Insurance Contract Basics
There are as many different types of insurance contracts as there are types of insurance. The provisions in an auto insurance policy, for example, are different from the provisions in a long-term care insurance contract. In some ways, comparing insurance contracts is like comparing apples with oranges. Nevertheless, insurance policies all share certain common elements. Once you understand the basics of insurance contracts, you should be able to make some sense of your insurance policy--no matter what the type.
An insurance policy is a written contract between you and the insurance company
An insurance policy is a written agreement between you (the named insured) and the insurance company. Every insurance policy contains an insuring clause or agreement, which is a general statement of the promises the insurance company makes to the insured. In exchange for your payment of a premium and your observance of certain conditions stated in the policy, the insurance company agrees to pay you (and/or others) money in the event of a loss. In a sense, the risk of financial loss is transferred from you to the insurance company. Should a loss never occur, though, you'll be out some money in the form of premiums.
Policies are broken down into sections. Your policy should define all of its terms and describe the types of coverage, each party's rights and obligations, various exclusions from coverage (and any other limitations), and any optional types of coverage selected or amendments made to the standard contract.
An initial page will summarize your agreement
Typically, an insurance policy begins with a page that summarizes the agreement between you and your insurance company. This initial page--which could be called a Declarations Page, a policy specifications page, or a benefit summary page (depending on the type of insurance)--provides information about who is covered, what is covered, the effective dates of coverage, and the amount of the premium. The number of the policy will be listed, along with your name and address and your insurance agent's name and address. You'll also see other important information such as coverage limits. In addition, if you elect to purchase one or more endorsements to expand and/or restrict the coverage your policy offers, these will be identified on the initial page by name, form number, and date.
The provisions of the policy spell out the features and requirements of the contract, as well as the exclusions
Your insurance contract will contain several provisions. These provisions describe the features of the policy and the types of benefits you can expect. They also explain the requirements of the contract and the rights and duties of each party. Some of the provisions in an insurance contract may be required by the laws of your state and are designed to protect you. For example, if a grace period clause is required, you'll be allowed additional time (after the regular payment due date) to pay your premium.
Your policy will also contain a section for exclusions that deny or preclude coverage in specific instances. Here, various exclusions from coverage are listed and described. For example, a homeowners insurance policy will contain an exclusion from coverage for losses that result from war.
Options require you to make a choice about your coverage
If you had to elect any options when you applied for insurance, the insurance contract will also contain a section that explains the options. For example, if a life insurance policy has more than one dividend option, the contract requires you to choose what you would like the insurer to do with any dividends paid with respect to your policy. In an auto insurance policy, you'll find a section on optional coverage. This might involve purchasing additional bodily injury coverage to protect you from potential lawsuits if you seriously injure someone in an accident.
Riders provide additional coverage (for a price)
Typically, riders provide additional coverage above and beyond what is included in the basic insurance contract. Generally, you must pay an additional premium for such coverage. For example, an accidental death rider may be purchased and added to a basic life insurance contract. If the insured suffers an accidental death, the beneficiary would receive an additional benefit. And in a homeowners policy, you might want to purchase a higher amount of coverage to protect your diamond necklaces against theft, as the basic limits for jewelry coverage may be inadequate.
The insurance company may add an endorsement to an insurance policy at the time of issue or after issue to amend or change any provision of the standard contract, unless that is prohibited by the contract.
Make sure you understand your contract before you sign it
Because an insurance policy is a legal contract, you shouldn't sign it (or pay your premium) unless you understand all of its provisions. Your insurance agent can help you. Make sure he or she explains everything that you don't understand. It may also be wise to shop around for insurance and compare various policies and insurance companies.