We’ve compiled this list of insurance terms in a glossary to help you better understand how insurance works.
Insurance is a contract between an individual (the “policyholder”) and an agency or company (the “insurer”), in which the policyholder receives financial help or reimbursement (“protection”) from the insurer should something bad happen accidentally or unexpectedly that results in loss. Common types of insurance include auto, health, homeowners / renters and life insurance. New types of insurance include coverage for things like pet health, income loss and cyber security.
An insurance policy is the agreement written up and signed so both the policyholder and the insurer understand and agree about what kind of losses are—and are not—protected by the insurer.
Coverage is the scope of the insurance policy; it tells you what kinds of losses are protected and what are not.
Policies include “exclusion provisions” that allow insurers to deny coverage for losses they will not insure.
A pre-existing condition is a medical condition the policyholder knew about for a specific amount of time before their insurance coverage went into effect. Insurers may exclude some pre-existing conditions (addiction or chronic health problems, for example) because the risk of having to provide protection is too likely and/or they would not have enough money available for every policyholder who needs it.
Sometimes insurance policies include a deductible, which is a specific amount of money policyholders have agreed to pay themselves (“out-of-pocket”) before their insurance protection kicks in. Typically, policies with high deductibles (out-of-pocket costs) have lower premiums (monthly costs).
The policy limit is the maximum amount an insurer will pay for a loss. Typically, the more the insurer will cover (the higher the limit), the higher a policyholder will pay for that coverage each month.
In the event of an unexpected loss, the policyholder makes a claim to the insurer to report the loss and to demonstrate that it occurred within the circumstances agreed upon in the policy contract.
Benefit or Payout
The benefit (or payout) is the sum of money the insurer is contractually obligated to pay to the policyholder after approving their claim.
The waiting period is the amount of time a policyholder, after paying the first premium, must wait before some or all of their insurance coverage comes into effect. Only after the waiting period has passed will a loss be covered. That’s when the policyholder can submit a claim to the insurer.
Some policies also designate a waiting period (also known as an “elimination period”) between the time the policyholder submitted a claim and when they will receive the benefit from the insurer.