What is an Insurance Policy?

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When looking to purchase any type of insurance it is important to have a basic understanding of exactly what is insurance. Essentially, insurance is a legal contract between two parties, the insurer and the insured. The insured will receive financial protection in accordance with the specific terms of the insurance contract from the insurer, which is usually an insurance company. The insureds pay premiums to the insurance company which allows the insurer to pool the risks of the insureds’ risks to enable more affordable payments. 

Hedge Against Risk of Financial Losses 

Insurance policies hedge against risk of financial losses of varying sizes. Especially those that result from damages to the insured’s property or bodily injury to the insured. The policy may also cover liability for injury or damage suffered by a third party due to the actions of the insured. 

Different Types Of Insurance 

There are various types of insurance policies which are available for purchase by any individual or business. The most common insurance policies for individuals are auto, homeowners, health and life. Usually individuals living in the United States have at minimum one of the above-mentioned types of insurance. Auto insurance is legally required for all drivers. 

Insurance Polices for Businesses 

Businesses face certain types of risks which are not usually faced by individuals. Also, the risks businesses face can be specific to the particular type of business. For instance, a fast food eatery needs insurance which covers injury or damage related to use of a deep fryer for cooking. In contrast, a car dealer is not at risk of this particular risk but will require coverage for injury or damage occurring during test drives. Other insurance policies that address specific needs of particular types of businesses are coverage for medical malpractice, kidnap and ransom and errors and omissions insurance, also known as professional liability insurance. 

Components of an Insurance Policy 

There are three essential components of any insurance contract: the premium, the policy limit and the deductible. It’s important to understand these. Having a a comprehensive understanding of these components will help in choosing the best policy for your specific situation and needs. 


The premium for an insurance contract is the price the insured pays to obtain coverage against risk of loss or injury by the insurance company. Usually the premium is paid on a monthly basis. The premium amount paid is determined based upon the risk profile of the individual or business. One of these factors used by an insurance agency perth amboy nj to determine a risk profile is credit worthiness. 

Policy Limit 

The maximum amount an insurance company will pay under an insurance contract is known as the policy limit. The policy limit may be set for each period or per injury or loss. It can also be set for the entire lifetime of the insurance policy, which is known as a lifetime maximum. Usually, higher limits will require larger premium amounts to be paid by the insured. 


Generally an insured will be required to pay a specified amount from his or her own funds before an insurer will pay a claim. This amount required of the insured is known as a deductible. A deductible is used to deter large volumes of insignificant and small claims which can be cumbersome and costly for an insurer.


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