What Is an Insurance Contract?

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Life is full of unexpected events that can lead to financial losses and expenses. Insurance is a type of financial product designed to protect consumers against the financial burden of losses and expenses. An insurance contract, also known as an insurance policy, is a document that details the terms of insurance coverage.

Insurance Policy Basics

  • An insurance contract explains the types of losses and expenses an insurance company will pay for, the various costs that the insured party must pay for coverage, and other relevant terms of insurance coverage. A consumer gains protection under the terms of an insurance contract by paying the required insurance premiums, or fees, associated with the contract. If you fail to pay your insurance premiums, your coverage may end.

Types

  • Insurance policies vary greatly in terms of what types of losses and expenses will result in compensation from the insurance company. Health insurance contracts, for example, compensate policyholders for various health-related expenses, auto insurance covers losses related to owning a car and homeowner insurance pays policyholders for losses related to home ownership. Insurance contracts are also available for specific perils. For instance, flood insurance, compensates policyholders for specifically for flood-related damages.

Risk

  • The cost of an insurance contract depends upon the likelihood that you will make a claim, or suffer a loss and subsequently request compensation. The more likely you are to make a claim, the more risky it is for an insurance company to cover you and the higher your insurance premiums will tend to be. Insurance companies use many factors to assess the risk that policyholders present. For example, when you buy car insurance, you will tend to pay more for coverage if you have been in accidents in the past, since past accidents indicate that you may get in more accidents in the future. When you buy health insurance, you will typically pay more if you smoke, since smoking is associated with increased risk of costly health problems. Factors insurance companies use to assess risk will vary from one type of insurance contract to another.

Considerations

  • It is important to read the terms of an insurance contract carefully before agreeing to it and paying premiums. You should make certain that the contract covers the losses and expenses you need it to cover and to choose a plan that offers adequate protection at a reasonable cost. Insurance policies have coverage limits that indicate the maximum amount of compensation you can receive. Limits should at cover the full value of property you are insuring, such as a home or vehicle, so that you receive as much compensation as possible if your property is destroyed.

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