life insurance basics 1

peril

cause of loss

• pecific events causing loss

  • fire, accident, illness, death

risk

uncertainty of loss

hazard

conditions increasing loss likelihood

• physical: tangible conditions

• moral: dishonest character/intentional

• morale: Careless attitude due to insurance

losses

unintentional decrease in value

• direct: immediate damage from peril

• indirect: Consequential losses

• must be definite and measurable

risk sharing

spreading among multiple parties

risk transfer

moving risk to another party (insurance)

risk avoidance

eliminating risk-causing activity

risk reduction

decreasing loss likelihood/severity

risk retention

keeping risk (deductibles, self-insurance)

risk prevention

actions to eliminate loss potential

adverse selection

selection against the insurance company by higher-risk individuals

state insurance departments

issue licenses, enforce regulations

• primary regulators

NAIFA

National Association of Insurance and Financial Advisors

• professional association for agents

• creates model laws and regulations

NAIC functions

• promotes uniform state laws

• creates model regulations

• protects consumer interests

• preserves state regulation

NCOIL

legislative organization focusing on insurance

what is insurance?

the transfer of risk through legal contract from policyholder to insurer

• insurance contracts create an immediate estat

insured

person receiving insurance protection

insurer

company providing coverage and assuming risk

premium

payment made for insurance coverage

policyowner

person who transfers risk to insurer

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 receive dividends

• policyholders elect board of directors

underwriting

reviews applications, assigns risk classifications

producers (agents/brokers)

sell insurance products

underwriters

assess and classify risks

actuaries

calculate rates and reserve

adjusters

investigate and settle claims

brokers

• represent the buyer

• cannot bind coverage

• must work with agent/company

key legislation

Paul v. Virginia (1868): Established state regulation • McCarran-Ferguson Act (1945): Returned regulation to states • Gramm-Leach-Bliley Act (1999): Privacy requirements • Fair Credit Reporting Act (1970): Consumer protection

all insurance contracts must have all four essential elements to be valid

value vs indemnity

insurable interest

• means financial/economic interest in the subject of insurance

• must suffer financial loss if insured person/property is damaged

• timing requirements differ by insurance type

key features that make insurance contracts unique

aleatory contract

• unequal exchange pssible

• benefits based on uncertain event

example: pay $1,200/year fr $500,000 cverage

contract of adhesion

• written by insurer only

• take-it-or-leave-it basis

• ambiguities favor insured

unilateral contract

• only insurer makes enforceable promise

• policyholders don’t promise to pay premiums

• insurer can cancel if premiums are unpaid

personal contract

• between insurer and specific persn

• can’t transfer to another person

• exception: life insurance allows assignment

agents

• represent insurer

• can bind coverage

• have fiduciary responsibility