Words Matter: How to Speak Insurance

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All insurance policies are contracts between an insurance company and a person or business. As with all contracts, they contain some very specific language that spells out the responsibilities of both the insurance company and the policy holder. Since insurance policies are intended to be read by consumers without the benefit of an attorney, the laws governing them require that they be written in language that ordinary people can understand. Unfortunately, that is not always the case.

Insurance contracts are written based on the Reasonable Expectation Doctrine, which says that “whenever there is an ambiguity in an insurance-policy, it is resolved in favor of the insured’s reasonable expectations.” This doctrine does not mean that anything goes in terms of a policyholder’s expectation. Courts have consistently ruled that policyholders have a responsibility to make an effort to understand the terms of the contract. In other words, it’s a two-way street.

Even though the doctrine of reasonable expectations favors the weaker party — the policyholder — that benefit of the doubt only goes so far. As a policyholder, you are expected to make some effort to understand the terminology used in the policy. The doctrine of reasonable expectations may favor consumers, but the limits of that make it essential that insurance consumers have a full understanding of the terms and terminology used since their very presence in a policy indicates that courts have found they are reasonable.

The Four Parts of an Insurance Policy

All insurance policies are composed of the same four sections: declarations, insuring agreement, exclusions, and conditions. While the specific content of each will vary from insurer to insurer and among different types of policy, each of the sections contain the same basic information. Knowing where to look for important information is easier once you know where that information can be found in a policy. Learning what is contained in each section is the first step in that process.

1. Declaration Page

The declarations page is the first page of an insurance policy and is sometimes called the cover or title page. It contains mostly identifying information, such as the name of the insurance company, the policyholder’s name, and the type of policy it is. A life insurance policy would have the name of the person whose life is insured and an auto policy would include the make, model and vehicle identification number of the car or truck that’s insured.

The declaration page will also include the amount of coverage being provided. This amount is referred to as the face value of the policy. The final piece of information that is almost always on the cover page is the amount and frequency of the premium.

2. Insuring Agreement

This is the core of the insurance contract, and is where the insurance company lays out what it promises. It will specify that what losses caused by which perils it will pay for, such as wind damage in a homeowners policy. This section will also address whether the insurance company agrees to defend the policyholder in the event of a lawsuit.

There are two different types of insuring agreement. The first is named perils coverage, which specifies which perils you are insured against and excludes all those not listed. The second type is called all-risk coverage, which means you are covered for all perils except those that are expressly excluded.

3. Exclusions

What the insuring agreement gives, the exclusions takes away. The exclusions page is especially important when the insuring agreement is all-risk because this is where “all” gets cut down by having perils removed from coverage. For example, an all-risk homeowners policy will exclude flooding from coverage and an auto policy will exclude damage caused by normal wear and tear.

Even though a named peril insuring agreement implies that there is no need for exclusions, there may still be some listed here covering certain variations of those named perils. In addition to excluded losses, the exclusions page may also list excluded property such as outbuildings — e.g., sheds or gazebos. Even life insurance policies have exclusions for risky behaviors such as scuba diving or hang gliding.

4. Conditions

Just as the insuring agreement and the exclusions page indicate what is expected from the insurance company, the conditions page spells out what is expected from the policyholder.

The most prominent item on this page is the condition that the policyholder promises to pay the premium set forth on the declaration page on time. Conditions are generally dependent upon the type of policy, such as state inspections for vehicles and police reports for home burglaries.

Auto Insurance Terms

The first term that often requires clarification when it comes to auto insurance is auto. This is because auto insurance refers to insurance for most four-wheel motor vehicles, including SUVs, pickups, vans, and some RVs. In addition to the five types of auto insurance coverage, there are other terms that are important to understand.

At Fault: This refers to who is responsible for an accident. Fault is seldom 100% the result of one driver in a multi-car accident.

Claim: When you request that your insurance company pay for damage or injuries from an accident or other insured peril.

Claims Adjuster: Sometimes just referred to as an adjuster, this is the person who reviews the damage to your car and determines the cost to repair it. This term also applies to homeowners insurance.

Collision Coverage: This pays for damage to your vehicle when an accident occurs, regardless of who’s at fault.

Comprehensive Coverage: Sometimes called fire and theft, it covers loss or damage that is the result of anything other than an accident.

Deductible: The portion of damages that you agree to pay before the insurance company pays. For instance, if your policy has a $500 deductible, and your car needs $3,500 in repairs, you’ll be on the hook for the first $500 worth of damage, and the insurance company will pay the remaining $3,000. This term is also used in homeowners and health insurance.

Endorsement: Any optional or special protection that is not a part of the basic policy. Endorsements may also be used to raise the limits for certain items or perils. Endorsements are also used in homeowners policies.

Exclusions: Items or perils that are excluded from coverage and are listed on the exclusions page. Exclusions may be found on all types of insurance, such as flood exclusions on homeowners policies or wear and tear in auto insurance.

Liability Coverage: Sometimes called basic insurance, it pays for damage and injuries to other vehicles and property resulting from an accident in which you are at fault.

Motor Vehicle Report: A report from your state’s department of motor vehicles that lists any accidents, violations and suspensions that the insurance company uses to determine your premium.

Under-Insured Motorist: A type of coverage that pays for medical expenses for injuries to you and your passengers when the other driver is at fault and does not have sufficient insurance.

Uninsured Motorist: This works the same way as underinsured motorist insurance and protects you in the event the other driver is uninsured, or in the case of a hit and run where the other driver cannot be identified.

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Homeowners Insurance Terms

Your home is more than just the place you live and the largest investment you will ever make; it is the primary source of most Americans’ net worth. Having a full understanding of the many terms that affect your homeowners insurance is an important key to protecting your most valuable asset.

Actual Cash Value: The first of two ways that can be used to determine your home’s value, it is based on the current cost of replacement less depreciation. See Replacement Value.

Additional Living Expenses: See ‘Loss of Use Protection’ below.

Appraisal: An evaluation of a property claim by an authorized person to determine the property value or the damaged property value. This process may be used in the event of a claim dispute.

Binder: A temporary policy that provides proof of insurance while your policy is being prepared. This term also applies to auto insurance.

Depreciation: The approximated decrease in the value of property over time due to aging and wear and tear. This term also applies to auto insurance.

Effective Date: The date on which insurance coverage begins. This date is usually, but not always, the same as the date the first premium is paid.

Escrow: Money that is deposited with a third party until certain conditions are met.

Expiration Date: The date on which insurance coverage ends.

Grace Period: The amount of time, usually 30 days, that a policy remains in force after a premium is due but not paid. This term also applies to life insurance and sometimes auto insurance.

Independent Adjuster: Performs the same function as a claims adjuster, but is not an employee of the insurance company. This term also applies to auto insurance.

Inflation Protection: Automatically adjusts the amount of your insurance to compensate for increases in your home’s value and the increased cost of repairs and replacement.

Liability Coverage: Protects against losses for which the homeowner is legally responsible — for example, if someone other than a household member slips and falls in your home.

Loss: The amount an insurance company pays for a claim.

Loss of Use Protection: Pays for living expenses such as housing and meals while a home is repaired following a covered loss.

Loss History: The number and amount of previous claims made by the policyholder. 

Market Value: The current value of your home, including the land.

Material Misrepresentation: A misstatement in an application for insurance that would have resulted in either denial of coverage or a higher premium. This term applies to all forms of insurance.

Peril: A specific risk or danger such as fire or theft.

Personal Property: All material property that is inside of your home but not a part of the structure, such as furniture and jewelry.

Property Damage: Physical damage to your property.

Public Adjuster: An independent adjuster hired by the policyholder to negotiate a claim. This term can also apply to auto insurance.

Replacement Cost: The full cost of replacing an insured structure without deducting for depreciation.

Rider: A written agreement that is added to a policy to increase or expand coverage. This is the same as an endorsement.

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Life Insurance Terms

While no form of insurance can replace you, life insurance can ease the financial burden on loved ones when you die. Knowing the various terms associated with life insurance is the best way to ensure that the decisions you make are the best ones for your needs.

Accelerated Benefits Rider: Allows early payment of a portion of a policy’s face value if the insured has a terminal illness.

Accidental Death and Dismemberment: This benefit usually pays twice the face value if the insured dies as the result of an accident. It will also pay the face value if the insured loses a limb (other than fingers or toes) or becomes completely blind.

Annuity: A policy that provides a regular payment upon maturity, usually for as long as the policyholder lives.

Annuity Certain: Makes regular payments for a specified period of time, regardless of life or death of the policyholder.

Annually Renewable Term: A type of term insurance that automatically renews in one-year increments.

Beneficiary: The person who receives the proceeds of a life insurance policy.

Cash Surrender Value: The amount of cash that has accumulated in a policy that is available to the policy owner if they choose to cancel the policy before the death of the insured.

Conditional Receipt: A receipt you get upon making your first premium payment along with your life insurance application, which provides coverage while your application is being reviewed.

Contingent Beneficiary: The person or persons who will receive the death benefit if the beneficiary is deceased.

Convertible Term: A clause in a term life insurance policy that allows the policyholder to convert to a permanent policy without providing proof of insurance.

Decreasing Term: Sometimes called a decreasing term-level premium policy, it is where the policy’s face value decreases over time while the premium remains constant.

Dividend: Participating insurance companies will return a portion of premiums paid to the insured in the form of dividends in the event the insurer’s losses were less than anticipated.

Free Look Provision: A period of time, usually 10-30 days, where the policyholder can examine the policy and cancel if not satisfied and receive a full refund.

Insurable Interest: A legal requirement that the owner of a policy be either related by blood, have an established emotional relationship with, or have a substantial economic interest in the insured.

Medical Examination: A medical examination usually conducted by a paramedic or nurse as part of the life insurance application process to determine if the insured meets health requirements.

Non-Participating Policy: A life insurance policy where the insurance company does not distribute surplus premiums to policyholders.

Participating Policy: A life insurance policy where the insurance company distributes excess premium dollars that will not be needed to pay claims to policyholders.

Preferred Risk: A person whose health, lifestyle, and occupation make them likely to have a longer than average life.

Proceeds: The amount of money that is paid to a life insurance beneficiary after outstanding policy loans have been repaid.

Secondary Beneficiary: Person or persons who will receive the death benefit if the beneficiary is deceased.

Smoker Rating: Individuals who use tobacco products are subject to a higher premium than non-tobacco users.

Standard Risk: A person who is not subject to a higher rate or restrictions due to health, lifestyle, or occupation.

Sub-Standard Risk: A person who pays a higher premium due to poor health or a riskier occupation or lifestyle.

Suicide Clause: A provision that says if an insured commits suicide within two years of a policy’s inception the insurance company will not pay the death benefit.

Term Insurance: One of the most common forms of life insurance, term policies cover the insured for a set dollar amount (e.g., $250,000) over a specific amount of time (e.g., 30 years).

Waiver of Premium: A rider that exempts policyholders from having to pay premiums if they become completely disabled after the policy has been issued.

Whole Life Insurance: The other most common form of life insurance, whole life coverage usually costs more than a term policy, but lasts for the entire life of the insured. Whole life policies often also build up a cash balance that can be borrowed against or cashed out.

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Health Insurance Terms

My favorite doctor — Dr. Seuss — once said, “You’re in pretty good shape for the shape you are in.” Well, in order to maintain or improve your health, you should understand the terms of your health insurance. Health insurance is full of specialized terms and lingo which, if you don’t understand it, can make you feel sick.

Benefit Period: Usually a calendar year that defines the start and end of coverage for the purpose of determining deductibles, benefit maximums, and other limits.

Coinsurance: The percentage you must pay each benefit period after you have paid your deductible.

Coinsurance Limit: The maximum coinsurance payment you will have to make during a benefit period.

Copayment: The amount you pay to a health care provider at the time of a visit or when services are rendered.

Covered Charges: Health care services that are eligible for payment by your insurance.

Covered Person: Someone covered under a health insurance plan.

Covered Service: Same as covered charges.

Emergency Medical Condition: Any condition, illness, or injury that occurs suddenly with severe symptoms that must be treated urgently in the opinion of a person without medical training.

Experimental Drug: Sometimes called an investigational drug, device, or treatment that has not been approved by the FDA.

FSA: A Flexible Spending Account is an employer-sponsored savings plan that allows you to save pre-tax money for the purpose of paying medical expenses.

HMO: A Health Maintenance Organization is a type of insurance plan that requires your primary care physician to oversee all of your care and provide referrals to specialists as needed, typically within your affiliated network.

HSA: A Health Savings Account is a type of medical savings account that allows you to accumulate money free from federal income tax. Unlike an FSA, this account is controlled by you and not your employer.

In Network: A health care provider that belongs to your plan. 

Long-Term Insurance: A type of coverage that covers certain services over a period of time, usually one year.

Medicare: A subsidized federal health insurance program for people over 65 years old.

Non-Covered Charges: Charges for services that are not covered by your insurance plan.

Out of Network: A health care provider that is not a part of your plan’s network, usually incurring a higher out-of-pocket cost.

Outpatient Services: Medical care and services that do not require an overnight stay in a hospital.

Out of Pocket: Any cost that you must pay.

Provider: Any health care provider, such as doctors, hospitals, and clinics

Urgent Care Provider: A health care provider offering medical care that is needed right away but does not qualify as an emergency.

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