Life Cycle of an Insurance Policy

Insurance policies provide protection against a range of unexpected circumstances -- including sickness, an auto accident, a house fire and flooding -- as well as for one ultimately expected experience: death. The life cycles of all types of insurance policies are similar.

Insurance policies require an application and premium payment to become effective. On the application, an applicant is asked a series of questions that help the insurance underwriter decide on the level of risk involved with insuring the individual.

Policies may be approved, denied or accepted with changed provisions. Policies may be rated as an exceptional risk, demanding a higher premium, or may include exclusions, allowing a company to deny claims in certain specific situations.

When a catastrophe hits and you need to file a claim, insurance companies require basic information about what happened to thoroughly investigate the claim. Insurance adjusters then decide if the claim is valid and how much payment the contract requires.

Insurance companies pay out claims either to the individual or to a service provider based on the terms of the contract. If policy premiums have been paid with pretax dollars or paid by an employer, the payout will be taxable. Premiums that were paid with after-tax money are tax free.