Have you ever taken your car into the shop and felt your eyes glaze over as the mechanic explains the problem has to do with the intake manifold, which is affecting the crankshaft...er...sorry...what was that?
Not to perpetuate a well-worn stereotype, but there are all kinds of topics that have complex terminology we often don’t fully understand. If you’re familiar with cars, maybe you get tongue-tied when the topic turns to investing, or perhaps computers. Or, if you’re like many people, you shut down when it comes to insurance. According to the State of Insurance Report conducted by TD Insurance, 31 percent of respondents don’t ask questions about their insurance policy because they think it’s too complicated, while another 23 percent fail to do so because they’re embarrassed about their lack of knowledge.
It seems like the easy way out - until you file for a claim and find out you’re not covered.
You might need a new whatchamacallit for your car, but a nasty insurance surprise is something we can all live without. Here we’ll take a look at 10 insurance terms you should know, and how to use those terms to read - and understand - your policy.
10 insurance terms you need to know
1) Insured perils According to Dave Minor, Vice President at TD Insurance, insurance documents are generally organized in a standard way. First comes terminology, followed by the incidents the policy covers. These are known as insured perils, and they describe the damages the insurance company agrees to pay for (which means you won’t have to). Read through them to make sure you’ve got what you need.
2) Exclusions Next up are exclusions. As you might imagine, these are the cases regarding which damages won’t be covered. For example, your home insurance policy might insure against water damage under certain conditions, such as sudden and accidental leaks, but not others, such as through a hole created during construction. In some cases, you can still insure against these perils, but you’ll have to ask (and pay more) for it. Minor says that exclusions are especially important in home and auto insurance policies. 3) Limitations After insured perils and exclusions, an insurance policy usually covers limitations, or the maximum payout you are eligible to receive on a particular claim. These may be applied on a per-occurrence or a per-claim basis. 4) Premiums You probably know that your insurance premium is the amount that you pay each month in exchange for coverage. (We tend to be more attuned to the things that cost us money!) What you might not know about your premium is that it’s calculated based on all sorts of factors in your coverage. So, if you want more coverage, you’ll have to pay more. If you want to save on premiums, ask you insurance provider what can be done. It may mean less coverage, but if you choose carefully, you can often weed out coverage you’re unlikely to need – and save a lot of money in the process.
5) Replacement value Replacement value is the amount it would cost you to replace your car, home or possessions if they were destroyed. Sounds straightforward, right? Where this term gets tricky is that we often assume it refers to the kind of coverage we will get when we make a claim. Not so. In fact, standard insurance policies often cover only actual cash value. If you want replacement value, you’ll have to ask (and pay) for it.
6) Actual cash value Let’s say that the couch and entertainment center you splurged on for the basement a couple of years ago is destroyed when water seeps in during a rainstorm. That setup may have cost you $5,000, but that doesn’t mean that’s what you’ll get from your insurance company. If you have a standard policy, what you’re more likely to get is actual cash value, which is calculated as what you’d pay for a similar item today, minus the depreciation your flat-screen TV and furniture has undergone since you bought them. Translation: Your next entertainment center may not be as nice.
7) Deductible A deductible is a term that may apply to both home and auto insurance, and it refers to the amount of money you have to pay out-of-pocket before your insurance company will cover the rest. Most of us hate to have to pay a deductible, but it can actually be a money-saver; paying a few hundred dollars for damages upfront can save you thousands on your insurance premium.
8) Collision coverage Here’s another term many of us know, but may not fully understand. While we all have to have car insurance, collision insurance insures your vehicle against damages and pays for repairs or replacement in case of an accident. What you may not realize is that this type of coverage is not mandatory if you own your car outright. In fact, it may be poor value for an old car that’s only worth a few thousand dollars. Unless you’re very accident-prone, you’re likely to pay more in premiums than the car is worth. Set the money aside instead. If you keep a clean driving record, you can keep it as a reward.
9) Pre-existing condition A pre-existing condition is a health problem you have before applying for an insurance policy. These conditions are often excluded from insurance coverage, at least for a period of time after purchasing the policy. Minor says that a common misconception is that you can’t get coverage with a pre-existing condition. The key is that you have to disclose it to the insurance company. Otherwise, you are inaccurately portraying your risk, which could mean you’ll be denied coverage when you make a claim.
10) Hazardous activities We all know that we should get insurance coverage before we head out of the country for a vacation. Just don’t expect to be covered if you break your leg while at the bottom of a zip line. Many life, health and travel insurance policies carry exclusions for hazardous activities, such as sky diving, bungee jumping and other sports that could result in severe injury or even death.
Read the fine print
Most insurance policies are about ten pages long. That’s a lot of reading, but it’s actually a good thing. Insurance companies are required by law to disclose everything. It’s up to you to read it and ensure you’re covered.
If you don’t understand what you’re reading, call your insurance company to ask questions. It’s a pretty good investment of time and energy if you consider what’s at stake. Now, if only your mechanic would offer the same kind of transparency!
- Water damage: What's covered (and what's not) by your insurance
- The No.1 rule for buying insurance
- 10 insurance policies you just don't need
- 5 white lies that could get your life insurance claim denied
- Car insurance: How to get more and pay less