Definition of an Insurance Policy or Contract

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An insurance policy is a contract between a company that guarantees insurance benefits, and one or more consumers who agree to pay premiums for those benefits. As with other legal contracts, an insurance policy must outline the specific obligations of each party to the agreement.

Types of Insurance Policies

Consumers have access to a number of different types of insurance policies, include health, dental, life, home and auto. Health and dental policies pay benefits for routine and treatment-based medical services. Life insurance generally is used to cover the financial needs of a person's family upon death. Home insurance includes personal liability for harm caused to others on your property, as well as benefits covering the house and valuables inside. Auto insurance includes liability for accidents, as well as comprehensive and collision benefits for damage to your vehicle.

Businesses need insurance as well. If you operate out of a building, commercial property insurance is standard. Also, business operators purchase several forms of liability insurance to protect against the risks of harm caused to others. These coverages include general business liability, product liability and professional liability.

Contract Development

The insurance policy or contract is prepared in the underwriting department of an insurance provider. Underwriters review the details of an application and state the commitments of the insurance company, and the premiums assessed to the insured. Individual, group or company premiums are based on a variety of risk factors, such as demographic traits of a driver or health insurance customer.

After a policy is created, it is signed by the consumer seeking insurance. As long as the individual or group pays its premiums, it is covered by the terms of the agreement. In employer-group health policies, provider networks often allow insured members to get the lowest out-of-pocket costs. Along with premiums, contract terms include the types and maximum amounts of benefits, annual deductibles, co-insurance and co-payment obligations of members.

Tip

  • With a life insurance policy, the covered individual must declare one or more beneficiaries of the contracted payout if death occurs.

Additional Contract Elements

An insurance policy also normally notes any exclusions to coverage, such as smoking cessation programs in health insurance. Group network plans refer to benefits based on whether you use an in-network or out-of-network provider. Typically, a separate network directly is provided. Obligations of the covered member in the claims process are stated in the policy as well.

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