Buying insurance policies can seem overwhelming, especially when you don't understand how insurance works. Learning more about insurance policies is always helpful whether you're considering life, health, auto, or home insurance.

In this blog, let's uncover the meaning of insurance policies and learn how the insurance policy method works.

What is meant by the Insurance Policy Method?

The term 'insurance policy method' refers to the system that insurance companies use for handling, issuing, and managing insurance policies. This includes the practices and processes insurance companies follow to design and sell their policies to customers. The insurance policy method includes the following aspects.

  • Issuance of Policies: The process of creating and delivering insurance policies for customers.
  • Underwriting: The method of assessing the risk related to every policyholder and pricing their policies accordingly.
  • Claims Management: Processing and settling claims when an insured event occurs.
  • Premium Collection: The system for calculating, billing, and collecting premiums from policyholders.
  • Renewal or Cancellation: The process for handling policy renewals and cancellations.

What is an Insurance Policy?

An insurance policy is a contract through which the insurance company agrees to provide financial protection to the policyholder in exchange for premium payments. Each policy specifies the risks that it covers and the ones it doesn't. When a covered event—like a car accident, illness, or property damage—occurs, the policyholder can file a claim, and the company will pay for the related costs up to the policy's limits.

Key Components of Insurance Policy

An insurance policy is made up of several components such as coverage, inclusions, exclusions, and conditions.

  • Covered risks: Each insurance policy describes the specific risks that it covers. This is an essential aspect of the policy since the entire claims process depends on it.
  • Exclusions: Insurance policies also describe the risks or situations that are not covered by the insurance. For example, a homeowners policy might exclude certain types of damage like floods or earthquakes, which require separate coverage.
  • Conditions: These are the obligations and requirements that the policyholder must meet for the policy to remain valid.
  • Add-ons or Riders: These are optional add-ons that expand the coverage of the policy. Using this option, policyholders can customize their coverage. For example, car owners can purchase add-ons to cover situations like losing the car keys.
  • Limits: The liability limits define the maximum amount the insurer will pay for a covered loss.
  • Deductibles: The deductible is the amount the policyholder must pay out-of-pocket before the insurer covers the remaining loss. Policyholders choose deductibles so that they can cover small losses themselves and save their insurance claims for larger expenses.

Types of Insurance Policies

There are multiple types of insurance policies to cover various risks and situations. Here are some common types of policies that you will come across.

Life Insurance

Life insurance policies provide financial help to the beneficiaries of the policy after the policyholder passes away. The family members of the policyholder can receive a lump sum payout as compensation, which can help them get back on their feet during tough times.

Health Insurance

Health insurance policies cover the medical costs of the policyholder. This includes the costs of doctor visits, hospital stays, surgeries, and preventive healthcare treatments.

Motor Insurance

This policy is meant to protect you from risks related to your vehicles. It provides financial protection against accidents, theft, and third-party liabilities related to the insured vehicle.

Homeowners' Insurance

Designed for homeowners, this insurance protects against damage to a home and its contents. It usually covers risks like- damages to the structure and contents of the house and the theft of personal belongings.

Travel Insurance

This policy covers unexpected travel-related expenses, such as trip cancellations, lost luggage, medical emergencies, and evacuations while traveling abroad.

Insurance companies offer several other insurance policies like business insurance, renter's insurance, and loan insurance.

How Does the Insurance Policy Method Work?

Here's a summary of how insurance policies work to provide financial protection to policyholders.

Risk Assessment and Underwriting

This is the first stage of issuing an insurance policy. The insurance company assesses the risk of issuing a policy to the applicant. Using data and actuarial science, underwriters set coverage terms, conditions, and premiums. Premiums are based on risk factors like health, driving record, or property condition, depending on the type of insurance.

Policy Issue

Once underwriting is complete, the insurer issues the policy. The coverage, exclusions, limits, and deductibles are mentioned in the policy documents. The documents are delivered to the policyholder and if they agree, the policy is issued.

Premium Collection and Renewals

Once the policy is issued, the insurance company collects premiums periodically. Generally, they are collected once a year. Insurers often have automated systems to collect these payments. At the end of the term, policies can be renewed based on updated risk factors, claims history, and any changes in the policyholder's situation.

Claims Processing

When a covered event occurs, policyholders file a claim. The insurer checks the claim to confirm it falls within the policy’s terms, evaluates the loss or damage, and issues a payment or service to cover it.

Wrapping Up

Understanding insurance helps you make informed decisions when buying insurance policies. You must also understand the important aspects of your policies, such as coverage, inclusions, exclusions, and conditions, to file claims correctly. 

FAQs on Insurance Policy Method

What is the insurance policy method?

It refers to the processes used by insurance companies to issue, handle, and manage insurance policies.

What do you mean by insurance policy?

An insurance policy is a contract between the insurer and the policyholder. Under this contract, the insurer agrees to compensate the policyholder for specified losses under specified situations.

What are the 7 main types of insurance?

The seven main types of insurance are- life insurance, health insurance, auto insurance, travel insurance, homeowner's insurance, disability insurance, and renter's insurance.