Merritt Personal Lines Manual: A Few Basic Concepts

Insurance is designed to m ake a loss whole. In the simplest terms, a loss occurs when things you own are destroyed or reduced in value. If your house burns to the ground, insurance will pay to rebuild it. If the family breadwinner dies, the insurance will provide funds to pay ongoing famil y expenses. The idea is to pay for your actual losses without allowing you to make money. This is what an insurer means by making th e loss whole.

In addition, it's important to note that an insurance policy is a legally binding contract between two parties. One party is the insured person, you, and the other is the insurance company.

As is true with all contracts, an insurance policy describes the rights and obligations of each party. In addition, the policy id entifies how much you must pay to receive those rights. This amount is known as the premium. The policy identifies how much the insu rance company is obligated to pay, if certain events should occur. The maximum amount an insurance company will have to pay is the l imit of insurance.