Sarah, a young business owner with a promising startup, bought a thorough business insurance policy to safeguard her company. She thought “business interruption coverage” would cover lost income from unplanned disruptions, so she was shocked when the insurance company rejected her claim for a fire-related incident as it was not covered in her policy.
There are times when we’ve been in similar scenarios where a simple misunderstanding of a word led to problems. So whether you’re a newbie or professional, it is crucial to understand the key terms in your policy document before signing.
In this article, we’ll look at common insurance terms and specific terminology for the different types of insurance policies.
Insurance Defined
The first word to know in insurance terms is insurance itself. Insurance is a contractual agreement between an individual or entity and an insurance company to provide premiums in exchange for financial security against unforeseen events.
There are different types of insurance and their specific offerings, so it is vital to understand your policy and know what it entails.
Understanding the insurance policy
Gaining a firm grasp on the insurance terms and conditions laid out in your insurance policy holds great importance when it comes to protecting yourself financially. By not fully understanding these guidelines, there is a risk of being denied compensation for an assumedly included loss. Furthermore, having knowledge about the obligations and rights associated with being a policyholder plays a key role in ensuring successful claim submissions.
You should carefully review your policy document, paying attention to important details such as coverage limits, deductibles, and any additional endorsements or riders included.
Policyholder
A policyholder is a person or entity that is the owner of an insurance policy. As the principal in an insurance contract, they are in charge of all responsibilities and duties related to the policy.
It is important to distinguish between a policyholder and an insured. The insured is the person or entity that the insurance policy covers. While the policyholder is responsible for owning the policy. Although they can sometimes be the same person, this is not always true.
For example, your employer can be the policyholder for your life insurance, while you are the insured. Your employer is responsible for contributing funds towards the policy on your behalf.
There are certain rights and responsibilities that come with owning a policy.
Your Rights as a Policyholder
1. It is within your rights to seek insurance coverage tailored precisely to meet your unique needs and requirements.
2. You are entitled to receive a thorough and easily understandable document that outlines all the terms, conditions, and specifics of your coverage.
3. You have the right to ask for accurate and complete information regarding your premium costs, limitations in coverage areas, exclusions of certain incidents, and claim procedures.
4. You have the right to request modifications to your current plan, whether it is adding or removing coverage options, adjusting limits, or updating personal information.
Your Responsibilities as a Policyholder
1. Premium Payments: It is your responsibility to pay the premiums as agreed upon in the policy. Failure to make timely payments may result in a lapse in coverage or policy cancellation.
2. Accurate Information: When applying for insurance coverage, It is important that you provide accurate and truthful information. Misrepresenting or failing to disclose relevant information can lead to claim denials or policy cancellations.
3. Compliance with Policy Terms: You are responsible for understanding and complying with the terms and conditions stated in your policy. This includes fulfilling any obligations or requirements specified by the insurance company.
4. Prompt Reporting of Claims: It is your responsibility to promptly report any claims to your insurance company. You should provide all necessary documentation and information.
Premium
This is also an important insurance term to know. Premium refers to a sum that individuals or businesses hand over to an insurer as payment for obtaining coverage through an insurance policy. It essentially represents the expense incurred by individuals or businesses wishing to secure and manage a form of financial protection offered via this particular type of arrangement.
There are various factors that affect premium costs. Some of them are:
1. Risk Factors: Insurance companies assess the level of risk associated with insuring individuals or businesses. Factors such as age, health condition, occupation, driving record, claim history, and credit score can impact premium costs. Generally, individuals or businesses with a higher perceived risk are likely to pay higher premiums.
2. Coverage and Policy Limits: The extent of coverage and policy limits selected by insured individuals can affect premium costs. Choosing higher coverage limits or adding additional coverage options can increase the premium amount.
3. Type of Insurance: Different types of insurance have varying premium structures.
4. Underwriting and Rating Factors: Insurance companies use various underwriting and rating factors to determine premiums. For example, standard, preferred, and preferred plus are sample rating insurance companies could offer you. The “higher” the rating means your “less” ricky to insure.
Coverage
Another insurance term to know about is coverage. Coverage in insurance refers to the extent of protection offered by a policy. Coverage forms the basis of an insurance policy, dictating areas where individuals or businesses receive financial protection. For example:
Life insurance coverage provides a death benefit to your family upon your death. This will serve as an income replacement to cover your family’s financial needs when you are no longer living.
Read Also: What Is Disability Insurance and Who Is It For?
Claims
This is an official request for obtaining the death benefit provided by the insurance policy. Filing a claim varies by insurance type and company, but general steps include:
- Notification: Policyholders should promptly contact their insurance company to report loss of loved one ro begin the claims process. This can be done either via a phone call or over the internet.
- Documentation: Gather all the supporting evidence for your loss. A death certificate is required for claim submission.
- Investigation: The insurance company will conduct an investigation to determine the validity of processed death. ..
- Evaluation: Using the information gathered during their investigation, the insurance company will evaluate whether the claim falls within the coverage provided by the policy.
- Settlement: If approved, the insurance company will settle the policyholder. The nature of this settlement may vary depending on factors.
To facilitate a smooth claims process experience, it’s essential to timely report any incidents that may result in a claim, follow the instructions, and exercise patience.
Other common insurance terms
Riders: Riders are insurance policy add-ons that provide additional coverage. They can be purchased separately or included as part of your policy. Riders are often used to customize your coverage to meet specific needs, such as adding coverage for expensive jewelry or increasing liability limits.
PUA Rider, for example, means a Paid up additions rider. PUA is a rider you can add to a policy that will not only provide a small amount of death benefit but can enhance the cash value growth.
Base Premium: This is also an insurance term worth knowing. The base premium is the amount of money applied to the premium that purchased death benefit.
MEC Limit: This insurance term is a limit set by the IRS rules about the maximum amount of premiums that can be paid into the policy in its first seven years. If you pay “too” much in premium, the IRS considers your policy an investment and you will be taxed on the growth if you cross the limit. Also, a good insurance term to note.
Exclusions: Exclusions are incidents or conditions that your insurance policy does not cover. Examples of exclusions include pre-existing medical conditions, intentional acts of harm, and damage caused by natural disasters.
Grace period: The grace period is an insurance term that comes into effect after you’ve missed your premium payment deadline. It is the period of time when you can pay your outstanding premiums without any penalties while still enjoying your insurance coverage.
Underwriting: This is the process of assessing if an individual or company should be provided with insurance coverage. Insurance companies run checks on certain factors to determine the level of risk you pose to them.
Surrender value: The insurance term surrender value is the sum of money you would receive if you ended your policy prematurely. It is less than the total amount of premiums you’ve paid into the policy.