Most insurance policies use the same core terms: the premium is what you pay for coverage, the deductible is what you pay before coverage starts, limits are the most the insurer will pay, and exclusions are what isn't covered. Knowing these terms, plus a handful of policy-specific ones, lets you read your declarations page and coverage documents with confidence.
Insurance policies are legal contracts, and they read like it. Pages of defined terms, exceptions to exceptions, and words that sound familiar but mean something specific. It’s no wonder most people never read past the price.
The problem is that the details decide what gets paid when you file a claim. This guide translates the insurance terms you’ll see most often into plain English, grouped by where you’ll find them.
Insurance terms that appear in almost every policy
Premium
The amount you pay to keep your policy active, whether monthly, quarterly or yearly. Missing payments can cause your coverage to lapse.
Deductible
The amount you pay toward a covered loss before the insurer pays. Auto and home deductibles usually apply per claim. Health deductibles usually apply per plan year.
Limit
The maximum amount the insurer will pay. Limits can apply per claim, per person, per accident or per year. If a loss exceeds your limit, you’re generally responsible for the rest.
Exclusion
Something the policy specifically does not cover. For example, standard homeowners policies exclude flood and earthquake damage, which require separate coverage.
Endorsement or rider
An add-on that changes the policy, either adding coverage, removing it or changing terms. Riders are common in life insurance, while endorsements are common in auto and home policies.
Declarations page
Usually the first page or two of your policy. It summarizes who’s insured, what’s covered, your limits, deductibles, premium and policy period. If you read one page, read this one.
Claim
Your formal request for the insurer to pay for a covered loss.
Underwriting
The process an insurer uses to evaluate risk and decide whether to offer coverage and at what price.
Grace period
Extra time after a missed premium due date during which coverage stays active. Length varies by policy type, insurer and state.
Health insurance terms
- Copay: a flat fee for a service, such as an office visit or prescription.
- Coinsurance: your percentage share of costs after meeting the deductible. If your plan has 20% coinsurance, you pay 20% and the plan pays 80%.
- Out-of-pocket maximum: the most you’ll pay for covered in-network care in a plan year. After you reach it, the plan pays 100% of covered services. Premiums don’t count toward it.
- Network: the doctors, hospitals and pharmacies your plan contracts with. In-network care costs less.
- Prior authorization: approval your plan requires before certain services or drugs are covered.
- Formulary: the list of prescription drugs your plan covers, often divided into tiers with different costs.
- Explanation of Benefits (EOB): a statement showing what was billed, what the plan paid and what you owe. It is not a bill.
- Summary of Benefits and Coverage (SBC): a standardized document that lets you compare health plans side by side.
Auto insurance terms
- Liability coverage: pays for injuries and damage you cause to others. Almost every state requires it, with New Hampshire as the main exception.
- Split limits: limits shown as three numbers, such as 50/100/50. That means $50,000 per person for bodily injury, $100,000 per accident for bodily injury and $50,000 for property damage.
- Collision: pays for damage to your car from a crash, regardless of fault.
- Comprehensive: pays for non-collision damage like theft, hail, fire or hitting a deer.
- Uninsured/underinsured motorist: protects you when the at-fault driver has little or no insurance.
- Personal injury protection (PIP): covers medical costs for you and your passengers regardless of fault, required in some states.
Home and renters insurance terms
- Dwelling coverage: pays to repair or rebuild the structure of your home.
- Personal property coverage: covers your belongings.
- Replacement cost: pays what it costs to replace an item with a new one of similar kind and quality.
- Actual cash value: pays replacement cost minus depreciation, so older items get less.
- Loss of use: covers extra living expenses if you can’t live at home after a covered loss.
- Percentage deductible: a deductible calculated as a percentage of your dwelling coverage, common for wind or hurricane damage.
Life insurance terms
- Beneficiary: the person or entity who receives the death benefit.
- Death benefit: the amount paid when the insured person dies.
- Term vs permanent: term covers a set number of years; permanent lasts for life and may build cash value.
- Contestability period: usually the first two years, when the insurer can review and potentially deny claims based on misstatements in the application.
Terms that cause the most confusion
A few insurance terms trip people up again and again. Here’s how they play out in real life.
- Deductible vs out-of-pocket maximum: the deductible is the starting line; the out-of-pocket maximum is the finish line. In between, you usually pay copays or coinsurance.
- Replacement cost vs actual cash value: say a five-year-old TV is stolen. Under actual cash value, you get what that used TV was worth. Under replacement cost, you get closer to what a new comparable TV costs. The difference can be significant on a full room of belongings.
- Covered vs paid in full: a service being covered doesn’t mean it’s free. It means the plan shares the cost according to your deductible and cost-sharing rules.
- Policyholder vs insured: the policyholder owns and pays for the policy; the insured is the person whose life, health or property is covered. Often they’re the same person, but not always.
How to read your own policy
- Start with the declarations page to see limits, deductibles and covered items.
- Read the definitions section, since everyday words may have narrow meanings.
- Review the exclusions carefully.
- Check any endorsements or riders attached to the policy.
- Write down questions and ask your agent or insurer before you need to file a claim.
Bottom line
Once you know the core insurance terms, like premium, deductible, limit, exclusion and endorsement, your policy stops looking like a foreign language. Definitions and coverage vary by insurer, state and policy form, so always check the definitions in your own policy and ask a licensed agent or your state insurance department if anything is unclear.
Frequently asked questions
What's the difference between a copay and coinsurance?
A copay is a fixed dollar amount you pay for a service, while coinsurance is a percentage of the cost you pay after meeting your deductible.
Where can I find my coverage limits?
Your declarations page lists your coverage limits, deductibles, premium and the policy period. It's usually at the front of your policy documents or in your insurer's app or online account.
Is an Explanation of Benefits a bill?
No. An EOB shows how your health plan processed a claim and what you may owe, but the bill itself comes from your provider. Compare the two to catch errors.
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This article is for general information only and is not insurance, legal, tax or medical advice. Rules, coverage and prices vary by state, plan and insurer. Check your policy documents and speak with a licensed agent, your HR department or HealthCare.gov before making decisions.
