Legal Definitions - policy reserve

A policy reserve is a fund of money set aside by an insurance company to cover future liabilities. It represents the difference between net premiums and expected claims for a given year. This type of reserve is kept especially by life insurance companies.

For example, if an insurance company collects $100 in premiums from policyholders and expects to pay out $80 in claims, it will set aside $20 as a policy reserve to cover any unexpected claims or losses.

Policy reserves are important for insurance companies to ensure they have enough funds to pay out claims and meet their obligations to policyholders. They are regulated by state insurance departments to ensure that insurance companies have adequate reserves to cover their liabilities.