Learn many of the words you'll hear when buying or using insurance.
This glossary contains definitions of insurance terms—some are general; some apply mostly to a specific type of insurance such as life insurance or property insurance. You'll find many of the terms within the StreetWise Insurance Guide. We've also included additional terms that are handy to know.
Actual cash value policies
Property insurance that pays to replace your home and possessions minus depreciation up to the policy limit.
Mortality statistics tables used particularly in the insurance industry to estimate the life expectancy and rates of death for various groups of people.
In the U.S., the job title of the specialist mathematician in insurance who helps calculate risks, rates, dividends, and a vast array of insurance statistics that are useful to insurance companies.
A claims adjuster is employed by property and casualty insurers (auto, home) to evaluate losses and claims and make settlement of claims on behalf of the insurance company. Adjusters may be employed by the company or be independent contractors.
Affinity marketing or sales
Did an organization to which you belong or of which you're an alumni ever send you an offer for, let's say, term-life insurance, identity theft insurance, or supplemental health insurance? Those are examples of affinity marketing, marketing directed and focused toward a specific affinity group.
An insurance agent sells and services insurance policies. An agent may specialize in a particular type of insurance such as life or health. An insurance agent is either an independent agent who sells insurance from a number of companies or a direct writer or captive agent, who sells insurance for only one company.
In liability insurance, the total amount which the policy will cover regardless of the total number of separate accidents and claims that occur.
Financial contracts with an insurance company designed to be a source of retirement income. They can be purchased in two ways: single-premium or flexible-payment. The return on annuities may be fixed or variable. Payment may be deferred to a future date or begin immediately. Annuities are marketed primarily as an investment vehicle.
Assigned risk plans
A state-mandated insurance pool or plan from which automobile insurance may be purchased by automotive vehicle owners who are unable to purchase such insurance on the voluntary market. If you have had a number of accidents or insurance claims you may have to get your auto insurance from an assigned risk plan. It's often called the insurance of last resort because premiums tend to be much higher than on the voluntary market. Plans differ from state to state.
The person or entity that will receive the proceeds of the insurance policy upon the death of the insured.
Acceptance and authorization of insurance coverage temporarily until the actual policy can be issued. For example, insurers often provide a binder for auto insurance that starts immediately and covers the insured vehicle (perhaps your newly purchased auto) until the actual policy is authorized.
A standard measurement for auto insurance that is equal to 365 days, starting whenever the policy takes effect.
In insurance, a loss or liability, typically injuries to persons or damage to property, proceeding from an accident.
Chartered Property and Casualty Underwriter (CPCU)
A professional designation within insurance given by the American Institute for Property and Liability Underwriters. It indicates that the holder has three years experience in insurance or a related field and has successfully completed a number of examinations in various areas of expertise.
A request for payment of benefits due under the terms of the policy. Claims may be made by the insured person or their beneficiaries.
A report of the history of insurance claims or losses on a specific property or an individual that is based on the information in a national, computerized database of loss history information. The largest database is the Comprehensive Loss Underwriting Exchange, known as CLUE and provided by the ChoicePoint company. Because of CLUE's dominance in the market, most loss history reports are referred to as CLUE reports. The second largest database is called A-PLUS (Automated Property Loss Underwriting System) and provided by Insurance Services Office (ISO).
The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, 1986, and 1990 provides that an employee (and family members) of a company with 36 or more employees may continue health insurance coverage at their own expense after leaving the company. This type of insurance is usually called COBRA insurance after the legislation.
In health insurance, the amount you pay after the deductible has been met in a fee-for-service plan. It is usually expressed as a percentage such as 80/20; the insurance company pays 80% and you pay 20%.
Cost-of-living adjustment. COLAs, for example, are built into Medicare and may be built into Long-Term Care Insurance.
Insurance sold to cover business or commercial needs as opposed to individuals.
In health insurance, the flat fee you pay for a medical service such as doctor visit, prescription, or medical test.
In general use, having insurance protection. Used in the plural, typically what amounts the insurance company will pay if the specified loss occurs.
Coverage that pays off or makes payments only on the specific debt specified in the policy (such as a mortgage, loan, or credit card account) in the event of the policyholder's death, disability, or involuntary job loss. The contract insures the debtor for the benefit of a specific creditor.
In life insurance, the amount of money payable to the policy's beneficiary upon the death of the insured.
The amount the policy holder must pay on a loss or claim before the insurance pays.
The decrease over time of the value of real property such as an automotive vehicle or house.
A written attachment to a policy usually adding or increasing coverage for the specified entity.
Provisions specifying what is not covered by the insurance policy.
In life insurance, the amount of insurance coverage (death benefit) on the life of the insured. If you have a $250,000 universal life insurance policy, the face amount is $250,000 in contrast to its “cash value” or “cash surrender value” which describes the “equity” you have accrued in the policy at any given time.
A written attachment to a policy that insures property that moves from location to location.
Flooding is not covered by homeowners or renters policies. It has to be purchased separately and can be bought for building only, contents only, or a combination of the two. Individuals whose dwelling is in a government-identified area prone to flooding, such as coastal areas or communities located near rivers, may be eligible to participate in the National Flood Insurance Program, which is administered by an agency of the federal government.
Automotive gap insurance, also known as Guaranteed Asset Protection (GAP), pays the difference between what you owe on the vehicle (whether you are buying or leasing) and the cash value of the vehicle in the event that the vehicle is “totaled” in an accident or stolen.
A single insurance policy that covers a specific group of people. Examples of groups include employees of a company, members of a professional organization, or alumni of a college. Many group policies include dependents of group members.
Guaranteed replacement cost policies
Property insurance that pays whatever it costs to rebuild your home as it was before the disaster even if it exceeds the policy limit.
A specific circumstance that increases the probability and/or potential severity of a loss. For example, fire is a peril but storing the propane for the grill in the basement is a hazard. Other hazards might be outmoded electrical system or furnace, a dead tree in the yard, a pool and so forth.
Health Insurance Portability and Accountability Act of 1996.
Health Maintenance Organization.
A single insurance policy that covers one person.
A financial instrument by which individuals (or entities) pay a specified amount of money to transfer certain risks to an insurance company that commits to pay specific benefits against specific losses as spelled out in a specific policy.
The legal contract between an individual or company and the insurance company. It specifies how much you'll pay (monthly, quarterly, semi-annual, annually) and what coverages the insurance company will provide for that payment.
Insurance scoring is a method of rating an individual's risk for making claims for certain types of insurance based on selected aspects of their credit history. The insurance industry cites statistical evidence showing a strong correlation between good credit and fewer claims and poor credit and more frequent/more costly claims. Based on this correlation, an insurance score, typically a three-digit number similar to a credit score, may be used both as a screening factor for an insurance applicant's acceptability and as a rating factor for placing a consumer in a particular risk classification, which has a bearing on the cost of premiums and insurance benefits.
The insured are the individuals and their properties covered by the specific insurance policies.
The insurance company and their representatives.
A legal obligation to pay another person for injuries or property damage that you caused.
Loss history database
See CLUE report.
Mutual insurance company
An insurance corporation where company ownership is held by the policy holders.
In insurance, the causes of possible loss included or excluded from insurance policies. Typical perils covered by homeowners (property casualty) insurance include fire, smoke, lightning, vandalism, theft, explosion, windstorm, water damage (except from flooding). Also see "hazard."
Permanent life insurance
Life insurance that provides lifelong protection. As long as the premiums are paid, the death benefit will be paid. Most of these policies provide cash value (also called a cash surrender value). The cash value is different from the face amount—which is the death benefit. Whole life, universal life, and variable life are types of permanent insurance.
Insurance sold to cover private individuals as opposed to businesses.
See “Insurance policy”.
Insurance provided by a group of insurance companies who pool assets in order to insure risks that are larger than one company can cover. Pool insurance may be voluntary or mandated by state regulations. Examples of state-mandated pool insurance include assigned risk plans for auto insurance and windstorm insurance for hurricanes in some coastal states—both intended for individuals who cannot buy insurance on the voluntary market.
An illness or health condition that you have before your new insurance coverage takes effect.
The amount you pay for specific insurance with specific benefits for a specified time period.
An event, what the insurance industry calls an “occurrence,” that activates the protections promised by the policy.
The cost of a specific unit of insurance, usually $1000.
The process of estimating the risk represented by an applicant for insurance or policyholder for a particular type of insurance. In the rating process, insurance companies use a variety of criteria and complex models.
Classifications assigned by the insurer to individual insurance applicants and policyholders on the basis of the estimated risk each is judged to represent. Different tiers typically represent different pricing levels.
Insurance for the insurers. Property/casualty insurers (primary insurers) typically reduce their risk extended in issued policies by selling it to reinsurers who for part of the premium share part of the risk. Reinsurers don't make claims payments to policyholders but reimburse the primary insurer for claims paid out.
Property insurance that covers only the value of your belongings not the physical building. Policies may be written for actual cash value or replacement cost benefits. Perils typically covered include fire or smoke, lightning, vandalism, theft, explosion, windstorm and water damage but not flood damage.
Replacement cost policies
Property insurance that pays the actual cost of rebuilding/repairing your home and replacing your possessions up to the policy limit. There is no deduction for depreciation.
A modification to a policy that adds, modifies, or removes coverage.
The possibility and/or probability of a loss occurring.
Stock insurance company
An insurance corporation owned by stockholders, who own shares (stock) in the company and may or may not be policy holders.
The right of an insurance company who has paid an insured's loss (paid the claim) to pursue restitution or remedy for that loss from a third party. For example, your insurance company pays to have your auto repaired after an accident that is found to be the fault of the other driver. Your insurance company may seek restitution of those monies from the “at-fault” driver's insurance company.
Term Life Insurance
Life insurance that covers a policyholder for a specific period of time. It's the simplest form of life insurance. It provides a death benefit, but not any additional cash value.
The process of determining if an applicant will be accepted for coverage. The underwriting process involves evaluating the risk represented by the applicant using underwriting criteria established by the insurer. Underwriting also includes rating the risk into company determined rating tiers or classifications.
Universal or adjustable life insurance
Life insurance that offers a death benefit and a savings component that generally earns a money market rate of interest.
Variable life insurance
Life insurance that offers a death benefit and a savings component that is invested in a stock or bond mutual fund investment.
The open, competitive insurance market in which insurers may accept or reject applicants and price policies on the basis of their underwriting criteria and within state regulations. The opposite is the pool market (assigned risk plans for auto insurance) in which those who are uninsurable in the voluntary market may purchase insurance.
Whole life insurance
Sometimes called “ordinary” insurance. Whole life offers a death benefit and a savings component which earns interest or dividends.