The A to Z of insurance terminology

Every industry has their own jargon and set of acronyms used by insiders. Sometimes they are technical terms or language that people use to describe a precise process, a part, or a concept; sometimes, they are slang that develops among colleagues in an organization or an industry over time. But industry-specific terminology can be confusing, misunderstood, or even off-putting to outsiders. Think about the last time you tried to communicate with a car mechanic, a computer tech, or some other specialist  and you couldn’t understand what they were telling you. It can be frustrating!

Insurance is no different. It’s a profession that has a lot of industry-specific terminology related to financial products and a variety of acronyms. Here are a few prior blog posts about some insurance  terms that are frequently used and that customers often question:

But there are many other terms that are likely unfamiliar to a buyer – particularly when you get into commercial insurance. For example, what’s a BOP? An actuary? A captive? Underwriting? Reinsurance? Premium? Loss Ratio?  We could go on, but instead we point you to some good insurance authorities that maintain various glossaries.

  • The National Association of Insurance Commissioners (NAIC) has a handy Glossary of Insurance Terms that are commonly used in the insurance business. The glossary was developed by staff in NAIC’s Research and Actuarial Department based on various insurance references. These definitions represent a common or general use of the term.
  • AM Best’s Consumer Center offers a Glossary of Insurance Terms.
  • International Risk Management Institute, Inc. (IRMI) maintains an in-depth Glossary of Insurance and Risk Management Terms, along with a huge list of acronyms
  • California’s insurance department maintains a Glossary of Insurance Terms and it also includes a list of Insurance Terms Used in the Area of Sureties and Bonds and Insurance Terms Used in the Area of Residential Title Insurance.
  • New York’s Department of Financial Services offers a Glossary Of Life Insurance Terms.

Health insurance is a bit of a different matter. with its own distinct language. Here are some resources:

Of course, if you are buying an insurance policy and you find the terminology difficult to understand, there’s an alternative to doing your own online research – you can call your local insurance agent to talk things over. That’s where local agents excel. They can interpret the unfamiliar jargon or talk to you about the pros and cons of various options and decision points. See our prior post that talks about the value, expertise and advocacy services that agents provide 24/7: The value of working with a local, independent insurance agent.

Reprinted from Renaissance Alliance – no usage without permission.

Insurance lingo watch: Actual cash value vs replacement costs

Sometimes, insurance lingo is quite confusing. Even simple terms can be misunderstood when you review your policies. One question that our agents hear all the time is “What’s the difference between cash value vs. replacement costs in homeowners insurance?” Here’s the scoop.

Cash value insurance coverage is the cost of the item minus depreciation. So, if a fire destroyed your entire home or a thief broke in and stole your TV, you would be paid for the cost of your home or TV less depreciation. That means you might not realize enough payment to rebuild your home or replace your TV in today’s market without dipping into your own pocket to supplement the costs.

Replacement cost insurance coverage, on the other hand, does not factor in depreciation. It pays you the cost to rebuild/replace in today’s marketplace. Most homeowners insurance policies quoted are for “replacement cost” by default but always check to be sure. Even with replacement cost coverage as an option, you need to review your policy limits with your insurance agent regularly to be sure they are sufficient for your needs.

There’s a third, less-common option called guaranteed or extended replacement cost. The Insurance Information Institute explains:

This policy offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster–even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won’t cover the cost of upgrading the house to comply with current building codes. You can, however, get an endorsement (or an addition to) your policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if you own an older home.

As we noted, in most policies, replacement cost would be the default, but check. So why would anyone opt for actual cash value rather than guaranteed or extended replacement? Like most things in life, it comes down to cost. There may be some instances when an actual cash value coverage makes sense, such as on a vacation home.

Even when you have replacement cost coverage, there are some instances when that coverage might not be enough. One example is in the case of items that are irreplaceable or that increase in value over time, such as art, antiques, or special collections. Plus, most insurance companies set limits on how much a standard homeowners policy will cover for valuable items such as jewelry and furs. If you have valuables or special collections, talk about those with your independent insurance agent. You might need a policy add-on called a floater (more lingo!) to extend coverage for those items.

Of course, there are other coverage issues you need to consider in a homeowners policy, such as liability coverage. The Insurance Information Institute offers a good primer with guidelines on how to protect your home and your assets with adequate insurance coverage: How much homeowners insurance do I need?

There are no dumb questions, just dumb lingo

Insurance can be very confusing and that’s why having an agent as a guide can be great. Many TV ads make car and home insurance seem like simple choices, but as the saying goes, the devil is in the details. It’s important to fully understand what an insurance policy does and doesn’t cover so that you don’t face any unpleasant surprises at the time of a loss. Make sure that you talk over any lingo or unfamiliar terminology in your policy with your agent.

Reprinted from Renaissance Alliance – no usage without permission.

What’s an insurance rider?

Every industry has its own business jargon and insurance is certainly no exception … in fact, we may have more than our fair share, and a lot of lingo can be quite confusing to the average person. One question that we get on the regular is “what’s an insurance rider?”

An “insurance rider” is more commonly known as an “endorsement,” a term which might also be confusing! The concept is actually pretty simple: an optional, written addendum to a basic insurance policy that modifies the terms of the insurance contract in some way.

Generally, an endorsement would be added to protect the insured by expanding or limiting the coverage in some defined manner. An endorsement or rider can occur at the start of a policy or can be added midterm. Depending on whether you are adding or limiting your coverage with the endorsement, it may have an impact on your premium

The National Association of Insurance Commissioners (NAIC) is a great source of education on this and other insurance matters. See: What is an Insurance Endorsement or Rider? They offer this definition and explanation for how endorsements work:

An endorsement, also known as a rider, adds, deletes, excludes or changes insurance coverage. An endorsement/rider can also be used to increase standard limits of coverage and take precedent over the original agreement or policy.

An insurance endorsement/rider is an amendment to an existing insurance contract that changes the terms of the original policy. An endorsement/rider can be issued at the time of purchase, mid-term or at renewal time. Insurance premiums may be affected and adjusted as a result.

You can have an endorsement/rider on your homeowners and renters policy, life insurance and auto insurance policies. It can include adding or deleting people and locations to your current insurance policy. Endorsements/riders are important because they address issues or items not in the original contract or policy.

  • Additional Coverage – An endorsement that adds or includes coverage that would otherwise be excluded.

  • Exclusions – Some endorsements exclude coverage for certain types of claims.

  • Modification of Coverage – An endorsement can expand the scope of existing coverage.

Examples: for a standard homeowners policy, common endorsements might include coverage for a home business, coverage for damage incurred during natural disasters such as earthquakes, floods or windstorms, coverage for property’s replacement value rather than cash value or – as discussed in a prior post – an endorsement might expand coverage limits for valuables.

A specific endorsement may not be available from every insurer or in every state. A good insurance agent will likely inform you of any common policy options, but when discussing a specific type of insurance with your agent, ask if there are any options that would expand your coverage.

NAIC offers the reminder that because a rider/endorsement is part of the legal terms of your policy, be sure to keep a copy with the policy.

Reprinted from Renaissance Alliance – no usage without permission.

What’s an insurance deductible?

Like many other industries, insurance has its own unique jargon that can sometimes make shopping for coverage seem overly complicated. Your local independent insurance agent is always happy to break things down for you and explain any language or terms that you don’t understand. One term that is commonly used in auto, health and in other insurance policies is “deductible.”

In simple terms, a deductible is the amount of money that you, the insured, must pay for a claim before your insurance will kick in.

If you have a deductible, it means that you will be responsible for any losses or payment of services up to the stated dollar amount in your insurance policy. Usually, deductibles are defined as a dollar amount, but they can also be defined as a percentage.

Deductibles can be beneficial both for the insured and for the insurance company. For the insured, it can be a way to are a way to reduce the cost of insurance: The more risk for loss that you, the insured, agree to pay before the insurance kicks in, the lower your premium. For the insurance company, it is a way to avoid the cost of processing and paying a high volume of small claims. Talk to you insurance agent about what deductible options are available to you and how they will affect the cost of your coverage.

Let’s look at an example: You are in an auto accident and your car’s damages are assessed at $1250 in damages. If your insurance policy has a $500 deductible, you will have to pay the first $500 of the damages to your car out of your own pocket and the insurer will pay the remaining $750. Generally, once the deductible is met, any future losses that you might have during the term of that policy will be covered in full.

The Insurance Information Institute has a great article on understanding your insurance deductibles that explains how deductibles work to prevent surprise costs and save money. It’s a good introduction with clear examples. They also discuss homeowners disaster deductibles for hurricane, wind/hail, flood and earthquake coverage. (Reminder: your homeowners insurance does not automatically cover you should your home be damaged by flood, earthquake, and other natural catastrophes – talk to your insurance agent about what your homeowners does and doesn’t cover.)

Businesses can also opt for deductible plans for certain types of business coverage such as workers compensation programs.

Many people are familiar with deductibles through their health insurance coverage. Learn more about health insurance deductibles at HealthCare.gov.

As with all insurance matters, you need to check your own policy. Insurance can vary by state law, by type of coverage, and by individual policy. It’s a good idea to read your policy and to ask your insurance agent to explain any terms that you don’t understand.

 

Reprinted from Renaissance Alliance – no usage without permission.