Introduction to Life and Health Insurance

Alabama Life and Health Insurance Producer Exam

Purpose of Life and Health Insurance

• To protect your greatest asset

• To offset risk

Life Insurance

A contract (or policy) that will pay a stated amount to a beneficiary upon death of the insured.

Functions Include:

• Funeral Protection

• Survivor Protection

• Estate and Creation and Protection

Funeral Protection

Life policy death benefits grew to cover the funeral and the final expenses of the deceased.

Survivor Protection

Pay final medical expenses, cover short-term debts and even installment loans in addition to funeral costs.

Estate Creation

“I want to leave an estate large enough to enable my family to do those same things in my absence.”

Only Life insurance can instantly create an estate

Estate Protection

Life insurance can provide that big check at exactly the right time to protect hidden wealth.

“If I leave my kids, my farm, my business or a bunch of assets, the IRS is going to want a big check”

Health Insurance

• A common factor in most American households

• Prepaid Medical Insurance became almost universally available through Blue Cross and Blue Shield

Disability Income

• Employers offered partial salary continuation following a worksite injury or illness that might prevent us from working either permanently or temporarily

Your ability to earn a paycheck

Your greatest asset

Risk

• Exposure

• Uncertainty

• Uncertainty or Chance of Loss

Speculative Risk

• The risk is actually created

• The opportunity for either gain or loss

Pure Risk

• Risk or Loss is not created; it is inherent

• If you are alive, there is a risk that you might die prematurely, get sick or become disabled

Risk Managers

What policyowners view producers as this. Policyowners look to producer to show them where insurance is the most practical and cost effecient method of offsetting risk.

Risk avoiding

Inappropriate method of coping. Avoiding something to prevent risk and loss from occurring.

Reducing Risk

• Giving up something to lower risk

• Insurance companies would award your decision with lower rates

Retaining Risk

Idea of accepting deductibles or self-insuring

Transfer of Risk

• How insurance works by transferring risk from your client to an insurance company via an insurance policy

Insurance

A method by which your risk is transferred to a company, which for consideration, assumes your losses up to a predetermined limit.

Consideration

• Insurance companies are in the business to make money

• Something of value

• Both money and statements on the application are elements of this

Predetermined Limit

• Death Benefit

• Face Value

• What the insurance company knows exactly what they are on the hook for the event of the policyholder’s deathin

Adverse Selection

The tendency of poor or bad risks to buy more or large amounts of insurance

Law of Large Numbers

Tells us that it is possible to accurately predict what will happen to a large group of similar risks/individuals.

Mortality Tables

Used to predict life expectancy for life insurance

Morbidity Tables

Predict likelihood of sickness or accident for a particular group.

Stock companies

• In the business to earn money for its stockholders

• Pays dividends to stockholders

• Nonparticipating company

Non participating company

A company that does not return any surplus monies to policyowners

Mutual Companies

• Policyholders elect the board of directors

• Surplus is distributed to policyowners as dividends

• dividends paid to policyowners are viewed as a return of overcharge

• Dividends paid to policyowners are not taxable

• Participating company

Participating Company

policyowners participate in the profitability of the company.

Fraternal Benefit Societies

• Religious and social fraternities to offer small amounts of insurance to their members.

• Operated for the benefit of their members, they have no stockholders and they pay dividends to policyowners

• Before you can purchase insurance from a Fraternal, you must join the fraternal.

Risk Retention Groups

Form of group self insurance for business liability risks.

Lloyd’s Associations

• Not truly a company

• A place where several hundred insurance syndicates or associations meet to underwrite risks

• Famous for assuming highly unusual risks

• Primarily are engaged in insuring in transit, which is known as Marine insurance.

• Regarding to life and health insurance, they reinsure the exposure of smaller Life and Health companies thus spreading the risk and increasing the reserve capacity of companies to provide insurance.

Government Insurers

• Biggest insurer on the planet

• Provides Social Security and Medicare

• Insurance programs available to our servicemen and women as well as for their families

• Federal government involved with insurance for catastrophic losses like floods

• At a state level, Workers compensation is actually sold by the state in some jurisdictions.

• There are risk pools created to help people purchase Health Insurance

Domestic Company

A company chartered in the same state

Foreign Company

A company chartered in another state

Foreign Company

A company chartered in another country

Admitted Company

A chartered Authorized Company

Due Diligence

• To ascertain the fiscal soundness of the companies with which you place your clients

  • There are a number of independent rating services that do this

    • Standard and Poor’s Insurance Rating Services

    • Moody’s Investor Service and the A.M. Best Company

• Initial fact finding interview with your client to truly understand their economic position, their financial objectives, and their willingness (and ability) to take risk

• Your recommendations should obviously match the client’s needs, and regular reviews should be held to monitor and adapt to important changes in your client’s profile

quite good

On the A.M. Best Scale B+ up to an A+ would be ___

barely marginal

On the A.M. Best Scale C or C- would be

not meet minimum requirements

On the A.M. Best Scale anything below C- would