Life and Health Insurance

Agent

An individual authorized to solicit, sell, and transact coverage for specific insurance providers under an agent contract

Broker

A person who represents the insured (client) rather than the insurance company and cannot bind coverage

Claims Department

The department responsible for processing, investigating, and paying claims

Insurance

The transfer of risk through the pooling or accumulation of funds

Insured

The customer who recieves insurance protection under an insurance policy

Insurer

An insurance company that provides coverage and assumes risk

Mutal Insurance Company

An insurer owned by policyholders that typically issues participating insurance policies with potential dividends

nonparticipating policy

A policy that doesn’t provide dividends or voting rights to policy owners

participating policy

a policy that allows policy owners to recieve dividends and elect the board of directors

producer

an individual licensed to sell, solicit, or transact insurance, including both agents and brokers

stock insurance company

an insurer owned by stockholders that typically issues nonparticipating policies

underwriting department

The department responsible for reviewing applications, approving or declining coverage, and assigning risk classifications

Adverse Selection

The tendency of higher-risk individuals to seek insurance coverage more frequently than lower-risk individuals

Hazard

A condition that increases the likelihood of a loss occurring

Law of Large Numbers

The principle that the larger the number of similar risks insured, the more accurately future losses can be predicted

Loss

An unintentional decrease in value due to a covered peril

Peril

The specific event or cause that resulted in a loss

Pure risk

A risk that involves only the possibility of loss, with no chance of gain; tha only type of risk that is insurable

risk

The uncertainty regarding the possibility of loss

Speculative risk

A risk that involves the possibility of both loss and gain; not insurable

contract of adhesion

An insurance contract prepared by the insurance company with no negotiation between the applicant and insurer. The applicant must accept the contract terms on a “take it or leave it” basis.

Consideration

The items of value that each party provides in a contract. The applicant provides material information and premiums; the insurer promises to pay covered claims

Insurable interest

The financial or economic interest that a person must have in the subject of insurance to purchase legally enforcable coverage. A person has an insurable interest if they would suffer a financial loss from damage to or loss of the insured person or property.

Material misrepresentation

A false statement made by an applicant that influences either the insurers decision to accept the risk or the classification and pricing of accepted risk

utmost good faith

The principle that both the policy owner and insurer must disclose all material facts and relavent information, with no attempt to conceal or decieve

Void contract

A contract that has never been legally in force because it lacks one of the essential elements of a contract

voidable contract

a contract that may be set aside by one of the parties for a reason satisfactory to the court

waiver

The voluntary giving up of a known legal right

Stock Insurance Companies

• owned by shareholders

• issue nonparticipating policies

• profits go to stockholders

• publicly traded entities

Mutual Insurance Companies

• owned by policyholders

• issue participating policies

• policyholders recieve dividends

• policyholders elect the board of directors

Fraternal Benefit Societies

• non-profit organizations

• must have a lodge system

• must have ritualistic work

• exist for reasons beyond insurance

Recipricoral Insurers

members insure each other

Risk Retention Groups (RRGs)

Created under federal law for liability insurance

Captive Insurers

owned by a parent company to insure its risks

Paul V Virginia

1868 and established state regulation

McCarran-Ferguson Act

1945 and returned regulation to states

Gramm-Leach-Bliley Act

1999 privacy requirements

Fair Credit Reporting Act

1970 and consumer protection

NAIC

created mosel laws and regulations

NCOIL

legislative organization focusing on insurance

State insurance departments

primary regulators, issue license, and enforce regulations

NAIC Functions

• promotes uniform state laws

• creates model regulations

• protects consumer interests

• preserves state regulation

NAIFA

professional association for agents

Rating Services

Evaluate insurer financial strength

Career agency system

agents work exclusively for one company

Independent agency system (American Agency)

represents multiple companies

personal producing general agency (PPGA)

focuses on sales

Direct selling

The company deals directly with consumers

captive agents

work for one company

independent agents

represent multiple companies

brokers represent who?

represent the buyer

solicitors are what?

not licensed to sell, only refer

Marketing and sales department

increase prospective applicants

underwriting department

reviews applications, assigns risk classifications

claims department

processes and pays claims

actuarial department

calculates rates, reserves, and dividends

producers

brokers/agents who sell insurance products

Underwriters

assess and classify risks

actuaries

calculate rates and reserves

adjusters

investigate and settle claims

What are premiums?

Premiums serve as payment for insurance coverage and constitute part of the policyholder’s considerations

What is the consideration?

consideration is the “binding force” in the contract between insurer and policy owner

What happens if the premium is not paid before the grace period?

The policy will lapse

How are life insurance premiums calculated?

per $1,000 of coverage

What are the big 3 factors in premium calculation?

• mortality factor

• interest/investment factor

• expense factor

what is the mortality factor?

based on mortality tables showing the probability of death at each age

what is the interest/ investment factor?

reflects insurer’s return on investments of premiums

what is the expense factor?

derived from operating expenses, including death benefits, commissions, and administrative cost.

are there any other factors affecting premium cost?

Yes

• age of the proposed insured : older age= higher premium

• sex/gender: women pay lower premiums becuase of longer life expectancy

• health history : poor health increases death and disability

• occupations : hazardous jobs increase risk of loss

• personal activities and hobbies : high risk activities increase risk of loss

• personal habits : tabacco use, DWI/DUI present higher risk

What are the premium types and what do they cover?

• net (single) premium: covers motality cost and interest

• net level annual premium : amount required annually to ensure future benefits

• gross premium : actual premium paid (net premium+ insurer expenses)

• gross annual premium : adjusted for payment over years rather than single payment

What are the different premium funding methods? explain

• single premium funding : one-time lump sum payment covering the entire policy

• fied/level premium : funding premiums are spread evenly over the policy period

• modified premium funding: lower initial premium for a set period, then increases to a higher constant amount

• graded premium funding : begins with lower premiums that increase annualy for a specifiec period, then stablizes

• flexible premium funding : allows adjustable payments throughout the policy’s life

What are the reminders of premiums

• premium mode if the frequency of payments

• a higher frequency = higher total premiums

• policy owners may use their cash value and dividends to pay premiums

• minimum deposit insurance uses policy loans to pay premiums

• an earned premium is the amount an insurer is entitled to for providing coverage

• unearned premium is the amount paid but coverage not yet provided

• reserves are funds insurers set aside to pay current and future claims

What are the cost comparison methods? explain

• interest-adjusted net cost method : considers premiums, death benefits, cash value, and dividends

• surrender cost index : determines the average cost per thousand for a policy surrendered for cash value

• net payment cost index : estimates average annual premium outlay without assuming surrender

• comparative interest rate method : determines the rate of return required on an investment to yeild the same return as a cash value policy

Describe viatical settlements

• enables an individual with a chronic or terminal illness to sell their existing policy to a third party

• original policy owner recieves a percentage of the face value

• the new owner continues premium payments and collects the death benefit

• special license required for viatical settlement providers in most states

• tax-free payments require viator to be chronically or terminally ill

describe life settlements

• sale of existing policy to a third party for more than the durrender value but less than the death benefit

• no requirement for the insured to be chronically/terminally ill

• life settlement brokers must hoold appropriate license

• disclosure requirements inclue the right of rescission within 15 days

• not considered life settlements : policy loans, 1035 exchanges, assignments as collateral