A simple guide to understanding your insurance contract

What is an insurance contract?

An insurance contract is an agreement between a client (the main insured) and an insurance provider where the client pays a monthly premium to the insurance provider, who will then be legally obligated to provide the client with a (lump) sum of money, on the occurrence of a specified insured event.

There are two main types of insurances: life insurance and non-life insurance. Life insurance covers events such as death, disability, serious illnesses, loss of income, whereas non-life insurance mainly covers loss of or damage to possessions, such as cars and property.

Here are some of the terms you can expect to see in a typical insurance contract:  

• Waiting periods: This is the time between when you have signed and when your cover under a policy comes into effect. This will determine when you can start claiming from the benefits of your policy. For example, there might be a waiting period of six months on your funeral policy, which means your benefits will only be paid out once the first six months of your policy has passed (provided you pay all your premiums,keeping your policy up to date).
• Insurable interest: The interest a person/company has in insuring something or someone. When you buy a property, you take on insurance for your house, not your neighbour’s, because you only have interest in the financial loss if there is damage to your house.
•  A declaration (also known as the policy schedule or certificate of insurance): This section of the contract states who is insured and what risks or items are covered under the policy.
• Terms and conditions: The policy terms and conditions describe how the policy will operate and specify what is covered and what is not covered, what the insurance company promises to do and what the client is required to do in order to have no challenges at the claims stage. It’s important to comply with the terms and conditions of the policy to avoid being in breach of the contract with the insurer.
• Sum insured: This is the maximum amount the insurer will pay or settle in the event of a claim. For instance, with life cover, this would refer to the amount that the insurer will pay your nominated beneficiaries in the event of the main insured member passing away.
• Excess: This applies to non-life insurance and refers to the agreed amount of money you pay the insurer as a contribution towards the replacement, repair or restoration of the insured item, such as a car.
• Exclusions: This refers to the nature of incidents or items that are not covered by your policy. It’s important for you to read through the exclusions and understand what you aren’t covered for. If you need a more detailed explanation on the any of the exclusions, you should contact your insurer or broker for more information.
• Third-party liability: For non-life insurance, this cover compensates a third party on your behalf if you are legally found to be responsible for loss or damage of the third party’s property or for the injuries or death of the third party. For example, if your car was involved in an accident with another vehicle, it would pay towards the other vehicle’s damage repair.
• Repudiation: This refers to a decision by the insurer to refuse to pay a claim for a particular reason, which could include a breach of contract by the client, the event which led to the loss or damage to the insured item not being covered or for instance where the client claims for a specific health condition that is not covered in terms of the policy.  
• Ex gratia: This is goodwill payment that the insurer is not compelled to pay in terms of the insurance policy.
• Extensions: This is additional cover or ‘optional cover’ that can be added to the standard non-life insurance cover but at an additional premium.

TOP TIP: Before you enter into any agreement, make sure that you fully understand the terms and conditions of your policy, and if you have any questions or need clarity, speak to your financial adviser, broker or insurer.