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Key takeaways:
- When you understand the terminology, you’ll get more benefit from your insurance coverage.
- Knowing the difference between coverage for Replacement Cost and Actual Cash Value could mean a significant difference in your insurance settlement.
- A good insurance broker will make sure you have the coverage you need.
Insurance is designed to protect you and your assets. Make the most of that protection by making sure you know what these important insurance terms mean.
Insurance terms and definitions
1. Actual cash value
This is the value of an item at the time of loss, measured by replacement cost less depreciation.
2. Adjuster
Sometimes called a claims examiner, this person investigates the claim you file, decides if the claim is covered, and determines how much you’ll be paid under a settlement.
3. Bundling
When you have multiple insurance policies (homeowners, auto, boat, umbrella, etc.) all with the same carrier, it’s called bundling. Besides lower premiums and time savings, bundling may provide additional benefits, such as having to pay just one deductible for claims that involve two policies (a tree falls, damaging both your garage and the vehicle inside, for example).
4. Claim
When you have a loss that is covered by the terms of your insurance policy, you can file a claim, which is a formal request to your insurance company asking for payment. Once the company confirms that the claim is covered, you’ll be paid according to the terms of your policy. If you have a deductible, that amount will be subtracted from the payment you receive.
5. Coverage
This is the benefit of your insurance, the protection you have against losses that are covered under your policy. For example, while your homeowners policy typically covers loss from fire or theft, it may or may not include coverage for damage caused by flooding.
6. Damage
Loss to your property or harm to yourself or others. This differs from the term ‘damages,’ which describes the money that one person must pay another when they are determined to be at fault for a loss.
7. Deductible
The amount of money you must pay out of pocket before your regular insurance coverage takes over to cover a claim. A deductible can be a flat amount (say $1,000) or it can be a percentage of the total (like 20 percent). Deductibles vary according to the type of loss. Your deductible for a comprehensive auto claim (to replace a broken windshield, for example) will likely be different from your deductible for an auto accident. Higher deductibles lower your premium and vice versa.
8. Depreciation
When the value of an item decreases over time due to age, use, or other factors, it’s called depreciation. It’s determined by the difference between Replacement Cost and Actual Cash Value.
9. Insurance broker
An insurance broker sells and services policies for several different insurance companies. However, they represent the insurance buyer rather than the insurance company.
10. Policy
The written contract between you and your insurance company.
11. Premium
This is your cost of coverage—the amount you must pay for your insurance policy. Your premium is based on the risk factors associated with your coverage. For example, if you have teen drivers in your family, your auto premium will be higher than if the insurance just covered you. Your premium also depends on the deductible and coverage limits you’ve chosen.
12. Replacement cost
The amount you would pay today to replace an item, which is different from its Actual Cash Value or Market Value. Many homeowners policies offer optional coverage which allows claims to be settled on a replacement cost basis, which allows you to buy new items to replace those that were lost or damaged.
13. Term
The period of time your policy is in effect, typically a year (although it may vary).
14. Umbrella insurance
Umbrella insurance provides additional liability protection over and above that which is already provided by your auto, homeowners, and other insurance policies. Umbrella insurance takes over when your other policies reach their liability coverage limit.
