Insurance Policy (Definition) and Types of Insurance Policy
Insurance is a legal contract between an insurance company, which is the insurer, and the insured which can be an individual, family, or business. In which the insured receives financial protection against losses from the insurer in exchange for a small fee known as a premium. This legal contract is represented by or otherwise known as an insurance policy.
An insurance policy is used to determine the obligations of both the insurer and the policyholder or insured. However, most insurance policies can be in a quite confusing manner and also contains terms that can be difficult to understand. Therefore, in this article, we provide information in detail on the meaning of insurance policy, types, parts, or components, and how to review an insurance policy.
Meaning of an Insurance policy
In insurance, the insurance policy is a contract between the policyholder and the insurance company, it is what outlines the coverage or protection they will provide and other features associated with the agreement. An insurance policy is also called a contract of adhesion because the insurer draws up the contract and the insured has no ability to make material changes to and also agrees to uphold the terms and conditions of the agreement.
Moreover, the insurance company or the insurer is required to pay the benefits under the policy or contract if the policyholder has paid the premiums and met other basic criteria outlined in the policy.
Also, the core components that make up most parts of the insurance policies are the premium, deductible, and policy limits. However, a premium refers to the price of a policy, it is the monthly fee you pay in exchange for the insurer’s coverage. The policy limit is the maximum amount an insurer will pay under a policy for a policyholder’s claim over a covered loss. While deductible refers to the specific amount the insured must pay before the insurer pays a claim.
Part of an Insurance Policy
However, there are five main parts that make up most insurance policies. They include declarations, definitions, insuring agreement, exclusions, and conditions. Whereas many may contain an additional form or a sixth part called endorsements. The definitions, insuring agreement, exclusions, and conditions are combined into a single coordinated document called a policy form. Here’s a detailed explanation of each part to identify its provisions and requirements:
The declaration is usually the first page of an insurance policy. It is a form that summarizes the core information specific to the policy and is filled out by the insurer based on the policyholder’s application and affixed on the top of other pages of the policy. The declarations show who is insured and the address, the insuring company, the risks or property covered, policy limits, any applicable deductibles, premium amount, policy date, and number.
This section defines important terms used in the policy as they contain common words that have special meaning in the background of insurance. However, the insurance policy usually identifies these terms by bold print or quotation marks.
However, this section specifies risks assumed or the nature of coverage provided by the insurance company in exchange for the insured’s premium. This is where the insurer makes one or more promises to secure the policyholder.
Exclusions in Insurance Policy:
The exclusions section serves as a way to clarify the coverages that are granted by the policy. It moves coverage away from the insuring agreement by describing property, risks, or losses that arise from a specific cause that the policy does not cover.
This section contains certain provisions, rules, and obligations imposed by the insurance company. Which the insured or policyholder must comply with otherwise failure can cancel or restrict coverage. Examples of such requirements or conditions include payment of premiums, rules, or duties to follow after a loss. The insurer promises to pay the benefits and provide other services only when the covered event occurs and if the policyholder has fulfilled imposed obligations.
Endorsements are additional policy forms that come with and modify the main coverage forms. Most policies also contain endorsements but not all, they can add or modify coverage.
Types of Insurance Policies
However, there are various types of insurance policies one can buy. But here are the main types of insurance policies everyone needs:
1. Auto Insurance:
Auto insurance refers to policies that offer financial coverage in the event of accidents involving your car. It is mandatory that you have basic auto liability insurance in most states. Which is a type of auto insurance that covers legal fees, injury or death, and property damage to others when you are responsible.
2. Life Insurance Policy:
Refers to a policy that provides protection or coverage for the people that are financially dependent on the policyholder in case of the insured’s untimely death. Life insurance can replace lost income, help pay debts such as mortgage and loans, and also pay for burial costs if you are single.
3. Health Insurance:
Health is one of the most important types of insurance. It covers your necessary medical costs, from doctor’s appointments to surgeries. The rising cost of medication is enough reason to make health insurance a necessity. With the fact that health is wealth because your good health is what allows you to work and earn money.
4. Home Insurance Policy:
Home insurance covers your home against loss or damage that may occur due to accidents like fire and other natural disasters and theft. With this type of policy, you remain free from all financial liabilities that may arise from damage to your home.
5. Disability Insurance:
Disability insurance is also among the most important type of insurance because it covers your ability to earn income. This policy covers your financial income if you are not able to work due to injury or medical conditions. However, disability insurance can cover any form of disability. This includes total disability but does not cover medical care and services for long-term care. Which is different from disability insurance.
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In conclusion, insurance plays an important role in the sense that it replaces economic loss in the event of damage or risk. Buying the right insurance policies will go long way in helping protect your earning capability and possessions.