While protecting your important assets is an important step in creating a solid personal financial plan, securing the right insurance policies will go a long way to help you safeguard your earning potential together with your possessions.
Most consumers often spend more time researching purchases for household or personal properties than they research their insurance products.
Regardless of how wealthy you are, how well you are getting paid, or even how good your driving skills are, you need insurance.
This is simply because insurance acts as a safety net that protects you financially when things go bad, especially when it precipitates.
Table of contents
What is an Insurance Policy?
An insurance policy is a legal contract between the insurer (often an insurance company) and the person(s), business, or entity that is being insured.
The concept behind insurance policies is very simple to understand. You deposit a certain amount monthly or yearly to an insurance company to insure your life, vehicle, house, or any other property for a certain period.
In return, the insurer covers your financial damages when any harm happens to you or your property.
You are transferring the risks of financial loss you might experience because of uncertainties in your life to an insurance company for a small fee.
An insurance company will have to cover your medical costs and the damages to your car. In the worst cases, they will have to give your family a huge amount of money in case you die.
It is important to read your insurance policies to verify if they meet your needs and understand your responsibilities and your insurance company’s responsibilities if there should be a loss.
Many people get insured without understanding what is covered, the exclusions that take away coverage, and the conditions that must be met before they can apply for coverage when there is a loss.
Reading and understanding your insurance policies will help you avoid problems and disagreements with your insurance company when there is a loss.
Read Also: What is a Car Insurance Policy Number?
What are the Basics of an Insurance Policy?
There are four basic parts of an insurance policy: the declaration page, insuring agreement, exclusions, and conditions. Others include the definitions and endorsements, and riders.
It is important to understand that multi-peril policies may contain specific exclusions and conditions for each type of coverage, such as collision coverage, medical payment coverage, liability coverage, etc.
You need to ensure you read and understand the part for the specific coverage that applies to your loss.
1. The Declaration page: This is the first part, and it identifies who is insured, what risks or properties are covered, the period of the policy, and the limits of the policy, for example, the declaration page of a life insurance policy will include the name of the person insured and the face amount of the insurance policy.
2. Insuring agreement: This part summarizes the insurance company’s promises and states what is covered. It is here that the insurer agrees to do certain things, such as paying for losses covered, agreeing to defend the insured in a liability lawsuit, providing certain services when the need arises, etc. There are two basic forms of an insuring agreement which are:
- Named-peril coverage: Here, only the losses listed specifically are covered. Perils that are not listed here won’t be covered.
- All-risk coverage: This type covers all losses except the ones specifically excluded, e.g. life insurance policy
3. Exclusions: In this part, coverage is removed from the insuring agreement. The three major types of exclusions are:
- Perils or causes of loss
- Losses and
- Property.
An example of an excluded loss under an automobile policy is damage due to wear and tear.
4. Conditions: This part contains the provisions included in the policy that qualify or limit the insurer’s promise to pay or perform. If the conditions of a policy are not met, the insurer can deny the claim. Common conditions in a policy include the requirement to file proof of actual loss with the company.
5. Definitions: This part is present in most insurance policies. It contains the meanings of specific terms used in the policy. It may be a stand-alone section or attached to another section. To comprehend the terms of an insurance policy, you need to read this part.
6. Endorsements and riders: Endorsements and riders are written provisions that change the existing provisions in the insurance policy. It allows the insurer to change the language or coverage of a policy at the time of policy renewal.
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What are the Different Insurance Types?
Insurance is available for a lot of things that we cherish and value as human beings which include arts, pets, houses, cars, jewelry, etc., but the three major essential types of insurance are:
1. Life Insurance
This type of insurance keeps your family in case you die early or unexpectedly. Here, you pay a certain amount of money (premium) to the insurance company for a specific number of years.
In return, the insurance company pays your family an immense sum if you die during this agreed period while the insurance is still valid.
In some life insurance policies, you get paid an immense sum if you live through the policy’s tenure.
2. Health Insurance
Health insurance helps to ensure that you and your family can afford the best medical care without having to worry about the cost.
Here, you pay a premium regularly, and in return, the insurance company takes care of your hospital bills when you get hospitalized or need treatment.
Your bills are often directly settled between the hospital and the insurance company through a cashless approach.
3. Liability insurance
The liability type of insurance is concerned with keeping assets like vehicles, properties, businesses, etc, secure.
You have to buy insurance for whatever asset you want to secure, and in return, the company compensates the owner financially when the property gets damaged.
What are the benefits of an insurance policy?
There are several benefits of keeping cherished and valued assets of your life secured with an insurance policy, and the three most important of them are:
1. Insurance policy ensures family financial stability:
No matter how much you have stacked in the banks, some problems or unexpected events can burn down a majority, if not all, of the money you’ve stacked and jeopardize your family’s financial future.
Even in the case of your early death, though no money can replace losing a loved one, your life insurance would save your family from suffering financially, especially if you have kids who need to be taken care of.
2. Insurance brings peace of mind:
You are guaranteed coverage from your insurance company whenever there is damage from an unforeseen event, as you pay your premium regularly.
This gives you peace of mind as you will be much less worried about what unforeseen event you may have to tackle on your own.
3. Insurance reduces stress during difficult times:
Adequate insurance makes you less worried about finances during unexpected hard times and focuses fully on recovery. This way, you save yourself a lot of emotional, physical, and financial strain.
Conclusion
Most people think insurance is unnecessary as they feel confident about their future and ability to tackle unseen circumstances.
In reality, some unexpected circumstances cripple the fortune of even wealthy individuals, leave people stranded and cause many irreversible changes that will be hard to live with. It is during hard times that insurance companies come to the rescue.
An insurance policy is it – life, health, and liability are essential parts of financial planning. It saves people from a lot of headaches during unexpected hard times.
Also, remember that your decision to purchase an insurance policy should be guided by – requirements, the benefits of the insurance policy, and your ability to pay the premium required.
Read Also: 12 Best Term Life Insurance Companies in 2023
References
- https://www.investopedia.com/terms/l/lifeinsurance.asp
- http://sectorsource.ca/sites/default/files/resources/files/how_to_read_an_insurance_policy.pdf
- https://www.americanbar.org/groups/litigation/committees/insurance-coverage/articles/2014/mayjune2014-dont-forget-policy-conditions/
- https://en.wikipedia.org/wiki/Insurance_policy
- https://www.forbes.com/advisor/life-insurance/how-it-works/
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