This glossary defines common terms in finance and insurance to help you understand the concepts
discussed on SafePremium. If you come across a word you’re not familiar with, you can likely find it below.
The terms are listed in alphabetical order for easy reference.
Asset
An asset is anything of value that you own. This can include money in your bank account,
investments like stocks or bonds, your house or car, or other property. Assets are often categorized
as liquid (easily converted to cash) or illiquid (not easily sold quickly). In personal finance, building
assets (such as savings and investments) is key to growing your wealth.
Budget
A budget is a financial plan that outlines your income and expenses over a certain period
(usually monthly). Creating a budget helps you allocate money for needs (like rent, utilities, food),
wants (like entertainment or dining out), and savings goals. By tracking and limiting how much you
spend in each category, a budget ensures you live within your means and work toward your financial
objectives.
Credit Score
A credit score is a numerical representation of your creditworthiness. It’s based on
your credit history and calculated from information in your credit report (like payment history,
amounts owed, length of credit history, etc.). Lenders (such as banks or credit card companies) use
your credit score to decide how risky it is to lend you money. A higher credit score can help you get
loans or credit cards with better interest rates, while a low credit score may make it harder or more
expensive to borrow money.
Deductible
In insurance, a deductible is the amount of money you must pay out-of-pocket on a
claim before your insurance coverage begins to pay. For example, if your car insurance policy has a
$500 deductible and you have an accident causing $2,000 in damage, you would pay the first $500
and the insurer would pay the remaining $1,500. Deductibles are a way of sharing risk between you
and the insurance company; generally, policies with higher deductibles have lower premiums, and
vice versa.
Diversification
Diversification is an investment strategy that involves spreading your money across
different assets or investments to reduce risk. The idea is “don’t put all your eggs in one basket.” For
example, instead of investing all your money in one company’s stock, you might invest in a mix of
stocks, bonds, and other assets. If one investment performs poorly, others in your portfolio might
perform well, balancing out losses. Diversification helps protect your overall portfolio from being too
dependent on any single asset.
Emergency Fund
An emergency fund is a savings reserve set aside for unexpected expenses or
financial emergencies. This fund is meant to cover things like sudden medical bills, urgent home or
car repairs, or temporary loss of income. Financial planners often recommend saving enough to
cover 3-6 months’ worth of living expenses in your emergency fund. Keeping this money in an easily
accessible account (like a savings account) ensures that you can quickly use it when an emergency
arises without having to rely on credit or loans.
Inflation
Inflation is the rate at which prices for goods and services increase over time, leading to a
decrease in the purchasing power of money. In simpler terms, over time your money buys less than
it used to because things become more expensive. For example, if inflation is 2% per year, something
that costs $100 today might cost $102 next year. Moderate inflation is normal in a growing economy,
but high inflation can be problematic if incomes don’t keep up with rising prices, and deflation
(falling prices) can also signal economic trouble.
Interest Rate
An interest rate is the percentage charged on a loan or paid on savings. If you borrow
money (like through a loan or credit card), the interest rate is what you pay the lender for the
privilege of using their money (e.g., a 5% annual interest rate on a $100 loan means you’d pay $5 in
interest per year). Conversely, if you deposit money in a savings account or investment, the interest
rate is what the bank or investment pays you for keeping your money there. Interest rates can be
fixed (staying the same over time) or variable (changing with market conditions).
Investment
An investment is an asset or item acquired with the goal of generating income or
appreciation over time. Common investments include stocks (shares of companies), bonds (loans to
companies or governments), real estate, or mutual funds and ETFs (which are bundles of stocks/
bonds). When you invest, you’re putting your money to work in hopes that it will grow as the asset
increases in value or produces income (like dividends or interest). Investments come with varying
levels of risk typically, higher potential returns come with higher risk.
Liability
In finance, a liability is any debt or financial obligation that you owe to others. This can
include loans, credit card balances, mortgages, or even bills due. On a personal balance sheet,
liabilities are the opposite of assets; they represent money that will flow out of your pocket in the
future. In insurance, “liability coverage” refers to protection against claims resulting from injuries or
damage you cause to other people or their property (for example, auto liability insurance covers you
if you’re at fault in a car accident and need to pay for the other party’s damages).
Mortgage
A mortgage is a loan specifically used to purchase real estate, usually a home. With a
mortgage, you borrow money from a lender (like a bank) to buy a house, and you agree to pay back
that money over time (typically 15-30 years) with interest. The property itself serves as collateral for
the loan, meaning if you fail to repay as agreed, the lender can take ownership of the house through
foreclosure. Mortgages come in various types, such as fixed-rate (interest stays the same) or
adjustable-rate (interest can change over time), and they often require a down payment (initial cash
paid upfront).
Premium
A premium is the amount you pay for an insurance policy. It’s usually billed monthly,
quarterly, or annually. For example, if your car insurance premium is $100 per month, that’s what
you pay the insurer to maintain your coverage. Premium amounts are determined by factors like the
type and amount of coverage, your personal risk factors (such as driving record for auto insurance
or health factors for health/life insurance), and sometimes how high or low your deductible is.
Paying the premium keeps your insurance active; if you stop paying, the coverage will lapse.
Quote
In the context of insurance, a quote is an estimated price provided by an insurer for a specific
insurance policy. For instance, you might request a quote for home insurance ; the insurance
company will give you an estimate of the premium based on information you provide (like home
value, location, coverage needs). In a broader financial context, a “quote” can also refer to the latest
price of a security, such as a stock quote which tells you the current trading price of a stock.
Essentially, a quote is a snapshot of price or cost at a given time, whether for an insurance policy or a
financial asset.
Refinance
To refinance means to replace an existing loan with a new one, usually to secure better
terms. People often refinance mortgages, car loans, or student loans. For example, if interest rates
have fallen since you first got your mortgage, you might refinance your home loan at a lower rate to
reduce your monthly payments or total interest paid. Refinancing typically involves applying for a
new loan that pays off the old loan, then making payments on the new loan under its terms. It can
save money in the long run, but you should consider closing costs or fees in the decision.
Return on Investment (ROI)
Return on Investment, often abbreviated as ROI, is a measure of the
profitability of an investment. It’s usually expressed as a percentage and calculated by dividing the
net profit (or gain) from an investment by the initial cost of the investment, then multiplying by 100.
For example, if you bought stocks for $1,000 and later sold them for $1,100, your profit is $100; the
ROI would be $100/$1,000 * 100 = 10%. ROI helps compare how effective different investments are
at making money. A higher ROI means you gained more relative to what you put in, although it’s
important to also consider the time frame and risk associated with the investment.
Risk Tolerance
Risk tolerance is the level of variability in investment returns (i.e., ups and downs in
value) that an individual is willing to withstand. If you have high risk tolerance, you might be
comfortable with investments that can swing widely in value (like stocks), in exchange for a higher
potential return. If you have low risk tolerance, you likely prefer safer investments (like bonds or
savings accounts) that have steadier, but often lower, returns. Your risk tolerance can depend on
factors like your financial goals, time horizon (how soon you’ll need the money), and personal
comfort – for example, younger investors saving for retirement often can take more risk than
someone nearing retirement who needs to preserve capital.
Savings Account
A savings account is a deposit account held at a bank or credit union that is
designed to hold money you don’t need for daily expenses. These accounts typically earn interest (so
your money grows slowly over time) and keep your funds relatively liquid (easy to withdraw when
needed). They are a safe place to store an emergency fund or save for short-to-medium term goals.
Savings accounts usually have limitations on how often you can withdraw each month, and the
interest rates can vary; while they don’t earn as much as investments might, they also carry virtually
no risk because banks are often insured by the government (like FDIC insurance in the US).
Stock
A stock represents a share of ownership in a corporation. When you buy a company’s stock,
you become one of its shareholders, which means you own a small piece of that company. Stocks are
also known as equities. The value of a stock can go up or down based on the company’s
performance and other market factors. Investors buy stocks with the hope that they will increase in
value over time or provide dividends (a portion of the company’s profits paid to shareholders). Stocks
are considered a fundamental building block of many investment portfolios and are traded on stock
exchanges.
Term Life Insurance
Term life insurance is a type of life insurance policy that provides coverage for
a specified period, or “term,” such as 10, 20, or 30 years. If the insured person passes away during
the term, the policy pays out a death benefit to the beneficiaries (often used to provide financial
support for family members). If the term expires and the person is still alive, the coverage ends
(though some policies offer options to renew or convert to permanent insurance). Term life is
generally more affordable than permanent life insurance (like whole life) because it is purely
insurance protection without a cash value savings component, and it only covers a set time frame.
Volatility
Volatility refers to how much and how quickly the value of an investment, market, or
financial instrument can change. High volatility means the price moves up and down frequently and
by large amounts, which indicates higher risk (but also the potential for higher returns). Low
volatility means prices are relatively stable over time. For example, stocks are generally more volatile
than savings accounts or government bonds. Investors often consider their own risk tolerance in
relation to volatility if frequent big swings in value would keep you up at night, you might prefer
less volatile investments. Understanding volatility is important for setting expectations about how
“bumpy” an investment ride might be.
And that’s our list! This glossary should help clarify key terms as you explore our finance and insurance
content. If you come across any other terms on SafePremium that you’re unsure about, feel free to reach
out and ask we’re always happy to explain.