Taking out insurance is a smart and important way to secure your financial future, but insurance terminology can sometimes be difficult to understand. Many insurance documents contain complex words that most people don’t understand. Before you take out insurance, it’s a good idea to familiarize yourself with some of the most commonly used insurance terms. You may encounter these words and phrases on your insurance policy, in brochures, and during conversations with your insurance agent. Knowing what they mean will help you make better decisions, avoid costly mistakes, and ensure you understand exactly what you’re insuring.
Insured and Policyholder
When you review your insurance policy, the first thing you’ll see is the term “policyholder.” The policyholder is the person or group that owns the policy. The policyholder is the person who pays the premium and can change the terms of the policy. In some cases, the person who owns the policy is also the insured, also called the “insured.” However, this can be different people. For example, a parent might take out life insurance for their child. In this case, the child is the insured, and the parent is the policyholder. It’s important to understand the difference between these two terms, as your rights and obligations can change depending on your responsibilities.
Premium
The premium is the fee you pay to keep the policy valid. Depending on your agreement with your insurance company, you can pay your premium monthly, quarterly, six-monthly, or annually. Your premium is essentially the price of your insurance. The type of policy, the coverage, your age, health, location, and risk level all affect the premium you pay. If you don’t pay your premiums, the insurance company can cancel your policy. Therefore, it’s important to choose a premium you can afford and pay it on time.
Pre-Tax Deductible
A pre-tax deductible refers to the amount you bear personally before the insurance company reimburses the remaining costs. Suppose your deductible is €1,000 and you claim €5,000; you pay the first €1,000, and the insurer covers the rest. Many insurance policies, such as car, health, and home insurance, have deductibles. If you choose a higher deductible, your premiums may be lower, but you’ll pay more when you file a claim. Knowing your deductible prevents surprises when you need your policy.
Coverage Limits
The coverage limit is the maximum amount the insurer will pay for a covered claim. Policies often contain multiple limits, such as a limit per claim and a limit for the entire policy. For example, your car insurance might only cover €50,000 per injured person and €100,000 per claim. If the repair costs or medical expenses exceed these limits, you’ll have to pay the difference. It’s important to choose the right coverage limits so you don’t end up paying a huge amount, even in the event of a serious accident or loss.
Exclusions
Exclusions are specific types of damage, situations, or circumstances that your policy doesn’t cover. Depending on the type of insurance, your policy clearly outlines the situations not covered. For example, a standard home insurance policy might not cover flood damage. If you live in an area with a high risk of flooding, you should purchase a separate flood insurance policy. You should carefully review the exclusions in your policy so you know which situations are and aren’t covered. This prevents confusion and ensures you won’t encounter any surprises when you file a claim.
Beneficiaries
A beneficiary is a person or group who receives compensation or benefits from a life insurance policy or other insurance policy upon the death of the policyholder. You can choose one or more beneficiaries and distribute the benefits as you see fit. If you designate a beneficiary, your loved ones or other designated beneficiaries will receive compensation if you are involved in an accident. Make sure your beneficiary information is up-to-date, especially after major life changes, such as getting married, divorced, or having children.
Claims
When you file a claim, you’re formally asking the insurance company to pay you according to the terms of your policy. Typically, you’ll need to provide proof of the accident, such as photos, police reports, medical bills, or repair estimates. Once the insurance company receives the claim, it’s reviewed to determine if the accident is covered and how much should be paid. Claims are a key part of the insurance process, and it’s important to know how to file a claim correctly so you get the premium you paid.
Underwriting
Before an insurance company offers you a policy, it uses the underwriting process to assess your risk tolerance. When you apply for insurance, the insurance company reviews your medical history, driving history, lifestyle, and other key information to determine your likelihood of filing a claim. They use this information to decide whether to insure you and what your premium should be. The underwriting process helps insurance companies keep their money safe and ensures that premiums are reasonable for each customer’s risk tolerance.
FAQs
1. Why is it important to understand insurance terms before taking out a policy?
Understanding the meaning of insurance terms can help you get the right coverage, avoid mistakes that could cost you money, and know what to do if you need to file a claim.
2. What is the difference between a deductible and a premium?
The premium is the monthly amount you pay for insurance. The deductible is the amount you have to pay out of pocket if you file a claim.
3. What happens when my policy expires?
When your policy expires, you are no longer covered, and your insurance company will not pay any claims filed during that period.
4. What does beneficiary mean?
A beneficiary is the person or group you choose to receive money from your life insurance policy in the event of your death.
5. What does a coverage limit mean?
The maximum amount your insurance will pay in the event of a covered loss or claim is the coverage limit.
