Insurance terminology | Insurance | Financial Literacy | Khan Academy

Now let's talk about some of the words you're likely to hear if you're dealing with insurance.

So the first one is a premium, or an insurance premium, and that's really just what you're paying in order to get the insurance. So if you pay, let's say, 200 dollars a month for health insurance, that 200 dollars a month is your premium.

Now the other number, or that other word you'll hear a lot, is deductible. Now this is an amount of money that you're going to have to pay, and then only when you get above that amount, then the insurance kicks in. So let's say your health insurance has a five thousand dollar deductible.

And let's say you have to go through some type of—unless it's the beginning of the year, usually it's based on a calendar year—and you have to get some type of health care done, and it costs two thousand dollars. Well, you're going to pay that two thousand dollars out of pocket. You're going to pay that yourself, and because you haven't hit the deductible yet, let's say you have to go in that same year and do another thing that costs, uh, three thousand dollars.

Once again, you're going to pay that out of pocket, which is just another way of saying you're going to pay that yourself. It's not going to come through insurance. But so far, you have paid five thousand dollars: two thousand dollars for the first thing, three thousand dollars for the second thing. And now, if you were to go and let's say you have to get another five thousand dollar procedure done in that same year, now the insurance will kick in because you used up your deductible.

So if there's a five thousand dollar deductible—and you'll see it on health insurance, you'll see it on car insurance—you pay that first amount, and then the insurance kicks in above and beyond that.

Now you might say, "Well, why would I ever want a deductible?" Well, usually, the higher the deductible, the lower your premium. You usually have to pay less for insurance if it has a high deductible. From an insurance company's point of view, they say, "Okay, the deductible is kind of an incentive for you to not necessarily use this service, you know, get your car in a wreck all the time, or necessarily have to go to health care all the time."

And from your point of view, you might say, "Hey, you know what? I really am willing to take a deductible because at the end of the day, insurance is really for if the bills become really, really, really large."

So just another example: let's say your car insurance has a five thousand dollar—well, I'll use a different number. Let's say your car insurance has a one thousand dollar deductible, and then you were to get into some type of a fender bender, and the mechanic says it's going to cost three thousand dollars to repair this car.

Well, then you would file a claim with your insurance company—that's saying, "Hey, something happened, I'm going to need to get paid out a little bit because I've been paying this premium all this time." And the insurance company says, "Okay, we'll pay it, but you have a one thousand dollar deductible."

So you paid that one thousand dollars out of pocket, and then we are going to pay the remaining two thousand dollars for that total of three thousand dollars for the repair.

Now the last thing I'll talk about is there's oftentimes some type of limit to the insurance policy, or you know, sometimes they'll call it a policy limit. And that's this idea that the insurance might cover you up to a certain amount.

So let's say you have liability insurance—that's really just insurance in case someone sues you for doing something wrong. Usually, that has a limit to it; so it might have a hundred thousand dollar limit, or five hundred thousand dollars, whatever it means.

And what that means is let's say someone sues you, and if the court decides that you have to pay them a hundred thousand dollars, let's say your limit is a hundred thousand dollars, then the insurance company will pay the hundred thousand dollars.

But let's say the court decides that you owe that other person who just sued you for some type of liability—let's say you have to owe them one hundred twenty-five thousand dollars—well, then the insurance company will go up to the one hundred thousand, and then you're going to have to pay that other twenty-five thousand dollars out of pocket.

One last word, now that I really think about it, is the notion of a copay. And you're going to see a copay a lot when you're thinking about health insurance, whether it's health insurance or dental insurance.

And that's this idea that let's say you go for your regular checkups—either your dental checkups or your health care checkups—you might see copays at other places. The actual cost of that checkup might be three or four hundred dollars, and the insurance company says, "You know what? We will cover some of this, what we'll call preventative care," which is care that, you know, checkups make sure you don't get sicker.

And it makes sense for insurance companies to do that because the sicker you get, the more expensive your health bills could get. But they say there is some amount that you have to pay alongside us. So that's what the copay is.

So, for example, in my health insurance, I go, I get a checkup, I have to pay a twenty dollar copay. It might cost a few hundred dollars of what the insurance company is paying, but I pay twenty dollars alongside that.

So hopefully, you're a little bit more knowledgeable about some of the words of insurance. I obviously didn't know all of these words until, honestly, I had left college, and I had to get insurance myself. So if you already know these, and especially if you haven't got—I know you're younger—you're very much ahead of the curve.