Insurance Glossary
A
Actuary – A professional who uses mathematics, statistics, and financial theory to study uncertain future events, especially in relation to insurance and pension programs. Actuaries help insurers assess risk, determine premium rates, and ensure the financial stability of the company.
Agent – A licensed individual or firm that sells, solicits, or negotiates insurance contracts on behalf of an insurer. Agents act as intermediaries between insurance companies and customers, providing advice and offering insurance products.
B
Buy-Out Agreement – Also known as a Buy and Sell Agreement. This is a formalized and legal contract between the partners or shareholders of a business that ensures that the management and/or ownership will pass smoothly to the remaining partners/shareholders in the event of death, incapacity, or retirement of one of the partners or shareholders. It prevents disputes and ensures continuity by clearly outlining the process for the transfer of shares.
C
Claim – A formal request made by the policyholder to the insurance company for compensation or coverage for a covered event under the terms of the policy. A claim can be made for various types of insurance, including health, life, auto, and home insurance.
Coverage – The amount of protection provided under an insurance policy. Coverage specifies the risks or perils that are included and defines the scope of protection, such as the policy limits, exclusions, and types of losses covered.
D
Deductible – The amount that the policyholder must pay out of pocket before the insurance coverage kicks in. Deductibles are commonly seen in auto, health, and property insurance policies. A higher deductible typically results in lower premium payments.
E
Exclusion – Specific conditions or circumstances that are not covered by an insurance policy. Exclusions reduce the scope of the policy, and it’s important for policyholders to understand them to avoid surprises during claims.
F
Franchise – A system in which the insured must cover all or a specific amount of losses up to a certain threshold. If the loss exceeds this threshold, the insurance company then covers the remaining amount. This is often used in property insurance.
Flexible Premium – A type of life insurance policy where the policyholder can adjust the premium amount and frequency based on their financial situation, giving them greater control over their contributions.
G
Gross Premium – The total premium paid by the policyholder for an insurance policy before any deductions or commissions. It includes administrative fees, taxes, and the insurance company’s profit margin.
H
Hazard – A condition or situation that increases the likelihood of an insured loss occurring. In the context of property insurance, a hazard could be an environmental risk (e.g., proximity to a floodplain) or a physical risk (e.g., an old, worn-out roof).
Health Insurance – A type of insurance that covers medical expenses incurred by the policyholder due to illness or injury. Health insurance plans may cover hospital stays, outpatient services, prescription medications, and preventive care.
I
Indemnity – The principle of restoring the policyholder to the financial position they were in prior to a loss. Insurance is designed to compensate for losses but not to allow the insured to profit from a claim. The indemnity principle ensures that no one is unfairly enriched.
Insurance Policy – A legal contract between an insurer and the policyholder, outlining the terms of coverage, including the insured events, exclusions, premiums, policy limits, and the procedures for filing claims.
L
Liability Insurance – A type of insurance that protects the insured against claims arising from injuries or damage caused to other people or their property. Common types of liability insurance include general liability, professional liability, and product liability.
Life Insurance – A policy that pays out a sum of money either on the death of the insured person or after a set period. Life insurance is designed to provide financial security to the beneficiaries in case of the policyholder’s death.
M
Moral Hazard – The risk that an insured party will take on higher risks because they know they are protected by insurance. Insurance companies attempt to mitigate moral hazard by enforcing safety protocols, deductibles, and exclusions.
Motor Insurance – A type of insurance specifically covering vehicles such as cars, trucks, and motorcycles. It provides protection against damages caused to the vehicle, injuries to the driver or passengers, and damage to other people’s property in the event of an accident.
N
Net Premium – The amount of premium that the insurer receives after deducting expenses such as agent commissions, taxes, and other costs from the gross premium. It reflects the actual money available to cover claims.
O
Underwriting – The process by which an insurer evaluates the risks of insuring a person or entity and determines the terms and conditions of the policy, including the premium rates. Underwriting involves assessing factors like the applicant's health, age, lifestyle, and risk factors.
Obligatory Insurance – Insurance that is required by law, such as car insurance in many jurisdictions or workers' compensation insurance. Failure to comply with mandatory insurance requirements can result in penalties or fines.
P
Premium – The amount paid by the policyholder to the insurance company in exchange for coverage. Premiums can be paid monthly, quarterly, or annually and vary based on the type of insurance, coverage amounts, and the policyholder’s risk profile.
Policyholder – The individual or entity that owns an insurance policy and is entitled to the benefits and coverage provided by the policy. The policyholder is responsible for paying premiums and complying with the terms and conditions of the contract.
R
Reinsurance – Insurance purchased by an insurance company to limit its own risk exposure. Reinsurance involves transferring a portion of risk to another insurer (reinsurer), allowing the original insurer to protect itself against large losses.
S
Subrogation – The process by which an insurance company seeks reimbursement from a third party that caused the insured loss. If the insurer pays for a claim caused by another party's negligence, subrogation allows the insurer to recover those costs.
State Insurance – Insurance provided or regulated by the government. State insurance programs often cover areas like workers' compensation, unemployment insurance, and social security benefits.
Short-Term Insurance – Insurance that provides coverage for a fixed period, typically less than a year. It covers specific events such as auto accidents, travel mishaps, or home damage during that period.
T
Term Life Insurance – A type of life insurance that provides coverage for a specified term (e.g., 10, 20, or 30 years). If the policyholder dies during this term, their beneficiaries receive a death benefit. However, there is no payout if the insured survives the term.
U
Umbrella Insurance – A type of liability insurance that provides additional coverage beyond the limits of other existing policies (such as auto or homeowners insurance). It offers extra protection against major claims or lawsuits.
V
Variable Life Insurance – A type of permanent life insurance that allows the policyholder to invest the cash value of their policy in various investment options, such as stocks and bonds. The death benefit and cash value can vary depending on the performance of these investments.
W
Workers' Compensation Insurance – A mandatory form of insurance that provides compensation to employees who suffer job-related injuries or illnesses. It covers medical expenses, rehabilitation costs, and a portion of lost wages.
X
Excess Insurance – Insurance that provides coverage above and beyond the standard or primary insurance limits. It typically kicks in after the primary insurance coverage has been exhausted.
Y
Yield – The income earned on an investment or insurance policy, often expressed as a percentage. In the context of insurance, yield can refer to the return on cash value in permanent life insurance policies or the returns from investments within variable life insurance.
Z
Zero-Claims Bonus – A reward or discount offered by insurers to policyholders who have not filed any claims within a specified period. It is commonly offered for auto insurance policies as an incentive for safe driving.