Understanding Insurance Contracts

Highlights

  • Read the fine print in your policy.
  • Make sure to understand the limits of insurance coverage you are considering.
  • Determine the right coverage level for your needs.
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Important Terms, Requirements & Features of Insurance Policies

How to read and understand your insurance contract

Almost all of us have taken out some sort of insurance policy. Whether for auto insurance, home insurance, health insurance or life insurance, we have paid considerable sums of money to an insurance company to buy the peace of mind that comes with knowing that should disaster strike, we are covered. But, how many of us fully understand the details in the paperwork we signed?

The full details of an insurance contract are very complex and can be hard to understand. Fortunately, most insurance companies today have made an effort to organize the contract so it is possible to understand the details. It is very important that you take the time to understand the details of any policy you are considering, to ensure that all the risks you think are covered are actually included in your policy.  Many insurance policies have terms or exclusions from coverage that may catch you under-insured, when disaster strikes, even when you thought you were covered.

Insurance Premium

Let's start with something straightforward, the insurance premium. The premium is the payment you must make to the insurance company to keep your policy in good standing and ensure that, when an insured event happens, the insurance company is obliged to pay. Take a look at your payment options. Sometimes, while a monthly payment option may feel more affordable because the payment is smaller than a payment you make once or twice a year, you may find that choosing the monthly option costs you substantially more over the course of the year.

Deductible

An important variable that affects the cost of your insurance is the policy's deductible. The deductible is the portion of an insurance claim a that must be paid by the policy holder and not by the insurance company. A high deductible will dramatically reduce the cost of your insurance, but it will also leave you exposed to higher potential out-of-pocket costs.  For example, a $2500 deductible on an auto insurance policy may reduce your premium costs dramatically, compared to a policy with a $500 deductible, but the cost of repairs following many accidents might never exceed the amount of your deductible. In this scenario, if your car is damaged and the costs of repair are less than your deductible, you will receive nothing from the insurance company and will be solely responsible for the repairs.

Insured Events

A common problem consumers encounter is not fully understanding the limits of their insurance policy coverage. Many people assume that once they have bought insurance they are fully covered for anything, but this is rarely the case. Most insurance policies have specific exclusions. If a policy holder submits a claim for an excluded event, the insurance company need not pay. For home insurance, losses due to war, earthquake, and flood are excluded (for flood and earthquake, at least, separate insurance can be purchased if desired). For life insurance, many policies exclude death by suicide within some period of time after initiation of the policy (two years is common). Many life insurance policies also exclude death in private aviation accidents or while pursuing 'dangerous activities'. The most common health insurance exclusion is for claims arising from health conditions that already existed when the policy was taken out (called 'pre-existing conditions'). Make sure you know the exclusions for your policy! Shop around and compare the coverage you are being offered, so you don't pay for a policy that doesn't adequately cover the risks you want covered.

Insurance Limits

It is vitally important to understand your insurance policy's payout limits. A policy that has a low payout limit will cost you less than one with a higher limit, just as it is cheaper to purchase a policy with higher deductibles than one with lower deductibles. While a policy with a low premium may seem appealing (and in the case of auto insurance, may meet your legal obligation), make sure that you are not under-insuring yourself just to save a few bucks. A good example comes from home insurance. Insuring your house and its contents up to $X  may feel about right. $X is what it cost you to build the home 15 years ago. But could you rebuild your home for $X today, with current labor and replacement costs, as well as changes to the building codes that may mandate a more costly approach to rebuilding?

Home Insurance policies contain many details that you need to pay attention to. Does your policy cover upgrades arising from code changes? Will it replace your home contents with new appliances, electronics, etc. or will it only cover the value of those items in the open market at the time the insured event happens? Are your home contents covered at all?

Make sure you read all of the fine print in your policy and assess whether it covers you adequately, should the worst happen. If you are concerned about whether your auto, life, home or health insurance do provide the right coverage, you can work with through bills.com's insurance savings center to compare it with policies from other providers. 

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