Alyssa Lane
Insurance policies are legal contracts between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured). The insured receives a contract called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured or their designated beneficiary or assignee. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. There are several terms associated with insurance policies, such as policyholder, assignment, nominee, rider, grace period, surrender value, death benefit, claim, coverage, exclusions, premium, deductible, and policy limits.
| Characteristics | Values |
|---|---|
| Contract | Insurance policy |
| Insurer | Insurance company |
| Insured | Person(s), business, or entity being insured |
| Policyholder | Individual in whose name the insurance policy is registered |
| Premium | Fee paid by the insured to the insurer for assuming the risk |
| Deductible | Amount the insured is responsible to pay before benefits from the insurance company are payable |
| Policy limits | Maximum amount that can be claimed |
| Coverage | Level of protection offered by the policy |
| Exclusions | Situations for which no insurance is provided |
| Conditions | Provisions that qualify or place limitations on the insurer's promise to pay or perform |
| Endorsements and Riders | Written provisions that add to, delete, or modify the provisions in the original insurance contract |
| No-claim bonus | Bonus paid by the insurance company if no claims are issued in a financial year |
| Reinsurance | When the insurer passes on some or all of the risk to another insurer |
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What You'll Learn
Insurance policy
An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured). The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured, their designated beneficiary, or assignee.
The insurance policy outlines the claims that the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for the loss caused by perils covered under the policy. The premium is the price of the policy, typically a monthly cost, and is influenced by the insurer's perception of the policyholder's risk of making a claim. For example, an individual with several expensive automobiles and a history of reckless driving will likely pay a higher premium for an auto policy than someone with a single midrange sedan and a perfect driving record.
The insurance policy will also outline which perils are covered and which are not. For example, a vehicle insurance policy will typically cover both the property risk (theft or damage to the vehicle) and the liability risk (legal claims arising from an accident). A home insurance policy in the United States usually includes coverage for damage to the home and the owner's belongings, certain legal claims against the owner, and even a small amount of coverage for medical expenses for guests who are injured on the property.
Insurance policies can be complex, and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. Therefore, it is important to read and understand the entire policy to avoid problems and disagreements with the insurance company in the event of a loss.
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Insured and insurer
An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured). The insured is the individual or organisation protected by the insurance policy, whether a life, car, or another type of coverage. They are covered if that individual dies or suffers an accident. The insurer is the entity that provides protection and pays claims.
The insurer calculates risks, provides insurance policies, and pays out claims. They create insurance quotes, sell policies, and handle claims filed by policyholders. Insurers also provide coverage in the form of financial compensation. They will evaluate how risky an investment is and ask for information such as name, address, and birthday. After that, they calculate the risk of insuring the policyholder, taking into account the location and condition of their property, as well as their claims history.
The insured is the policyholder, the person (or people) covered under the insurance policy. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured or their designated beneficiary or assignee. The insured agrees to pay the insurer's regular premiums when purchasing an insurance policy. In the event of a loss, the insured submits a claim to the insurer for processing by a claims adjuster. The insured is responsible for paying the deductible (or, in the case of health insurance, a copayment) before the insurer will pay a claim.
It is important to note that the insured and insurer have specific duties and responsibilities. The insured is responsible for notifying the insurer about a loss or damage immediately, cooperating with the insurer, and providing proof of loss and damage. On the other hand, the insurer is responsible for paying the legal expenses of the insured in the event of loss and damage. The insurer may also change the language or coverage of a policy at the time of policy renewal and must send a copy of these changes to the insured.
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Premiums
An insurance premium is the price you pay to buy an insurance policy. It is the cost of your policy on a monthly, semi-annual, or annual basis. Premiums are your regular payments for many common insurance policies, including life, auto, business, homeowners, and renters insurance. The frequency and method of premium payments depend on the type of insurance and the insurer. Some insurance companies offer installment-type premium payments, which can be paid monthly or semi-annually. Certain insurers may require you to pay the entire price of the policy upfront each year.
The cost of insurance premiums varies based on the type of insurance and the level of coverage. For example, auto insurance premiums are often based on the driver's age, driving record, claims history, vehicle, and the amount of coverage purchased. Similarly, life insurance premiums typically consider factors such as age, health, life expectancy, and coverage limits. The deductible chosen can also impact the premium, with higher deductibles usually resulting in lower premium costs.
In the context of health insurance, premiums can be influenced by age, location, who is covered, tobacco use, and the type of coverage. According to the Affordable Care Act (ACA) of 2010, insurance companies offering coverage through the ACA Health Insurance Marketplace can only consider these five factors when setting premium rates. Additionally, marketplace plans must charge the same rates for men and women and cannot take health history into account.
The price of premiums for homeowners insurance is influenced by factors such as the location and value of the property, the coverage amount, and the policyholder's claims history. Renters insurance premiums, on the other hand, may be determined by the value of the renter's belongings, the presence of security features in the building, and the renter's credit score.
It is important to note that failure to pay insurance premiums can result in the cancellation of the policy and loss of coverage. Therefore, it is advisable to shop around for insurance and compare rates to find affordable premiums that meet your specific needs.
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Deductibles
An insurance deductible is a mandatory out-of-pocket expense that must be paid by the insured before an insurer will pay a claim. In other words, it is the amount of money that the insured person must pay toward an insured loss before their insurance policy starts paying for covered expenses. Deductibles are how risk is shared between the policyholder and the insurer.
For example, if you have a health insurance policy with a deductible of $1,000 and you receive a medical bill for $2,000, you would be responsible for paying the first $1,000, and your insurance would cover the remaining $1,000. Deductibles can vary widely depending on the type of insurance policy, the level of coverage, and other factors. Some insurance policies, such as liability insurance, may not have a deductible at all.
The amount of the deductible is subtracted, or "deducted", from what your insurance pays toward a claim. Deductibles can be a specific dollar amount or a percentage of the total amount of insurance on a policy. The amount is established by the terms of the coverage and can be found on the declarations (or front) page of standard insurance policies. For instance, if your policy states a $500 deductible and your insurer has determined that you have an insured loss worth $10,000, you would receive a claims check for $9,500. Percentage deductibles generally only apply to homeowners' policies and are calculated based on a percentage of the home's insured value. Therefore, if your house is insured for $100,000 and your insurance policy has a 2% deductible, $2,000 would be deducted from any claim payment.
When shopping for insurance, you may find that deductible amounts vary from policy to policy. Typically, the larger the deductible, the less you pay in premiums for an insurance policy. Conversely, a lower deductible usually means higher premiums. For example, increasing your auto insurance deductible from $200 to $500 can reduce optional collision and comprehensive coverage premium costs. However, it is important to note that when choosing an insurance policy, individuals should consider their circumstances and financial situation. If you have a chronic medical condition that requires frequent visits to the doctor, you may want to choose a health insurance policy with a lower deductible to help manage your out-of-pocket expenses.
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Exclusions
Insurance policies are legal contracts between the insurance company (the insurer) and the insured. The insured can be a person, business, or entity. The contract, called the insurance policy, details the conditions and circumstances under which the insurer will compensate the insured.
Insurance policies can be complex, and some policyholders may not understand all the fees and coverages included in a policy. As a result, they may inadvertently purchase policies on unfavourable terms. Therefore, it is important to read the policy documents thoroughly to understand what is covered and what is not.
The three major types of exclusions are:
- Excluded perils: These are specific hazards or events that are not covered by the policy. For example, homeowners' insurance policies typically exclude coverage for floods, earthquakes, and nuclear radiation.
- Excluded losses: These are specific types of losses that are not covered by the policy. For example, automobile policies typically exclude damage due to wear and tear.
- Excluded property: These are specific types of property that are not covered by the policy. For example, a homeowners' policy may exclude personal property such as an automobile, a pet, or an airplane.
In addition to these specific exclusions, there are also standard exclusions that are commonly found in insurance policies. These include:
- Nuclear exclusion clause: Excluding damage caused by nuclear and radiation accidents.
- War exclusion clause: Excluding damage from acts of war or terrorism.
- Lawless behaviour or criminal actions: Most insurance policies will not cover losses resulting from illegal activities.
- Pre-existing conditions: In the context of health insurance, policies may exclude coverage for conditions that were known prior to acquiring the policy. However, this practice has been prohibited by the Affordable Care Act in the United States.
It is important to note that exclusions can be mitigated by purchasing additional coverage or add-ons (endorsements or riders) to your policy. These can fill in the gaps caused by exclusions and provide more comprehensive coverage.
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Frequently asked questions
An insurance policy is a legal contract between the insurance company (the insurer) and the person(s), business, or entity being insured (the insured). It details the conditions and circumstances under which the insurer will compensate the insured.
A premium is the fee paid by the insured to the insurer for assuming the risk. It is typically a monthly cost.
A deductible is a mandatory out-of-pocket expense required by an insurance policy before an insurer will pay a claim.
Policy limits refer to the maximum amount an insurer will pay for a covered loss.
A rider is an optional coverage that can be added to a basic plan to boost its level of protection. It is an add-on offered by the insurance company.
