Basic parts of an insurance policy

Your insurance is an important part of your personal finances. While some insurance policies contain a plethora of information, they don't have to be confusing or complicated. When you understand an insurance policy's components, you are in the best position to shop around and choose the optimal plan for your needs. 

Here's a look at five important parts of an insurance policy that everyone should know about. Full infographic.

1. Premium

An insurance premium is one of the most important places to look when choosing your insurance. The premium is what you have to pay on an ongoing basis to have an insurance policy. You may pay monthly, pay your entire premium upfront or choose another schedule within your policy's guidelines. When shopping for a home, auto, business or other insurance policy, you'll have to pay the premium to have insurance whether or not you ever have to file a claim. If cost is the most important factor to you when choosing insurance, this is where you want to focus most.

2. Deductible

In the unfortunate event that you do have to file a claim with your insurance company, you'll have to pay the deductible before your insurance benefits kick in. For example, if you have a $500 auto insurance deductible and accidentally cause $2,500 in damage to your car, you would have to pay the first $500, and your insurance would pay for the remaining $2,000 in repairs. With many insurance policies, you can choose between a range of deductibles. A lower deductible means you'll pay less if you file a claim, but typically leads to a higher policy premium. Based on your finances, pick the deductible level that makes the most sense for your needs.

3. Policy Limits

Your insurance policy limits are the most you could get in coverage from your insurance policy. For example, if you own a home and it is lost in a fire, you would likely get the maximum coverage provided by your policy. If your rebuilding costs would be more than your limit, you are considered underinsured and should look into increasing your policy limits. Like a change in deductibles, changing your policy limits leads to a change in your premium rates, as well. For higher limits, you can expect to pay higher premiums. But increasing your limits may be less costly than you think, so it's worth discussing with your agent if you have any doubts about your coverage.

4. Exclusions

Depending on the type of insurance you choose, you will likely encounter various exclusions, which are types of damage that are not covered by your insurance. Most homeowner's policies don't include earthquake or flood insurance, for example. If you live in an area prone to either of those events, you may want to find additional coverage.

When signing up for a new policy, read through your exclusions carefully. While it may seem like legal mumbo jumbo is hiding in the fine print, exclusions can have serious consequences in the future. It's always important to understand your insurance coverage limits and exclusions, so you aren't surprised by an expensive, uncovered event.

5. Riders - Additional coverage and options

Riders are an optional add-on that can increase the coverage or features of your insurance policy. With home insurance, for example, you may want to add a rider that specifically covers valuable jewelry. There are many types of riders that can enhance your insurance.

When you tack new features onto an insurance policy, the costs will likely go up. But in many cases, the added cost is worthwhile for the features they bring. Work with your insurance agent to learn more about what riders could add value to your insurance policy and customize them to meet your needs better.

Does Your Insurance Meet Your Needs?

It's easy to set your insurance and forget about it, but it's a good idea to check in with an annual review of all of your coverage to make sure what you have is still right for your needs. Changes in lifestyle, income or goals may shift your needs in a way that leads to increased coverage or cost savings.

If you are not sure, you can contact a Westfield agent to assist you. When you line up these five parts of an insurance policy in your favor, you'll find the right balance between cost and coverage to protect your finances, while giving you peace of mind that you and your loved ones are protected. That's a win for your family and your finances.

Most people would rather go to the dentist than try to read an insurance policy. Like most things that seem intimidating at first, though, when you break it down, it makes a lot more sense. We’ll tell you how to understand an insurance policy.

There are four basic parts of an insurance policy:

• Declarations
• Insuring agreement
• Exclusions
• Conditions

Declarations: The declarations introduce your coverage. They identify the insurer, the insured, and policy number. They also identify the properties or risks the policy covers, and for how long (the policy period). They outline the financial considerations of the contract, including premiums you will pay, limits and deductibles. Here are some of the things you can find out about your coverage in the Declarations section. Check and make sure they are accurate:

• Check that the name of the insured matches the entity’s legal name, spelled correctly.
• Check that the policy lists the addresses of all the business premises you want to cover (for a business property policy).
• For an auto policy, verify information on make, model, and VIN numbers for covered vehicles.
• For a liability policy, verify the declarations accurately describe the type of coverage you want.
• Check the policy start (inception) and termination dates. This is your coverage period. If you are replacing an existing policy, will this create any coverage gaps? Some claims-made liability policies provide coverage for accidents that occur before the current policy term, the retroactive period.
• Check the retroactive date — the date on a renewal claims-made liability policy should match the date on your first policy, otherwise you will have a coverage gap.
• Policy limits are the most the insurer will pay under the policy. Some policies also have separate, lower sub-limits for specific types of claims. Will these limits provide enough coverage?
• The declarations page will also list the premiums you pay, along with any deductibles you will have to pay before the insurer begins to pay on a claim. To lower your premiums, can you afford higher deductibles?
• Some policies include separate schedules, or itemized lists of covered property. They might also include endorsements, which are separate documents that modify terms of coverage under a policy. The declarations should list these — check that they are correct.

Insuring agreement: This section summarizes the insurer’s agreement to pay covered claims.

If you’re wondering which part of your property insurance policy will describe the perils, you’ve found the right place. For a property policy, the insuring agreement will state the property covered and types of perils, or causes of loss, the policy covers.

In a liability policy, the insuring agreement describes the types of activities covered.

For a commercial general liability policy, the insurer agrees to any money the insured is legally obligated to pay for bodily injury or property damage claims covered by the policy. The insurer also agrees to provide the insured’s legal defense for liability claims that might be covered by the policy.

• Action item: For a property policy, determine whether you have a “named perils” or “all-risk” policy. A named perils policy will list the specific perils that the policy covers. Any peril not named is not covered. The so-called “all-risk” policy offers broader coverage, covering losses caused by any peril, except for those specifically excluded in the policy. If you have a named perils policy, do you have any significant risk exposures that are not covered?

Exclusions: Exclusions limit your coverage by stating the types of activities or losses the policy will not cover.

• Action item: To avoid significant coverage gaps, list the exclusions included in all your liability policies. Most general liability policies exclude liability for pollution and design error, among other things. If you need coverage for these exposures, you will need to buy separate, specialized insurance. Most businesses have a second layer of liability protection through an umbrella or excess policy. This pays claims that exceed the limits of the primary liability policies. Often an umbrella policy will provide broader coverage (that is, cover more perils) than your primary policies. If not, and you have significant risk exposures excluded in your primary policies, please contact us so we can tailor a coverage solution for you.

Conditions: The conditions describe the obligations of each party to the contract. Conditions can appear in the basic policy, the standard form and (if you have them) in your policy endorsements. Conditions include the policy’s cancellation provision. They also describe how the insurer will proceed if other coverage applies to a loss, and reserve the insurer’s right to subrogate a claim, or seek recovery from another party after it has paid a claim on your behalf. The conditions also outline your obligations to the insurer. They spell out when and how you must notify the insurer of an accident or claim that might be covered by a liability policy, your obligation to protect covered property after a loss, and your obligation to cooperate during the company’s investigation or defense of a liability lawsuit.

• Action items: Read policy conditions carefully, because failure to fulfill your obligations to the insurer could nullify your coverage! To ensure you have time to find other coverage, look for a cancellation provision that requires the insurer to provide at least 30 days’ notice before cancelling your policy for reasons other than non-payment. For difficult to place coverage, you may want as many as 90 days’ notice.

Our hope is that you understand the different insurance policy sections after reading this blog, but if you need help reviewing a policy or understanding policy provisions, please contact us. We’ll be happy to help!

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