General Insurance Terms and Concepts

General Insurance Terms

  • Insurance: A contract whereby one party (insurer/agent) agrees to indemnify another party (insured/client) against a loss by a specified future contingency or peril in return for payment of a premium.

  • Risk: Uncertainty of a loss.

    • Pure risk: Insurable as it involves a chance of loss only.

    • Speculative risk: Not insurable as it involves a chance of loss or gain, e.g., gambling.

  • Hazards: Events or conditions that increase the chance of loss.

    • Physical hazards: A physical condition, such as medical history, blindness, or deafness.

    • Moral hazards: Involves a lie or morally questionable behavior.

    • Morale hazards: Involves unsafe behaviors under the presumption that insurance exists (e.g., careless actions).

  • Peril: The cause of a loss, including events like fire, accidents, or floods.

  • Law of Large Numbers: Predicts the number of deaths within a similar group of people where the larger the population, the more accurate the predictions become.

Agents and Their Types

  • Captive/Career agent: Works for one company, selling only their products.

  • Independent agent: Works independently, selling products from multiple companies.

  • Domestic agent: Incorporated in the same state where they do business (e.g., California).

  • Foreign agent: Incorporated in a different state but does business in California (e.g., Oregon or Arizona).

  • Alien agent: Incorporated in a country outside the United States (e.g., Canada or England) but does business in California.

  • Fiduciary: A person in a position of financial trust; e.g., an agent collecting premiums must remit them promptly to the insurance company.

  • Appointment: The authorization of an agent/producer by an insurer to represent the company.

  • Authorized/Admitted: Refers to companies, including domestic, foreign, and alien, that must be licensed to conduct business in a state. An authorized company has a Certificate of Authority.

  • Certificate of Authority: A license granted by the state's insurance authority allowing an insurer to conduct business in that state.

  • Expressed Powers: Powers specifically stated and written in contracts.

  • Implied Powers: Powers not specifically stated but assumed necessary to conduct insurance business.

  • Commissioner: A public official responsible for regulating the insurance industry by enforcing insurance laws.

Receipts and Contract Terms

  • Conditional Receipt: A premium receipt that states coverage will be effective either on the date of application or the date of medical examination, whichever is later, provided the premium is submitted with the application and coverage is approved as applied for.

Contract Definitions

  • Consideration: The value given in exchange for the promise to pay benefits.

  • Insurable interest: A financial interest in another person's life, requiring that one must be in a position to lose something of value if the insured dies. Must exist at the time of application.

  • Adhesion contract: A contract offered on a "take it or leave it" basis by an insurer where the insured’s only options are to accept or reject the contract.

  • Aleatory contract: A contract wherein the participating parties exchange unequal amounts.

  • Conditional contract: A type of agreement where both parties must perform certain duties for the contract to be enforceable.

  • Unilateral contract: A contract that legally binds only one party (usually the insurer) to contractual obligations after the premium is paid.

  • Buy-Sell Agreement: A contract that determines what will happen to a business in case an owner or partner dies.

  • Indemnify: To restore the insured to the same condition that existed prior to the loss, with no intent of profit or loss.

  • Utmost Good Faith: Both parties must intend to fulfill the contract’s terms faithfully.

Applicant's Statements

  • Representations: Statements believed to be true to the applicant's best knowledge, often found in application forms.

  • Misrepresentations: False statements or lies.

  • Concealment: The act of hiding the truth or failing to disclose material facts.

  • Warranties: Statements guaranteed to be true; absolute truths.

  • Fraud: A lie intended for financial gain.

  • Underwriting: The process of evaluating risk and determining premiums.

  • Proof of Insurability: Documentation regarding an individual’s physical and/or mental health, character, occupation, lifestyle, etc. Used by insurers to assess risk.

Application Process

  • Human Life Value Approach: Computes probable future earnings of the insured based on:

    • Wages

    • Inflation

    • Years until retirement

    • Time value of money

  • Needs Approach: Predicts the family’s predicted financial needs using the acronym DIME:

    • Debt

    • Income

    • Mortgage

    • Expenses

Parts of the Application

  • I. General Information

  • II. Medical

  • III. Agent's Report

Risk Classifications

  • Preferred: Healthier than standard risk; usually issued policies at a discounted premium.

  • Standard: Considered a normal or average risk; no special conditions required in the policy.

  • Substandard: Higher risk level, requires special conditions to be incorporated into the policy, or the policy may be issued with higher-rated premiums.

Life Insurance Policies

Level Term Life Insurance Policies

  • Term Life Insurance: Pure protection for a specified term; offers the most insurance for the least premium. Coverage remains the same for the term.

  • Annual Renewable Term: Policy renews annually without proof of insurability; premiums increase each year based on attained age.

  • Decreasing Term: Coverage decreases as debt decreases; best for scenarios where the need for protection declines over time.

Whole Life Insurance (Cash Value)

  • Straight Life: Basic policy with a level death benefit; premiums are paid until death or age 100.

  • Limited Pay: Premiums are paid until a certain age or time while coverage remains until death or age 100.

  • Single Premium: Coverage continues until age 100; premium is paid in a lump sum.

Flexible Premium Policies (Cash Value)

  • Adjustable Life: Three parts (coverage, premium, and type of plan) are adjustable; the insured chooses two parts and the insurer chooses one.

  • Universal Life: Provides flexible coverage and premium adjustments; includes two death benefit options (A & B). Offers partial surrenders and cash withdrawals.

  • Joint Life: Covers two or more insureds on the same policy; pays benefits on the first death.

  • Survivorship Life: Also covers two or more insureds but pays benefits on the last surviving insured.

Group Life Insurance

  • Definition: A master contract usually held by the employer; certificates are provided to employees.

  • Underwriting: Done as a group.

  • Contributory: Premiums paid by members.

  • Non-contributory: Premiums paid by the owner/employer.

  • Conversion: Allows for transition to an individual policy within 31 days; policy amount is the same but premiums may be higher based on attained age.

Special Coverage Policies

  • Mortgage Redemption: Insures the borrower for the amount equal to their mortgage; insurer pays the loan balance if the borrower dies.

  • Family Maintenance Policy: Combines whole life and level term insurance for family coverage under one policy.

  • Family Policy: Provides coverage on each family member.

  • Family Income Policy: Combines decreases term and whole life insurance for coverage on the family breadwinner.

  • Jumping Juvenile: Life insurance for a minor that increases face amount at a predetermined age, often 21, while keeping the premium level.

Policy Provision Terms

  • Insuring clause: Promise by the company to pay benefits.

  • Consideration clause: Details what constitutes consideration; application and initial premium.

  • Grace Period: Typically 30/31 days post the due date where coverage remains valid despite non-payment.

  • Reinstatement Clause: Rules for returning a lapsed policy to active status; may require back premiums and proof of insurability.

  • Incontestable Period: Guarantees no challenge to death benefits after two years.

  • Misstatement of Age and Sex: Adjusts the face amount based on correct data.

  • Free Look: Offers a refund period; typically 10 days for new policies and 20 days for replacements (varies by state).

Ownership and Beneficiary Clauses

  • Ownership Clause: The owner has all rights to the policy, including making changes.

  • Assignment Clause: Owner can assign policy ownership either absolutely (permanently) or temporarily (collateral).

  • Beneficiary: The person receiving policy proceeds upon the insured’s death.

  • Primary Beneficiary: First listed beneficiary.

  • Contingent Beneficiary: Designated to receive proceeds if the primary dies before the insured.

  • Revocable Beneficiary: Can be changed at any time by the policy owner.

  • Irrevocable Beneficiary: Cannot be changed without written consent from the beneficiary.

  • Common Disaster Provision: Ensures death benefits are paid to the estate if the insured and sole beneficiary perish in a common disaster within a state-specified duration.

  • Spendthrift Clause: Protects beneficiaries' death benefits from creditors' claims.

  • Premium Modes: The frequency of premium payments (monthly, quarterly, semi-annually, annually); more frequent payments usually increase the total annual cost.

Policy Options

Settlement Options (CLIFF)

  • Cash Payment (Lump Sum): Not taxable to the beneficiary.

  • Life Income: Guaranteed installments for the life of the recipient; principal forfeited upon death.

  • Interest Only: Temporary option until proceeds are settled; interest is taxable.

  • Fixed Period: Funds deplete over a fixed timeframe.

  • Fixed Amount: Pays a set amount until proceeds are exhausted.

Dividend Options (OCRAP)

  • Return of Premium: Non-taxable and non-guaranteed excess premiums returned.

  • One-Year Term: Dividend buys additional one-year term insurance, increasing overall death benefit.

  • Cash Option: The insurer pays dividends directly to the policy owner.

  • Reduction of Premium: Dividends applied towards next year’s premium.

  • Accumulation at Interest: Dividend accumulates in the insurer’s interest-bearing account.

  • Paid-Up Additions: Purchase of a single premium policy in addition to the permanent policy’s death benefit.

Policy Loans/Withdrawal Options

  • Cash Loans: Loans that are not subject to income tax.

  • Automatic Premium Loan: Prevents lapsing of policy due to non-payment of premiums.

  • Withdrawal or Partial Surrender: Applies to universal life insurance; may involve surrender charges and potential tax implications.

Non-Forfeiture Options (REC)

  • Reduced Paid-Up: Converts to a policy with reduced face amount.

  • Extended Term: Converts to term policy with the same face amount.

  • Cash: Taxable interest on cash values; surrender charges may apply, decreasing over time.

Policy Riders

  • Definition: Extra provisions attached to a policy for added cost.

Disability Riders

  • Waiver of Premium: Waives premiums if the insured becomes totally disabled, with a 6-month waiting period; expires at age 65.

  • Accelerated Benefits Rider: Provides early payments if diagnosed with a specified critical illness; reduces death benefit amount correspondingly.

Riders Covering Additional Insureds - Term Riders

  • Spouse Rider: Covers the spouse for a limited time/amount; usually expires when the spouse turns 65.

  • Children's Term Rider: Adds children for limited time/amount with conversion options.

  • Family Term Rider: Integrates coverage for spouse and children into one rider.

  • Payor Benefit (Juvenile Insurance): If the payor becomes disabled or dies, the insurer pays premiums until the child reaches adulthood.

Riders Affecting the Death Benefit Amount

  • Accidental Death: May offer double or triple the death benefit if death meets defined criteria, typically within 90 days of the incident.

  • Guaranteed Insurability: Allows policyholders to purchase additional insurance at designated times without evidence of insurability.

  • Cost of Living: Adjusts the face value based on inflation each year.

  • Return of Premium: Death benefit includes the return of all premiums paid to the beneficiary.

Annuities

  • Definition: A retirement plan that liquefies an estate, preventing the risk of outliving one’s money; earnings grow tax-deferred.

    • Parties Involved:

    • Owner: Purchases the annuity and pays premiums.

    • Annuitant: Receives payouts based on various factors (amount, age, gender).

    • Beneficiary: Receives either cash value or premiums if the annuitant dies during the accumulation period; interest accrued may be taxable.

Annuity Terminology

  • Accumulation Period: Pay-in phase where the estate builds and grows tax-deferred; money belongs to the owner.

  • Annuity Period: Pay-out phase where money belongs to the company, and the policy owner receives payouts.

  • Premium Payment Options:

    • Single Premium: A lump sum payment made once.

    • Level Premium: Consistent payments at fixed intervals.

    • Flexible Premium: Variable payment terms.

    • Note: Premiums are not tax-deductible.

Annuity Payment Options

  • Cash One-Time Payment: Entire amount is taxed at once; penalties apply before age 59½.

  • Annuity Certain: Guarantees payments for a fixed amount or period.

  • Straight Life: Guaranteed payments for the lifetime of the annuitant.

  • Life with Period Certain: Payments are guaranteed for life, with specified time guarantees for beneficiaries.

Exclusion Ratio

  • Nonqualified Annuity: Portion of payout is taxable (interest) while the premium portion is not (paid after tax).

  • Qualified Annuity: Entire payout is taxable, including both interest and principal, due to pre-tax funds paid in during accumulation.

Types of Annuities

Fixed Annuities

  • Characteristics: Interest rates are guaranteed; income payments are stable and predictable; premiums are held in the insurer’s general account.

  • Considerations: Though the dollar amount is guaranteed, inflation may erode purchasing power.

Variable Annuities

  • Characteristics: Growth is not guaranteed; premiums are kept in a separate account; subject to market risks.

Equity Indexed Annuities

  • Characteristics: Combines benefits of fixed and variable annuities; growth potential linked to market performance while offering a guaranteed minimum interest rate; less risky and typically aims for higher returns than standard fixed annuities.

Immediate Annuities

  • Definition: Payments start within 12 months of purchase and require a single premium payment.

Deferred Annuities

  • Definition: Payments begin after 12 months post-purchase, can have single, level, or flexible payments.