Finance 101. What’s in your insurance policy?
An insurance policy is a contract between a person and a company in which the company takes on a financial burden on behalf of a person under certain circumstances.
Insurance Company’s Promise
If X happens to the insured then the insurance company will pay $ to the beneficiary as long as the contract is valid (or in force) when X occurs. Except in rare cases (cancelable contracts), the insurance company cannot cancel the contract as long as the policy owner pays the premium on time, as agreed.
Policy Owner’s Promise
If the policy owner continues to pay the premium as agreed in the contract, then the insurance company must uphold their promise. The policy owner may chose to stop paying the premium at any time and cancel the contract. The insurance company then no longer pays out under their promise.
Additionally, insurance policies have the following characteristics:
The person or entity ultimately in control of the policy and who makes decisions about it. The policy owner must have an insurable interest in the insured. Insurable interest is proof that the policy owner will suffer financially if something were to happen to the insured.
Insured is the person whose personal information was used to assess risk for the purpose of determining the premium and who is the person insured under the policy. If the policy owner and insured are not the same person and something happens to the policy owner, the policy will not pay out.
In some cases, the policy owner is different from a person who takes on the burden of paying the premium. Most often, this is the same person, but it does not have to be.
The premium is the amount of money that the insurance company requires in order to uphold their promise. It is determined based on the statistical risk that the insured will suffer occurrence X. This is a complicated and actuarial calculation that is best left to the insurance companies. Premiums can be level or can be otherwise calculated.
The person to whom the face amount is payable to if X occurs.
Face (benefit) amount
This is the amount of money that the insurance company will pay to the beneficiary if insured suffers X. Usually, at least some portion of it is level and guaranteed. If X occurs and the company does pay out, the beneficiary normally has a few options as to how to receive their money. (Insurance policy settlement options.)
In force date
The date that the policy becomes in effect and that insurance company starts upholding their promise.
If ifs and buts were candy and nuts…
There are certain situations where the insurance company reserves the right to cancel the policy or alter it after the in force date.
Fraud, other malicious and intentional misinformation
If people responsible for disclosing the facts to the insurance company for the purpose to calculating risk and in turn, the premium, intentionally conceal or misrepresent them, the insurance company can deem the policy void ab initio (not valid since the beginning) and simply return the premiums paid and cancel their promise.
Mistakes and other minor and non-intentional misrepresentations
If there is a mistake, most often the insurance company will retroactively adjust the information, calculate what they would have promised if they knew the truth, and pay out under those circumstances.
Medical Insurance Bureau (MIB)
There is a central deposit of medical information shared by all insurance companies to prevent intentional misrepresentation to an insurance company after receiving a negative answer from another. When you apply for insurance and disclose medical information, it is double checked against the database to ensure consistency. You are entitled to know what the database is telling the insurance companies and can request the report directly from the MIB.
It is best always to tell the truth and carefully review the policy upon receipt to ensure that the information is accurate and correct. If you are suspecting that the insurance company is operating on false information from the medical insurance bureau, you can request the report, and clear up the mistake. Talk to your advisor if this is the case. The advisor understands the underwriting process and can explain the insurer’s decision as well as guide you in obtaining the report from the MIB.