It’s a funny thing – we spend thousands of dollars on our insurance policies every year; and yet, when the policy document comes in the mail, we take one look at the masses of fine print, roll our eyes, and do nothing more with it than file it away. For something that performs such an important function for us, shouldn’t we pay little attention? Certainly, your insurance contract is full of jargon and difficult technical terminology that makes the going difficult. But your insurance advisor should be there for you to help you understand whatever you need to know. To get you started, let’s look at the preliminaries of how to understand an insurance contract.
Some of the terminology in an insurance contract is pretty simple – once you get past the complicated-sounding words that they use for no reason. For instance, in the opening paragraphs of your contract, they talk about an offer, an acceptance and consideration. These are pretty simple – the offer is the form that you fill in to apply for an insurance policy, the acceptance is when they actually accept your form and sell you insurance for the premium they determine. The consideration is the premium you pay every month.
Technically, an insurance contract is called an indemnity contract – that means that they promise to indemnify you or make good your loss when it occurs. Most times, an insurance contract promises to return you to the financial state you were in before the loss occurred. But there are often many additional complexities and wrinkles to this kind of promise. For instance, sometimes, you may find that you can’t afford to insure your car or your house for its full value. If your house is worth $100,000, and you find that you can only afford insurance for $75,000, they call this underinsurance.
Sometimes, you can get insurance with excess. Let’s say that you ensure your car for an excess of $10,000. This means that whenever damage occurs to car that’s worth over $10,000, they will pay you everything for it. If you are in a little fender bender that costs $500 to repair, they won’t pay you anything at all.
Before you insure something, they will make sure that you actually own the thing that you’re insuring – your car, your house, or anything else. You can’t insure something that doesn’t belong to you. In technical language, they say that you need to have an insurable interest in the thing that you’re insuring. The interesting thing here is that if you are married, you can take out insurance in the name of your husband or wife. You may not own them, but they think that you’re important enough to each other that you have an insurable interest in them.
And finally, there’s this funny word that you’ve probably heard in math class sometime – the principle of subrogation. This is where when you put in a claim with your insurance company for something like a totaled car, they will go after the person caused the accident and made them lose all this money to you.
It pays to understand your insurance contract. After all, it’s something that costs you and saves you a lot of money.