Insurance can be confusing, with a language all its own. Before purchasing a policy or making a claim, it is important to understand the terminology involved. Here, we’ll break down some of the most common insurance definitions and concepts to help you feel confident in your insurance decisions.
Policy Basics
When it comes to insurance, the policy is the contract between the insured (you) and the insurer (the insurance company). Here are some important terms to know:
Premium
The premium is the amount of money you pay for your insurance policy. This can be paid monthly, quarterly, or annually.
Deductible
A deductible is the amount of money you must pay out of pocket before your insurance coverage kicks in. For example, if you have a $500 deductible and you file a claim for $1,000, you would be responsible for paying the first $500 and your insurance company would cover the remaining $500.
Policy Limit
The policy limit is the maximum amount of money your insurance company will pay for a covered loss. For example, if your home insurance policy has a limit of $250,000 and your home is destroyed in a fire, your insurance company would pay up to $250,000 for the damages.
Coverage
Coverage refers to what is protected under your insurance policy. For example, a home insurance policy may cover damage to the structure of the home, personal belongings, and liability in case someone is injured on your property.
Exclusions
Exclusions are specific circumstances or events that are not covered under your insurance policy. For example, a home insurance policy may exclude damage caused by floods or earthquakes.
Types of Insurance
There are many types of insurance policies available, each with its own set of definitions and terminology. Here are some of the most common types of insurance:
Auto Insurance
Auto insurance covers damage or injury caused by a car accident. Common terms to know include:
Term |
Definition |
Collision Coverage |
Covers damage to your vehicle caused by a collision with another vehicle or object. |
Liability Coverage |
Covers damages or injuries you may cause to others while driving. |
Comprehensive Coverage |
Covers damage to your vehicle caused by events such as theft, vandalism, or weather-related incidents. |
Uninsured/Underinsured Motorist Coverage |
Covers damages or injuries you may sustain in an accident caused by someone without insurance or with insufficient coverage. |
Home Insurance
Home insurance protects your home and belongings from damage or loss. Common terms to know include:
Term |
Definition |
Dwelling Coverage |
Covers damage to the structure of your home caused by events such as fire, vandalism, or storms. |
Personal Property Coverage |
Covers damage or loss of your personal belongings, such as furniture, electronics, or jewelry. |
Liability Coverage |
Covers damages or injuries you may cause to others while on your property or as a result of your actions. |
Additional Living Expenses Coverage |
Covers the cost of temporary housing and other expenses if your home is damaged and you cannot live there while repairs are being made. |
Life Insurance
Life insurance provides financial security for your loved ones in the event of your death. Common terms to know include:
Term |
Definition |
Death Benefit |
The amount of money paid to your beneficiaries upon your death. |
Beneficiary |
The person or entity who will receive the death benefit in the event of your death. |
Policy Term |
The length of time during which the policy is in effect. |
Policy Type |
Life insurance policies can be term, whole, or universal. |
FAQ
What is the difference between a deductible and a premium?
A deductible is the amount of money you must pay out of pocket before your insurance coverage kicks in. A premium is the amount of money you pay for your insurance policy.
What is liability coverage?
Liability coverage protects you from financial loss if you are found responsible for damages or injuries to others. For example, if you cause a car accident and someone is injured, liability coverage would help cover the cost of their medical expenses.
What is an exclusion in an insurance policy?
An exclusion is a specific circumstance or event that is not covered under your insurance policy. For example, a home insurance policy may exclude damage caused by floods or earthquakes.
What is a death benefit?
A death benefit is the amount of money paid to your beneficiaries upon your death in a life insurance policy.
What is comprehensive coverage?
Comprehensive coverage is an optional type of auto insurance that covers damage to your vehicle caused by events such as theft, vandalism, or weather-related incidents.
By understanding these insurance definitions and concepts, you can make informed decisions about your insurance policies and protect yourself from financial loss in the event of an accident or other covered event.
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