Buying insurance can be confusing, especially if it’s your first time doing this on your own. Just because you’ve been insured and used insurance before, doesn’t mean you know how it works or what to consider when shopping for a policy. Our Eldersburg, MD insurance agents are here to help you navigate the complicated world of insurance. Here are some terms you may come across that you should know and understand. Most of them apply to all kinds of insurance, including home, auto, business, life and many others.
The price for one term of your insurance policy.
Premiums is what you pay every month or every year for your insurance. Most insurance companies offer discounts if you pay in advance for 6 months or the full year, depending on the term of your policy.
How much you pay out of pocket for your insurance claim.
If you get in a car accident, you will pay for repairs up to your deductible. So if the repair bill is $1,700 and your deductible is $500, you will pay $500 and your insurance will cover the remaining $1,200. Typically, the higher the deductible, the lower your insurance premiums are.
Actual Cash Value (ACV)
How much it costs to replace your property minus depreciation (some courts have defined it as “fair market value.”)
Actual cash value can be a deceiving term. Let’s say you own a reclining leather couch that you’ve had for over 5 years and now it’s damaged in a covered event. To calculate the actual cash value of your couch, the insurance company will check how much it would cost to buy a new couch that is similar to yours. Then they will subtract money for wear and tear and depreciation, depending on how old your couch is. This will live you with the amount of money you may expect to get if you sold your couch right now. Needless to say, this type of reimbursement typically won’t buy you a brand-new couch that is the same as yours.
How much it costs to replace your property.
If your insurance reimburses you based on the replacement cost, you receive the amount of money equal to how much it would cost to buy your item brand new. Going back to the couch example, you would get the $700 or whatever the current going price is for reclining leather couches.
Insurance agent or agency not tied to a single insurance provider.
When you contact an insurance company directly, you typically speak with an agent who works for that company and sells insurance that company offers. When you work with an independent agent or agency, like our Maryland insurance agency, you have a middle man between you and several insurance companies this agent may represent. This can save you the time and hassle of getting separate quotes from different insurance providers. An independent agent will collect your information once, listen to your budget and coverage requirements and do all the busy work for you.
The maximum amount your insurance will pay for a liability claim.
Liability simply means that you are responsible for causing injuries or damage to someone else. Some accidents result in thousands of dollars in damage, especially if you injure a person and they end up receiving expensive treatment or are unable to continue work. Your insurance will cover these expenses only up to your liability limits, and you will be responsible for covering the rest.
When the cost of repairs exceeds the cost of replacement.
Many factors are considered when determining a total loss and each insurance company may do it differently. In most cases, the insurance provider will estimate the actual cash value of your property and then compare it to a repair estimate from a qualified professional. Even if the repair estimate comes close but doesn’t exceed the ACV, your property may still be considered totaled.
Insufficient insurance coverage that may result in a financial hardship.
Underinsurance simply means that the coverage you’ve purchased is not adequate for the claim you are filing, which far exceeds all insurance limits. Underinsurance can apply to health, business, home and all other types of insurance. It is often a result of poorly assessed risks or failure to extend the coverage as the value of assets increases. For example, if you’ve built an addition to your home and hasn’t included it into your homeowners’ policy, you won’t get reimbursed for it.
Hopefully this glossary of essential insurance terms will help you better understand insurance. And if you have any additional questions, feel free to contact one of our agents and we’ll be happy to help!