What is a 'Contract Holder'

A contract holder is an individual or organization owed a return on a contractual obligation. If all parties meet the terms of the contract, the contract holder receives the full benefits outlined in the contract. In broad terms, a contract holder owns a promise of a financial return on a specified date, usually in return for something of value. 

In the insurance industry, the contract holder is usually the policyholder.

BREAKING DOWN 'Contract Holder'

In insurance, the policyholder is the contract holder. The insurance company promises to provide various financial benefits in return for a regular payment from the policyholder. The financial benefit may be a death benefit in a life insurance policy, partial payment of medical bills in a health insurance policy, and paid replacement in a property liability policy.

An employee who receives health insurance as an employment benefit contributes to a group policy. However, in that case, the employer who purchases the group coverage from the insurer serves as the contract holder, since the premiums and benefits technically flow through an employer’s human resources department.

In finance, a bank issuing a mortgage becomes a contract holder, exchanging the cash necessary to purchase real estate in exchange for a collateralized loan. The contractual terms of the loan, such as the interest rate, payment schedule and final repayment due date, describe the benefits owed to the contract holder. 

In some cases, the contract holder reserves the right to transfer the benefits in whole or in part to another party, such as when a bank sells a block of mortgages to a financial services company. In insurance, the selling of policies to other entities is reinsurance.

Reinsurance is insurance for insurers or stop-loss insurance for these providers. Through this process, a company may spread the risk of underwriting policies by assigning them to other insurance companies. The primary company, who originally wrote the policy, is the ceding company. The second company, who assumes the risk, is the reinsurer. The reinsurer receives a prorated share of the premiums. They will either take on a percentage of the claim losses or take on losses above a specific amount.

Contract Holders and Misrepresentation

In the context of insurance, contract holders exchange premiums for contractually obligated benefits. Any individual or group that purchases insurance would be considered the contract holder. 

The terms of a contract govern the conditions under which the contract holder receives benefits. If the contract holder breaks one or more provisions or terms of the contract agreement, they may forfeit some or all of their benefits. For example, a contract of an automobile insurance policy must abide by many provisions contained in the insurance policy to collect on claims. 

Policies typically give insurers recourse to deny claims if insured parties make substantive misrepresentations or conceal essential information when they apply for coverage. If an applicant for an automobile insurance policy failed to mention that they had a child of driving age living in the household, the insurance company could legally void their rights as a contract holder if the child got into an accident.

Insurance companies will void or limit benefits in cases of concealment or misrepresentation. Misrepresentation involves actively providing incorrect information to an insurance agent when purchasing a policy, while concealment technically consists of neglecting to provide information that would change the terms of the policy.

RELATED TERMS
  1. Cooperation Clause

    An insurance contract clause that requires the policyholder to ...
  2. Traditional Whole Life Policy

    A traditional whole life policy is a type of life insurance contract ...
  3. Classified Insurance

    Classified Insurance is coverage provided to a policyholder that ...
  4. Insurance

    Insurance is a contract (policy) in which an insurer indemnifies ...
  5. Continuous Contract

    A continuous contract is a reinsurance contract that does not ...
  6. Net Line

    A net line is the amount of risk that an insurance company retains ...
Related Articles
  1. Insurance

    How To Easily Understand Your Insurance Contract

    Understanding your insurance contracts can go a long way in making sure that your advisor's recommendations are on track. Learn how to read yours today.
  2. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  3. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  4. Insurance

    Bundle Your Insurance for Big Savings

    Bundling your insurance can save you money and time. Read on to see how to get the most out of multi-line insurance discounts.
  5. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  6. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  7. Financial Advisor

    Mutual vs. Stock Insurance Companies

    Learn about the differences between stock and mutual insurance companies and which is best for you as a policyholder.
  8. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  9. Insurance

    What To Do If Your Insurance Won't Pay

    Before paying for coverage, find out what you need to do to ensure you get paid.
RELATED FAQS
  1. What is the main business model for insurance companies?

    Read about the most important components of an insurance company business model, such as risk pricing, investing and claims ... Read Answer >>
Trading Center