What is an Insurance Contract?
An insurance contract is a document outlining the agreement between two parties: the insurance provider and the policy owner. The contract can also be called an insurance policy.
Signing a life insurance contract
Life insurance contracts are multi-page documents outlining a variety of important legal aspects pertaining to the insurance coverage that the policy owner has purchased.
When you apply for insurance, it’s important to read through your insurance contract in its entirety before signing that you accept it. That way, you understand clearly what you’ll be getting in exchange for your premiums, and you’ll be aware of any limitations or exclusions. You’ll also be informed about any clauses that could affect your coverage, like a suicide clause.
The parts of a life insurance contract
While different life insurance providers structure their insurance contracts differently, there are a few key components all contracts should include:
- Policy term. This outlines how long the coverage and/or level-premium period will last with the terms laid out in the contract. If you’re buying level-premium term life insurance, for example, the level premium might last for 20 or 30 years, after which the premium will rise if you choose to keep the policy. If you’re buying permanent life insurance, the policy should last the insured’s lifetime.
- Premiums. This is the money the policy owner needs to pay in order to keep the policy active.
- Beneficiaries. This part of the insurance contract lists the person, people, or entity who will receive the policy benefit. In other words, when the insured dies, the beneficiary or beneficiaries are the ones to receive the life insurance payout.
- Death benefit. Also called the face amount, this is the primary policy benefit that comes with both term and permanent life insurance policies. It’s the amount of money the beneficiaries will get paid out by the life insurance provider when the insured passes away.
- Cash value (for permanent policies only). If you’re buying permanent life insurance, the policy will come with a cash value component. The insurance contract should outline how this part of the policy works, including how it earns money (e.g., through guaranteed growth, interest rates, dividends and/or investment gains) and how the policy owner can use it.
- Riders. If the policy automatically includes or the owner decides to add any additional coverages to the policy — like an accelerated death benefit or critical illness rider — the insurance contract will list them.
Ultimately, a life insurance contract should give the policy owner all of the information they need about the coverages the policy includes and how they work. It also outlines what the policy owner needs to do in order to hold up their end of the contract, like paying the policy premium by a certain date each month or year.