Insurance terms you need to know to keep up

We start with something simple, such as the term policy, the contract signed between the client and the insurance company, which establishes both the rights and obligations of both in relation to the insurance.

It comprises two parts: the specific conditions, which are specific to each contract, unlike general conditions, which apply to all policies.

It is very important to review them before signing the contract to understand the product’s features, the covered risks, and the existing exclusions in detail.

Do you know how many different roles you might encounter in an insurance policy? There are three: policyholder, insured party, and beneficiary. They may seem the same, but they are not:

• The policyholder is the person who takes out, signs, and pays for the policy. They are responsible for decisions such as determining coverage, deciding whether to renew the contract, and designating beneficiaries.
• The insured party is the person protected by the insurance. It may be the same person as the policyholder or someone else.
• Finally, the beneficiary is the person who receives, in specific cases, the compensation provided for in the contract.

For example, in a life policy the policyholder can contract the product in the name of another (the insured party) and name a different beneficiary if they die.

The amount of money you must pay periodically to the insurance company to keep your policy active has its own name: the premium. By paying this amount, you will have access to the coverage and guarantees of the purchased product. It is determined by the frequency and type of risk insured, the duration of the signed contract, and the coverage included, among other factors. Depending on when the payment is made, it may be monthly, bi-monthly, quarterly, half-yearly, or annual.

There are also other concepts that you must be clear about, because they can affect the use of the policy. For example, the waiting period. If it appears in any of the coverages, then that is the period you must wait to access certain benefits. This concept is common in health insurance.

When we talk about a deductible, we’re referring to the predetermined amount of money that the insured party must pay in the event of an incident, after which the insurer covers the remaining costs. This is increasingly common in motors insurance: if an accident occurs, you would pay, for example, the first €200 of the repair costs, and your insurance company would cover the rest.

As for compensation, there are other concepts that you have to understand. Do you know what the capital or sum insured is? It is simply the maximum amount the insured person receives if the policy’s guarantees and coverage are enforced. Keep this in mind to manage your protection, as well as the values that apply when an insured item is affected by an incident. The most common are:

• Market value : the value of an asset on the market at the time of its loss or damage, considering its age, wear, and depreciation—in other words, its actual value at the time of the incident.
• Value as new: for example, the value of a vehicle at the time of sale. The status, condition, and available extras are taken into account.
• Market value: the fair and competitive price at which a product can be purchased or sold on the market. It represents the balance between supply and demand at a specific time.
• Replacement value: similar to the above, is the estimated cost of replacing an insured item with a new or comparable item in the event of loss or damage.

When it comes to insuring your assets, don’t get caught up in overinsurance (something insured above its actual value) or in underinsurance (quite the opposite: below). Both situations should be avoided: in the case of overinsurance, you’ll pay more than necessary, and with underinsurance, if an incident occurs, you’ll receive compensation from your insurer that is less than the actual damages incurred.

To make it even clearer, in the event of underinsurance, the proportional rule applies, whereby the compensation will be reduced in proportion to the amount by which the asset was underinsured.

The equity rule, which is considered in some insurance policies, is different. It is used when the information provided in the policy does not correspond to the actual risk of the insured item. In this case, the premium that should have been paid is taken into account.

There as just a few concepts that can shed more light on the insurance world. However, if you have questions or are curious about any term related to this sector, Fundación MAPFRE offers a consultation tool on its website: the Insurance Dictionary. Its access is free and unrestricted, and it is constantly updated.

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