Insurance policies protect you, your property, and assets—as well as your loved ones. But how do they work, what are the best kinds, and how can you sign up for one? Read on to learn more.
6 min read
“No risk, no fun” goes the saying, and life is certainly full of risks. That’s why it’s important to protect ourselves, those we care about, and our property with insurance. From car insurance, homeowners’ insurance, life insurance, pet insurance, and much more—the insurance business is packed with offers for extra protection based on your needs. But let’s start with the basics—what is an insurance policy and how does it work? Read on to find out all this and much more.
What is an insurance policy, and what kinds of contracts are there?
An insurance policy is an official document detailing the terms and conditions of an insurance contract. Insurance policy validity is laid down in article 1882 of the Italian Civil Code, which states that an insurance contract must substantiate, upon payment of a premium, the obligation of an insurer to reimburse or cover the cost of the damage. In simple terms, this means that when you file a valid claim, your insurance company needs to pay for it—provided you’ve held up your part of the agreement. From a legal perspective, the insurance contract:
Must always be written out and the scope must be specified as clearly as possible
Is consensual and mandatory, meaning the insured party is subject to certain obligations
Is based on events that are independent of the will of the two parties
A policy also contains information on the following:
How long the insurance coverage is valid
The consequences when you fail to pay the insurance premium
Whether the policy can be sold or inherited
Possible limitations to the insurance coverage, such as a deductible—or the amount that the insuree must pay out-of-pocket for the policy to kick in
The insurance ceiling, meaning the maximum compensation that can be reimbursed by the insurance company
Once you’ve made a request with an insurance company, they’ll prepare a policy proposal for you to review. Unless the insurance contract is signed, you can cancel or terminate the policy with no financial consequences. Unless otherwise stated in the contract, the insurance coverage is valid starting24 hours after it’s been signed.From that moment onward, if the policyholder wants to end the contract, they’ll need to make a formal request to withdraw from the contract. The withdrawal terms depend on the insurance company and the type of policy taken out.How many parties does an insurance policy include? In addition to the insurance company (or insurer), three parties are officially involved in an insurance policy, though they often overlap:
The policyholder (the party that pays for the policy)
The insured (the party that benefits from the policy)
The beneficiary (the party that receives compensation in the event of a claim) Often, this is the same person as the policy holder, but in some cases—like a life insurance policy—the beneficiary will be the surviving spouse or children.
There are many different types of policies and types of contracts. In general, policies are grouped into two major areas:
Non-life insurance policies: These types of policies protect the insured party against events that may damage property, persons, or assets.
Life insurance policies: These are policies taken out to guarantee a capital sum to the chosen beneficiaries specified in the insurance contract in the event or events specified in the policy.
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Non-life insurance policies protect property, persons, and assets and can be broken down into the following categories:
Insurance for damage to property: This covers against events such as theft, fire, or natural disasters—which may cause damage to material goods, such as homes or vehicles.
Personal injury/disability insurance: This protects the insured and his or her family from injury, illness, or other health-related situations that may limit their ability to work.
Insurance on assets and expenses: This coverage protects the insured against financial or commercial risks, such as economic hardship, or other difficulties that may trigger a detrimental change in assets. This category includes policies that cover manufacturing assets, machinery, or other work tools.
Non-life-insurance policies also include third-party liability insurance, which protects against damage caused to third parties as a result of his or her conduct. Third party motor insurance is an example of this type of insurance, and is required by law in Italy—and many other countries.
Life insurance policies
Life insurance can be broken down in the following categories:
Life policies: Here, a capital sum or an annuity is paid by the insurance company to the insured if he or she is still alive when the contract expires.
Death policies: With this policy, the insurance company undertakes to pay compensation to the beneficiary of the contract in the event of the insured party’s death. These types of policies can be temporary, meaning the insurance company only pays if the insuree’s death occurs during the contractual period—or whole life, meaning the insurance company pays no matter when the insuree’s death occurs.
Mixed policies: Here, the insurance company must pay the capital sum if the insured party is still alive when the insurance contract expires. They’ll also need to pay a portion of the capital sum to the beneficiary in the event of the death of the insured party during the contractual period.
Index-linked policies: These are insurance products whose result is tied to the performance of a particular index fund. These policies have a predetermined maturity, and the policyholder usually pays a one-time premium in exchange for a capital sum equivalent to the premium paid. This capital sum is revalued based on the increase recorded by the reference index during the contractual period. The invested capital is therefore returned at maturity.
Unit-linked policies: Here, the insurer’s performance depends on the performance of the investment fund shares, which can be held internally or externally.
Variable payout policies: These are life insurance contracts in which the insurance premium paid by the policyholder along the insurer’s commitments are revalued on an annual basis according to the performance of a separately managed fund into which the premiums collected and invested by the insurance company are deposited.
More specifically, life insurance is grouped into six branches:
Branch I: Insurance based on the length of a person’s life. This is the most traditional form of insurance
Branch II: Marriage and birth insurance
Branch III: Financial insurance linked to investments (unit-linked, index-linked)
Branch IV: Medical insurance and policies covering dependent policyholders—guarantees an annuity in the event of the loss of full self-sufficiency
Branch V: Capitalization and payment of a capital sum upon maturity
Branch VI: Management of collective funds for the provision of death, life, and employment benefits (this group includes supplementary pension schemes, which offer an additional pension provision to the one provided by the compulsory contributory system.)
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