Policyholder

Published on :

21 Aug, 2024

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A policyholder is an individual or organization that holds an insurance policy and aims to obtain financial protection against the risks that may occur in the future. The policyholder's main responsibility is to pay the insurance premiums and comply with the terms and conditions of the policy.

By purchasing an insurance policy, the policyholder transfers the financial burden of a potential loss to the insurer in exchange for paying regular premiums. The policyholder can then have peace of mind, knowing they are protected against financial loss. In addition, the insurance policy can provide the policyholder with legal protection in case of a covered event, including legal representation and defense against claims or lawsuits.

Policyholder Meaning

A policyholder is an individual or entity that owns an insurance policy and is covered by its terms and conditions.
Policyholders are responsible for paying premiums to maintain their insurance coverage and are entitled to receive benefits from the policy when certain events occur, such as illness, injury, or death.
Policyholders have a legal right to review and understand the terms of their insurance policy, including coverage limits, deductibles, and exclusions.
In the event of an insurance claim, policyholders have the right to expect fair and timely claims processing and resolution from their insurance company.

Policyholder Explained

A policyholder is an individual or entity that holds an insurance policy issued by an insurance company. An insurance policy is a legal contract between the policyholder and the insurer. The policyholder agrees to pay a certain amount of money, known as an insurance premium, to the insurer in exchange for financial protection against specific risks, such as accidents, illnesses, property damage, or loss.

The responsibility of a policyholder goes beyond just paying the premiums. Policyholders also have to comply with the terms and conditions of the policy, including providing accurate information when applying for insurance, reporting insurance claims promptly, and cooperating with the insurer's investigation. Failure to meet these obligations can result in the insurer denying coverage or canceling the policy. Therefore, it is important for policyholders to understand their rights and obligations under the insurance policy and to seek professional advice when needed.

Examples

Let us look at policyholder examples to understand the concept better:

Example #1

John wanted to protect his home from natural disasters like floods or fires. To achieve this, he purchased homeowners insurance from an insurance company. As the policyholder, John paid monthly premiums to the insurer in exchange for coverage that would protect his home and personal belongings and provide liability insurance in case someone got injured on his property.

One day, John's house was flooded, and he immediately contacted his insurance company to submit a claim. The insurer responded by assigning an adjuster to assess the damage and determine the cost of repairs. Following the policy terms, the insurer paid for the necessary repairs to John's home.

Essentially, John paid for a service providing financial protection during catastrophic events like floods. As the coverage provider, the insurer fulfilled its obligation to John as the policyholder by covering the repair costs according to the policy terms.

Example #2

McDonald's is a well-known fast-food restaurant chain with thousands of locations worldwide. McDonald's purchases insurance from State Farm, the largest property and casualty insurance company in the United States, to protect its business from potential risks such as natural disasters, theft, and liability claims.

As a policyholder, McDonald's pays regular premiums to State Farm in exchange for financial protection against potential losses. If any covered events occur, such as a fire or a customer injury, McDonald's can file a claim with State Farm to receive financial compensation for their losses. As a large insurance provider, State Farm ensures that its policyholders understand their coverage and that their claims are handled promptly and fairly.

Policyholder Surplus

The amount of money an insurance company has available to cover claims and expenses after considering its liabilities and capital is known as policyholder surplus in the insurance industry. It is determined by deducting liabilities from assets.

The policyholder surplus is significant because it represents the cash available to the insurance company to pay claims for a catastrophic loss, such as an earthquake. The greater the policyholder surplus, the insurance company is regarded as more financially secure. As a result, this surplus is typically used to assess an insurance company's solvency and assist regulators in ensuring it meets its financial obligations.

Furthermore, rating agencies use it as a key metric in determining the company's credit rating, and investors use it to evaluate its financial strength.

Policyholder vs Insured

The difference between the policyholder and the insured is as follows:

Policyholder	Insured
An individual or organization that possesses an insurance policy.	Insured is the person or entity whose risk of loss is covered by the insurance policy.
Pays the premiums and is in charge of keeping the policy in good condition.	Receives financial protection from the policy.
Usually, the same person or entity as the insured.	It can be different from the policyholder.
Example: In commercial insurance, the policyholder is generally the company.	Example: In commercial insurance, the insured can be the company or its employees, customers, or other stakeholders.

Frequently Asked Questions (FAQs)

What is a policyholder trust?

A policyholder trust is a legal entity that holds assets on behalf of an insurance company's policyholders. A policyholder trust aims to protect the interests of policyholders if the insurance company becomes insolvent or cannot meet its financial obligations.

What are policyholder dividends?

Policyholder dividends are payments made by an insurance company to its policyholders to share profits. Dividends are typically paid in cash but can also be paid in stock or other securities. Insurance companies use policyholder dividends to return a portion of their profits to policyholders in appreciation for their support and loyalty. Dividends are typically paid from the company's surplus, which is the money left over after paying claims, expenses, and other financial obligations.

What are policyholder liabilities?

Policyholder liabilities refer to the financial obligations an insurance company owes to its policyholders, including death benefits, claims, surrender values, and policy loans. Insurance companies must maintain adequate reserves to cover these liabilities and adhere to regulatory requirements and accounting standards to ensure proper reporting.