Back to the Basics: The Key Components of Your Insurance Policy
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The details of an insurance policy can be complicated, but a firm grasp of the main components will help you understand your coverage.
When you read an insurance policy for the first time, the sheer volume of information can feel daunting. The answers to even your simplest questions can seem buried under a mountain of complicated jargon.
While it takes time to fully grasp all the ins and outs of an insurance policy, familiarizing yourself with its basic components will give you the tools to read your contract and understand the coverage it provides.
This article outlines the most common sections found in insurance policies and gives a brief description of the type of information you can find in each of them. But keep in mind individual policies can vary widely, so your policy might combine certain sections or include additional items not listed here.
Still, knowing these key components will allow you to identify and skip to the section that contains the information you need, saving you time and frustration.
The declarations page is generally the first page or two of your policy. It is basically a snapshot of your coverage, and you can find the answers to most of your basic coverage questions in it. The information includes the name of the insured, the type of coverage provided, basic coverage limits and applicable sublimits, deductible amounts, and the policy period (see An Intro to Insurance Sublimits to learn more about them and how you can fill these gaps in your coverage).
If your policy covers property, such as your home or vehicle, then it will also be listed on the declarations page alongside the property value and any necessary identifying information, such as a vehicle’s VIN number. As for health insurance policies, this section might be called a summary of benefits and will include information about your premiums, maximum benefit limits, deductibles, copay, and coinsurance (to find out how these work, see All the Ways You Pay: Premiums, Deductibles, Co-pays, and Coinsurance).
Occasionally, you may need a policy that covers multiple items. If you cover several vehicles or multiple pieces of property under the same policy, the declarations page may not offer sufficient space to list them all. In this case, your insurance provider will attach a schedule listing all your covered property and applicable limits for each item.
You will typically find schedules just after the declarations page. If you need to verify coverage of a certain item and don’t see it listed in the declarations, look through your policy in case the property schedule has been inserted elsewhere.
The insuring agreement is also found near the front of your policy. It simply outlines the basics of the insurance contract and the responsibilities of both you and your insurance company. The primary responsibility of the insurance company is to pay claims on your behalf for losses suffered due to covered perils and defend you in the case of lawsuit (see Insurance and Lawsuits to find out what happens when you are sued). Your chief responsibility is to pay the agreed premium and truthfully report losses in a timely manner.
In a property policy, the insuring agreement also indicates the type of policy you have, either all-risk or named perils. Named perils policies only provide coverage for losses brought about by causes specifically listed in the policy document. Conversely, all-risks policies provide coverage for all causes of loss, except those specifically excluded in the policy.
While the declarations page provides a snapshot of your limits and covered property, the policy coverage section provides a much more detailed explanation of how and when your coverage applies. It outlines the type of coverage provided and how deductibles, limits and sublimits apply to covered losses. If you have a question about your policy that looking at the declarations page cannot answer, the policy coverage section should be your next stop.
In a named perils policy, each covered peril is outlined specifically. In an all-risks policy, the policy coverage section includes boilerplate wording outlining applicable coverage for “any covered loss.” Perils not covered by an all-risks policy are specified in the following section.
In health insurance policies, this section lists your covered services and the applicable in- and out-of-network costs. It may also include specific limitations or requirements for coverage to apply, such as obtaining a referral from an approved provider before seeking specialist care.
Most policies have exclusions, though they differ by coverage type, the state in which the policy was issued, and the insurance company that issued it.
For homeowner’s policies, the most common exclusions are war, earthquake, acts of terrorism, water damage, and neglect (to learn more about water damage exclusions, see 5 Water Damage Home Insurance Scenarios: Are You Covered?).
Auto policies often contain exclusions limiting coverage for vehicles not listed on the policy; damage intended by the insured; or vehicles used for commercial purposes, such as delivery services. In many cases, you may elect to pay an additional premium to have certain exclusions removed.
Health insurance policies may include exclusions or limitations regarding pre-existing conditions or claims that arise due unapproved medical costs. Common exclusions include services provided in relation to the commission of a felony and experimental treatments.
If you have questions about a specific cause of loss, check your policy’s exclusions to make sure your coverage isn’t limited.
In addition the insuring agreement, most policies also contain a section that outlines specific conditions that the insured must meet for claims to be paid. Common ones include timely reporting of claims, submitting official proof of loss forms, and cooperating with the company’s investigation of your claim. For example, property and auto policies generally also require that the insured take any necessary and practical steps to ensure no additional damage is done to covered property after a loss.
There are a number of life events that can cause your insurance needs to change. If you need to alter your existing coverage prior to the policy’s expiration, your insurance company will issue an endorsement amending your policy. If you make many changes in a single year, the policy you have at the end of your policy term may only bear a passing resemblance to the one you originally purchased.
Common endorsements include adding or deleting vehicles or property from a policy, removing certain exclusions, and increasing or decreasing policy limits. Most endorsements will affect your premium, either increasing it for an increase in coverage or reducing it for a decrease in a coverage reduction. Any premium change will be pro-rated based on the remaining days in the policy period.
If you spot an error in your policy regarding covered property, services, or causes of loss, read through this section before contacting your insurer. It may be that an endorsement has amended the error.
As you review your policy documentation, you may notice several terms printed in bold. These terms are likely defined in a glossary included in your policy. Some portions of your contract might feel like a dense forest of insurance jargon. The glossary is a great resource if you ever feel lost while reading one of those passages.
Any insurance policy can be overwhelming if you take it as one giant tangle of technical legalese. Your policy will feel much more manageable, however, if you look at its various parts and address only those sections applicable to your current question.
If you can understand the basics of policy composition and the information each section provides, you are well on your way to a fuller, more usable comprehension of your insurance coverage.