Glossary of Terms

This is a list of terms designed to assist you while shopping or learning about insurance. It is not meant to be all inclusive, but should help with your understanding of the most common terms.

A

Actual Cash Value: The value of property based on the cost of repairing or replacing it with property of the same kind and quality. Typically, actual cash value equals the current replacement cost minus depreciation (age, condition, length of time in use, and obsolescence).

Adjuster: A person who investigates and settles losses for an insurance carrier.

Agent: In insurance, the person authorized to represent the insurer in negotiating, servicing, or effecting insurance policies.

Annuity: A contract that provides for a series of periodic payments to be made or received at regular intervals.

Applicant: The party applying for an insurance policy.

Application: A printed form developed by an insurer that includes questions about the prospective insured and the desired insurance coverage and limits.

Assigned Risk: A risk insured through a pool of insurers and assigned to a specific insurer. These risks are generally considered undesirable by underwriters, but due to state law or otherwise, they must be insured.

Auto Collision Coverage: Optional auto insurance which pays for damage to your car caused by collision with another car or object, or by rolling the car over. Frequently required if you have a car loan.

Auto Comprehensive Physical Damage Coverage: Optional auto insurance which pays for damage to your auto caused by things other than collision or rolling the car over, such as fire, theft, vandalism, flood or hail. Frequently required if you have a car loan.

Automatic Premium Loan: A provision in some life insurance policies that authorizes a policy loan using the cash value accumulated by the insurance policy to pay for past due premiums at the end of the grace period. This prevents a lapse of coverage.

B

Beneficiary: Any person, persons, or other entity designated to receive the policy benefits upon the death of the policyholder.

Binder: A written or oral contract issued temporarily to place insurance in force when it is not possible to issue a new policy or endorse the existing policy immediately. A binder is subject to the premium and all the terms of the policy to be issued.

Binding Receipt: A premium receipt acknowledging temporary insurance coverage immediately until the insurance company rejects the application or approves it and issues a policy.

Broker: A marketing specialist who represents insurance organizations and who deals with either agents or companies in arranging for the coverage required by the customer.

Buy-Sell Agreements: Agreement that a deceased business owner's interest will be sold and purchased at a predetermined price or at a price according to a predetermined formula.

C

Cancellation: The discontinuance of an insurance policy before its normal expiration date, either by the insured or the company.

Cash Value (cash surrender value): The cash amount payable to a life insurance policyowner in the event of termination or cancellation of the policy before its maturity or the insured event.

Certificate of Insurance: A statement of coverage issued to an individual insured under a group insurance contract, outlining the insurance benefits and principal provisions applicable to the member.

Claim: A person's request for payment from an insurer for a loss covered by the insurance policy.

Collision Insurance: Protection against loss resulting from any damage to the policyholder's car caused by collision with another vehicle or object, or by upset of the insured car, whether it was the insured's fault or not.

Comprehensive Auto Insurance: Protection against loss resulting from damage to the insured auto, other than loss by collision or upset.

Compulsory Auto Liability Insurance: Insurance laws in some states required motorists to carry at least certain minimum auto coverages. This is called "compulsory" insurance.

Conditions: The part of your insurance policy that states the obligations of the person insured and those of the insurance company.

Contingent Beneficiary: In a life insurance policy, the person designated to receive the policy benefits if the primary beneficiary dies before the insured.

Contract: A legally enforceable agreement between two or more parties.

Conversion Privilege: The right to convert or change insurance coverage from an individual term insurance policy to an individual whole life insurance policy.

Convertible Term Life Insurance: A type of term life insurance that offers the policyowner the option to exchange the term policy for a form of permanent insurance.

D

Declination: The insurer's refusal to insure an individual after careful evaluation of the application for insurance and any other pertinent factors.

Deductibles: The portion of the loss that the policyholder agrees to pay out of pocket, before the insurance company pays the amount they are obligated to cover. For example, if the covered claim is $1000 and your deductible is $250, you pay $250 and your company will pay $750. Deductibles help to keep insurance rates reasonable. Raising the amount of the deductible lowers the cost of insurance.

Depreciation: Reduction in the value of property due to age and use.

Double Indemnity: A provision in a life insurance policy, subject to specified conditions and exclusions, under the terms of which double the face amount of the policy is payable if the death of the insured is the result of an accident. In general, the conditions are that the insured's death occurs prior to a specified age and results from bodily injury effected solely through external, violent and accidental means independently and exclusively of all other cause, within 60 or 90 days after such injury.

E

Endorsement: Attachment or addendum to an insurance policy; an endorsement changes the contract's original terms.

Extended Term Life Insurance: A nonforfeiture benefit under which the net cash value of the policy is used to purchase term insurance for the amount of coverage available under the original policy.

F

Face Amount: The amount stated in the life insurance policy as the death benefit.

G

Grace Period: The specified length of time, after a Life or Health premium payment is due in which the insured may make the payment and keep the policy in force. (Usually 30 days.)

Group Health Insurance: An insurance plan designed for a group, such as employees of a single employer. Insurance is provided to them under a single policy.

Guaranty Association: Established by each state to support insurers and protect consumers in the case of insurer insolvency, guaranty associations are funded by insurers through assessments.

H

I

Indemnification: Compensation to the victim of a loss, in whole or in part, by payment, repair, or replacement. Indemnity. Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.

Insolvent: Having insufficient financial resources (assets) to meet financial obligations (liabilities).

Insurable Risk: The conditions that make a risk insurable are (a) the peril insured against must produce a definite loss not under the control of the insured, (b) there must be a large number of homogeneous exposures subject to the same perils, (c) the loss must be calculable and the cost of insuring it must be economically feasible, (d) the peril must be unlikely to affect all insureds simultaneously, and (e) the loss produced by a risk must be definite and have a potential to be financially serious.

Incontestable Clause: A life insurance policy wording that provides a time limit (e.g. two years) on the insurer's right to dispute a policy's validity based on material misstatements in the application.

Insurable Interest: Any interest a person has in property that is the subject of insurance, so that damage to this property would cause the insured a financial loss.

Insurance Company: An organization that has been chartered by a governmental entity to transact the business of insurance.

Insured: A person or organization covered by an insurance policy, including the "named insured" and any other parties for whom protection is provided under the policy terms.

Insurer: The party to the insurance contract who promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.

Irrevocable Beneficiary: A named beneficiary whose rights to life insurance policy proceeds cannot be canceled or changed by the policyowner unless the beneficiary consents.

J

K

Key Employee: Insurance Protection of a business against financial loss caused by the death or disablement of a vital member of the company, usually individuals possessing special managerial or technical skill or expertise. Also called key executive insurance.

L

Lapse: Termination of a policy due to nonpayment of premiums.

Liability: A legal obligation to compensate a person harmed by one's acts or omissions.

Liability Coverage: Insurance that provides compensation for a harm or wrong to a third party for which an insured is legally obligated to pay.

Life Insurance: Insurance that pays a specified sum of money to designated beneficiaries if the insured person dies during the policy term.

Loss: The happening of the event for which insurance pays.

Loss Expense - Allocated: Handling expenses, such as legal or independent adjuster fees, paid by an insurance company in settling a claim which can be definitely charged to that particular claim.

Loss Expense - Unallocated: Salaries and other expenses incurred in connection with the operation of a claim department of an insurance carrier which cannot be charged to individual claims.

M

Medical Payments Coverage: Medical and funeral expense coverage for bodily injuries sustained from or while occupying an insured vehicle, regardless of the insured's negligence.

Misrepresentation: Act of making, issuing, circulating or causing to be issued or circulated an estimate, an illustration, a circular or a statement of any kind that does not represent the correct policy terms, dividends or share of surplus or the name or title for any policy or class of policies that does not in fact reflect its true nature.

N

Negligence: Failure to use a generally acceptable level of care and caution.

No-fault Insurance: A system of compensation enacted by law in many states under which indemnification is made by the insured's own insurance company regardless of who is at fault. Details of this system vary significantly from state to state.

O

Offer and Acceptance: The offer may be made by the applicant by signing the application, paying the first premium and, if necessary, submitting to physical examination. Policy issuance, as applied for, constitutes acceptance by the company. Or the offer may be made by the company when no premium payment is submitted with the application. Premium payment on the offered policy then constitutes acceptance by the applicant.

P

Paid-up Policy: An in-force life insurance policy for which no further premium payments are required.

Peril: The cause of loss or damage.

Personal Injury Protection: First-party no-fault coverage in which an insurer pays, within the specified limits, the wage loss, medical, hospital and funeral expenses of the insured.

Physical Damage: Damage to or loss of the automobile resulting from collision, fire, theft or other perils.

Permanent Insurance: A general term for ordinary life and whole life insurance policies that remain in effect as long as their premiums are paid.

Personal Property Insurance: Protects against the loss of, or damage to property other than real property (real estate) caused by specific perils.

Policy: The written forms that make up the insurance contract between an insured and insurer. A policy includes the terms and conditions of the coverage, the perils insured or excluded, etc.

Policy Declarations: The part of the insurance contract that lists basic underwriting information, including the insured's name, address and description of insured locations as well as policy limits.

Policy Limits: The maximum amount an insured may collect or for which an insured is protected, under the terms of the policy.

Policy Loan: A loan from a life insurer to the owner of a policy that has a cash value.

Policyholder: The person who buys insurance.

Policyowner: An individual with an ownership interest in an insurance policy.

Policy Period: The amount of time an insurance contract or policy lasts.

Preexisting Condition: A physical illness or disability that existed before the health or life insurance policy effective date and generally, which was not disclosed on the application.

Preferred Risk: A risk whose physical condition, occupation, mode of living and other characteristics indicate a prospect for longevity superior to that of the average longevity of unimpaired lives of the same age.

Premium: The price for insurance coverage as described in the insurance policy for a specific period of time.

Primary Beneficiary: The person designated as the first to receive the proceeds of a life insurance policy upon the death of the insured.

Proof of Loss: A sworn statement that usually must be furnished by the insured to an insurer before any loss under a policy may be paid.

Property Damage Coverage: An agreement by an insurance carrier to protect an insured against legal liability for damage by an insured automobile to the property of another.

Protection Amount: The face amount of a life insurance policy, or amount of money that will be paid to a beneficiary upon the death of an insured. This amount will be reduced by the amount of any outstanding policy loan.

Q

R

Rate: The pricing factor upon which the insurance buyer's premium is based.

Rated Policy: Sometimes called an "extra-risk" policy, an insurance policy issued at a higher-than-standard premium rate to cover the extra risk where, for example, an insured has had a DUI or other traffic violations.

Rebating: Giving any valuable consideration, usually all or part of the commission, to the prospect or insured as an inducement to buy or renew. Insurance rebating is prohibited by law.

Reimbursement: The payment of an amount of money by an insurance policy for a covered loss.

Reinstatement: The process by which a life insurance company puts back in force a policy that has lapsed or has been canceled for nonpayment of premium.

Renewable Term Life Insurance: A renewable life policy permits the owner of the policy to automatically renew the policy beyond its original term by acceptance of a premium for a new policy term without evidence of insurability.

Revocable Beneficiary: A life insurance policy whose designation as beneficiary can be revoked or changed by the policyowner at any time prior to the insured's death.

Riders: An addition to an insurance policy that becomes a part of the contract.

Risk: The possibility or chance of loss or injury.

S

Salvage: Recovery made by an insurance company by the sale of property which has been taken over from the insured as a part of loss settlement.

Settlement: An agreement between a claimant or beneficiary to an insurance policy and the insurance company regarding the amount and method of a claim or benefit payment.

Standard Risk: A person who, according to a company's underwriting standards, is entitled to purchase insurance protection without extra rating or special restrictions.

Substandard Risk: A risk that cannot meet the normal requirements of an auto insurance policy. Protection is provided in consideration of a waiver, a special policy form, or a higher premium charge. Substandard risks may include those persons who are rated because of poor driving habits.

T

Term Insurance: Life insurance under which the benefit is payable only if the insured dies during a specified period. If the insured survives beyond that period, coverage ceases. This type of policy does not build up any cash or nonforfeiture values.

Theft Limit (or Inside Policy Limits): The highest amount an insurance company will pay on certain items of personal property. For instance, some policies have a $5,000 limit for computers. If an item would cost more than the limit to replace.

U

Underwriter: (a) A company that receives the premiums and accepts responsibility for the fulfillment of the policy contract; (b) the company employee who decides whether or not the company should assume a particular risk; (c) the agent who sells the policy.

Underwriting: The process of reviewing applications for coverage. Applications that are accepted are then classified by the underwriter according to the type and degree of risk.

Unilateral: A distinguishing characteristic of a life insurance contract in that it is only the insurance company that pledges anything. The policyowner does not even promise to pay premiums; therefore, it is really a one-sided contract favoring the policyowner.

Uninsured (Underinsured) Motorist Coverage: A form of insurance that pays the policy holder and passengers in his/her car for bodily injury caused by the owner or operator of an uninsured or inadequately insured automobile.

Uninsurable Risk: One not acceptable for insurance due to excessive risk.

Universal Life: Flexible premium, two-part contract containing renewable term insurance and a cash value account that generally earns interest at a higher rate than a traditional policy. The interest rate varies. Premiums are deposited in the cash value accounts after the company deducts its fee and a monthly cost for the term coverage.

V  

W

Waiver: An agreement attached to a policy which exempts from coverage certain disabilities or injuries that otherwise would be covered by the policy.

XYZ