To put it simply, insurance can be complicated. To help you better understand the language used in your insurance policies, we have compiled a glossary of the most frequently searched insurance definitions and provided examples to help.
If you have any questions after reading this, don’t hesitate to reach out to your MSIG insurance agent or contact us directly!
A
Accidental Death & Dismemberment (AD&D) Insurance
AD&D insurance, aka double indemnity insurance, is a form of life insurance that only provides coverage for accidental death or the loss of / loss of use of body parts (e.g., arm, finger, eyesight, hearing, speech, etc.).
It is usually added as a rider to life insurance policies, but it can also be purchased as a policy in itself (standalone policy).
Actual Cash Value (ACV)
ACV refers to the cost to replace or repair your property minus depreciation. It is a method insurance companies use to determine the amount they will pay a policyholder for a covered loss. It is most commonly heard in home and auto insurance policies.
ACV Formula: Replacement (or Repair) Cost – Deductible – Depreciation Adjustment
- Example: it will cost $10,000 to repair the five-year-old siding on your house, but your deductible is $1,000, and the insurance company determines your siding has depreciated $2,000 over the past five years.
- Calculation: $10,000 – $1,000 – 2,000 = $7,000 ACV
Adhesion
In insurance, adhesion refers to insurance contracts (policies) in which one party has significant say over the other. Generally, the party with more say is the insurance company because they are the ones offering the contract and willing to cover the risks of the policyholder.
If the policyholder wants coverage from the insurance company, they essentially must adhere/agree to the contract as it is.
C
Coinsurance
Depending on the type of insurance, coinsurance can have two meanings:
Property Insurance Coinsurance
Coinsurance in property insurance requires a policyholder to carry insurance with a limit equal to a specified percentage of the replacement cost or actual cash value of their property. If the policyholder doesn’t, they will not receive full compensation for their loss. It was designed to ensure property owners were thoroughly insuring themselves, and compensating insurance companies appropriately for the level of risk they were taking on.
- Example: if you have 90% coinsurance, and your commercial building is worth $100,000, you only need to carry commercial property insurance with a limit of $90,000 to receive full compensation for any loss.
To calculate your compensation if you do not meet your coinsurance requirements, use this easy formula: Amount of Insurance Carried / Amount of Insurance Required * Loss – Deductible
- Example: your building is worth $100,000, and you are carrying 80% coinsurance ($80,000) but are required to carry 90% coinsurance when your building experiences $10,000 worth of damage.
- Calculation: $80,000 / $90,000 = 0.89 * $10,000 – 0 = $8,889
To calculate your coinsurance penalty, use this formula: Loss – (Amount of Insurance Carried / Amount of Insurance Required * Loss)
- In the above example, it would be $10,000 – ($80,000 / $90,000 * $10,000) = $1,111
Health Insurance Coinsurance
In health insurance, coinsurance is a percentage of the claim (bill) that is paid by the policyholder after the deductible is surpassed.
Example: if a policyholder has a health insurance plan with 20% coinsurance, this means they will pay 20% of the claim (after the deductible) up to a specified amount, often referred to as the out-of-pocket maximum. After the out-of-pocket maximum is reached, the insurance company covers the rest of the claim.
Comprehensive Insurance
Comprehensive insurance is a form of car insurance, applicable to both individual auto and commercial auto insurance. It provides coverage for non-accident-related physical damage to a vehicle, such as a fallen tree branch, hitting a deer, or even theft and break-in damage.
Collision Insurance
Collision insurance is a form of car insurance, offered in both individual auto and commercial auto policies, that provides coverage for accident-related physical damage to your vehicle. It can provide coverage whether you are at fault or not.
Copay
Copay is a flat rate a policyholder pays for services (not a percentage like coinsurance). Copays are always paid even after the deductible has been met unless the policyholder has reached their out-of-pocket maximum for the year (coinsurance, deductibles, and copayments contribute to the out-of-pocket maximum).
Example: a $250 copay for emergency rooms means a policyholder pays $250 each time they visit the emergency room. However, if additional procedures are performed in the emergency room like an x-ray, these costs will apply to the deductible and/or coinsurance.
D
Deductible
An insurance deductible, often heard when discussing health insurance and car insurance, is a specified amount the policyholder pays for covered losses under their insurance policy before their insurance company provides any coverage.
Deductibles were implemented to share the cost of loss with policyholders to prevent them from making excessive claims and to cushion the hit insurance companies take from catastrophic losses.
*A helpful note to remember is the larger your deductible, the lower your premium payments will be.
Disability Insurance
Disability insurance provides coverage for employees who cannot work because of an injury or illness. It provides payment equal to a specified percentage of the worker’s salary (usually between 60% – 70%). This is different from workers’ compensation insurance which provides coverage for work-related injuries and illnesses.
There are two types of disability insurance:
- Short-term disability insurance: provides disability coverage for usually up to 6 months.
- Long-term disability insurance: provides disability coverage for 6 months+.
G
Gap Insurance
Gap insurance, also known as guaranteed auto protection, is a form of auto insurance that covers the difference between a car’s actual cash value and the amount the policyholder owes on their car loan if the vehicle is totaled or stolen. It is a great way for a policyholder to protect themselves from paying off a loan worth more than their car.
H
Hazard
A hazard is something that increases the risk of a peril occurring.
There are three types of hazards:
- Physical: physical things in the natural world.
- Example: a tree hanging over a house.
- Moral: individuals looking to take advantage of insurance.
- Example: faking an auto insurance car reck to get a new car.
- Morale: careless and reckless behavior.
- Example: leaving your car unlocked in a dangerous area.
Health Insurance
Health insurance provides coverage for the costs of receiving medical treatment, services, and prescription drugs.
You can enroll in health insurance with an individual/family plan or through an employer-sponsored group health insurance plan.
Health Maintenance Organization (HMO)
An HMO is a type of health insurance plan that provides its policyholders with a narrow network of providers to receive care from (e.g., specific clinics, hospitals, or possibly a single health system). In an HMO plan, policyholders are limited to receiving care from “in-network” healthcare providers if they want to receive benefit coverage.
HMO plans typically have fewer out-of-pocket expenses and lower premiums than other health insurance plans like PPOs.
Homeowners Insurance
Homeowners insurance provides your home with property and liability coverage. Property insurance protects your home and your personal property from damage and theft. Liability insurance protects you against bodily injury or property damage you cause to others.
Hospital Indemnity Insurance
Hospital indemnity insurance, aka hospital insurance, can provide coverage when your health insurance plan doesn’t. Unfortunately, health insurance doesn’t provide coverage for everything related to a medical visit, like ambulance transportation, for example. Hospital insurance can help you cover these costs.
Hospital insurance is often paid out in a lump sum, allowing you to use it as you see fit. It can be very helpful for paying unexpected expenses that come with medical treatment, such as childcare and transportation.
I
Indemnity
When reviewing your insurance policies, you’ll often see the word indemnity or some form of it, such as indemnification or indemnify. Essentially, it is the agreement by an insurance company to compensate a policyholder for losses covered under their insurance policy.
The goal of indemnity is to make the policyholder “whole” again by returning them to a state they were in before the loss.
You may also hear the word indemnity in hospital indemnity insurance or professional indemnity insurance (E&O) There is more to come on this below.
Insurance
Insurance is a catch-all term to describe a system in which an insurance company (aka carrier or insurer) or government entity agrees to cover specified financial risks for a large group of individuals or businesses in return for premium payments.
By grouping many individuals or businesses together, insurance companies and government entities can mitigate their risks of loss.
Insurance Agency
An insurance agency is an entity that sells insurance products to individuals and/or businesses on behalf of an insurance company. In order to sell an insurance company’s products, an agency must be contracted with the company and appoint its agents to it. An agency can be composed of just one agent, dozens, or more.
There are two types of insurance agencies:
- Captive: generally, these agents/agencies work for one company and sell one company’s products (e.g., State Farm agency).
- Independent: these agents/agencies represent multiple insurance products from multiple insurance companies (e.g., Midwest Select Insurance Group).
For more information on insurance agencies, read our article about what insurance agencies are.
Insurance Binder
An insurance binder is a legal document that provides temporary coverage to you and/or your business before your insurance policy is issued. It was designed to provide individuals and businesses with coverage and proof of insurance quickly because acquiring an insurance policy can take weeks.
Additionally, proof of insurance is often required to take out a car loan or mortgage and to buy property.
Insurance Carrier
An insurance carrier, aka an insurance company or insurer, sells insurance products to individuals or businesses, often through insurance agents. Examples of insurance companies include The Hartford, Allstate, and State Farm.
Insurance Loss Ratio
The loss ratio is a percentage insurance companies use to determine the financial health of their company over a set period.
The calculation for it is:
- (Claims Paid + Loss Adjustment Expenses) / Premiums Earned * 100
Insurance Policy
An insurance policy, aka an insurance plan, is a legal agreement between an insurance company and an individual/business to provide compensation for covered losses in return for premium payments by the individual/business.
Insurance Rider
Insurance riders, aka insurance endorsements, are changes (aka amendments) made to an existing insurance policy. Riders can include adjustments in coverage, additional policy benefits, and more.
Example: in a health insurance policy, you can add a rider to provide you coverage for critical illness.
Adding a rider often increases the cost of your insurance premium for that policy since you are increasing your coverage.
L
Liability Insurance
Liability insurance is included in many insurance policies such as homeowners insurance policies, business owner’s insurance policies (BOP), and car insurance policies. It protects you or your business from injury or damages you cause to someone else or their property. It can help cover the costs of this damage and protect you from lawsuits that may arise from it.
Example: if you are at fault for a car accident that damages someone else’s car and injures the driver, your auto liability insurance can help you cover the costs.
Life Insurance
Life insurance provides financial compensation to a policyholder’s beneficiaries if the policyholder passes away.
Three of the most common types of life insurance are:
- Term life insurance: provides life insurance coverage for a set period. The policy only pays out if the policyholder dies during this period, otherwise, it expires.
- Whole life insurance: provides life insurance coverage for the length of the policyholder’s life, ensuring a death benefit is paid. Sometimes, the policyholder can take a lump sum out of their policy when they are alive, but this will reduce the overall death benefit.
- Universal life insurance: like whole life insurance, it provides life insurance coverage for the length of the policyholder’s life but allows more flexibility to withdraw funds while the policyholder is alive (e.g., borrowing money from the policy).
O
Out-of-Pocket
Out-of-pocket refers to costs the policyholder is responsible for paying which are not covered by insurance. Out-of-pocket costs can include coinsurance, copayments, deductibles, and specific medical services not insured under your insurance policy.
Your out-of-pocket maximum refers to the maximum amount you’ll have to pay during a calendar year. After it is reached, your insurance company will cover the rest of the costs. Coinsurance, copayments, and deductibles contribute to your out-of-pocket maximum each year.
P
Peril
In insurance, a peril is defined as the cause of loss. For example, if your house is destroyed by a fire, the peril would be the fire.
In a named-peril insurance policy, all perils covered are listed or “named.” In an all-risk insurance policy (aka open insurance policy), all perils are covered except those listed.
Personal Injury Protection (PIP)
PIP, aka medical payments coverage, provides coverage for medical expenses, funeral expenses (if necessary), and loss of income for accident-related injuries suffered by occupants of the policyholder’s car, regardless of fault.
Do not confuse it with auto liability insurance which provides coverage for damages to a third party if the policyholder is at fault.
Preferred Provider Organization (PPO)
A PPO is a type of health insurance plan that provides “in-network” and “out-of-network” health insurance coverage so policyholders can receive care from anywhere.
Example: if you are injured while on a trip across the country, you can rest assured that you will be covered no matter where you go to receive medical treatment.
“In-network” benefit coverage is typically better and has fewer out-of-pocket expenses than “out-of-network” benefit coverage.
Premium
An insurance premium is the amount a policyholder pays for their insurance policy. Premiums are generally paid directly to an insurance company on a monthly, semi-annual, or annual basis.
Nowadays, most premiums are deducted directly from employees’ paychecks for their employee benefits plans. Employers frequently pay a portion of their employees’ premiums to help lower the costs of their insurance.
If you are looking to reduce the cost of your employee benefits and/or improve your offerings as an employer, request a free employee benefits insurance quote today.
Professional Liability Insurance
Professional liability insurance, also commonly referred to as professional indemnity insurance or errors and omissions (E&O) insurance, is a type of liability insurance that protects your business from lawsuits arising from the professional services or advice you provide. Essentially, it protects you against the costs of legal defense and judgments that come from a client suing you, whether you made a mistake in the advice you provided, or not.
Example: you own a real estate agency, and one of your agents misinforms a buyer about a material fact about the property. The buyer has the right to sue the agent if they discovered this fact after acquiring the property. Professional liability insurance can help you cover these legal costs.
R
Rebating
Insurance rebating is an illegal practice in nearly all 50 states (including all in the Midwest), where an insurance agent agrees to share commissions with a customer if they agree to buy an insurance policy from them.
It was outlawed to prevent unfair competition in the insurance industry and to protect consumers from being induced to buy policies that fail to provide them with sufficient coverage.
Reinsurance
Reinsurance is insurance bought by insurance companies to protect them from massive losses. Reinsurance provides insurance companies a safety net in worse-case situations that create catastrophic losses, such as wildfires (like those in the western US) or hurricanes (like those in the Gulf of Mexico).
With reinsurance, insurance companies can continue to provide insurance at scale at rates that are more affordable for customers.
Renters Insurance
Renters insurance provides two types of coverage for those renting or leasing a building.
- Property insurance: coverage for your personal belongings if they are damaged or lost due to certain unexpected events such as fire or theft.
- Liability insurance: coverage if you are at fault for damage to somebody else’s property (including the rental property) or causing somebody else injury.
Replacement Cash Value (RCV)
RCV refers to the cost to replace or repair your property without subtracting depreciation (unlike ACV). It is a method insurance companies use to determine the amount they will pay a policyholder for a covered loss. It is most commonly heard in auto insurance and homeowners insurance policies.
RCV Formula: Replacement (or Repair) Cost – Deductible
- Example: it will cost $5,000 to repair the siding of your house and your deductible is $1,000.
- Calculation: $5,000 – $1,000 = $4,000 RCV
Risk
In insurance, risk refers to the chance of an unexpected loss happening, such as a policyholder getting in a car accident. Insurance companies calculate premiums based on risk, which is why it is in your best interest as a policyholder to mitigate them.
S
Subrogation
Subrogation is the right an insurance company has to attempt to recover losses from a policyholder’s claim that another party is at fault for. Insurance companies typically try to recover these losses from the at-fault party’s insurance company.
Example: if you are injured on another person’s property, and the property owner is at fault, your insurance company will likely help you cover the claim if the property owner’s liability insurance takes too long. In return, your insurance company has the right to request reimbursement from the property owner’s insurance company, which can even help you cover your deductible.
T
Third-Party Administrator (TPA)
In insurance, TPA stands for Third-Party Administrator. TPAs are organizations that handle administrative services for insurance companies as well as for businesses that offer self-funded group health insurance plans. They are used to outsource administrative functions such as claims processing, policy administration, and risk management.
TPAs are a useful tool businesses can use to offer insurance without having to deal with all the work that comes with it.
If you have any more questions about insurance definitions or insurance in general, read our article that answers 30 of the most frequently searched insurance questions. For additional help going through your insurance policy, contact us today to speak with an MSIG insurance specialist.
