17 Insurance Terms You Need to Know
Like most industries, the insurance industry uses certain terms and phrases that are unique to it.
While it may sound like a foreign language — especially if this is your first time shopping for homeowners or auto insurance on your own — it doesn’t have to. By learning a few key insurance terms, you’ll be more informed and better able to understand what, exactly, goes into your insurance policy.
With this in mind, below we offer a glossary of quick and simple definitions for 17 common insurance terms.
Insurance term glossary
1. Actual cash value
In insurance, actual cash value (ACV) refers to the value of insured property at the time it is being replaced. Calculating actual cash value requires you to consider factors like depreciation, or the way in which some property (like automobiles, electronics, etc.) lose value over time.
In many cases, the actual cash value of your insured property will be lower than the replacement cost. Replacement cost is the amount of money that it would take to actually replace a piece of property covered by your insurance policy, such as your home, vehicle, personal property, etc. Replacement cost will typically be higher than actual cash value (see above).
An appraisal is the process of examining a piece of property — like a car, a house, jewelry, fine art, collectibles, etc. — in order to determine how much it’s worth. Appraisals take many different factors into consideration, including any existing damage.
Appraisals provide value to both you and the insurance carrier. You benefit from undergoing an appraisal because it gives you a better sense of how much your property is worth and, therefore, how much coverage you should purchase. The carrier benefits by ensuring that the property being insured is actually worth the amount it is covered for.
An insurance claim is essentially any request for compensation that you (the policyholder) make to your insurance carrier. In other words, anytime you contact your insurance carrier to report damages to your property from a covered event and request their help in paying for the cost, you are submitting a claim.
Conditions, also known as policy conditions, are a section of your insurance policy which essentially outline your duties and responsibilities, as well as the duties and responsibilities of the insurance carrier.
5. Covered event
A covered event is any incident that causes damage to your insured property that triggers payment from your insurance carrier when you submit a claim. In other words, it’s an event that your insurance policy offers you protection from.
It’s important to note that not every event will be covered by every insurance policy. Your policy will outline the specific events that you are and are not covered by.
When you experience a covered loss and submit a claim to your insurance carrier, your deductible is the amount of money that you need to pay out of pocket on your own before your policy kicks in to cover the rest of the bill.
Typically, you’ll need to pay your deductible on a per-claim basis. This means that if you submit one claim this month and another claim next month, you’ll pay a deductible both times.
Your deductible can either be a flat dollar amount, or a percentage of the cost, depending on the terms outlined in your policy.
An endorsement is essentially an additional insurance policy that you can add onto your base policy in order to increase your protection. Endorsements may increase your coverage limits, or protect you from additional types of events that are not covered in your base policy. Endorsements are also commonly referred to as riders, add-ons, or floaters.
Earthquake insurance is one common type of homeowners insurance endorsement.
An exclusion is a part of your insurance policy that outlines those times when you will not be able to file a claim. For example, your insurance policy might specifically list out certain hazards, perils, or events that your policy does not cover. An exclusion might also limit the types of property covered by your policy.
A hazard is anything that increases the likelihood that you will experience a loss. If your insurance carrier believes that a hazard exists, it can have the effect of raising your insurance premiums and making your policy more expensive.
There are many different potential hazards that your insurance carrier will consider. If you live in an area where crime is common, for example, you might pay higher auto insurance premiums compared to someone who lives in an area with less crime. Likewise, someone who has a pool is likely to pay higher homeowners insurance premiums compared to someone who doesn’t have a pool.
10. Insurance agency
An insurance agency is a company or individual who is authorized by an insurance company to sell that company’s policies. Insurance agencies are also sometimes called insurance brokers.
Agencies do not underwrite or originate insurance policies. They simply connect individuals who are in the market for insurance with companies that are selling insurance, typically for a fee or commission (paid by the insurance company). Independent insurance agents sell insurance policies from multiple insurance companies, while exclusive agents only sell policies from one insurance company.
Matic, for example, is an insurance agency that connects individuals with 40+ insurance carriers in order to find the best option for their needs. All it takes is a few minutes to find the perfect homeowners, auto, or home and auto policy bundle.
11. Insurance carrier
An insurance carrier is the business that ultimately sells and underwrites an insurance policy.
When you take out an insurance policy, you pay your premiums to the carrier, and when you need to submit a claim, you submit it to the carrier.
Insurance carriers are also commonly called insurance companies.
Related: Insurance Agencies vs. Insurance Companies: What You Need to Know
In insurance, your policy limit is the maximum amount of money that the insurance carrier will pay out for each type of claim. Limits are clearly outlined in the terms of your policy. Generally speaking, the higher your limits, the more you will pay in monthly premiums for additional coverage.
A loss is essentially the reason for which you are filing a claim with your insurance carrier. Typically, this means that a loss is the covered damage or destruction of a piece of insured property, such as your home, automobile, collectible, etc.
Mitigation refers to any steps that you take to lower the risk of a loss. Storm-proofing your home or installing a security system in your car are two common examples of risk mitigation.
Often, efforts to mitigate risk of loss will translate into reduced premiums and discounts on an insurance policy, because it ultimately makes it less likely that you’ll need to file a claim.
Related: 18 Common Auto Insurance Discounts To Look For
Related: 18 Common Homeowners Insurance Discounts To Know
15. Named peril
Named peril is a term used to refer to any type of damage or loss that is caused by an event specifically listed out (or named) in your insurance policy. Common named perils include damage caused by:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Vandalism and mischief
- Volcanic eruptions
- The weight of ice or snow on a structure
- The accidental overflow or discharge of water or steam
- Cracking or bulging caused by a sudden and accidental event
- Accidental discharge from an artificially generated electrical current (i.e., a power surge)
- Falling objects
You can find more information about any named perils that you are specifically covered for in your policy.
Related: 8 Types of Homeowners Insurance Policies to Know
Your insurance policy is a legal contract between you (the insured) and the insurance carrier that you have purchased coverage from. As such, your policy outlines the key terms and conditions that guide your coverage, such as your premium and deductible, as well as limits, exclusions, named perils, endorsements, and more.
Your premium is the amount of money that you pay to the insurance carrier in order to purchase insurance. Premiums may be paid monthly, annually, or semiannually, depending on the terms outlined in your policy. It’s important to note that your premium does not contribute to your deductible.
Your premium can also sometimes be called your rate.
Insurance doesn’t need to be complicated
For many people, buying homeowners or auto insurance is a complicated and sometimes overwhelming process. But by learning the terms above, you’ll be better equipped to ask the right questions and look for the right things when you find yourself shopping for insurance.
Here at Matic, our goal is to make it as easy as possible for drivers and homeowners to purchase the exact insurance policy they need, for the lowest price possible. That’s why we help you compare your options, including the different discounts you might qualify for. All it takes is answering a few simple questions and you can have a personalized quote for an affordable policy.