Understanding Insurance

Why do I need to buy insurance?

  • Protects your assets against attachment as a result of a court award.
  • Provides for cost of defense when you are sued.
  • Allows you to purchase such high value items as a car or a home by insuring the collateral on behalf of the financial institution that lent you the money.
  • Provides financial security for your family in the event of your death.
  • Provides for the health care of you and your family through systematic payments.
  • Allows you to save for retirement while deferring interest payments to a time when your income is lower, thus reducing your tax payments.
  • Allows you to remain financially solvent when you're ill and can't work.

 

What factors affect the insurance premiums I pay?

  • Claims activity including such costs as medical care, auto body repair, construction, legal defense, jury awards, claims adjustment, and insurance fraud.
  • Overhead including rent, utilities, employee salaries and benefits, office supplies, equipment, and furniture.
  • Investment income.

 

Insurance Terms and Definitions

Acceleration Clause: The part of a contract that says when a loan may be declared due and payable.

Actual Cash Value: Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at current full value because of a decade of depreciation.

Adjustable Rate: An interest rate that changes, based on changes in a published market-rate index.

Adjuster: A representative of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted.

Aggregate Limit: Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.

Annuity: An agreement by an insurer to make periodic payments that continue during the survival of the annuitant(s) or for a specified period.

Case Management: A system of coordinating medical services to treat a patient, improve care and reduce cost. A case manager coordinates health care delivery for patients.

Casualty: Liability or loss resulting from an accident.

Claim: A demand made by the insured, or the insured's beneficiary, for payment of the benefits as provided by the policy.

Commercial Lines: Refers to insurance for businesses, professionals and commercial establishments.

Coverage: The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.

Cost-of-Living Adjustment (COLA): Automatic adjustment applied to Social Security retirement payments when the consumer price index increases at a rate of at least 3%, the first quarter of one year to the first quarter of the next year.

Death Benefit: The limit of insurance or the amount of benefit that will be paid in the event of the death of a covered person.

Deductible: Amount of loss that the insured pays before the insurance kicks in.

Earned Premium: The amount of the premium that has been paid for in advance that has been "earned" by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.

Floater:A separate policy available to cover the value of goods beyond the coverage of a standard renters insurance policy including movable property such as jewelry or sports equipment.

Grace Period: The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time. In Universal Life policies, it typically provides for coverage to remain in force for 60 days following the date cash value becomes insufficient to support the payment of monthly insurance costs.

Hazard: A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.

Hazardous Activity: Bungee jumping, scuba diving, horse riding and other activities not generally covered by standard insurance policies. For insurers that do provide cover for such activities, it is unlikely they will cover liability and personal accident, which should be provided by the company hosting the activity.

Indemnity: Restoration to the victim of a loss by payment, repair or replacement.

Licensed: Indicates the company is incorporated (or chartered) in another state but is a licensed (admitted) insurer for this state to write specific lines of business for which it qualifies. Loss Control: All methods taken to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and noninsurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring, and other techniques that minimize the risks of a business, individual, or organization.

Non-cancellable: Contract terms, including costs that can never be changed.

Occurrence: An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn't have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected not intended by the insured.

Out-of-Pocket Limit: A predetermined amount of money that an individual must pay before insurance will pay 100% for an individual's health-care expenses.

Paid-Up Additional Insurance: An option that allows the policyholder to use policy dividends and/or additional premiums to buy additional insurance on the same plan as the basic policy and at a face amount determined by the insured's attained age.

Personal Lines: Insurance for individuals and families, such as private-passenger auto and homeowners insurance.

Policy: The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.

Premium: The price of insurance protection for a specified risk for a specified period of time.

Qualifying Event: An occurrence that triggers an insured's protection.

Renewal: The automatic re-establishment of in-force status effected by the payment of another premium.

Replacement Cost: The dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.

Stop Loss: Any provision in a policy designed to cut off an insurer's losses at a given point.

Tort : A private wrong, independent of contract and committed against an individual, which gives rise to a legal liability and is adjudicated in a civil court. A tort can be either intentional or unintentional, and liability insurance is mainly purchased to cover unintentional torts.

Umbrella Policy: Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.

Underwriting: The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

Usual, Customary and Reasonable Fees:An amount customarily charged for or covered for similar services and supplies which are medically necessary, recommended by a doctor or required for treatment.

Valuation: A calculation of the policy reserve in life insurance.

Waiver of Premium: A provision in some insurance contracts which enables an insurance company to waive the collection of premiums while keeping the policy in force if the policyholder becomes unable to work because of an accident or injury. The waiver of premium for disability remains in effect as long as the ensured is disabled.