Insurance definitions

86 insurance terms from Achievable exam prep courses, each defined in plain language with links into the course textbook.

• Accidental death and dismemberment (AD&D) insuranceAccidental death and dismemberment (AD&D) insurance pays a benefit if the insured dies or loses a limb, sight, or another covered body part as the direct result of an accident. It covers accidents only — deaths from illness or natural causes are excluded.
• Actual cash value (ACV)Actual cash value (ACV) is a method of valuing insured property as its replacement cost minus depreciation. An ACV settlement pays what the property was worth at the time of loss — not what it would cost to buy new.
• Affordable Care Act (ACA)The Affordable Care Act (ACA) is a 2010 federal law that reformed the US health insurance market. It requires insurers to cover pre-existing conditions, mandates essential health benefits, allows dependents to stay on a parent's plan to age 26, and created health insurance marketplaces with income-based subsidies.
• AnnuityAn annuity is a contract with an insurance company designed to accumulate money and then pay it out as a stream of income, often guaranteed for life. It is primarily used to protect against outliving one's retirement savings.
• Annuity periodThe annuity period is the phase of an annuity contract when the insurer makes income payments to the annuitant. It follows the accumulation period, when the owner was paying money in and the funds were growing.
• Assignee (life insurance)An assignee is the person or entity that receives rights in a life insurance policy through an assignment. An absolute assignee gains full ownership of the policy, while a collateral assignee holds a limited interest as security for a debt.
• Automatic premium loan provisionThe automatic premium loan provision is a life insurance policy feature that automatically borrows from the policy's cash value to pay an overdue premium, preventing the policy from lapsing when the policyholder misses a payment.
• Beneficiary (life insurance)A life insurance beneficiary is the person, trust, or organization named in a policy to receive the death benefit when the insured dies. The policyowner chooses the beneficiary and can usually change that designation at any time.
• Boiler and machinery insuranceBoiler and machinery insurance, now commonly called equipment breakdown coverage, protects businesses against loss from the sudden and accidental breakdown of equipment like boilers, pressure vessels, electrical systems, and machinery.
• Business owners policy (BOP)A business owners policy (BOP) is a package policy that bundles commercial property and general liability coverage for small and medium-sized businesses in a single contract, usually at a lower cost than buying the coverages separately.
• Capital sum vs. principal sumIn an accidental death and dismemberment policy, the principal sum is the full benefit paid for accidental death, while the capital sum is the smaller benefit — usually a stated percentage of the principal sum — paid for a covered dismemberment such as loss of one hand or sight in one eye.
• Cash value (life insurance)Cash value is the savings component that builds inside a permanent life insurance policy, such as whole life. The policyowner can borrow against it, withdraw from it, or receive it upon surrendering the policy. Term life insurance has no cash value.
• Casualty insuranceCasualty insurance covers an insured's legal liability for injury to other people or damage to their property. Unlike property insurance, which pays for the insured's own losses, casualty coverage pays third parties on the insured's behalf.
• Certificate of authorityA certificate of authority is the license a state insurance department issues to an insurance company, allowing it to transact specified lines of insurance in that state. Without one, an insurer cannot legally write business there.
• Collateral assignment (life insurance)A collateral assignment is the temporary transfer of some of a life insurance policy's rights to a lender as security for a loan. If the insured dies before repayment, the lender is paid the outstanding balance and the beneficiary receives the rest.
• Commercial auto insuranceCommercial auto insurance covers vehicles a business owns, leases, hires, or borrows for work purposes, providing liability and physical damage protection that a personal auto policy excludes. Coverage is defined by numbered symbols that specify exactly which categories of autos are insured.
• Commercial general liability (CGL) policyA commercial general liability (CGL) policy protects a business against claims that it caused bodily injury, property damage, or personal and advertising injury to third parties. It is the foundational liability coverage for most businesses.
• Commercial package policy (CPP)A commercial package policy (CPP) combines two or more commercial insurance coverage parts, such as commercial property and general liability, into one policy for a single business. Packaging coverages is usually cheaper and simpler than buying separate monoline policies.
• Common disaster clauseA common disaster clause is a life insurance provision stating that if the insured and primary beneficiary die in the same event, the insured is presumed to have survived, so proceeds pass to the contingent beneficiary rather than the beneficiary's estate.
• Consideration clauseThe consideration clause in an insurance policy states what each party gives to make the contract binding: the insured provides the premium and the statements in the application, and the insurer provides its promise to pay covered claims.
• Corridor deductibleA corridor deductible is the amount a patient pays out of pocket between the point where basic medical coverage runs out and the point where supplemental major medical coverage begins. It bridges the gap — or corridor — between the two plans.
• Coverage E (personal liability)Coverage E is the personal liability section of a homeowners policy. It pays damages the insured is legally obligated to pay for bodily injury or property damage to others, and it covers the cost of defending the insured in a lawsuit.
• Dental insuranceDental insurance is health coverage that pays for the diagnosis, prevention, and treatment of dental conditions. Plans typically cover preventive care in full and pay a declining percentage for basic and major procedures, subject to an annual maximum benefit.
• Disability income insuranceDisability income insurance replaces a portion of an insured's earnings when illness or injury prevents them from working. Benefits are paid periodically, usually monthly, for as long as the disability lasts and the policy's benefit period allows.
• DP-2 policyA DP-2 policy is the broad form of the dwelling policy, covering a home and its contents against a named list of perils. It sits between the basic DP-1 and the open-peril DP-3, and typically settles building losses on a replacement cost basis.
• Dwelling policy (DP-1, DP-2, DP-3)A dwelling policy is a property insurance form that covers a residential building and its contents without the liability and theft coverage packaged into a homeowners policy. It comes in three forms — DP-1 basic, DP-2 broad, and DP-3 special — differing in covered perils and loss settlement.
• Elimination period (insurance)An elimination period is the stretch of time between the onset of a disability and the date benefit payments begin. It works like a deductible expressed in time rather than dollars, and longer elimination periods mean lower premiums.
• Entire contract clauseThe entire contract clause is a required insurance policy provision stating that the policy, the attached application, and any riders or endorsements make up the complete agreement between the insurer and the policyowner.
• Equity-indexed annuity (EIA)An equity-indexed annuity is a fixed annuity whose interest credit is tied to the performance of a market index, such as the S&P 500. It offers a guaranteed minimum return with upside that is capped and limited by a participation rate.
• Errors and omissions (E&O) insuranceErrors and omissions insurance is professional liability coverage that protects a firm or practitioner against claims of negligence, mistakes, or failure to perform professional services. It typically pays legal defense costs as well as any damages awarded.
• Exposure unit (insurance)An exposure unit is the standardized measure insurers use to price risk and calculate premiums — for example, each $1,000 of property value or each $100 of payroll. Rates are quoted per exposure unit and multiplied by the number of units to set the premium.
• Express authority (insurance)Express authority is the power explicitly granted to an insurance agent in writing through the agency contract with the insurer. It is one of three types of agent authority, alongside implied and apparent authority.
• Field underwritingField underwriting is the initial risk screening an insurance producer performs when taking an application. As the person who meets the applicant, the producer gathers accurate information and flags concerns before the application reaches the insurer's underwriters.
• Fixed annuityA fixed annuity is an insurance contract in which the insurer guarantees a minimum rate of interest during accumulation and a fixed dollar payment during the payout phase. The insurance company, not the contract owner, bears the investment risk.
• Fixed-period settlement optionThe fixed-period settlement option pays life insurance policy proceeds to a beneficiary in equal installments over a period of time the beneficiary chooses. The length of payout is fixed, and the size of each payment is whatever the proceeds plus interest will support.
• Flood insuranceFlood insurance is a separate policy covering damage from rising water, which standard homeowners and commercial property policies exclude. Most U.S. coverage is written through the federal National Flood Insurance Program, with private excess policies available above its limits.
• Group insuranceGroup insurance is a single insurance contract that covers many people — typically employees of one employer — under one master policy. Members receive certificates of insurance instead of individual policies.
• Homeowners policy (HO)A homeowners policy is a package policy that combines property coverage on a residence and its contents with personal liability coverage in a single contract. Standard HO forms are numbered — HO-3 for owner-occupied homes, HO-4 for renters, HO-6 for condominium unit owners.
• Homeowners policy formsHomeowners policy forms are the standardized versions of the homeowners (HO) policy — HO-2, HO-3, HO-4, HO-5, HO-6, and HO-8 — that differ in which perils are covered and whether the insured owns a house, rents, or lives in a condo.
• Incontestability clauseThe incontestability clause is a life insurance policy provision that prevents the insurer from voiding the policy or denying a claim due to misstatements in the application after the policy has been in force for a set period, typically two years.
• Indirect loss (insurance)An indirect loss is a financial loss that results from a direct physical loss rather than from the damaging event itself. Examples include the cost of temporary housing after a house fire or the income a business loses while it is closed for repairs.
• Industrial life insuranceIndustrial life insurance is a class of life insurance issued in very small face amounts, historically with premiums collected weekly or monthly by an agent who called at the policyowner's home. It is also known as debit insurance or home service insurance.
• Inland marine vs. ocean marine insuranceOcean marine insurance covers ships and their cargo during transport over water, while inland marine insurance covers property being transported over land, movable property, and instrumentalities of transportation such as bridges and tunnels.
• Insurable interestInsurable interest means the policyowner would suffer a genuine financial or emotional loss if the insured event occurred. Without it, a life insurance policy would be considered a wagering contract and would not be valid.
• Insurance policyAn insurance policy is a legal contract in which an insurer agrees to pay for specified losses in exchange for the policyholder's premium. It transfers financial risk from the insured to the insurance company.
• Insuring clauseThe insuring clause is the provision that states what the insurer promises to pay, to whom, and under what circumstances. It appears on the first page of a policy and defines the basic scope of coverage before any exclusions or conditions apply.
• Legal purpose (insurance)Legal purpose is a requirement for a valid insurance contract: the policy must be for a lawful objective and not against public policy. In insurance, this means the contract requires insurable interest and consent, and cannot reward illegal activity.
• Liberalization clauseA liberalization clause is a property insurance policy condition that automatically extends any coverage broadening the insurer adopts — at no extra premium — to existing policyholders, without requiring them to rewrite or endorse their policies.
• Life annuity with period certainA life annuity with period certain pays income for the annuitant's entire life, but guarantees payments for a minimum period — such as 10 or 20 years. If the annuitant dies within that period, a beneficiary receives the remaining guaranteed payments.
• Life insuranceLife insurance is a contract in which an insurer pays a death benefit to named beneficiaries when the insured dies, in exchange for premiums. It exists to replace the economic value a person's death would remove from the people who depend on them.
• Life insurance cost basisThe cost basis of a life insurance policy is the total amount of premiums the owner has paid in, reduced by any dividends or withdrawals already received. It determines how much of a surrender or withdrawal is taxable.
• Long-term care insuranceLong-term care insurance pays for custodial and skilled care that health insurance and Medicare generally do not cover, such as nursing home stays, assisted living, and home health aides. Benefits are paid as a daily or monthly amount once the insured cannot perform basic daily activities.
• Major medical insuranceMajor medical insurance is comprehensive health coverage with high benefit maximums that pays for a broad range of medical expenses — hospital, surgical, and physician costs — subject to deductibles and coinsurance.
• MedicaidMedicaid is a joint federal and state program that provides health coverage to people with limited income and resources. Unlike Medicare, which is age- and disability-based, Medicaid eligibility is determined by financial need under rules that vary from state to state.
• Medical expense insuranceMedical expense insurance is health coverage that pays for the costs of medical care, such as hospital stays, surgery, and physician visits. It comes in two broad forms: basic plans with limited, first-dollar benefits, and major medical plans with broad, high-limit coverage.
• MedicareMedicare is the federal health insurance program for people aged 65 and older, along with certain younger people with long-term disabilities or end-stage renal disease. It is organized into four parts covering hospital care, medical services, private plan alternatives, and prescription drugs.
• MedigapMedigap is private Medicare supplement insurance that helps pay the out-of-pocket costs Original Medicare leaves behind, such as deductibles, coinsurance, and copayments.
• Noncontributory group insuranceNoncontributory group insurance is a group plan in which the employer pays the entire premium and employees contribute nothing. Because no employee pays, insurers require 100% of eligible employees to be covered.
• Nonforfeiture optionsNonforfeiture options are the guaranteed choices a life insurance policyowner has for the policy's cash value if the policy lapses or is surrendered: take the cash surrender value, buy reduced paid-up insurance, or buy extended term insurance.
• OASDIOASDI stands for Old-Age, Survivors, and Disability Insurance — the formal name of the U.S. Social Security program. It pays retirement, survivor, and disability benefits funded by payroll taxes on workers and employers.
• Ocean and inland marine insuranceInland marine insurance covers property that moves over land, property in transit, and movable or specialized property that a standard property policy does not adequately protect. It developed out of ocean marine insurance, which covers vessels and cargo on the water.
• Optionally renewable policyAn optionally renewable policy is a health or disability policy that gives the insurer the right to refuse renewal on a policy anniversary or premium due date. The insurer may also raise premiums by class, making it one of the least favorable renewability provisions for the insured.
• Participating policyA participating policy is a life insurance policy that pays dividends to the policyowner, letting them share in the insurer's favorable results. Participating policies are typically issued by mutual insurance companies owned by their policyholders.
• Payor benefit riderA payor benefit rider is a life insurance rider, typically on a juvenile policy, that waives premiums if the adult paying for the policy dies or becomes totally disabled before the insured child reaches a specified age.
• Permitted incidental occupanciesPermitted incidental occupancies is an endorsement to a homeowners or dwelling policy that extends coverage to certain small business activities run from the residence, such as a home office, studio, or private school, which the base policy would otherwise exclude.
• Personal auto policy (PAP)A personal auto policy (PAP) is the standardized insurance contract covering private passenger vehicles. Its parts cover liability, medical payments, uninsured motorists, and physical damage to the insured's own auto.
• Policy deliveryPolicy delivery is the step where the producer hands the issued insurance policy to the applicant, collects any outstanding premium, and obtains a statement of continued good health if required. Delivery often determines the exact date coverage begins.
• Private insurerA private insurer is a non-governmental company that sells insurance coverage, as opposed to government programs like Medicare, Medicaid, and Social Security. Private insurers include stock companies, mutual companies, and fraternal benefit societies.
• Professional liability insuranceProfessional liability insurance covers claims arising from mistakes, negligence, or failure to perform in the delivery of professional services. It fills a gap left by general liability policies, which are not built for losses caused by the rendering of professional advice or care.
• Property and casualty (P&C) insuranceProperty and casualty (P&C) insurance covers damage to a policyholder's belongings and their legal liability for harm to others. It spans homeowners, auto, renters, and most commercial insurance — everything outside life and health.
• Reinsurance treatyA reinsurance treaty is a standing agreement in which a reinsurer automatically accepts an agreed share of all risks of a defined class written by the ceding insurance company, rather than evaluating each policy individually.
• Relation of earnings to insurance provisionThe relation of earnings to insurance provision is an optional health policy provision that limits total disability benefits to the insured's actual earnings. If benefits from all policies exceed that income, the insurer reduces the payment proportionally and refunds the excess premium.
• Representations (insurance)In insurance, representations are the statements an applicant makes on an application that are believed to be true to the best of their knowledge. They are not guaranteed to be accurate, but a material misrepresentation can give the insurer grounds to void the policy.
• Risk (insurance)In insurance, risk is the chance or uncertainty of loss. Insurers distinguish pure risk — where only loss or no loss is possible — from speculative risk, and only pure risk is insurable.
• Scheduled personal property endorsementA scheduled personal property endorsement adds itemized coverage to a homeowners policy for high-value belongings like jewelry, art, and instruments. Each listed item is insured for a stated value, bypassing the base policy's special dollar limits.
• Section 125 planA Section 125 plan is an employer-sponsored benefit arrangement that lets employees choose between taxable cash and qualified pre-tax benefits such as health insurance. Contributions made through the plan reduce the employee's taxable income.
• Stock insurance companyA stock insurance company is an insurer owned by its stockholders (shareholders), who share in profits through dividends and stock appreciation. It contrasts with a mutual insurance company, which is owned by its policyholders.
• Term life insuranceTerm life insurance provides a death benefit for a specific period — such as 10, 20, or 30 years — and pays only if the insured dies during that term. It builds no cash value, which makes it the most affordable form of life insurance.
• Time limit on certain defensesTime limit on certain defenses is a required health policy provision that stops an insurer from voiding coverage or denying a claim because of misstatements on the application after the policy has been in force for a set period, typically two or three years.
• UnderwritingUnderwriting is the process of evaluating and pricing risk. In insurance, underwriters decide whether to accept an applicant and at what premium; in securities, underwriters help issuers bring new stocks and bonds to market.
• Unfair trade practices (insurance)Unfair trade practices in insurance are marketing and sales activities prohibited by state law, such as misrepresentation, twisting, rebating, coercion, and false advertising. Violators face fines, license suspension, or license revocation.
• Unilateral contractA unilateral contract is an agreement in which only one party makes a legally enforceable promise. Insurance policies are unilateral because the insurer promises to pay covered claims, while the policyowner never promises to keep paying premiums.
• Variable life insuranceVariable life insurance is permanent life insurance whose cash value and death benefit fluctuate with the performance of investment subaccounts chosen by the policyholder. It is regulated as both an insurance product and a security.
• Watercraft endorsementA watercraft endorsement is an addition to a homeowners policy that extends liability and medical payments coverage to boats that the base policy would otherwise exclude because of their size, speed, or horsepower.
• Whole life insuranceWhole life insurance is permanent life insurance that covers the insured for their entire life, with level premiums, a guaranteed death benefit, and a cash value that grows at a guaranteed rate.
• Workers' compensationWorkers' compensation is insurance, mandated by nearly every state, that pays medical expenses, lost wages, rehabilitation costs, and death benefits for employees injured on the job, regardless of who was at fault.