Insurance Glossary: Key Terms You Need to Know

## Premium A premium is the amount you pay your insurance company to keep your policy active, typically billed monthly, quarterly, or annually. It's the cost of having insurance, regardless of whether you file a claim. For example, if your auto insurance premium is $150 per month, you pay $1,800 per year for coverage — even if you never have an accident. ## Deductible A deductible is the amount you pay out of your own pocket before your insurance kicks in to cover a claim. If you have a $1,000 deductible on your homeowners policy and a storm causes $5,000 in roof damage, you pay the first $1,000 and your insurer pays the remaining $4,000. Higher deductibles generally mean lower premiums, so choosing your deductible is a balancing act between monthly cost and what you can afford to pay if something goes wrong. ## Copay A copay (or copayment) is a fixed dollar amount you pay for a specific healthcare service at the time you receive it. For instance, your health plan might require a $30 copay for a primary care visit and a $60 copay for a specialist. Unlike coinsurance, a copay is a flat fee that doesn't change based on the total cost of the service — you pay the same $30 whether the office visit is billed at $150 or $300. ## Coinsurance Coinsurance is the percentage of a covered medical expense that you're responsible for after you've met your deductible. If your plan has 80/20 coinsurance, your insurer pays 80% of covered costs and you pay 20%. On a $10,000 hospital bill after your deductible is met, you'd owe $2,000 and your insurer would cover $8,000. Coinsurance continues until you reach your out-of-pocket maximum. ## Out-of-Pocket Maximum The out-of-pocket maximum is the absolute most you'll spend on covered healthcare services in a plan year. Once your deductibles, copays, and coinsurance add up to this amount, your insurance covers 100% of remaining covered costs for the rest of the year. For example, if your out-of-pocket max is $8,000 and you've already paid $8,000 in cost-sharing by September, every covered service from October through December costs you nothing. ## Liability Liability coverage pays for damages or injuries you cause to other people or their property. In auto insurance, liability covers the other driver's medical bills and car repairs if you cause an accident. In homeowners insurance, it covers injuries to guests on your property or damage your family (including pets) causes to others. Liability coverage doesn't pay for your own injuries or property damage — it protects you from financial responsibility to others. ## Comprehensive Coverage Comprehensive coverage is an auto insurance protection that covers damage to your vehicle from events other than collisions. This includes theft, vandalism, fire, hail, flooding, falling objects, and animal strikes. If a tree falls on your car during a storm or someone breaks your window, comprehensive coverage pays for the repairs minus your deductible. It's optional unless you have a car loan or lease, in which case your lender typically requires it. ## Collision Coverage Collision coverage pays to repair or replace your vehicle when it's damaged in an accident with another vehicle or object, regardless of who caused the accident. If you rear-end someone at a stoplight or slide into a guardrail on an icy road, collision coverage handles your car's repairs. Like comprehensive, it's optional but usually required by lenders. You pay your deductible first, then the insurer covers the rest up to your vehicle's actual cash value. ## Coverage Limit A coverage limit is the maximum amount your insurer will pay for a covered claim. Auto liability is often expressed as split limits like 100/300/100 — meaning $100,000 per person for bodily injury, $300,000 total per accident for bodily injury, and $100,000 for property damage. If damages exceed your coverage limit, you're personally responsible for the difference. Choosing adequate limits is one of the most important decisions when buying insurance. ## Exclusion An exclusion is a specific situation, condition, or type of loss that your insurance policy does not cover. Every policy has exclusions, and they're listed in the policy document. Common homeowners exclusions include flood damage, earthquake damage, and gradual wear and tear. For example, if your basement floods during a hurricane, a standard homeowners policy won't cover the water damage — you'd need a separate flood insurance policy. ## Underwriting Underwriting is the process an insurance company uses to evaluate your risk and decide whether to offer you coverage and at what price. Underwriters analyze factors like your age, health, driving record, credit history, home condition, and claims history. For life insurance, underwriting might include a medical exam and blood work. The underwriting process determines your premium — lower-risk applicants get lower rates because they're statistically less likely to file expensive claims. ## Rider A rider is an add-on to your insurance policy that provides additional coverage beyond what the standard policy includes. Riders modify or expand your policy for an additional premium. For example, a scheduled jewelry rider on your homeowners policy might add $15,000 in coverage for an engagement ring that would otherwise be limited to the policy's standard $1,500 jewelry sub-limit. Riders let you customize your coverage to match your specific needs. ## Endorsement An endorsement is a formal amendment to your insurance policy that changes its terms, conditions, or coverage. Endorsements can add coverage, remove coverage, or modify existing provisions. In practice, the terms "rider" and "endorsement" are often used interchangeably, though technically an endorsement is the document that makes the change while a rider is the added coverage itself. A common example is a water backup endorsement on a homeowners policy, which adds coverage for sewer and drain backups. ## Claim A claim is a formal request you make to your insurance company asking them to pay for a covered loss. When you have a car accident, experience a house fire, or need medical treatment, you file a claim with your insurer. The claim includes details about what happened, when it happened, and the extent of the damage or loss. Your insurer then investigates the claim, determines whether it's covered under your policy, and if so, processes payment. Filing frequent small claims can sometimes lead to higher premiums at renewal. ## Adjuster An adjuster (or claims adjuster) is the person your insurance company sends to investigate and evaluate your claim. After you file a claim, the adjuster inspects the damage, reviews documentation, interviews involved parties, and determines how much the insurer should pay. For a homeowners claim after a fire, the adjuster would visit your property, assess the structural damage, review your personal property inventory, and calculate the payout based on your policy terms. You can also hire a public adjuster to represent your interests if you disagree with the insurance company's assessment. ## Actual Cash Value vs. Replacement Cost These are two different methods insurers use to calculate how much they'll pay you for a loss. **Actual cash value (ACV)** pays what your property was worth at the time of the loss, accounting for depreciation. A 10-year-old roof with a 25-year lifespan might only be valued at 60% of a new roof's cost. **Replacement cost** pays what it actually costs to repair or replace the item with a new equivalent, without deducting for depreciation. The difference is significant: if your 8-year-old TV is destroyed, ACV might pay $200 while replacement cost would pay $600 for a comparable new model. Replacement cost coverage has higher premiums but provides much better protection. ## Named Peril vs. Open Peril These terms describe how your policy defines what's covered. A **named peril** policy only covers losses caused by specific events explicitly listed in the policy — such as fire, lightning, windstorm, hail, theft, and vandalism. If a loss is caused by something not on the list, it's not covered. An **open peril** (also called "all-risk") policy covers any loss except those specifically excluded. Open peril is broader because it covers everything unless the policy says otherwise. Most standard homeowners policies use open peril for the dwelling and named peril for personal property, though you can often upgrade personal property to open peril for an additional premium.