An Insurance Contract has certain unique features not found in other financial contracts. Understanding these unique features in an insurance contract can help you understand the value of the policy as well as help make you a better shopper.
The four standard features which all financial contracts possess such as:
- Offer and Acceptance: “I will give you x if you give me y” which are of the same value.
- Consideration: This is the payment or value given in exchange for the product or service sought.
- Legal Purpose: You can’t have a contract for illegal transactions
- Competent Parties: All parties must legally be able to enter into the contract. Typically this means they must be of legal age, of sound mind and not under the influence of a psychoactive drug.
Additionally, insurance contract has some features that are unique.
Conditioned on an event happening not the exchange of payment.
Think about buying a car. If you want to buy a car from a dealer that costs $25,000, you will need to give that dealer $25,000 and they will give you the car.
If you give them $50 and they give you the car, then they would be giving you a gift. On the other hand, if you gave them $25,000 and they give you a new set of floor mats, you would know you were ripped off.
This isn’t the case with insurance. With an insurance contract, you could give an insurer $50 for a car insurance policy and have an accident the next day causing your new car to be a total loss.
As long as your contract stated “full replacement” the insurance company would give you $25,000 to pay off your loan and/or buy a new car. In legal terms, the fact that the contract is exercised when an event occurs is known as an aleatory contract.
Insurance Contracts are not negotiable
Earlier, maybe you were thinking that you could get a car dealer to sell you a $25,000 car for $50 because you are an amazing negotiator. If not $50 maybe down to $20,000.
This is possible with cars, not for insurance though. Insurance is known to be a contract of adhesion meaning, it is what it is, take it or leave it.
There is no negotiating. That being said, not all policies are the same. Some policies may have more favorable terms than others. It is your job to know your choices and Decision Tree Financial can help you navigate these for you.
Insurance Contracts are unilateral
Cannot paying an insurance premium hurt your credit like not paying a car payment. The answer is “NO” because you are not legally obligated to pay the premium.
If you stop, you may not have coverage but the insurance company isn’t going to sue you. This is because only the insurance company is legally obligated to perform (i.e. – pay a claim) while the contract is in force. This is what a unilateral contract means.
When you buy an insurance policy, know that it is a contract. You as a policy owner have a legally binding guarantee to receive compensation from the insurance company if the covered event occurs.
It is up to you to understand what is covered and what is not in all insurance policies you own. Generally speaking, the more the premium, the more that is covered.
The worst thing that can happen to you is to believe you are covered, have something happen causing you a significant financial loss and find out after that what you thought had your back didn’t in that situation.
Let Decision Tree Financial do an evaluation of your insurance coverage. Contact us to set a time. The internet and technology allows us to work with clients from all across the USA.