coverage, or the many different types of health insurance. It’s a starting place, however, to help you make sense of the blogs I hope you’re reading and the discussions you should be having with your employer or insurance agent when it’s time to make decisions about your coverage. Hopefully, once you’re more comfortable with a few basics, you’ll be better able to ask questions about anything not covered here that you come across or need to know.
General Insurance Terms
- Actual Cash Value (ACV)
The price potential buyers would have paid for something right before it was damaged or destroyed. A policy that covers ACV (as opposed to “Replacement Cost – see below) might not pay to replace an item if the item itself wasn’t worth that much but would be expensive to replace. Some older vehicles fall in this category, for example. The clunker you’ve been nursing along may have had an ACV of a few hundred dollars, so that would be what’s covered. And if the cheapest you’ll find a replacement vehicle is very likely going to be at least ten times that…? Too bad for you!
- Deductible
This is the amount you’re expected to pay before your policy kicks in. Lower deductibles are nice when you need to use your policy (to pay for medical care, damage to your home or car, etc.) but usually mean higher premiums. A higher deductible means lower premiums, but also leaves you responsible for a higher out-of-pocket expense if something happens.
Deductibles usually reset after a set period of time. With most health policies, for example, you’ll have a yearly deductible. Once you’ve met it, your policy covers most or all expenses until the end of the policy year, at which point your deductible starts over. (There are all sorts of complicated variations on this idea as well.) - Depreciation
This one applies to home and auto coverage but works very much the same in both situations. Depreciation is the amount your property goes down in value as it gets older. It’s computed using a combination of the item’s normal life expectancy and it’s Replacement Cost Value (RCV). The RCV is a function of the current cost to completely repair the item versus simply replacing it with the same or a similar item.
The math isn’t important right now, but the general idea is that if you total a car you purchased for, say $20,000 five years ago, insurance may not offer you $20,000 to replace it. If their depreciation system suggests the car was only worth $10,000 at the time of the accident, that affects what they’re willing to pay. Or let’s say you had a favorite old truck that’s damaged in an accident. It will cost $1800 to repair it, but the numbers say it’s only worth $1200 to begin with, no matter how much you love it. The insurance company probably won’t pay to fix it in those circumstances.
It’s worth noting in many cases that your policy may give you the right to replace what’s been destroyed yourself and submit the receipts to the insurance company for reimbursement, in which case depreciation isn’t always a factor. They’re counting on the fact that many people either can’t afford to replace everything out of pocket or choose not to and simply accept a check instead – for an amount in which depreciation is generally computed to be as much as possible. - Endorsement (or Rider)
This is an attachment to an existing policy that amends the coverage described. These are usually added to increase coverage in specific circumstances or to add specific items or situations to what’s normally covered by the policy.
- Exclusion
This is the opposite of an endorsement. It specifically describes items, people, or situations not covered by the policy. Sometimes these are standard with the policy; other times they’re tailored to circumstances. Typical exclusions in a homeowner or vehicle policy, for example, would include things like war or catastrophes so wide-ranging that the company couldn’t possibly cover them all. If there’s an alien invasion and they destroy 90% of the earth with their laser-beam eyes, you’re not going to be covered – even if your insurance company is part of the remaining 10%.
Other exclusions may include situations already covered by another policy, damage which occurs intentionally or through gross negligence, normal aging or wear and tear, or damage or injury occurring as part of a criminal act. If you crash your car during the big getaway, good luck filing that claim! - Replacement Cost
This one is both obvious and deceptive. It can refer to what it sounds like – the cost of replacing a damaged item with something similar or the same. But it also considers the cost of fully repairing the item. If that’s less, then the “replacement cost” is actually the repair cost instead.
- Premium
This is the most basic cost of any insurance policy. It’s usually paid monthly or rolled into financing if you purchased a home or vehicle on credit. It’s typically the largest expense of any policy, although it’s not always the only expense for which you’re responsible.
- Waiting Period
You’ll usually hear this term in relation to health insurance through your employer, but various homeowners policies and some vehicle coverage have their own variations as well. It’s essentially what it sounds like – a delay between when you first enroll and when your coverage becomes effective. The goal is to minimize instability in high-turnover workplaces and to discourage individuals from going without insurance until something bad happens, then scrambling to secure coverage then immediately filing a claim.
Health Insurance Terms
Co-Pay
This is the amount you’re responsible for paying before insurance kicks in. The most familiar instance is for doctor’s visits. You may have insurance, but when you check in you’ll still be asked to pay $25 or more, depending on your policy. This serves the dual purpose of offsetting at least a portion of the amount for which your insurance company is responsible and discouraging you from scheduling unnecessary appointments “because they’re free.” Both theoretically help keep premiums down by controlling costs.
Co-Insurance
Many plans don’t pay 100% even after you’ve met your deductible (see above). The amount for which you’re responsible after your deductible has been met is called “co-insurance.” For example, let’s say your basic health package has an annual deductible of $3,000. You’re responsible for everything until you’ve paid that amount out of pocket during the calendar year. Once you’ve hit that number, your insurance pays 80% (that’s common, but not universal). The 20% you’ll still pay is your “co-insurance.”
Dual Coverage
If you have dual coverage, it means you’re fortunate enough to be covered by two or more insurance policies for some of the same things. Maybe you have insurance through your spouse’s policy at work. You take a job that gives you individual insurance as well as part of the standard benefits package. When you go in for minor surgery, both policies offer partial coverage. When you file the claims, the companies touch base and do something called “coordination of benefits” where they figure out which of them will pay for what. They’re also careful to make sure they don’t pay more than 100% of your total expenses along the way.
HMO / PPO / EPO / POS / PCP / Etc.
These acronyms are all related to the idea of “in network” and “out of network” care. The basic idea is that insurance companies make arrangements with various medical providers to steer business their way and pay them reliably in return for negotiated rates for various medical services. In other words, we’ll send you more patients if you’ll go easy on what you’ll charge us for taking care of them. This isn’t as shady as it might sound; it allows reliable medical care at much lower premiums because your insurer isn’t dealing with dozens or even hundreds of different organizations and systems. It also eliminates you having to constantly try to figure out who does and doesn’t take your insurance. Most policies allow you to go out of network for specialists, or if you’re willing to pay a higher percentage of the costs, so it can be the best of both worlds.
The HMO, for example, is the most extreme version of this and one of the least expensive types of insurance offered by many employers. You choose a Primary Care Physician (PCP) who handles your basic checkups and coordinates any specialists or outside services you may need. The idea is to allow you to access the care you need while preventing unnecessary visits outside the network or excessive treatment unless the PCP believes it’s worth doing.
The PPO has a “network” as well, but you don’t need to go through your PCP to go outside it. You’ll pay a bit more for coverage, and higher co-pays and co-insurance when you’re out of network, but there’s more flexibility and you can always go in-network for regular care. At the risk of oversimplifying, a POS is the blended love-child of an HMO and a PPO – you pay a slightly higher premium and still work through a PCP, but it’s a bit easier to go out of network and the difference in your out-of-pocket cost isn’t quite as extreme. EPOs are like HMOs without the option of going outside the network, which has obvious advantages and disadvantages. These aren’t nearly as common.
There are other variations, but you get the idea.
Open Enrollment
When you’re choosing insurance through your employer, or as part of the Affordable Care Act, or in many other circumstances, you have a window of time each year during which you can enroll or make changes to an existing policy. This is the “open enrollment” period. Once that window has closed, you can’t change your coverage unless you experience a “qualifying event” – a spouse gets or loses a job, you have a child, someone in the family dies, etc. The goal of open enrollment is to allow you some flexibility with your policy choices while still providing a degree of stability for the insurance company as well as the employer paying into the program. It also makes it more difficult to simply avoid getting coverage until injured or ill.
There’s no substitute for asking good questions when considering any policy, but especially when it comes to health coverage. I suggest bookmarking this article by my colleague Jackie for easy reference when it’s time. She breaks down types of health insurance as well as essential insurance terms in plain English and real talk. No wonder she’s one of my favorites!
Home Insurance Terms
Declarations Page
This is a summary of your property specifics and a list of who and what are covered by a policy. It will have your address, policy number, the dollar amounts of your coverage (personal property, liability, etc.), your premium, your deductible, your agent and the insurance company, your lender if you have a mortgage, and the names of everyone covered under the policy.
It will have the dates during which the policy is effective, a list of any discounts you’ve received (from bundling home and auto, from installing storm windows, etc.), and anything else delineating what your policy is intended to do and how it’s intended to do it.
Liability
Liability coverage on a homeowners policy is designed to protect you from lawsuits from property damage or injury you or your family (including pets) might cause (hopefully by accident) against others. It often includes legal expenses for defending yourself in court if necessary.
Coverage may include things like “pain and suffering” or lost wages, depending on circumstances. Many policies extend beyond your actual property, such as damage or injury done by a child away at college or the family while on vacation. These policies vary widely, so there’s no shame in clarifying details with your agent.
There are other terms and unique considerations when selecting a homeowners policy. Your decision should be about more than just finding the lowest homeowners insurance price. My colleague Jackie has written about this far more extensively than I have room for here. If you have or may soon need a homeowners policy, I strongly suggest you check it out!
And yes, once you’re ready, we can help you find a great homeowners insurance price. We just want to be transparent about the other things you should be considering along the way!
Vehicle Insurance Terms
At-Fault / No-Fault
These terms are used by auto insurers and refer to legal responsibility for an accident or other circumstances for which a claim is filed. Many states require drivers to carry liability insurance to help pay the medial or repair expenses of anyone impacted by anything in which you’re determined to be “at-fault.” Other states require drivers to carry personal injury protection for themselves regardless – “no-fault” coverage. Most claims for repairing or replacing a vehicle still have to establish which driver was “at fault,” or the percentage of fault assigned to each.
Keep in mind that at-fault and no-fault and related terminology are about insurance obligations and payouts and may not always agree with your personal perception of “blame,” or even with any legal determinations of “guilt” if for some reason they come into play. The specifics vary widely from state to state. You’ll hear terms like “negligence,” “contributory negligence,” “comparative negligence,” “modified comparative negligence,” and so on – each with its own set of rules how insurance works in those situations. The point is, ask your agent to explain this part if you’re unclear. It’s not you; it’s them (in this case, your state legislators).
Declarations Page
Much like a Homeowners Policy Declaration Page, this is the summary of your policy details and the people and property covered. It will have your policy number, the breakdown of your coverage, deductible, the agent, the insurance company, and who’s financing your vehicle if it’s not paid off yet. The names of drivers covered (or any specifically excluded), a detailed description of your vehicle (from the color to the VIN), your driving history, average mileage, etc. It may even have which radio stations you’ve programmed into the car stereo.
(OK, probably not the radio stations. But you get the idea.)
Liability
Liability insurance is required by most states as part of the bare minimum auto insurance you must maintain in order to drive legally in the state. Liability is the part of your insurance coverage that goes towards the other person’s personal or property damage if an accident is your fault. That’s why it’s usually legally required – you may have the right to take your chances with your own vehicle or personal safety, but you don’t have the right to hurt someone else or break their stuff then walk away because you can’t afford to pay for it. Liability coverage usually distinguishes between personal injury and property damage when it comes to the dollar amounts covered for each.
Conclusion
These are only a handful of the words and phrases you’ll hear thrown around any time insurance is being discussed. Whether you’re looking at your vehicle insurance option, trying to get a quote on the best homeowners insurance price, or just hoping to make sense of the many types of health insurance out there, it’s OK to keep asking questions and essential to keep educating yourself.
Knowing some basic insurance terms is a great start. I promise you, it puts you ahead of many people who you may see smiling and nodding but have no idea what’s being discussed. The difference is that they lack the courage to ask or to go looking themselves.
If you’re needing reliable, affordable insurance quotes, we can point you in the right direction. Don’t take our word for it, however – do your homework and compare your options. Ask around and find out what’s worked (and what hasn’t) for other people. Then let us know how we can help.