11 Important Things You Should Know About Insurance Contracts
December 21, 2019
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When you decide to purchase insurance, you will need to sign a contract with the insurance company. This contract contains crucial details that you must understand to ensure you are fully protected. Below are 11 important aspects of insurance contracts that can help you navigate the process more effectively.
1. The Law Protects the Policyholder
Insurance contracts are governed by laws designed to protect the policyholder, who is often the more vulnerable party. These laws ensure that insurance companies cannot impose unfair terms. If any clause in the contract contradicts the law, it is only valid if it benefits the insured. Always read the contract carefully and seek help from an insurance agent if you have questions.
2. Insurance Contracts Are Not Free
Insurance contracts are legally binding agreements where both parties have financial responsibilities. The policyholder must pay the premium, and the insurer must provide compensation in case of a covered loss. This means insurance cannot be free; it is a paid service.
3. Paying in Full Can Save You Money
Insurance companies often allow you to pay your premium in installments (monthly, quarterly, or semi-annually). However, these installment plans usually come with additional fees. If possible, pay the premium in one lump sum to avoid these extra costs. Remember, the premium is indivisible, meaning you must pay it in full eventually.
4. Good Faith Is Essential
Insurance contracts are based on mutual trust and good faith. Both the insurer and the policyholder must act honestly and provide accurate information. Misrepresentation or withholding information can lead to the contract being voided.
5. Limiting Clauses Must Be Signed
Some clauses in the contract limit the rights of the insured. These clauses must be clearly highlighted and signed by the policyholder to be valid. Always review these clauses carefully before signing the contract.
6. Provisional Coverage Documents Are Valid
If the insurance company has not yet finalized your contract, they may provide a Provisional Document of Coverage. This document serves as temporary proof of insurance until the final contract is issued.
7. Rights and Responsibilities
The insurer’s responsibility is to compensate for losses as outlined in the contract, provided there is no fraud or misrepresentation by the policyholder. The policyholder, on the other hand, must pay the premium and provide accurate information about the risk being insured. In case of a loss, both the policyholder and the insured must notify the insurer promptly.
8. Avoid Underinsurance
Underinsurance occurs when the insured value is lower than the actual value of the item being insured. This can result in receiving only a partial payout in case of a loss. To avoid this, ensure the insured amount accurately reflects the value of what you are insuring. Consult your insurance agent for guidance.
9. Understand the Claims Process
Familiarize yourself with the steps required to file a claim. This includes knowing what documentation is needed and the time frame for reporting a loss. Being prepared can speed up the claims process.
10. Review and Update Your Policy Regularly
Your insurance needs may change over time. Regularly review your policy to ensure it still meets your needs. Update your coverage if necessary, especially after major life events like buying a new home or car.
11. Exclusions and Exceptions
Every insurance policy has exclusions—specific situations or items that are not covered. For example, natural disasters or pre-existing conditions might be excluded. Make sure you understand these exclusions to avoid surprises when filing a claim.
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