What is a Policy?
A policy is essentially a contract between you and your insurance provider. When it comes to life insurance, the policy outlines the agreement that, provided you regularly pay your premiums, the insurance company will give a sum of money to the people you choose after you die.
Key features of a life insurance policy
A life insurance policy is a multi-page document that generally lays out the following:
- The insured. With life insurance, the insured is the person whose death will trigger the life insurance company to pay the death benefit to the named beneficiaries.
- The beneficiaries. When buying a life insurance policy, the owner chooses a beneficiary or beneficiaries who will receive the death benefit when the insured dies.
- The death benefit. This is the sum of money the policy’s beneficiaries will receive once the insured passes away.
- The premiums. This is the amount you need to pay — and the schedule on which you need to pay it — in order to keep the policy in effect. Your policy will lay out the financial obligation you need to meet in order for the insurance provider to hold up their end of the contract, meaning they pay the death benefit to your beneficiaries.
- The policy term. You might get term life insurance, which means the agreement (specifically, the fixed premiums) will expire after a set number of years (which the policy will list), or permanent life insurance, which lasts your lifetime.
- The policy number. Useful for easy tracking when servicing your policy.
- The policy’s cash value: If you bought permanent life insurance.
- The policy riders. If you added any to your policy.
Additionally, your policy may explain additional features, like an accelerated death benefit, or riders you chose to add. The exact details laid out in a life insurance policy vary from company to company. Insurance experts advise all people to review the entire life insurance policy before buying coverage.
Insurance policy terms and conditions
When you buy insurance, the policy is the legal document that you get that lays out the details of what, exactly, you’re getting in exchange for your premiums. It outlines one or multiple coverages.
With most insurance policies, the coverage is the amount of money you get when a specific loss occurs. Here are a few examples:
- A life insurance policy pays out a death benefit when the insured passes away
- A home insurance policy pays to rebuild the home and replace destroyed belongings after a fire
- A car insurance policy covers the cost of damages you cause behind the wheel
In each of these examples, there are two pieces at play: the coverage amount and the covered incident. The coverage amount is how much you or someone else will get after a loss. With life insurance, that’s a set lump sum.
The covered incident is the triggering event that activates your insurance. Again, with life insurance, that incident is you dying.
The insurance policy lays out the details of coverage amounts and covered incidents, along with any other terms and conditions. If you buy term life insurance, for example, your insurance policy will state when that term ends. Or if you buy any type of life insurance, there will generally be a suicide clause, a condition that nullifies the policy if you die by suicide within the first year or two.