You have decided that you need life insurance. You have a mortgage that you want to be sure is covered if you should pass away before it is paid off. You don’t want the outstanding debt to become your spouse’s responsibility. You go online and get quotes from multiple companies. You look at the different rates and coverage options that the companies provide. You are pretty sure which product you will go with. But do you really know all the details of buying an insurance policy?
So what is an insurance policy? Simply put it is a contract. It is a contract that a policy holder pays for called a premium. What takes place is an agreement that for the price paid an insurance company will assume the possibility of an unknown loss. This could not take place without a contract, the policy. The risk is transferred from the individual to the insurance company. Risk is the chance or uncertainty of loss.
The insurance policy is a legal contract. As long as there is insurable interest, when a loss occurs the policy owner has their financial loss restored. There is no profit to be gained. One is merely made whole again.
A lot of the time people will put much time and energy upfront thinking about whether or not they need life insurance or any insurance, for that matter. Do I have a need to actually spend the money monthly or annually on a policy? Someone might ask this. Then they may spend ample time on the phone or the computer with an insurance agent. Or they may use one of the very useful and free resources on the internet and get free quotes and do a comparison of premiums. After doing all of this there is getting the policy issued. This may entail underwriting, which in most cases, necessitates a medical exam. Then finally getting the policy issued. After all of these steps are complete and all of that time and energy has been exerted, the policy is mailed to your home. At this point so many people never really read their contract. They just put it in a file drawer and never take it out again.
But what are the things that went into making this contract? Well for an insurance policy it has to have four components. All contracts commonly have a competent party, a legal objective, an offer & acceptance and valuable consideration. Did you know that policy that is sitting in a drawer somewhere collecting dust had these items that make it up? What are these things, though? Well, a legal objective is where the contract insures there is pure risk and insurable interest involved. Offer and acceptance is when one party, the applicant, “offers” to fill out an application and paying a premium, and the acceptance is when the insurance company accepts the risk by issuing the policy. Finally another feature is the term valuable consideration. That is when items of value are exchanged. For example, the insurance applicant provides information on the insurance application and pays a premium and in return the insurance company promises to pay for losses that occur under the policy.
These are the parts that went into making your insurance policy that may be snug in a drawer somewhere in your house. Now you know what components went into making that contract.