Definition: Insurance
A written Instrument that involves the transfer of risk fromone party to another through a legal contract.
Helps reduce the financial uncertainty of the policyowner with regard ot possible future losses.
Definition: Applicant/Policy Owner
Responsible for transferring chance of possibility of loss to another party.
Definition: Premium
Small fee applicant/policyowner pays for large amount of coverage.
Note: Insurance Polices
Contracts of Indenity
Definition: Risk
Uncertainty or chance of financial loss.
Definition: Pure Risk
Only type that may be insured since it involves a chance of loss only. Must be measurable, predictable, and not catastrophic.
Definition: Speculative Risk
May not be insured since it possesses chance for loss and gain.
Definition: Insurable Event
Any unknown event (Past, present, or future), which may injure or create a liability against another person.
Definition: Exposure
A Condition that maybe hazardous by nature with regard to an insured' operations or activities.
Note: Risk Management
Accomplished by:
1) Detecting - potential loss exposure
2) selecting - method or tool to reduce risk
3) executing - a course of action
4) periodically reviewing - the measures taken.
Note: Methods of Risk Management
Avoidance, Retention, Sharing, Reduction, and Transfer
Definition: Peril
Cause of Loss.
Primary: Premature Death
Definition: Hazard
Increases chances of a loss occurring.
Primary: Premature Death
Note: Types of Hazards
Physical Hazards - Slippery Floors, Icy Steps
Moral Hazards - Dishonest actions by a policyowner/insured
Morale Hazards - driving under the influence.
Definition: Life Insurance
Transfer of Risk of Premature death from one party, or policyowner/insured, to another party, Insurer.
Valued type of contract; pays stated amount upon death.
Instantly creates funds for a named beneficiary; an estate.
+Indemnify/attempt to "Make Whole" a
Note: Specifications of Life Insurance
1) parties between whom the contact is made
2) the life to be insured
3) insurable interest of the contract owner if he/she is not the insured
4) risks insured against (life, disability, medical expenses)
5) the period during which the insurance is to con
Definition: Party in Life Insurance Contract
PolicyOwner
Responsible for the payment of Premiums and possesses all ownership rights of the contract.
Definition: Party in Life Insurance Contract
Insurer
Issues the policy once the application is approved.
Definition: Party in Life Insurance Contract
Third Party Ownership
A PolicyOwner is a different person than the individual who is insured.
Think of wife owning a policy covering her husband or a business owning life insurance on a key employee.
Note: Costs associated with Death
Funeral & Burial Expenses
Estate Tax Liability
Debt Obligations
Outstanding Medical Expenses Incurred prior to Death
Attorney or Probate Fees
Definition: Insurable Interest; Life Insurance
+Individuals may not purchase life insurance covering another person unless he/she possesses an insurance interest in that person; financial or economic.
+Must exist at time of application; at minimum when the policy is issued.
+Both parties must consent.
Definition: Adverse Selection
Process that involves the danger to which an insurers is exposed when approving more bad risks than good ones.
+tendency of poorer risks to seek insurance coverage.
+All insurers attempt to reduce or avoid adverse selection by throughly underwriting all i
Note: Personal Uses for Life Insurance
Final Expenses
Estate Taxation funds
Funds for survivors to life on
Education expenses
Provide funds to pay off a debt
Supplement retirement income
Charitable contributions
Business situations.
Note: Determining Life Insurance Needs
Human Life Value Approach
Determining the value of an individual's earning potential over a period of time
+(Projected Earnings - Expenses) x Years to Retirement in Present Value Form
Note: Determining Life Insurance Needs
Needs Approach
Determining an individual/family financial goals & objectives
+Factors: Educational goals, emergency funds, bequests, charitable gifting, retirement income goals, ages, wages, health history, tax advantages.
+Focus - determining lump sum needs mixed with
Note: Determining Life Insurance Factors
Types
Mortality
Interest
Expenses
Definition: Determining Life Insurance Factors
Mortality
Determined from a mortality table which provides an indication of the probability of death of an individual at a particular age; death rate
+Greatest Effect on Premium Calculations
+Commissioners Standard Ordinary Mortality Table.
Definition: Determining Life Insurance Factors
Interest
Reflection of an insurer's return on their investments.
Definition: Determining Life Insurance Factors
Expense Factor
Derived from the funds the insurer pays out:
1) Death Benefits Paid
2) Commission or Compensation to producers/employees
3) Administrative Costs
Definition: Life Insurance
Surrender Charge
A fee levied against a policyowner by the insurer in the event the policy-owner surrenders hiss or her policy before the end of a predetermined surrender charge phase.
+Must be clearly outline.
Definition: Life Insurance
Gross Annual Preimum
Charged by an insurer;
compromised of mortality, interest, and expenses factors
Definition: Life Insurance
Net Single Premium
Comprised of Mortality & Interest Factors
Definition: Insurance Company Underwriting Team
Set standards for accepting & declining applicants
+Assess: age, health history, occupation, insurable interest, and overall degree of exposure of applicant.
Definition: Insurance Company Marketing & Sales Team
Designs products to satisfy consumer needs in order to sell such products to consumers
Definition: Insurance Company Actuarial Team
Calculates premium rates, reserves and persistency in order to make sure insurance operations are conducted soundly.
Definition: Insurance Company Claims Team
Investigates, processes, and settles claims under life and health products.
+Any person except a public enemy may be an insured.
Note: Type of Insurers
According to Domicile
According to Ownership
According to Authorization
Definition: Type of Insurers; According to Domicile
Domestic Insurer
One which has its principal or home office in a state where it is authorized.
Definition: Type of Insurers; According to Domicile
Foreign Insurer
One that is authorized in one state but its charter or principle office is in another state.
Definition: Type of Insurers; According to Domicile
Alien Insurer
Authorized in any stat within the U.S. But it's principal office is located outside the country.
Definition: Type of Insurers; According to Ownership
Mutual Company
Owned by it's policyholders.
+Issues participating life insurance policies
+Allows all policyholders to share in its divisible surplus
Definition: Type of Insurers; According to Ownership
Stock Company
Owned by it's Stockholders
+Issues nonparticipating policies.
+Any profits realized are distributed to shareholders/stockholders.
Definition: Type of Insurers; According to Ownership
Demutualization
Process whereby a mutual insurer becomes or converts to a stock company.
Definition: Type of Insurers; According to Authorized
Authorized Insurer
AKA: admitted Insurers
Allowed or authorized to conduct insurance business in a particular state
Definition: Type of Insurers; According to Authorized
Unauthorized Insurer
AKA: Non-admitted company
Not permitted nor allowed to conduct insurance operations in particular state.
Note: Insurance Classifications
Fraternal Associations
Reciprocals
Lloyds Organization
Self-Insuring
Risk Retention Groups
Surplus Lines
Definition: Insurance Classifications
Fraternal Organization
Aka: benevolent societies or social organizations
+provide insurance only for their members.
+operate on lodge system; exempt from federal income and state taxes
Definition: Insurance Classifications
Reciprocal
Unincorporated organization in which all members insure one another.
+Managed by attorney-in-fact (manager), who attempts to secure additional subscribers
+Managers: collect premiums
Definition: Insurance Classifications
Lloyds Organization
Group of individuals who share risk or underwriting exposures.
+if Losses occur they share in the expenses.
Definition: Insurance Classifications
Self Insuring
Individual/Business assumes the total risk of possible losses.
+In order to self-insure, permission must bear granted by a state authority and proof must be provided.
Definition: Insurance Classifications
Risk Retention Groups
Provide product liability coverage to businesses that make up the group
Definition: Insurance Classifications
Surplus Lines
Insurance available to those who need protection but it is not available through private or commercial carriers.
+aka; no traditional insurance market.
+effort must have been made to secure coverage in the authorized market.
Definition: Insurers
Private
AKA; Commercial Insurance Companies
+Owned by private citizens or groups
+Proprietary or Cooperative.
Offers: Individual, Group, Industrial, or Blanket Insurance Policies
Definition: Insurers
Government
Owned & Operated by Federal or State Entity.
+Government insurers may: 1) write insurance to cover perils or 2) write insurance on risks that are insurable
+Typically write insurance to cover catastrophic perils.
Note: Insurer Financial Status and Rating Services
Independent Rating Services Include:
+AM Best Review (A++ to F)
+Moody's Investment (Exceptional to Lowest)
+Standard and Poor's (AAA to D)
+Weiss Research (Excellent to Very Weak)
Note: Insurer Financial Status and Rating Services
Analyze Criteria
+Expense Ratios / Death Claims Paid
+Reserve Adequacy of insurers and the insurer's product mix.
-Not taken into consideration are personal practices.
Note: Principal Marketing & Distribution Systems
The four principal marketing systems:
1) independent Agency system
2) Direct Writers
3) Exclusive Agency System
4) Direct Mail or Direct Response
Note: Producers & They're Various Types
1) Agents who represent the insurer which sponsors them
2) Brokers who represent themselves and the insured
3) solicitors who represent and solicit insurance on behalf of an agent
4) service representatives who are employees of an insurer
Expected to act
Note: Producers
Guilty of Theft
Anyone who divers or misappropriates such funds is guilty of theft:
1) Remit - remit them back to the insurer less any commissions
2) Deposit - funds in a trustee or premium trust account
3) maintain - the funds in U.S. Government Securities or Bonds, or
Definition: Producers
Error and Omission
Producers who has performed an unintentional error or makes an honest mistake has committed a tort; cost of insurance for defensive purposes
Do not cover:
1) fraud or any intentional criminal act committed by a producer
2) actions involving the misuse of
Definition: Premium Collection
Earned Premium
Amount of insurer is entitled to since it provided coverage for a specific period of time.
Definition: Premium Collection
Unearned Premium
Amount that is pro-rated and returned to an insured by the insurer since it was paid and no coverage was provided.
Definition: Concept of Agency
Actual or Express Authority
Def: an agent possesses which is defined or contained in the agent contract or agreement.
+Insurer is responsible for the acts of its agents and producers
+Specifies actual powers and functions of the agent.
+May be in written and oral form.
Definition: Concept of Agency
Implied Authority
Def: Not specifically identified in the agent contract.
+An extension of an agent's regular duties
Definition: Concept of Agency
Apparent Authority
Def: This type of Authority the insurance buying public perceives the agent possesses.