what is an insurance contract?
An insurance contract is a legal contract between an insurance company and an insured. this contract allows the risk of a significant financial loss or burden to be transferred from the insured to the insurer. In exchange, the insured agrees to pay a small guaranteed payment called a premium.
Insurance can exist for just about anything in every industry, but we often see insurance deals for health insurance, life insurance, and auto insurance.
Like any other legally binding contract, for an insurance contract to be enforceable, it must contain all the essential elements of a contract. these elements include:
- Element #1: Offer and Acceptance: The offer in an insurance agreement is provided by the party seeking insurance by submitting an offer form. if the insurance company agrees to provide the insurance, that is acceptance.
- Element #2: Consideration: Consideration is the exchange of items of value, be it money, services, or goods. In an insurance contract, the insured pays a premium while the insurer promises a payment in the event of an insurance claim.
- Element #3: Legal Capacity: Both parties must have the legal capacity to enter into a legally enforceable contract. Neither party may be under the influence of alcohol or drugs, have mental health problems, or be under the age of eighteen.
- Element #4: Legal Purpose: If the agreement involves illegal activities, it is invalid and will not be legally enforceable.
- Claim: An insurance claim is a formal request to the insurer for compensation for a covered event.
- Comprehensive: Comprehensive means that the insurance policy covers everything and exclusions must be defined in the contract.
- Copay: Copays are seen in health insurance policies. this is the amount of money that the insured must pay out of pocket before the insurance company begins to pay. Members are often required to pay a set copay for each visit to a medical professional.
- Declaration Page: The declaration page is part of the insurance contract that outlines your coverage. It will detail your policy limits, premiums and deductibles and provide instructions on how to file a claim.
- Deductible: A deductible is the part of the loss that the insured must pay.
- Enrollment Period: Enrollment periods are the time frames in which a party can update or change its policy. This is often seen with health insurance policies.
- Liability Coverage: Liability coverage protects the insured against injury and damage to other persons and property claims.
- policy: a policy is the written contract that establishes the exact terms agreed upon by the insurer and the insured
- premium: premium is the payment that the insured agrees to pay in exchange for insurance coverage. premiums can be paid monthly, quarterly, semi-annually, and sometimes annually. when the deductible is higher, the premium will be lower.
- risk: risk is the possibility of losses that the insurance company agrees to cover.
- Term Insurance: Term insurance is a phrase that can be found in life insurance policies. If a policy is term insurance, payment will only occur if the insured’s death occurs within a specified time period or after a specified age.
- Underwriter: The underwriter of an insurance policy identifies the risk to determine if coverage should be provided and how much it will cost.
- Life Insurance: Life insurance policies come in two policies: term life insurance and whole life insurance. Term life insurance provides coverage at a fixed rate of payments for a limited period. Whole life insurance is permanent life insurance that covers the insured until his or her death. life insurance is essential for anyone supporting a family that would not survive financially without them.
- Health Insurance: Medical treatment, especially for serious injuries or illnesses, can be expensive. Health insurance shifts the burden of paying for this expensive care from the insured to the insurance company. the insured will often pay a monthly premium along with a copay on doctor visits in exchange for coverage after a certain amount of out-of-pocket costs.
- Car Insurance: Depending on your state, car insurance is often legally required to operate a motor vehicle. Car insurance not only covers damage done to a vehicle, it will also cover medical expenses for people injured in a car accident.
- Homeowners Insurance: Homeowners insurance protects a person’s home if it is damaged. damage can occur from natural disasters, fires, floods or accidents. Homeowners insurance also typically covers household items against damage or theft and property injuries.
- Renters Insurance: If you rent a property, renters insurance is important to protect your belongings. while homeowners insurance protects the owner’s investment in the property, anything you own on the property will not be covered. renters insurance protects personal property against theft and damage.
- general insurance: insurance agreements are usually capped and only cover damage up to a certain amount. if the damage exceeds the limit, you may have to pay out of pocket. umbrella insurance covers these costs which are more than other insurance policies.
- travel insurance
- pet insurance
- flood insurance
- uninsured motorist insurance
- conditions: conditions are the requirements of the insured, such as the responsibility to pay a premium on time and report any loss. If these conditions are not met by the insured, the insurance company has the right to deny the claim.
- Limitations: Limitations refer to policy limits, such as how much insurance will pay for a particular type of loss.
- exclusions: exclusions inform the insured about what the policy does not cover. The three main types of exclusions are:
- Excluded Perils or Causes of Loss: These are often defined as damage from floods, earthquakes, or nuclear radiation.
- Excluded Losses: In an auto policy, for example, normal wear and tear would be an excluded loss.
- Excluded Property: Personal property, such as a pet, is often excluded from homeowners policies.
The insured must understand these three parts of his insurance policy to avoid surprises if an event requires an insurance claim.
There are many other important parties included in insurance contracts. Some other essential elements of an insurance contract are the following:
- declarations: the declaration page identifies the insured, the insurance company, the risks or assets covered, the limits, the deductibles, the premium, the period of the policy and other important information related to the agreement.
- definitions: the definitions clause defines terms within the policy so that there is no ambiguity and the insured understands all elements of the policy.
- insurance contract: the insurance contract is the part of the policy where the insurance company expressly agrees to indemnify the insured.
- Endorsements: Endorsements are additional forms that modify the policy by expanding, revising, or deleting clauses in the policy.
- Riders: Riders, such as endorsements, are amendments to the policy. An example of a rider might be a change in the level of benefits in a health insurance policy. insurance companies are generally required to send the insured copies of any policy changes.
Read this article to learn more about the different parts you’ll find in an insurance contract.
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key terms in insurance contracts
There are many key terms in insurance agreements that you may not see in other contractual agreements. it is important to be familiar with them and understand the meaning of each term. The type of insurance agreement you have will determine which of these key terms you can find in your agreement.
these key terms include:
For more key terms you may see in your insurance policy, check out this glossary.
purpose of insurance contracts
The purpose of an insurance agreement is to create a legally binding contract between the insurance company and the insured. Within this agreement, the insured agrees to pay small periodic payments in exchange for a payment from the insurance company if the covered event specified in the agreement occurs.
events covered by insurance contracts are uncertain. this means that they may not happen at all, for example a car accident. the insured agrees to pay a premium in exchange for car insurance. If an accident occurs, the insurance company will cover the cost of the damage. however, even if an accident never occurs, the insured must still pay the premium payments.
Insurance contracts are random contracts because the amount that the parties exchange is unequal and depends on uncertain future events. Insurance agreements are also considered unilateral contracts because only the insurance company is making a legally enforceable promise.
For additional information on understanding your insurance contract, please see this article.
types of insurance contracts
Insurance settlements are used in almost every industry, and there are several types of policies that can be purchased by those looking to be insured for unexpected events.
Some of the most common types of insurance settlements include:
Other types of insurance policies available may also include:
The type of insurance policy you invest in will depend on your specific needs and risks.
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3 main parts of an insurance policy
The parts of an insurance policy will vary depending on the type of insurance; however, the three main components of an insurance policy are conditions, limitations, and exclusions.