PRINCIPLES OF INSURANCE

LESSON 1A INSURANCE BASICS This lesson focuses on the following topics:

•WHAT IS INSURANCE? •BASIC INSURANCE DEFINITIONS

WHAT IS INSURANCE?

An insurance policy is a legally binding contract between an insurance company and the

person who buys the policy, commonly called the "insured" or the "policyholder."

In exchange for payment of a specified sum of money, called the "premium," the

insurance company agrees to pay the "beneficiary" (or for some benefits, the "owner")

of the policy a fixed or otherwise determinable amount of money, if circumstances that

are set out in the policy, occur.

Another way of looking at insurance is to consider that it is a group of people getting

together and paying on a regular basis into a 'pooled' account. If any of them need to

claim off the insurance because of some personal calamity, the money is there to

enable this to happen. In that way, insurance serves as a risk transfer mechanism by

which people or businesses can shift some of their uncertainties or risks to the

insurance companies. The insurance companies charge a fee, known as a premium, for

accepting these risks, and in return, agree to pay for the financial losses that the

policyholder may suffer.

BASIC INSURANCE DEFINITIONS

Some of the basic insurance definitions are discussed here:

Application – The first questionnaire an insurance applicant fills out when he applies

for insurance. This form will ask for information about the applicant and the subject to

be insured (i.e., the applicant’s car, houses, personal property, etc.).

Cancellation – The termination of insurance coverage during the policy period. This is

further divided into three types of cancellations:

i. Flat Cancellation – The cancellation of a policy as of its effective date,

without any premium charge.

ii. Pro-rata Cancellation – When the policy is terminated at midterm by the

insurance company, the earned premium is calculated only for the period for

which the coverage was provided. For example: An annual policy with a

premium of $1,000 is canceled after 40 days of coverage at the company’s

election. The earned premium would be calculated as follows:

Earned Premium = 40/365 days x $1,000

Earned Premium = .110 x $1,000

Earned Premium = $110

iii. Short-rate Cancellation – When the policy is terminated prior to the

expiration date at the policyholder’s request, then the earned premiums

charged would be more than the pro-rata earned premium. Generally, the

return premium would be approximately 90 percent of the pro-rata return

premium. However, the company may also establish its own short-rate

schedule.

Decline – This refers to a situation when the company refuses to accept the request for

insurance coverage.

Effective Date – This is the date on which the insurance policy begins.

Expiration Date – This is the date on which the insurance policy ends.

Insurance Agent – A person authorized by, and acting on behalf of the insurer, to

transact all classes of insurance that the insurance company is licensed to sell.

*** QUIZ NO 1 ***

LESSON 1B INSURANCE BASICS This lesson focuses on the following topics:

•WHO NEEDS INSURANCE? •TYPES OF INSURANCE

INSURANCE AGENT?

Insurance is everyone’s need. Anyone who owns something or desires personal

protection needs insurance. From individuals to businesses, insurance is a way to

protect all of us from financial loss, disaster, and bad investment.

Everyone should buy insurance based on his/her unique personal needs. The market

offers a wide range of insurance products, including property, liability, health, disability,

crisis, savings, income protection and investment, to match the changing needs of

people or businesses at different stages of their lives.

Certain insurance contracts are also made compulsory by legislation. For example,

Oregon law states that tavern and liquor establishments must carry $300,000 of liquor

liability insurance or maintain a bond not less than $300,000 with a corporate surety

authorized to conduct business in Oregon. Many states require employers to purchase

workers’ compensation to protect employees injured on the job.

TYPES OF INSURANCE

There are many types of insurance. Here we will discuss the most common types of

insurance. Each type of insurance protects the insured from a different type of financial

loss.

Life Insurance – In this type of insurance, the company provides money to the

insured’s beneficiary when the insured dies.

Health Insurance – This type of insurance covers medical and hospitalization bills of

the policyholder.

Long-term Care Insurance – This type of insurance covers the person’s expenses

relating to nursing and hospitalization for the elderly.

Disability Insurance – This type of insurance provides income in case the insured

becomes disabled and is unable to work.

Personal Property Insurance – This type of insurance covers the property against

damages.

Home Owner's Insurance – This type of insurance covers damages to the insured’s

house.

Automobile Insurance – This type of insurance covers the insured’s car and

passengers against damages.

Other types of Insurance – There are also some other types of insurances related to

the Business, Disaster, Travel, etc.

INSURANCE AGENT

The insurance agent is an individual who sells and services insurance policies. There

are generally two classifications of agents:

1. Independent Agent

An independent agent represents at least two insurance companies, and

services clients by searching the market for the most advantageous price for the

most coverage. The agent's commission is a percentage of each premium paid

and includes a fee for servicing the insured's policy.

2. Captive or Exclusive Agent

This type of agent represents only one company, and sells only its policies. This

agent is paid on a commission basis in much the same manner as the

independent agent.

*** QUIZ NO 2 ***

LESSON 1C INSURANCE BASICS This lesson focuses on the following topics:

•WHAT DOES AN INSURANCE AGENT DO? •RESPONSIBILITIES OF AN INSURANCE AGENT •SUMMARY

What Does an Insurance Agent Do?

The agent system for the distribution of insurance has worked pretty well over the years,

with agents marketing the products of the insurer and, at the same time, educating the

consumers on how to limit risks and make better choices regarding their insurance

needs. As insurance costs have increased dramatically in the last decade, agents have

achieved a key role in planning cost saving measures for individuals as well as small

businesses.

Responsibilities of an Insurance Agent

The insurance agent needs to:

• Work with clients to evaluate their need for protection

• Educate the client by explaining the various plans available and by providing

appropriate cost indexes

• Make specific recommendations that suit the client's objectives and budget

• Encourage the client to act in a timely fashion to assure that the proper coverages

are in place when they are needed. The agent also sees to it that accurate and

complete information is provided to the insurer to make sure that the client gets the

very best premium available.

• Keep in contact with the client, and periodically review or update their coverage. The

agent should suggest appropriate changes, and counsel clients on ways to reduce

cost. Often they will need to assist their client in reviewing the need for legal and tax

compliance, and recommend other professional assistance when necessary.

• Assist with claims, answer questions and serve as the mediator in helping their

clients deal with insurance companies.

• Assist business owners in communicating their benefit packages to their employees,

often assisting the employee in seeing how the benefits coordinate with their

personal financial programs as well as those provided by government entities.

SUMMARY

In this lesson, we touched on the basics of insurance. We discussed some definitions of

insurance and the insurance policy. We learned about the application process for the

insurance policy, the cancellation processes at different stages during the policy, and

some important dates which need to be taken into consideration by the insurer. We also

discussed different types of insurance which mainly include Life, Health, Long-term,

Personal property, Disability and Automobile. At the end of the lesson, we discussed the

major responsibilities of the insurance agent, and the important role a good relationship

between the client and the company plays.

*** QUIZ NO 3 ***

LESSON 2A LIFE INSURANCE BASICS This lesson focuses on the following topics:

•WHAT IS A LIFE INSURANCE POLICY? •REASONS FOR PURCHASING LIFE POLICIES •LIFE INSURANCE: AN ASSET •ESTIMATING LIFE NSURANCE NEED •

WHAT IS A LIFE INSURANCE POLICY?

In a life insurance policy, the most common event is the death of the person who is

insured—in which case the payment is made to the beneficiary. Depending on the type

of policy, it sometimes may be the insured person attaining a certain age, or the owner

requesting to surrender the policy for its cash value, or to take that cash value out in the

form of monthly payments for a set number of years of the insured's life.

REASONS FOR PURCHASING LIFE POLICIES

People purchase life insurance for many reasons. Some of them are discussed here:

• Family protection – To provide financial security to surviving family members upon

the death of the insured.

• Insurance to cover a particular need – Such as paying off a mortgage or

consumer debt upon the insured’s death.

• Business insurance – To compensate a company on the death of a key employee

or to provide a surviving partner the resources to buy out the deceased partner’s

share of the business.

• To provide funds – To pay estate taxes or other final obligations necessary to settle

a deceased person’s estate.

LIFE INSURANCE: AN ASSET

A reasonable way to approach life insurance is to think of it as an asset rather than a

necessary expenditure. In fact, life insurance is akin to investment in property. Some of

the advantages of buying life insurance are listed below:

• It is a very secure asset

• The policy owner need not worry about closely managing it

• It is purchasable in any affordable amount

• It provides a reasonable rate of return

• Proceeds are payable immediately

• The policy owner can choose his/her method of premium payment

ESTIMATING LIFE INSURANCE NEED

There are several simple methods used to estimate an applicant’s life insurance need.

Next we will review these methods along with examples.

The most basic rule of thumb is the Income Rule, which states that the insured’s

insurance need would be equal to 6 or 8 times his/her gross annual income.

Example: Allie is earning a gross annual income of $60,000. She should have between

$360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.

The Income Plus Expenses Rule states that the insured’s insurance needs to be

equal to 5 times his/her gross annual income plus the total of any mortgage, personal

debt, final expenses, and special funding needs (i.e., college, university etc.).

Example: Assume that Fredrick earns a gross annual income of $60,000 and has

expenses that total $160,000. His insurance need would be equal to $460,000 ($60,000

x 5 + $160,000).

*** QUIZ NO 4 ***

LESSON 2B LIFE INSURANCE BASICS This lesson focuses on the following topics:

• ESTIMATING LIFE INSURANCE NEED o PREMIUMS AS PERCENTAGE OF INCOME

-Family Needs Approach -Income Replacement -Estate Preservation and Liquidity Needs • THE APPLICATION PROCESS

o INTRODUCTION o PARTIES INVOLVED IN THE APPLICATION PROCESS

Premiums as Percentage of Income

Using the Premiums as Percentage of Income rule, a minimum of six percent of the

insured’s gross income (as the primary income earner) should be spent on life

insurance premiums. Add an additional one percent for each dependent. Once the

applicant determines the percentage of the income that should be spent on life

insurance premiums, the agent may advise purchasing as much life insurance as the

applicant can get for that premium amount.

There are other more comprehensive methods used to calculate life insurance need.

Overall, these methods are more detailed than rules of thumb and provide a more

complete view of insurance needs. These methods are:

• The Family Needs Approach • Income Replacement • Estate Preservation and Liquidity Needs

The Family Needs Approach requires the applicant to purchase enough life insurance

to allow his/her family to meet its various expenses in the event of the applicant’s death.

Under the family needs approach, the applicant divides his/her family's needs into two

main categories:

1. Immediate Needs at Death (Cash Needs)

2. Ongoing Needs (Net Income Needs)

Once the applicant determines the total amount of his/her family's needs, he/she may

purchase enough life insurance to cover that amount.

The Income Replacement calculation is based on the theory that the purpose of life

insurance is to replace the loss of the applicant’s income when he/she dies. Under this

approach, the amount of life insurance the applicant should purchase is based on the

value of the income that he/she can expect to earn during his/her lifetime, taking into

account such factors as inflation and anticipated salary increases.

The Estate Preservation And Liquidity Needs approach attempts to calculate the

amount of life insurance needed upon the applicant’s death for items such as taxes,

expenses, fees, and debts, while preserving the value of his/her estate. This method

takes into consideration the amount of life insurance needed to maintain the current

value of his/her estate for his/her family, while providing the cash needed to cover death

expenses and taxes.

THE APPLICATION PROCESS

Introduction

First things first—to get insured, one needs to get an application from the insurance

company. The applicant then fills out the form, signs it, and returns it for consideration.

It is often required that the applicant be physically present in front of the agent while the

questions are being filled out on the application. The information provided in the

application form gives the underwriters of the insurance company a basis for

determining if they will issue a policy.

Parties involved in an Insurance Application

There are three parties relevant to an insurance application, namely:

The Proposed Insured – This is the person whose life is being insured by the

life insurance policy.

The Applicant – This is the person applying to the insurance company for life

insurance and may or may not be the proposed insured.

The Policy Owner – This is the person that usually pays the premiums and the

person who retains all rights to any values or options contained in the policy.

*** QUIZ NO 5 ***

LESSON 2C LIFE INSURANCE BASICS This lesson focuses on the following topics:

•MINOR APPLICATIONS •CORRECTING THE APPLICATION •CONDITIONAL RECEIPT •REPRESENTATIONS/WARRANTIES

FRAUD/CONCEALMENTMinor Applications

As a rule, minors - mostly persons of age less than 18 - are not allowed to enter

contracts. However, life insurance allows an exception: A person is a minor only until

age 15.

In case the proposed insured is not yet 15 years of age, one of the following persons

will have to sign the application on behalf of that child:

• His/her mother or father.

• A court-appointed guardian.

Correcting the Application

To change any information on the form, the proposed insured must initial any and all

changes on that application. Extra care must be taken when filling out the application

forms, since the insurance company can cancel or rescind the entire contract from the

date of issue, if the error is discovered after the issuance of a policy. Of course, this

must take place before the incontestability clause of the contract takes effect.

Conditional Receipt

The receipt located at the bottom of the application is called a conditional receipt. The

agent is advised to collect the first full premium from the applicant at the time of

application, and to use this receipt. Being conditional, it states in very clear terms that

the policy acceptance is subject to the approval of the carrier. It also acknowledges

payment of the first full premium.

Noteworthy: The conditional receipt becomes really important if the proposed

insured dies before the policy is issued. In such a situation, two alternative decisions

exist:

i. If the insurance carrier would have issued the policy to the proposed insured

had he still been living, the proceeds would be paid to the beneficiary.

ii. If the application was destined to be denied, the premium would be returned

to the beneficiary.

Representations/Warranties

• Representations – All statements made on the application are regarded as

Representations and are considered the truth. Even though some representations

may be found to be false, the person making these believes them to be true.

• Warranties – A Warranty, on the other hand, is a statement of absolute truth. No

statement in the application is regarded as a Warranty.

Fraud / Concealment

• Fraud – When a person makes a misrepresentation about a known material fact

with intent to gain advantage, it is classified as a fraud.

• Concealment – The withholding of relevant material information that should have

been provided by the applicant at the time of making the application is classified as

concealment.

*** QUIZ NO 6 ***

LESSON 2D LIFE INSURANCE BASICS This lesson focuses on the following topics:

•POLICY FEATURES •POLICY CLAUSES

POLICY FEATURES

Policy Effective Date

Policy effective date is the date stated in the policy from which:

• Full protection takes effect as of the policy effective date.

• The Incontestability Clause’s contestable period begins.

• The suicide clause begins.

Backdating Policies

• Backdating is the practice of allowing the policy effective date to be set in the past.

• The maximum number of months for backdating a policy is six.

• For most companies, backdating is good for sales. For instance, reducing the age of

the proposed insured by a month can result in lower premiums.

• It can also allow applicants into the acceptable age range for policies that have age

limits.

• Furthermore, by aligning with the policy owner’s income pattern or dates, it can

make payments convenient.

Policy Provisions

Policy provisions act as contractual provisions defining the limits of a certain life

insurance policy.

Policy Clauses

Ownership Clause

According to the ownership clause, the policy owner possesses all contractual

rights in the policy while the insured is still alive. Such rights include:

Selection of a settlement option

Naming and changing of the beneficiary designation

Assigning ownership of the policy to someone else

Selection of dividend options

Canceling the policy and selecting the non-forfeiture option

Taking out a policy loan

Entire Contract Clause

According to the Entire Contract Clause, the Life Insurance document, the

attached application, and riders constitute the complete contract between the

insurer and policy owner.

Important Points:

• To exercise these rights, the policy owner typically does not need the

beneficiary's consent.

• No statement can be used by the insurer to void the policy unless the

statement is a material misrepresentation and is part of the application. In

addition, any officer of the company cannot change the terms of the policy

unless the policy owner agrees to the change.

Incontestability Clause

Under the Incontestability Clause, the company is given a specific period of time,

usually two years, to find out any cause for contesting the policy. After the

contestable period has expired, the insurer cannot contest the policy.

Suicide Clause

A typical Suicide Clause states that the face amount of the policy will not be paid

if the insured commits suicide within a specific period of time, usually two years,

after the policy is issued. The only payment is a refund of the premiums.

*** QUIZ NO 7 ***

LESSON 2E LIFE INSURANCE BASICS This lesson focuses on the following topics:

•POLICY CLAUSES CON’T

Reinstatement Clause

If the premium is not paid during the grace period, a life insurance policy may

lapse for nonpayment of premiums. The Reinstatement Clause allows the policy

owner the right to reinstatement of a lapsed policy under certain conditions. The

conditions are:

• The insured must provide evidence of insurability, a condition that insurers

often waive for lapses of less than two months.

• All overdue premiums plus interest must be paid.

• A policy loan must be repaid or reinstated.

• The policy has not been surrendered for its cash value.

• The lapsed policy must be reinstated within a certain period, usually three to

seven years.

If the policy owner wishes to continue the same type of life insurance coverage, it

usually is more economical to reinstate a policy than to buy a new one. This is

because a new policy is likely to have a higher premium, since it will be issued

when the insured is older.

Misstatement Clause

The insured's age may be misstated in the application. Under the Misstatement

Clause, the amount paid is the amount of life insurance that the premium would

have purchased at the insured's correct age.

EXAMPLE:

• Assume that Mary's correct age is thirty but is incorrectly recorded in

the application as age twenty-nine. Assume that the premium for an

ordinary life application at age twenty-nine is $20.00 per $1,000.00 and

$21.00 per $1,000.00 at age thirty.

• If Mary has $15,000.00 of Ordinary Life Insurance and dies, only 20/21

the of the proceeds will be paid, or $14,286.00.

Beneficiary Designations

The beneficiary is the person or party named in the policy to receive the policy

proceeds. There are numerous Beneficiary Designations in life insurance. They include

the following:

The Primary Beneficiary – is the first party who is entitled to receive the

proceeds at the insured's death.

The Contingent (Secondary) Beneficiary – is the beneficiary entitled to the

policy proceeds if the primary beneficiary is not alive.

A Revocable Beneficiary – designation means that the policy owner has the

right to change the Beneficiary Designation without the beneficiary's consent. An

Irrevocable Beneficiary designation means that the policy owner cannot change

the beneficiary without the irrevocable beneficiary's consent.

A Specific Beneficiary – designation means that the beneficiary is named and

can be identified. For example, Martha Smith may be specifically named to

receive the policy proceeds if her husband should die.

A Class Beneficiary – designation means that a specific individual is not named

but is a member of a group to whom the proceeds are paid. One example of a

Class Beneficiary Designation would be "children of the insured”.

*** QUIZ NO 8***

LESSON 2F LIFE INSURANCE BASICS This lesson focuses on the following topics:

• MORE POLICY CLAUSES • INSURANCE COMPANIES

o INTRODUCTION o STOCK LIFE COMPANY o MUTUAL INSURANCE COMPANY o RECIPROCALS o LLOYD’S OF LONDON o REINSURERS o RISK RETENTION GROUP o OTHER ENTITIES

Change of Plan Provision

The Change of Plan Provision allows the policy owner to exchange the present policy

for a different one. If the change is to a higher premium plan, such as exchanging an

ordinary life policy for an endowment at age sixty-five, the policy owner must pay the

difference in cash values between the two contracts plus interest at a stipulated rate.

Important Points

• If the net amount at risk is reduced, evidence of insurability is not required.

• If the net amount at risk is increased, evidence of insurability is required.

INSURANCE COMPANIES

Introduction

A simple way to understand life insurance companies is to see how they are structured:

• Stock Life Companies

• Mutual Companies

• Reciprocal Insurers

• Lloyd’s of London

• Reinsurers

• Risk Retention Group

• Assessment Mutual Insurers

• Fraternal Benefit Societies

• Service Insurers

• Home Service Insurers

Stock Life Company

A stock life insurance company, as the name suggests, has stockholders. These people

may or may not also be policy owners. They each own shares in the company in the

form of stocks, and they elect a board of directors to guide the operation of the

company. If the company is successful financially, the stockholders receive dividends,

which are paid per share of stock owned.

Important Point: A stock life insurance company, like all other corporations, is in

business to make a profit for the stockholders.

Mutual Insurance Company

A mutual insurance company is also a corporation, and it derives its name from its basic

ownership characteristic. Control in a mutual company rests with the policy owners who

'mutually" own the company. The policy owner’s elect a board of directors, and any

"profits" are returned as dividends to the policy owners in the form of reduced costs for

insurance. It should be mentioned here that dividends from a mutual company are not

profits in the mercantile or commercial sense but rather the return of an “overcharge” of

premium.

EXAMPLE: A mutual life insurance company might sell life insurance at one

specific age for $15 per $1,000 of face amount. Once a dividend has been

declared, each policy-owner might then receive credit on the premium statement

in the amount of $2 per $1,000. Thus, the resultant cost for the insurance is $13

per $1,000 of face amount.

Reciprocals

These are arrangements where a group of people agree to insure each other; i.e. each

member is both an insurer and an insured simultaneously. In these arrangements, the

liability of each subscriber is limited.

Lloyd’s of London

Lloyd’s of London is an association of companies and individuals that individually

underwrite insurance. They are not an insurer.

Reinsurers

Companies that transfer the risk from other insurers to themselves are known as

reinsurers and the company transferring the risk is known as the ceding company.

Risk Retention Group

A mutual insurance company formed by people in the same line of business, occupation

or profession.

Fraternal Benefit Societies

A nonprofit lodge system. Its products can only be sold to its members. Products are

similar to commercial insurers.

Service Insurers

These are the Blue Cross, Blue Shield, HMO and PPO health carriers.

Home Service Insurers

These insurers sell the smaller face amount policies, known as industrial policies. They

are known as debit insurers.

Other Entities

Government Insurance Programs

Government programs were created to cover basic risks and redistribute income

where private insurers were unable to meet society’s needs. By virtue of

sponsoring programs like Social Security, Medicare and Unemployment

Programs, the US government is the largest insurer in the world.

*** QUIZ NO 9 ***

LESSON 2G LIFE INSURANCE BASICS This lesson focuses on the following topics:

•COMPANY RATINGS

•CHOOSING THE RIGHT TYPE OF LIFE INSURANCE •TERM LIFE INSURANCE

Company Ratings

The two most popular rating services are:

A.M. Best Company

Standard and Poor’s

These two rating services differ from each other in their rating methodologies.

• A.M. Best Company uses profitability, leverage, and liquidity to assign ratings from

A++ (Superior) to C and C (Fair) and below.

• Standard and Poor's uses the claims paying ability of an insurance company to

assign ratings from AAA (Superior) to D (Insurers placed under an order of

liquidation).

Other reputable rating services include:

Moody's Investors Service

Duff and Phelps

Important Point: Besides private rating services, there is also the National

Association of Insurance Commissioners. This government organization measures

the performance of insurance companies and prepares analytical reports as part of

the Insurance Regulatory Information System (IRIS). Agents can access the IRIS

ratios to get a better idea of a company's financial condition in various areas.

CHOOSING THE RIGHT TYPE OF LIFE INSURANCE

There are two basic types of life insurance, which are:

• Term Insurance

• Permanent Insurance

There are many variations on both of these types of Life Insurances.

Term Life Insurance

• Term Life Insurance provides life insurance for a specified period of time. These

policies provide benefits in the event of death, but they generate no “cash value, ” or

savings.

Important Points

If a prospect has a limited amount to spend, and only needs insurance for a finite

period of time, he/she may be able to get more coverage by buying term

insurance than by buying permanent insurance.

Keep in mind that the cost of term insurance increases as the prospect gets

older, which may make it more expensive than permanent insurance in the long

run.

• When the individual buys term insurance, he/she need to make a choice as to

how long he/she wants the protection. The individual may renew the policy

without a physical examination for the period of years specified in the policy.

Some term insurance can be converted to permanent insurance up to a specified

age with no physical examination. Premiums for the converted insurance will

most likely be higher than the premiums you would be paying for the term

insurance.

*** QUIZ NO 10 ***

LESSON 2H LIFE INSURANCE BASICS This lesson focuses on the following topics:

• PERMANENT INSURANCE o WHOLE LIFE INSURANCE

Permanent Insurance

• This type of insurance combines death benefits with an accumulation feature.

• The buyer of a permanent policy pays more in the early years than for term

insurance, but the money not needed to pay for the cost of the death benefit

accumulates at interest.

• If the policy is surrendered before the insured dies, there may be a cash value

paid to the policy owner.

Important Point

As a general rule, it is not a good idea to buy permanent life insurance if policy

owner plans to surrender early.

• If all premiums are paid, permanent insurance usually lasts for the whole life of a

person, and pays death benefits to the beneficiaries named in the policy upon the

death of the insured.

• The cash value can be used as loan collateral for borrowing funds at the interest rate

specified in the policy. Any outstanding loans are deducted from policy proceeds at

death or surrender. Some of these products may enjoy tax advantages.

• A policy lapse or surrender may create a taxable event and may generate a Form

1099.

Some of the most popular types of cash value insurance are described below:

Whole Life Insurance

Whole life policies are a type of permanent life insurance that offer protection

throughout a lifetime—that is for a person’s whole life. The individual pays the

same scheduled premium from the day he/she buys the policy.

There is no need to renew whole life policies. As long as policy owner pays

the premium when due, the policy remains in force throughout the insured’s

life or until the policy owner cashes it in.

The scheduled premium may be level or increase after a fixed time period,

but the premium will not change from the amount shown in the policy

schedule. It is important that the policy owner look at the policy schedule and

understand what his/her premium payments will be and that he/she can afford

them.

An insurance company will base the premium on the insured’s age at the time

of purchase. Initially, the premium for a whole life policy will be higher than

that for a term policy. The policy owner likely will pay a lower premium when

the insured is older, if the policy owner keeps the policy for a long time. Part

of each premium payment goes to the cash value growth, part for the death

benefit, and part for expenses such as commissions and administrative costs.

The applicant should be provided the company’s history of projected

dividends versus paid dividends.

There are two types of traditional whole life policies:

Nonparticipating policies provide a schedule of guaranteed premiums

and death benefits and a table of guaranteed values, but they pay no

dividends.

Participating policies guarantee premiums, death benefits, and cash

values, and may also pay policy dividends. Because of the dividend

feature, premiums tend to be higher. Policy owners have several options

for using policy dividends, including:

• Letting the dividends accumulate with interest

• Taking the dividends in cash

• Using the dividends to pay toward the premium, buying permanent

paid-up additions, or buying a combination of one-year term and

additional permanent paid-up additions.

Some companies fail to pay dividends at the originally projected rate,

while others exceed their original projections. When making purchase

decisions, the prospect should remember that dividends are not

guaranteed and may differ from those shown in illustrations.

Endowment Insurance is the third of the basic whole life insurance

policies. This policy specifies a time period and if the policyholder dies

within this specified time period, the policy proceeds are paid to the

beneficiary; if not, the proceeds are paid to the policyholder.

*** QUIZ NO 11 ***

LESSON 2I LIFE INSURANCE BASICS This lesson focuses on the following topics:

• UNIVERSAL LIFE • VARIABLE LIFE • VARIABLE UNIVERSAL LIFE • GROUP LIFE

Universal Life

The key characteristic of a universal life policy is flexibility. Within limits, the

applicant can choose the amount of insurance and the premium he/she will

pay. Later, depending on the policy value and policy owner’s financial needs,

he/she can change his/her premium amount.

The policy stays in force as long as its value is enough to pay its costs and

expenses.

The policy value is "interest-sensitive," which means that it varies in

accordance with the general financial climate.

The flexible premium feature of the policy allows the policy owner to change

his/her premium payments, depending on the policy value at hand and his/her

current financial needs.

Example: Policy owner may be able to skip a premium payment or

decrease/increase his/her premium payments.

Lowering the death benefit and raising the premium will increase the growth

rate of his/her policy. The opposite is also true. Raising the death benefit and

lowering the premium will slow the growth of his/her policy. If insufficient

premiums are paid, the policy could lapse without value before it reaches a

maturity date.

The maturity date is the date the policy ceases and its cash surrender value is

payable if the policyholder is still living. Therefore, it is the policy owner’s

responsibility to consistently pay a premium that is high enough to ensure that

his/her policy’s value is adequate to pay the policy’s monthly cost. The

company must send the policy owner an annual report and notify him/her if

he/she is in danger of losing his/her policy because of insufficient value.

Variable Life

A variable life policy allows the policy owner to invest the policy values in a

selection of separate accounts similar to mutual funds. Separate accounts

could include money market funds and mutual funds invested in stocks and

bonds.

A variable life policy presents a higher risk to the policy owner because the

cash value varies based on the investment performance of the separate

account.

Variable Universal Life Insurance

Variable Universal life insurance combines the flexibility of Universal life

insurance with the investment account features of Variable life insurance.

Group Life

Some of the silent features of Group Life insurance are listed below:

• A group life policy provides coverage to a group of people under one

contract.

• Most group life contracts are sold to businesses to cover their employees.

• Associations buy group life policies to cover their members.

• Lending institutions buy the policies to cover their debtor loans.

• Most group life policies are for term insurance.

Generally, an insurance company issues a master policy, and each person in

the group receives a certificate of insurance. If the employee terminates

his/her employment, the employee may convert to an individual policy and

keep his/her coverage.

An insurance company may not apply a new contestable period if the group

life policy has been in force for two years and the insurance amount is the

same or less than the employee’s original policy. If the employee converts

his/her policy before the two-year contestable period ends, an insurance

company may continue the contestable period until the employee reaches the

time limit under the original group policy.

If the employee increases the amount of coverage in the converted policy, a

company may apply a new contestable or suicide period only to the increased

amount of coverage.

A group life policy isn’t always a low-cost policy. Compare the cost of an

employee’s coverage under a group policy to the cost of an individual policy

and shop around for the best deal. Employers should compare prices and

coverages to get the best group policy for their employees.

*** QUIZ NO 12 ***

LESSON 2J LIFE INSURANCE BASICS This lesson focuses on the following topics:

• COMPARING PERMANENT AND TERM LIFE INSURANCE • TERM LIFE-COMMON POLICY VARIATIONS

Comparing Permanent & Term Insurance

This lesson focuses on the following topics:

• Comparing Permanent and Term Insurance • Term Life-Common Policy Variations

Permanent life policies differ from term life policies in several ways, including:

Higher Initial Premiums: Policy owner pays not only for a death benefit but also for

the cash value feature of the policy. Overall, permanent policies offer less insurance

protection per premium dollar than term life policies.

Greater Flexibility: The policy owner can use the cash value as collateral for a loan.

Some people buy permanent policies as a tax-deferred way to build an estate.

Dividend-paying policies usually provide an option to apply the dividends to pay all

or part of the premiums. Other permanent policies such as universal life provide for

payment of the cost of the policy if the policy has accumulated sufficient value.

Much Higher Agent Commissions: Insurance agents get higher commissions for

the “permanent insurance”. So the policy owner better keep this in mind if an agent

continues to recommend a “permanent life policy” when he/she is asked about “term

life policy”.

Important Points

Remember that surrender charges and other expenses may consume all or most

of a policy’s cash value if the policy owner cashes it in early. It usually takes at

least three to five years to build any cash value.

If the policy owner buys a “permanent policy”, try to continue his/her premium

payments for at least 15 to 20 years.

Historically, half the people who buy permanent policies drop them within five years.

Dropping a permanent policy can be costly, so the applicant should think carefully

before buying one.

Term Life - Common Policy Variations

Annually Renewable Term (ART)

Policy owner may renew most ART policies up to age 100. However, ART

premiums are extremely high for middle age and older consumers. If the

policy owner has been paying high premiums, he/she may want to shop

around for a better value.

An ART provides a fixed premium and death benefit for one year. When the

term ends, the policy owner may renew his/her policy, but the premium will

probably increase. To avoid yearly increases, some people look for 5, 10, or

20-year renewable term policies.

Decreasing Term

This policy provides death benefits that decrease each year.

Mortgage Insurance and Credit Life Insurance are examples of decreasing

term policies.

The initial death benefit may equal or approximate the amount of the policy

owner’s loan, with the benefit decreasing as he/she pays off his/her loan. If

the insured dies, the insurance benefits pay off or reduce the loan balance.

Important Point: You have a new contestable period with each new policy.

*** QUIZ NO 13 ***

LESSON 2K LIFE INSURANCE BASICS This lesson focuses on the following topics:

• MORE POLICY FEATURES o ILLUSTRATIONS o PAID-UP ADDITIONS o VANISHING PREMIUMS o RENEWABLE AND CONVERTIBLE POLICIES

• FILING OF A LIFE INSURANCE CLAIM

Illustrations

• Life insurance agents use charts or illustrations as sales tools to show how a life

policy’s cash value might grow.

• The applicant should confirm that the illustration shows the guaranteed values based

on the guaranteed interest rate the company promises to pay. he/she should not buy

a policy based on projected future or current values. These are only estimates and

may be higher than what the policy owner will actually receive.

• The applicant should understand the pattern of policy values, surrender charges,

and other expenses. He/she should ask the agent for this information if the

illustration doesn’t show it.

• The applicant should get copies of all the illustration pages, including those showing

the guaranteed values.

Paid-Up Additions

This is additional insurance purchased with interest or dividends paid on the policy.

Some policies include a column showing the paid-up additions increasing the death

benefit over time. Remember, this additional insurance is not guaranteed.

Vanishing Premiums

Applicants should be careful if an agent tells them that interest or dividends on their

policy will cause the premiums to "vanish" during the life of the policy. If interest

rates or dividends drop, the policy owner may have to pay additional premiums for a

longer time. Also, the amount the policy owner pays may be greater than he/she

estimated.

Renewable and Convertible Policies

• Because term life expires at the end of the term, the applicant should look for a

renewable policy.

• A renewable policy allows the policy owner to continue his/her insurance for

additional terms regardless of the insured’s health and without having to pass a

medical exam.

• This is an important advantage because it may be harder for the insured to pass a

physical exam as he/she grows older or if he/she becomes ill.

• Most term insurance policies are convertible. This means that as the policy owner’s

insurance needs change, he/she can exchange his/her term life policy for a

permanent policy without taking a medical exam or answering health questions.

• The policy owner may choose to convert his/her term life policy if the insured’s

health declines and it becomes difficult to qualify for a new term policy at standard

rates. The policy owner may also convert his/her term life policy if he/she decides to

use insurance as a way of accumulating funds instead of providing only death

benefits.

• Insurance companies usually allow conversion until age 65.

How does someone file a life insurance benefit claim?

• Notify the insurance company that the insured has died

Whenever a situation like this happens:

The insurance company should be contacted as soon as possible.

The claimant should call the policyholder services department directly, or if the

life insurance policy was issued through an agent or an employer, they can be

asked to notify the company to begin the claims process.

*** QUIZ NO 14***

LESSON 2L LIFE INSURANCE BASICS This lesson focuses on the following topics:

• FILING OF A LIFE INSURANCE CLAIM CON’T • RECEIPT OF LIFE PROCEEDS • INSURANCE UNDERWRITING

o WHAT IS INSURANCE UNDERWRITING?

• File a claim form

The claimant, usually the beneficiary, will begin the claims process by filling

out and signing a proof of death form.

Attach to it an original or certified copy of the insured's death certificate.

If the claimant is too distraught to fill out the form, the insurance agent may fill

it out for him or her, although the claimant will still have to sign it.

If there is another beneficiary named on the policy, that person must also fill

out a claim form.

The claimant may also have to fill out Form W-9 (Request for Taxpayer

Identification Number and Certification), which will enable the insurance

company to notify the Internal Revenue Service of any interest it has paid to

the beneficiary on the value of the policy.

To expedite the claim, follow the insurance company's instructions carefully.

• Wait for the company to process the claim

Life insurance claims are usually paid quickly, often within a few days.

First, however, the insurance company will ensure that the claimants are the

beneficiaries of the policy that the policy is current and in force, and that all

conditions of the policy have been met.

This is usually a simple matter, and does not delay the claims process.

Claims are more often delayed because the insurance company has not received

a valid death certificate.

The insurance company also has a right to challenge or deny a claim if it believes

that a policy provision has been violated.

• Receipt of Life Proceeds

• In a lump-sum cash payment

Life insurance proceeds are often paid as lump-sum cash payments. Most people

elect this form of payment because it enables them to control how the insurance

money is invested or spent. In addition, if the beneficiary elects to receive a lump-

sum payment, he/she will not owe income tax on the life insurance proceeds.

• Through a settlement option

A settlement option is a way of paying the proceeds of a life insurance policy

other than in a lump-sum cash payment. Many types of settlement options are

available, but all are designed to ensure good money management in situations

where the beneficiary is unable or unwilling to manage a lump sum of cash. Either

the policy owner chooses the settlement option at the time he/she purchases the

policy, or the beneficiary chooses the option at the time the benefit becomes

payable (unless the policy-owner had chosen an irrevocable option).

If the beneficiary receives the proceeds of an insurance policy through a settlement

option, the insurance company will keep the policy proceeds, invest them, and pay

the beneficiary interest. Or, the beneficiary may be allowed to withdraw part of the

proceeds or receive periodic payments of both principal and interest.

INSURANCE UNDERWRITING

What is Insurance Underwriting?

• When an applicant submits an application for life insurance to an insurance

company, the company underwrites the application. This means that it will look at

the information provided by the applicant (and obtain information from other

sources, if necessary) in order to assess the risks associated with the applicant

as an individual.

• Based on the results of underwriting, the insurer will decide whether or not to sell

the applicant a term insurance policy.

• It's not simply a matter of accepting or rejecting the application, though. Assuming

the company deems the applicant insurable, it will place him/her in a pool with

other applicants who share similar characteristics and pose a similar degree of

risk.

• This risk classification determines the premium the applicant will pay for term

coverage.

*** QUIZ NO 15***

LESSON 2M LIFE INSURANCE BASICS This lesson focuses on the following topics:

• INSURANCE UNDERWRITING CON’T o PURPOSE OF UNDERWRITING o CLASSIFICATION OF INSRUANCE APPLICANTS o WHAT FACTORS GO INTO THE UNDERWRITING PROCESS?

What is the purpose of the underwriting process?

• In a nutshell, the purpose of term insurance underwriting is to spread risk among

a pool of insureds in a manner that is both fair to the insured and profitable for the

insurer.

• Like other businesses, insurance companies need to make a profit. Therefore, it

doesn't make sense for them to sell term insurance to everyone who applies for it.

Although they don't want to make the insured pay an excessively high rate, it's not

wise for them to charge all their policy owners the same premium.

• Underwriting enables the company to weed out certain applicants and to charge

the remaining applicants premiums that are commensurate with their level of risk.

How do insurance companies classify term insurance applicants?

When the applicant applies for term insurance, he/she will be classified into one of

the following four risk groups: Standard, Preferred, Substandard, or Uninsurable.

Standard Risks: These are individuals who, according to the insurance

company's underwriting standards, are entitled to term insurance without

having to pay a rating surcharge or be subjected to policy restrictions.

Preferred Risks: This group includes individuals whose mortality experience

(i.e., life expectancy) as a group is expected to be above average and to

whom the company offers a lower than standard rate. The most common

preferred class today is nonsmokers, for whom many insurers now offer a

favorable rate.

Substandard Risks: These are individuals who, because of their health

and/or other factors, cannot be expected (on average) to live as long as

people who are not subject to these risk factors. Substandard applicants are

insurable, but only at higher than standard rates that reflect the added risk.

Policies issued to substandard applicants are referred to as rated or extra risk

policies.

Uninsurable Risks: These are applicants to whom the company refuses to

sell term insurance because they're unwilling to shoulder the risks. They've

decided that the risk factors associated with the applicant are too great or too

numerous. In other cases, the applicant's circumstances may be so rare or

unique that the company has no basis to arrive at a suitable premium.

What factors go into the underwriting process?

An insurance company typically looks at a number of factors during the underwriting

process in order to evaluate applicants in terms of risk. These factors enable the

insurer to decide whether or not applicants are insurable and, if they are, to place

them into the appropriate risk group. Some of the things considered are the potential

insured's:

Age

Sex

Current health/physical condition

Personal health history

Family health history

Financial condition

Personal habits/character

Occupation

Hobbies

An insurance company will gather information about the applicant from several

sources, like:

The applicant’s application

From the applicant’s agent/broker

From information bureaus

From physical examination with regard to health assessment

*** QUIZ NO 16***

LESSON 2N LIFE INSURANCE BASICS This lesson focuses on the following topics:

• INSURANCE UNDERWRITING CON’T • PREMIUMS

o OVERVIEW OF PREMIUMS o DETERMINATION OF PREMIUMS

When the insured’s term policy expires, will he/she have to go through the

underwriting process again?

There are policies that contain the renewal option i.e. the insurance company will

renew the policy when it expires without having to resubmit to the underwriting

process. This means that the renewal will be done at the same premium rate,

even if the insured’s risk factors have changed (e.g., his/her health has declined)

since the company sold the original policy.

If the insured’s policy doesn't contain this provision, he/she will have to reapply for

term insurance when the policy runs out and undergo what is known as post-

selection underwriting. At this time, the company has the right to deny the insured

continued coverage. Even if they don't deny the insured insurance, it's likely they

will at least put him/her in a higher risk group and raise the premium based on

his/her increased age.

Remember, though, if the company that wrote the original policy won't renew the

policy or will do so only at a higher rate than the insured or policy owner wants to

pay, the insured should shop around. Other companies may have less stringent

underwriting standards.

PREMIUMS

Premiums

Premium is defined as the consideration which an insured pays to the insurance

company in return for insurance protection. It follows, then, that for an insurance

company, this is a source of revenue; and the insured will incur the cost of the

premium in return for insurance.

There are two standard ways of making premium payments:

A single lump sum payment

Periodic payments

Of the two, the Periodic payment of premium is more popular, primarily because:

There is a large payment required upfront in the case of the lump sum option

In case the insured dies early on in the insurance term, the amount paid for

the insurance under the installment method will be less than the single

payment.

Determination of Premiums

• For a prospective client, one of the major criteria for selecting a company is the

amount of premium that has to be paid. For the insurance company, therefore,

the premium must be high enough to be able to cover the cost of issuing the

policy and other administrative costs, but still be able to compete in the market.

• The determination of premium rates is dependant on the following factors:

Mortality – The percentage of the insureds that are expected to die in the

future.

Investment – The quantity of return the company expects to make on the

amount of premium collected.

Operating Expenses – Expenses incurred in the running of the business,

including all commissions etc.

Contribution to Surplus – The difference between the premium earned and the

expenses paid.

*** QUIZ NO 17***

LESSON 2O LIFE INSURANCE BASICS This lesson focuses on the following topics:

• PREMIUMS CON’T

o NET AND GROSS PREMIUMS o LEVEL PREMIUM RESERVES o INSURANCE AGE

• SETTLEMENT OPTIONS o LUMP SUM SETTLEMENT o PROCEEDS AND INTEREST o FIXED YEAR INSTALLMENT o LIFE INCOME

Net and Gross Premiums

The company begins by calculating the net premium for a particular candidate based

on the factors mentioned above. Once this has been determined,

operating/administrative costs are loaded onto the net premium to arrive at the gross

premium.

Level Premium Reserves

To counter the problem of increasing premiums as the age of the insured increases,

the concept of level premiums was introduced. Under this philosophy, premiums

remain stagnant over the life of the insurance instead of stepping up as the insurance

period progresses. This amount is higher than the yearly renewable term premium in

the early years of the policy but lower than this amount in the later years.

Insurance Age

• One of the most important determinants of the premium charged is the insured’s

age (remember that this is because of the mortality factor). However, the

insurance age of the insured may or may not be the same as the insured’s

chronological age.

• Companies use two methods to determine the insured’s age:

1. In the first method, the insured’s age will be the chronological age at the

insured’s closest birthday. If the insured’s last birthday was more than six

months ago, the Insured’s age will be the chronological age plus 1.

2. In the second method, the age of the insured is the same as his/her

chronological age on the last birthday, regardless of the number of months

that have elapsed since.

Settlement Options

This refers to the payment of benefits after the death of the insured. The various

alternatives available are discussed below:

Lump Sum Settlement

This is when the beneficiary receives the policy proceeds in a single payment

following the death of the insured.

Proceeds and Interest

It is agreed that at the minimum interest rate stated in the policy, the insurance

company will hold the policy proceeds and make interest payments to the

beneficiary. The beneficiary retains the right to withdraw the proceeds of the

policy either in whole or part, at any time.

Fixed Years Installment

The beneficiary receives payments in equal monthly installments, and has the

option to choose the number of years for which he/she will receive payments.

The value of these payments is determined by the policy proceeds, the number

of years the beneficiary chooses to receive payments and the interest rate.

Under this option, the beneficiary has the option to withdraw proceeds at any

time.

Life Income

Payments are received for the life of the beneficiary; the value of these

payments depends on the policy proceeds, beneficiary’s age at the time of

commencement of payments, beneficiary’s sex, and the specified time for

which payments are required. Should the beneficiary die before the lapse of

the specified time, the payments are made to a named successor.

*** QUIZ NO 18***

LESSON 2P LIFE INSURANCE BASICS This lesson focuses on the following topics:

• MORE SETTLEMENT OPTIONS o JOINT LIFE INCOME o FIXED AMOUNT INSTALLMENTS

• NON-FORFEITURE o CASH SURRENDER VALUE o REDUCED PAID-UP INSURANCE o EXTENDED TERM INSURANCE

Joint Life Income

This option is used primarily towards the support of family members such as

parents. Joint Life Income continues in chosen equal monthly installments,

which continue till at least one payee is alive. Hence, in case the insured dies,

monthly payments continue to beneficiaries for the rest of their lives. The

value of these payments depends upon the age of the beneficiaries at the time

they begin to receive benefits, and the policy proceeds. What differentiates

this option is that beneficiaries do not have the flexibility of receiving these

payments as a lump sum amount.

Fixed- Amount Installments

The amount of payments, and the frequency of these payments, is chosen by the

beneficiary; proceeds that are held by the insurance company earn interest. If the

payments exceeds the interest earned, the proceeds held by the insurance

company decreases until the total proceeds are paid out. However, the

beneficiary does have the option to withdraw the unpaid balance at any time. In

the event of the beneficiary’s death before the payments are completed, the

balance is paid to the beneficiary’s estate.

Non-Forfeiture Options

In case the policy owner is unable to continue premium payments, non-forfeiture options

are included in insurance polices. The following are the five options currently available:

1. Cash Surrender Value

2. Reduced Paid up Insurance.

3. Extended Term Insurance.

4. Automatic Loan Provision.

5. Dividend Accumulations to Avoid Lapse.

1. Cash Surrender Value

A policy owner has the option to surrender the policy; with a request to be paid

the cash surrender value. Usually, a policy will have a cash value only after the

policy has been held for two to three years. The component of the cash value

that is paid to the policy owner is the original cash value plus the value of paid up

additions and dividends. This value can be reduced in the event of any

outstanding loans and accrued interest on these loans. Cash surrender value is

normally paid in a single lump sum.

2. Reduced Paid-up Insurance

If a policy owner wishes to have a reduced amount of paid-up insurance in force

under the same policy, he/she may request the insurance company to use the

cash value of the original policy for this purpose. The policy will have a reduced

face value, but will continue to earn cash value and dividends, if applicable.

3. Extended Term Insurance

The policy’s cash surrender value is used to calculate how long the face value of

the policy will remain in force after premiums are discontinued. The length of time

that this can happen is calculated by taking the policy’s cash surrender value and

the insured’s age and sex at the time the premium payments were discontinued

into the account. This cash surrender value is then used to purchase term

insurance for a specified time.

*** QUIZ NO 19***

LESSON 2Q LIFE INSURANCE BASICS This lesson focuses on the following topics:

• NON-FORFEITURE o AUTOMATIC LOAN PROVISION o DIVIDEND ACCUMULATION TO AVOID RELAPSE

• DIVIDEND OPTIONS

o CASH PAYMENT o REDUCTION OF PREMIUMS o ACCUMULATION OF INTEREST o PAID-UP ADDITIONS o ONE-YEAR TERM

• LIFE INSURANCE POLICY RIDERS

o WAIVER OF PREMIUM o ACCIDENTAL DEATH AND DISMEMBERMENT

4. Automatic Loan Provision

In this case, the insured can authorize the company to extend an automatic loan

from the policy’s cash value to settle any outstanding premium payments.

5. Dividend Accumulations to Avoid Lapse

In the case of dividend payments, these may be applied to any premiums

outstanding by the end of the grace period. In the event that these accumulated

dividends are not enough to cover unpaid balances, coverage is applied in an

amount proportionate with the premium paid by the accumulated dividends.

Dividend Options

A participating life insurance policy entitles the policy owner to receive dividends from

the earnings of the insurance company. The policy owner may choose one of the

following options to receive the dividend:

• Cash Payment

Under this dividend option, the insurance company sends the insured a check

equal to the amount of the declared dividend payment.

• Reduction of Premium

The premium due on the policy for the upcoming year will be reduced by the

amount of the current year’s declared dividend and the balance becomes the

new premium due for the upcoming year.

• Accumulation of Interest

The dividends may be retained with the insurance company to accumulate with

interest paid at the specified rate. The policy owner reserves the right to withdraw

accumulated dividends at any time.

• Paid-up Additions

Dividends are used to purchase paid-up additions, which have the same

provisions as the original policy.

• One-year Term

In some cases, dividends are used to purchase one-year term coverages, which

are added to the base policy in the event of the insured’s death.

Life Insurance Policy Riders

Life and Health Insurance jargon uses the term “rider” instead of “endorsements”.

Riders amend the terms of the basic policy coverage. The commonly used riders are:

• Waiver of Premium

In case the policy owner becomes totally disabled, the premiums are waived after

a waiting period of six months. Some policies also refund the premium payments

by the insured during the waiting period.

• Accidental Death and Dismemberment

Also known as “double indemnity”, this clause offers a payment of double the

face value in the event of the accidental death of the insured. Of course, the

clause is very carefully worded so as to specify the term accidental bodily injury.

The dismemberment rider entitles the insured rather than the beneficiary for

payment. Benefits typically paid for are loss of sight, hand(s), feet or foot. In this

case, the loss of the limb must involve “complete severance through or above the

wrist or ankle joint”. Amputations are admissible only if medically necessary and

a result of accidental injury.

*** QUIZ NO 20***

LESSON 2R LIFE INSURANCE BASICS This lesson focuses on the following topics:

• LIFE INSURANCE POLICY RIDERS o GURANTEED PURCHASE OPTION

• DELIVERING THE POLICY • OFFER AND ACCEPTANCE • SUMMARY

• Guaranteed Purchase Option

This entitles the policyholder to additional purchases of insurance covers without

assessment/examination, or without providing evidence of insurability. Normally,

purchases are linked with specific time intervals or events that change the family

status e.g. marriage, birth of a child, an anniversary policy year etc. Premiums

are based on the age of the insured at the time of the purchase and the type of

insurance purchased.

Delivering the Policy

The issue of the effective date of the policy is crucial for certain aspects of the policy like

the Incontestability Clause and the Suicide Clause.

• The incontestability clause allows the applicant a certain time to contest the policy

on the basis of misrepresentation or fraud.

• The suicide clause is not enforceable for the first two years of the policy.

Offer and Acceptance

• In the insurance business, the proposed buyer makes an offer to buy the insurance

by signing the application and submitting it along with the first premium. Once the

insurer issues a policy, it is construed as the acceptance of that offer.

• If, however, the premium payment is not made with the submission of the

application, no offer to purchase insurance has been made by the applicant. This

happens when the insurance company issues the policy. Acceptance then occurs

when the premium payment is made and that becomes the effective date of the

coverage.

Important Points

• In situations where the initial premium does not accompany the completed

application, most companies state in the application that the proposed insured

must be in good health at the time of policy delivery, before coverage becomes

effective.

• Also, if the premium is submitted with the application but no receipt is given, the

policy's effective date is generally the date that the policy is issued and delivered.

SUMMARY

In this lesson, we examined closely the reasons for purchasing a life insurance policy

and the advantages associated with holding a policy. We considered the

comprehensive methods used to estimate an applicant’s life insurance need such as

Family Needs Approach, Income Replacement and Estate Preservation and Liquidity

Needs. We also evaluated rules of thumb such as using the Income Rule and the

Income Plus Expenses Rule.

We proceeded to determine the percentage of the applicant’s income that should be

spent on life insurance premiums and the modalities of the application process, as well

as a description of the parties involved. The difference between representations and

warranties and fraud and concealment were also covered.

Subsequently, the features of an insurance policy were covered in depth including

backdating, provisions and various policy clauses including ownership clause, entire

contract clause, incontestability clause, suicide clause, reinstatement clause and

misstatement clause.

We went on to discuss the various kinds of beneficiaries and the way different life

insurance companies are structured. This was followed by a discussion of the two most

popular rating services, A.M. Best Company and Standard and Poor’s, and the way

these two rating services differ from each other in their rating methodologies.

An outline of the two basic types of life insurance, Term Insurance and Permanent

Insurance, was presented, with an elaboration on the many variations and differences

between them.

The course then illustrated how a life insurance claim is filed and the ways in which the

beneficiary can receive the life insurance proceeds.

The next section contained an explanation of insurance underwriting and its purpose, as

well as the factors that contribute to the underwriting process in order to evaluate

applicants in terms of risk.

We also delineated the four risk groups in which insurance companies classify term

insurance applicants: Standard, Preferred, Substandard, or Uninsurable.

An in-depth discussion on premiums, factors responsible for the determination of

premium rates and the two standard ways of making premium payments followed.

The lesson proceeded with a list of the various settlements, non-forfeiture and dividend

options and concluded with a discussion on policy rider and delivering the policy.

*** QUIZ NO 21***

LESSON 3A HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• WHAT IS HEALTH INSURANCE? • HEALTH INSURANCE BASICS • HEALTH CARE PLANS • FEE-FOR-SERVICE CHARGE

WHAT IS HEALTH INSURANCE?

• Health insurance provides payment of benefits for the loss of income and/or the

medical expenses arising from illness or injury, in addition to covering medical

expenses.

• Because of its inclusive nature, it is sometimes called other things, like accident and

sickness insurance or accident and health insurance.

• Often when speaking of health insurance, people refer to group insurance offered by

employers—insurance that covers medical bills, surgery, and hospital expenses, etc.

Group insurance is also called comprehensive or major medical coverage, because

of the broad protection it provides.

HEALTH INSURANCE – BASICS

Types of Health Insurance

The different types of health insurance are determined by:

Methods of underwriting

Injury or illness covered

Types of insurers

Types of benefits and services provided

Types of losses covered

Amount of benefits available

Health coverage today includes insurance policies and government-provided benefits.

There are fee-for-service and managed care plans. People usually know of, or have

heard of, specific kinds of managed care plans such as:

Health Maintenance Organizations (HMOs)

Preferred Provider Organizations (PPOs)

Point-of-Service (POS)

Health insurance comes as either individual or group. Group coverage usually has lower

premiums and hence this is how most people get their health insurance. Group

coverage is typically offered through employers.

Fee-for-service Coverage

Under fee-for-service coverage, a medical provider (usually a doctor or hospital)

is paid a fee for services rendered.

With fee-for-service insurance, the insured is free to choose his/her doctor, and

free to choose a different one for any reason, anytime. Under this type of policy,

the insured is usually reimbursed a certain percentage of a reasonable service

charge (determined by the existing cost of such medical service in the area).

Because of the influence that individual doctors have on determining how much

and what kind of service should be provided, indemnity coverage proves not to

be very effective for containing costs.

Important Point

Traditional Fee-for-service insurance is also referred to as indemnity

insurance.

The Fee-for-service plan is limited in three ways:

1. Deductible – It is a small fee that is mandatory on the insured to pay first

in order to have the insurance company pay the doctor and hospital bills.

For example, the insurance company might indemnify the insured for all

medical costs after the first $1000 each year, or the first $100 each month.

The deductible is intended to ensure that people only go to the doctor

when they’re really sick.

2. Co-insurance – Co-insurance, more than deductible, is specifically

intended to get policyholders to bear part of the cost. The insurance

company agrees to pay a certain portion (80% is common) of the medical

bill, while the rest, the other 20%, is to be paid out-of-pocket by the

insured.

3. Limited Coverage – Many indemnity plans do not cover specifically

named services such as prescription drugs or routine doctor visits. Certain

conditions are completely excluded from coverage, such as some

illnesses or even pregnancy and childbirth.

With the indemnity plan, the insured:

• May choose any doctor or hospital

• Can continue treatment with the same doctor even if he/she has changed

jobs or insurance companies

• Be confident that the doctor is not under pressure from the insurance

company to recommend substandard treatment.

*** QUIZ NO 22***

LESSON 3A HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• WHAT IS HEALTH INSURANCE? • HEALTH INSURANCE BASICS • HEALTH CARE PLANS • FEE-FOR-SERVICE CHARGE

Managed Care – An Overview

Managed care plans provide comprehensive health services to their members

and offer financial incentives for patients to use health service providers that

have a contract with the plan.

Instead of paying separately for each service that the insured uses, the plans pay

providers in advance for a package of services they may render in future. That is

how they are able to cut costs.

Like indemnity plans, most managed care plans require members to make a co-

payment when they get treatment. A co-payment is a specific dollar amount,

rarely more than $30, or a percentage of the cost of a service, and is due at each

visit to a health care provider.

Most of the other types of coverages are tied to some form of life insurance or

related plans. They are often intended to cover people who have difficulty in

obtaining traditional health insurance due to health or medical history.

Managed care imposes controls on the use of health care services and the providers of

health care services, usually through Health Maintenance Organizations (HMOs) or

Preferred Provider Organizations (PPOs). The insured or policyholder in these plans

is often referred to as a member.

An HMO is an entity that contracts with medical service providers - be they hospitals or

doctors - and employers, to provide medical care to a group of individuals. The HMO

gets paid at a fixed price per patient in return. Patients generally do not have any

significant “out-of-pocket” expenses.

Managed care plans involving HMOs usually require members to choose a primary care

doctor from the plan’s list of doctors. The primary care doctor, also called a gatekeeper,

controls the type of medical care a patient can access. It is only after the primary care

doctor decides that the patient’s situation is beyond his/her expertise that the member

gets to see a specialist.

*** QUIZ NO 23***

LESSON 3C HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• HEALTH MAINTENANCE ORGANIZATIONS • HMO BENEFITS • PREFERRED PROVIDER ORGANIZATIONS • MECHANICS OF A PPO

HMO Coverage

HMOs provide a wide range of health care services, referred to as basic health care

services. [Any additional services will come under supplemental health care services.]

Every HMO is required to provide its members with a list of the basic services that are

covered under the plan.

These services include:

• In-patient hospital and physician services for illness and injury (minimum of 90

days per calendar year). In the case of inpatient treatment for mental/emotional

problems, the minimum limit is reduced to about 30 days.

• Diagnostic services, laboratory and other services including short-term therapy in

an outpatient service category.

• Services in the preventative area, namely childcare and periodic health

evaluations and including things such as eye and ear examinations for children

under 18.

• Emergency services like ambulances, available 24 hours a day, every day of the

week.

HMO Benefits

Covers even preventative measures like routine physical examinations and programs

for quitting drugs and losing weight, etc. Members pay a set (often monthly) fee for a

broad class of “necessary health care.”

Exclusions/Limitations

Eye examinations and refractions for persons over age ((people 65 and older)

Eyeglasses or contact lenses

Dental services

Prescription drugs (other than those administered in hospital)

Long-term physical therapy (over 90 days)

Out-of-area benefits

Termination

HMOs can only terminate coverage in case of:

Non-payment of premiums or co-payments

Fraud or deception

A violation of contract terms

Failure to meet or continue to meet eligibility requirements

A termination of the group contract under which a member is covered

Preferred Provider Organizations (PPOs)

A PPO is a hybrid of a regular fee-for-service plan and an HMO. It is designed to

provide increased benefits to members who use doctors and hospitals within its

network. Unlike HMOs, PPOs do not utilize primary care gatekeepers. A single

physician does not manage an individual’s health care services.

Managed care plans have shown an increasing number of employees enrolled in these

programs, at the expense of growth in HMOs. Like large corporations, smaller

companies also show a growing trend in signing up for PPO services for their

employees.

Mechanics of a PPO

The insurance company enters into agreements with select physicians to form a

“preferred provider” network.

The basic difference between an HMO and a PPO is that a member of a PPO

may opt for a physician outside this preferred provider network. Of course, this

would mean increased costs for both the member and the insurance company.

In using a medical practitioner in the network, a member may have a higher

coinsurance rate (i.e. he/she would have to pay a lower percentage of the

medical cost) and would also have lower deductibles; that way, they pay a lower

amount towards the medical bill before the insurance coverage kicks in.

*** QUIZ NO 24***

LESSON 3D HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• PPOs vs. HMOs • TRADITIONAL INSURANCE VS. MANAGED CARE • WHAT IS MEDICARE?

PPOs vs. HMOs

There are several reasons that make PPOs better choices for certain people than

HMOs. The most important of these being that it affords them the luxury of

exercising their choices, as well as allows for people to continue with medical

professionals whom they trust. In cases where members are sure that the

deductibles limit will be exceeded, the financial value of the insurance plan is greatly

enhanced.

Traditional Insurance vs. Managed Care

Traditional insurance is a means by which the individual is in control of who his/her

medical professional is going to be. In the event that premium amounts are the

deciding factor, Managed Care comes out the winner. Some of the main differences

between the two philosophies manifest themselves in the rules regarding the choice

of the medical practitioner, a specialist consultation, and out-of-pocket expenses.

For specialist consultations under managed care, the primary care provider

determines if and when such consultation becomes necessary. Also, managed care

rules state that the insured make co-payments for network visits and prescriptions;

and in case of visits outside the network, insurance coverage kicks in after payment

of a deductible. In an insurance indemnity, the insured will pay an annual

deductible, and a co-insurance up to a specified limit.

What is Medicare?

Medicare is a federal health insurance program intended for the following:

The aged (people 65 and older)

People of any age with permanent kidney failure

Certain disabled people

Technically, Medicare is part of the Social Security System (and is administered by the

Health Care Financing Administration, an agency of the Department of Health and

Human Services) and is financed by workers and their employers through the payment

of the Medicare Tax. However, because the program is federally funded, participants

pay very little.

Depending on the coverage required, enrollment in Medicare can be either automatic or

optional. An individual must file the right paperwork to get the full package of Medicare

coverage. The coverage includes hospitalization as well as basic medical expenses.

Medicare Coverage

Medicare coverage is determined by federal health care experts, and in amounts that

are deemed to be reasonable by these experts. Medicare provides coverage in two

parts: A and B. Part A deals with Hospital Insurance; including home health care and

nursing facilities during recuperation after hospitalization. Medical Expense Insurance

is covered by Part B.

Important Point: Medicare Part A coverage also includes an 80% payment of

durable medical equipment such as wheelchairs etc.

Part A Exclusions

Medicare Hospital Insurance makes the following exclusions:

• Private room charges (unless it is a medical necessity)

• Private nursing care

• The first three pints of blood received in one calendar year

Medical Expense Insurance relates to services rendered by doctors, laboratory tests like

pap smears, x-rays etc. The insureds pay an annual deductible amount, and 20% of the

amount approved (the balance 80% being paid by Medicare). In case of a difference

between the amount approved and the amount actually incurred, the patient bears the

differential.

*** QUIZ NO 25 ***

LESSON 3E HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• MEDICARE SUPPLEMENT INSURANCE • MEDIGAP COVERAGE

Medicare Supplement Insurance

The stringent Medicare rules leave large gaps in the medical needs of retirees. The

gaps in the insurance needs of citizens are filled in by insurance companies with

supplemental policies known as Medigap. These policies are letter-designated and

range from A type policies with basic coverages to J type policies which offer

comprehensive insurance coverages.

Medigap Coverage

Choosing the optional benefits included in the various supplemental plans depends on

the specific requirements of the customer.

Plan A – Basic benefits supplement Medicare benefits by providing coverage for

hospitalization, and require co-insurance payments to be paid starting from the days

that are not covered under Medicare. Furthermore, once the insured pays the annual

deductible under Medicare Part B, the 20% and 50% co-insurance payments are

also covered.

Plan B – This plan adds on coverage to the basic benefits by paying all deductibles

and coinsurance payments.

Plan C – This plan includes both A and B coverages and throws in an amount of $95

for skilled nursing care after day 20. It also includes 80% of emergency care in a

foreign country.

Plan D – This plan includes all coverages in the other plans with the exception of

Medicare Part B deductibles but includes coverage for custodial care for up to $1600

a year for short-term assistance.

Plan E – This plan covers Preventative Care but excludes Medicare Part B

deductibles or custodial services. Preventative Care includes routine physical

exams, blood pressure and cholesterol screening procedures.

Plan F – This plan includes Excess Charges for Medicare Part B expenses, i.e. it

covers billings by a doctor who charges in excess of Medicare approved charges.

Plan G – This plan excludes the Medicare Part B deductible and Preventive Care

but pays the excess charges at a level of 80%, rather than the entire amount as in

Plan F.

Plan H – This plan pertains to prescription medication, and covers the same at 50%

(annual limit of $1,250 after payment of a $250 deductible)

Plan I – This plan excludes Medicare Part B deductible and Preventive Care, but

includes Prescription Drugs at the basic level of $1,250 annually.

Plan J – This plan offers an Extended Benefit which increases the annual amount of

Prescription Drugs to $3,000. This is the most comprehensive and includes

coverage for all benefits previously listed at the maximum levels.

*** QUIZ NO 26***

LESSON 3F HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• MEDICAID o WHAT IS MEDICAID? o MEDICAID COVERAGES

• WORKERS’ COMPENSATION (WC) o AN OVERVIEW o WHAT IS WORKERS’ COMPENSATION? o WHO IS ELIGIBLE?

What is Medicaid?

Medicaid is targeted towards low-income families and individuals of all ages. So far, the

program has proved to be very beneficial for senior citizens, who have depleted their

resources.

Medicaid Coverages

Medicaid is the largest long-term care insurer and provides coverage for a major portion

of middle-income families. It offers a minimum set of services including hospital,

physician and nursing home services. Additional services including prescription drugs,

hospice care and personal care are at the discretion of state agencies.

Workers’ Compensation – An Overview

In addition to personal health care coverage, there also exists a type of insurance

designed to guard against any injuries or disabilities arising from occupational injuries

and disabilities. Worker’s Compensation is administered at the state level and requires

that employers provide compensation benefits for their employees.

Workers’ Compensation came into existence after the industrial revolution; after a time

when employers were almost impossible to sue and no benefits of any kind were due to

the employees, despite increasing occupational hazards, a booming and cheap labor

force and inadequate safety controls.

What is Workers’ Compensation (WC)?

As mentioned earlier, WC covers injuries and diseases arising out of, and in the course

of, employment. Of course, there must be an established, direct correlation with the

disease/injury and the kind of work that an individual does. Furthermore, the injury must

be accidental. It is important to mention here that the purpose of workers’ compensation

is to provide benefits if employees have a job-related sickness or injury and not replace

health insurance for workers.

The law also stipulates that if there is a serious or willful misconduct on the part of the

employer, the benefits will increase; if a minor is employed illegally and suffers injury,

benefits double.

Important Points

• In the case of penalty payments, workers’ compensation policies do not cover

these and all costs incurred are to be borne by the employer.

• In case an employee suffers an injury, but is able to continue work in some

other capacity but sustains another injury which leaves him/her incapacitated,

the benefits would be much higher than if the first injury had not occurred. It

follows, therefore, that if an employee has been incapacitated, the chances of

another injury leading to permanent disability are much higher. This would

mean substantially increased benefits payable to the employee for the second

injury.

Who is Eligible?

Workers’ Compensation applies to all classes of employees. Unlike health insurance

which may be offered to a certain segment of the workforce in the company, Workers’

Compensation applies to all employees, whether full time or part time. In certain cases,

even illegal workers are covered under the workers’ compensation plan.

The most important eligibility criteria is that the individual must be employed in an

industry that is covered under the Workers’ Compensation plan and must sustain an

injury that is directly related to his/her occupation. The law states that only employees

such as farm labor, domestic servants and casual workers can be excluded from this

coverage, although it is available to employers at their discretion.

Important Points

• In certain states, the law exempts employers who have less than a specified

number of workers from the Workers’ Compensation requirement. Again, the

employer may choose to offer the benefit even if he has three, or fewer,

workers.

• Most employers subject to the Workers’ Compensation rule get insured in case of a

problem of this nature. Most states do allow companies to set up a self-insurance

program.

*** QUIZ NO 27***

LESSON 3G HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• WORKERS’ COMPENSATION o WHAT DOES WORKERS’ COMPENSATION DO? o WHERE CAN EMPLOYEE BUY WORKERS’ COMPENSATION

INSURANCE? • THE POLICY

o WORKERS’ COMPENSATION

What Does Workers’ Compensation Do?

The following benefits are provided for under the Workers’ Compensation laws:

Medical Benefits

Death Benefits

Rehabilitation Benefits

Income Benefits

Medical benefits are generally unlimited in the sense that an employee has the right to

receive all necessary treatment to cure the disease, or to provide relief from it. The

benefits may in some cases be restricted to a specific number of visits, as in the case of

psychological therapy, but the benefits will still be unlimited.

Perhaps the most significant of all these benefits is the rehabilitation aspect. This covers

physical therapy, alternative medicine treatment and other services that may not strictly

fall within the gambit of medical treatment. These benefits may also include vocational

training for the employee, the cost of wheelchairs etc. and in some cases, even

traveling and living expenses during the recuperation stage.

While the amount of benefits offered varies from state to state, they are often low except

in cases where extensive follow-up care is required.

Where Can an Employer Buy Workers’ Compensation Insurance?

Many property and casualty insurance companies offer Workers’ Compensation

insurance, while some specialize in this business alone. There are some states that

have set up a fund for Workers’ Compensation and employers can only buy

compensation insurance from these funds. In other states, private insurance companies

offer these facilities, or there may be state insurance companies, which compete for

Workers’ Compensation insurance business with private insurance companies.

The Policy

The policy has two coverage parts:

1. Workers’ Compensation

2. Employer’s Liability

1. Workers’ Compensation

Under the Workers’ Compensation coverage, the policyholder is covered against

statutory claims. As mentioned earlier, the bodily injury or disease has to be work-

related. The basic policy features are:

No deductibles, or co-insurance

Supplementary coverage is provided including claim expenses and litigation

costs charged against the employer.

Employer subrogation rights: This applies in cases where another insurance is

applicable, in which case the insurance company will only cover its share of

claims and costs. This is designed to prevent a company from collecting twice on

the same loss.

The employer and insurance company are deemed to be one and the same

entity with regard to injury notification. For example, the bankruptcy of the

employer will not absolve the insurance company of its obligation to settle a

claim.

Important Point

o The policy must conform to the state laws regarding Workers’

Compensation. In case there is a conflict in any clause, it automatically

changes to reflect the legal position.

*** QUIZ NO 28***

LESSON 3H HEALTH INSURANCE BASICS This lesson focuses on the following topics:

• THE POLICY CON’T o EMPLOYER’S LIABILITY

• OCCUPATIONAL VS. NON-OCCUPATIONAL COVERAGE • THE 24-HOUR COVERAGE • SUMMARY

Employer’s Liability

Employers’ Liability covers bodily injury and disease. It protects the company

against several general law exposures and is required to supplement compensation

coverage and also to cater to claims that are outside of the legal parameters of

compensation laws.

The insurance company agrees to pay all sums, falling within policy limits, that

become the obligation of the company by way of damages/injuries sustained in the

course of, and arising out of, the employment. Coverages offered are:

• Damages claimed by a third party

• Injury and loss of service

• Consequential injury to a spouse or relative of the worker

• Suits against the insured outside the capacity of an employer.

Important Point

o Fines, penalties and damages for violations of law are excluded because

the policy is designed to cover only the actual exposures of employers.

Occupational Vs. Non-occupational Coverage

Traditionally, most forms of health insurance have provided non-occupational coverage

only, i.e. for injuries and diseases which are not work-related. Under these policies,

coverage is excluded for losses which are covered by Workers’ Compensation laws.

Workers’ Compensation provides coverage for on-the-job hazards; it does not cover

after work hours, on weekends or holidays/vacations. Because of this, most people

have both occupational and non-occupational coverage (which is usually provided by

employers in the form of health insurance). Given the different needs for coverage,

there may be more than one insurer in a particular case; thus, there is a need to

determine whether each claim is work-related or not, and if there are any gaps in

coverage.

There are many proponents of the 24-hour coverage. This is basically an attempt to

combine both occupational and non-occupational coverages under a single head. It

offers 24-hour disability coverage in a single policy and includes limited medical

benefits. Some of the possible advantages of this coverage are:

• A more encompassing coverage

• Reduced duplications in coverage

• Cost saving and efficiencies

A 24-hour system provides disability benefits for an employee’s injury or disease,

whether work related or not. Medical benefits are provided only for work-related injuries

and diseases.

Accident Coverage

Another variant of the 24-hour coverage policy is the accident coverage policy

where all accidents, whether work-related or not, are covered. Medical benefits

are provided only for work-related diseases. Conversely, 24-hour medical and

disability coverage would be provided for all diseases whether work related or

not, but only injuries sustained during an accident arising out of employment

would be covered.

Universal 24-Hour Coverage

This is the most comprehensive 24-hour coverage available and provides a

complete occupational and non-occupational coverage of both accidents and

disease. However, there are still several legal, institutional and regulatory

barriers due to the inherent nature of non-occupational and occupational

coverage.

SUMMARY

In this lesson, we discussed what health insurance is and how the different types of

health insurance are determined. The Fee-for-service coverage is explained in detail,

along with its limitations such as deductible, co-insurance and limited coverage.

This was followed by a discussion of Managed Care Plans and how they work. We

covered, in detail, the range of basic health care services provided by HMOs and the

benefits of HMOs along with exclusions and limitations. A list of reasons whereby HMOs

can terminate coverage is also provided.

We then proceeded to discuss Preferred Provider Organizations (PPOs) and their

mechanics and the reasons that make PPOs a better choice for certain people than

HMOs. We also compared managed care with traditional insurance.

The next section dealt with a detailed explanation of Medicare and Medicaid and their

coverages. This was followed by a discussion of who Medicare deals with and how

Medicare coverage amounts are determined by federal health care experts. Also

covered was Medigap coverage which consists of supplemental policies by insurance

companies to fill the gaps in the insurance needs of citizens.

We also explained in detail the two aspects of a policy: Worker’s Compensation and Employer’s

Liability.

The lesson is concluded with a discussion of the 24-hour coverage policy and its variants, including

Accident Coverage and Universal 24-Hour Coverage.

*** QUIZ NO 29***

LESSON 4 LONG-TERM CARE INSURANCE

This lesson focuses on the following topics:

• WHAT IS LONG-TERM CARE INSURANCE? • POLICY LIMITS • BENEFIT LIMITS • DAILY BENEFIT PAYMENT TYPES

WHAT IS LONG-TERM CARE INSURANCE?

Long Term Care insurance provides coverage that is not covered by health insurance. It

provides varied services, such as health and maintenance services like long-term

nursing, in the event of an insured becoming ill or disabled. This type of insurance pays

coverage on a per-day basis. In view of increasing health costs in the future, most

policies offer some sort of inflation adjustment.

BENEFITS

Here are some of the benefits provided under this insurance plan:

Nursing Home Services: Nursing home services must be provided by a

licensed nursing facility.

Assisted Living Services: Assisted living services must be provided by a

licensed assisted living facility.

Home Health Care Services: Home health care services must be provided by a

licensed home health agency. Covered services may include part-time skilled

nursing care, physical therapy, and assistance with activities of daily living.

Adult Day-Care Program Services: These programs provide daytime care to

individuals who do not need to live in a nursing home. Typical benefits include

nursing or therapeutic care, social and educational activities, or personal

supervision because of "cognitive impairment," such as Alzheimer’s or a similar

disease. Daily benefit amounts for home health care and adult day-care are

usually lower than for nursing home care. However, total benefits for home health

care and adult day-care must be at least one half of the total nursing home

benefits for a year.

Other Services: A policy may include other benefits or offer them as options.

These could include:

respite care (care provided so that family members who are normally

caregivers can have time off)

recovery period benefits (care after a stay in a hospital)

home assistance services (help with chores like cleaning and shopping)

training for family members

Benefit Eligibility Triggers

The policy must provide coverage for long-term care services listed in the policy if the

insureds are unable to perform the specified number of Activities of Daily Living or if the

insureds require supervision and services due to cognitive impairment.

Activities of Daily Living (ADLs): Activities considered essential to a normal

lifestyle - bathing, continence, dressing, eating, toileting, and transferring (moving

around).

Cognitive Impairment: A loss in intellectual capacity that requires the insured to

have substantial supervision to maintain the safety of himself/herself and others.

POLICY LIMITS

Many states allow long-term care insurance policies to exclude coverage for some

conditions. Some conditions may be excluded for a limited period of time, while other

conditions may be excluded completely from coverage.

Pre-existing Conditions: A pre-existing condition is an illness or disability for

which you received medical advice or treatment during the six months before you

apply for long-term care coverage. A long-term care policy can delay coverage of

a pre-existing condition for up to six months after the policy´s effective date.

Some policies, however, exclude them for less than six months.

For example, if an insured took prescription medicine or was treated by the

doctor for arthritis during the six months before the policy was purchased, the

insurance company could refuse to pay benefits during the first six months that

the insured has the policy if the insured needs long-term care due to arthritis.

After the first six months, the company would have to cover such care.

Mental and nervous disorders: A long-term care policy can exclude coverage

of some mental and nervous disorders, but the policy must cover Alzheimer’s

disease and other age-related disorders. However, a person already suffering

from Alzheimer’s probably will not qualify for a long-term care policy under a

company´s underwriting guidelines. A long-term care policy also must cover all

serious mental illnesses and brain diseases that are biologically-based, such as

schizophrenia or major depressive disorders. The diagnosis must be made by an

appropriately licensed medical practitioner.

Family Members: Most policies will not pay members of the insured’s family

for caretaking. Some policies, however, will pay to train family members to be

care providers.

Standard Policy Exclusions

Texas long-term care policies may exclude coverage for conditions resulting from:

alcoholism and drug addiction

illness caused by an act of war

care already paid for by Medicare or by any government program, except

Medicaid

attempted suicide or intentionally self-inflicted injuries

service in the armed forces

aviation activities, if you are not a fare-paying passenger

participation in a riot, felony, or insurrection

BENEFIT LIMITS

There are many variables that should be considered before buying a long-term care

policy. The policy should meet the insured’s possible future needs, but still fit his/her

budget. The choices about basic benefit features, the level of benefits, and the

elimination period, as well as the insured’s health at the time of application, will affect

the premium. The following lists typical benefit ranges for nursing home coverage:

A daily benefit may range from $50 to $250 per day.

An elimination period (the waiting period before benefits begin) usually ranges

from zero to 100 days. The most common options available start benefits at zero,

20, 30, 60, 90, or 100 days after the insured enters a nursing home or begins to

receive other covered services.

Note: Some policies have only one elimination period, while others require an

elimination period for each new "period of care."

A maximum benefit period (payment period) may range from one year to a

lifetime. The most common benefit payment periods are one, two, three, or five

years, or for the insured’s lifetime.

DAILY BENEFIT PAYMENT TYPES

Generally, policies pay benefits using either an "actual expenses incurred" or an

"indemnity" basis. An expense incurred policy pays the charges when the insured

receives eligible services. For example, assume that the insured has a policy with a

daily benefit of $100, and the nursing home charges only $65 per day. An expense

incurred policy will pay only $65 per day since the actual charge is less than the $100

daily benefit. An indemnity policy pays a set daily benefit, without regard to the cost of

the services that the insured receives. For example, if the insured’s policy is an

indemnity policy with a $100 daily benefit and the nursing home charges only $65 per

day, it will still pay $100 per day.

For either policy, benefits will be paid to the insured, or the insured may "assign" his/her

benefits to be paid directly to the nursing home or other provider providing the service.

*** QUIZ NO 30***

LESSON 4B LONG-TERM CARE INSURANCE

This lesson focuses on the following topics:

• BENEFIT OPTIONS o Inflation Protection o Non-forfeiture Benefits o Other Optional Benefits

BENEFIT OPTIONS

All policies must offer certain optional features for an additional premium.

Inflation Protection

Many states require companies to offer inflation protection. If the insured decides not to

buy inflation protection, the offer must be rejected in writing. The offer of inflation

protection must include a graphic comparison of benefits on a policy with and without

inflation protection over a 20-year period.

Inflation protection must be offered in at least one of the following three ways:

1. Benefits automatically increase by at least 5 percent each year, compounded

annually. For example: A $70 daily benefit that increases by a "simple" 5 percent

a year will provide $140 a day in 20 years, but will provide $186 a day when

compounded annually.

2. The insured’s original benefit amount increases by at least 5 percent

compounded each year on the policy’s renewal date. If the increase is not

desired, it must be rejected in writing within 30 days after the policy renewal date.

3. The policy can cover a specified percentage of actual or reasonable charges for

as long as the insured owns it, with no maximum daily limit or policy limit.

Nonforfeiture Benefits

Companies must offer the insured a guarantee that some benefits that were paid for will

be received even if the coverage is lost or cancelled. This guarantee is called

"nonforfeiture benefits." In most cases, the longer the insured pays premiums on the

policy, the larger the nonforfeiture benefit. For example, if the insured paid premiums on

a long-term care policy with a nonforfeiture benefit for 10 years, and then cancelled it,

the insured might get 50 percent of the daily benefit if long-term care services in the

future are needed. Or, the insured might get a full daily benefit, but only for one-third or

one-half as long as the original benefit period.

A nonforfeiture benefit can significantly add to a policy’s premium, depending on factors

such as the insured’s age at the time of purchase, the type of benefit offered and

whether the policy provides for inflation protection.

Methods vary for determining the type and amount of nonforfeiture benefits the insured

receives, and each method has a different cost.

Note: If you decide not to buy a nonforfeiture benefit, you must reject the offer in writing.

In Texas, after July 1, 2002, the company must explain its "contingent lapse benefit" if

the insured chooses not to buy a nonforfeiture benefit. The company must also offer a

contingent lapse benefit each time it raises the insured’s premium substantially. A

contingent lapse benefit allows the insured to choose a reduced benefit amount so that

premiums will not increase or to convert the policy to a paid-up status. The paid-up

status will be either a total sum of all premiums paid for the policy or 30 times the daily

nursing home benefit amount at the time the policy lapsed.

Other Optional Benefits (Some companies may charge an additional premium)

Waiver of Premium: Many policies include a waiver of premium provision. This

provision allows the insured to stop paying premiums once the insured is in a

nursing home and the insurance company has started to pay benefits. Some

companies waive the premium as soon as they make the first benefit payment.

Others wait 60 to 90 days. This provision may not apply if the insured is receiving

benefits under certain provisions of the policy (for instance, if the insured is

receiving home health care or adult day-care).

Refund of Premium Benefits: Under this option, some or all of the premiums,

minus any claims paid under the policy, will be refunded to the insured if the

policy is cancelled. The refund will be made to the insured’s beneficiary if the

insured dies. Usually, the insured must have paid premiums for a certain number

of years before this benefit becomes effective.

Restoration of Benefits: Some policies offer to restore benefits to the original

maximum amounts after a period of long-term care if the insured is treatment-

free for a certain period of time, often 180 days.

Bed Reservation Benefit: If the insured is hospitalized during a nursing home

confinement that is covered by the policy, some policies will pay to reserve the

insured’s bed in the nursing home for a specified number of days or until he/she

returns.

***QUIZ 31***

LESSON 4C LONG-TERM CARE INSURANCE

This lesson focuses on the following topics:

• UNDERWRITING IN LTC POLICIES o UNDERWRITING CRITERIA

• LTC POLICY PROVISIONS o MANDATORY LTC POLICY PROVISIONS

UNDERWRITING IN LTC POLICIES

Much of the information required by the insurance company for the underwriting process

is obtained by one the following sources:

The Application itself

The Insurance Agent

Verification Reports which are investigative in nature and sometimes highlight issues

that do not surface from other sources

Medical Records of the applicant.

Underwriting Criteria

Policies that are a standard risk to the insurance company are called standard or

submitted; these policies attract standard premiums. Often, however, the applicant is

required to pay an amount that exceeds the standard premium to make the risk of that

particular policy acceptable to the insurance company.

Insurance companies employ several criteria to assess the risks they are likely to incur

with each additional policy. Some of these criteria are:

Age

Current, historical and an assessment of future medical conditions

Pre-existing conditions

POLICY PROVISIONS

To promote equity and fairness, the Uniform Policy Provision Law established and

categorized certain policy provisions. These were divided into two parts; those that are

mandatory and are required by law to be a part of every policy, and those that were

deemed to be optional.

Mandatory Provisions

Entire Contract

This includes all attached papers, riders and endorsements. All changes are to

be approved and executed by an officer of the company.

Period of Incontestability

This is usually two years in length. In the event that there are fraudulent

statements in the policy, the period of contestability extends to the life of the

contract. Only in the case of a guaranteed renewable policy will the policy remain

uncontestable once the specific period has expired.

Reinstatement

A policy may be reinstated after it has lapsed and the specified procedures are

followed. Reinstatement discretion lies with the company.

Claim Forms

The law requires insurance companies to supply the insured a claim form within

15 days of the claim being lodged. If this is not done, a proof of loss may be

submitted in any form.

Grace Period

A company normally allows the insured about 31 days to submit late premium

payments, after which the policy will lapse or terminate.

Notice of Claims

A policy holder is required to notify the company within 30 days.

*** QUIZ NO 32***

LESSON 4D LONG-TERM CARE INSURANCE

This lesson focuses on the following topics:

• MANDATORY LTC POLICY PROVISIONS CON’T • OPTIONAL LTC POLICY PROVISIONS

Time Payment of Claims

Claims are required to be paid “immediately” and the normal time period is 60

days.

Proof of Loss

The insured has 90 days within which to file proof of loss. In case it was

reasonably possible to do so, and was not done, the claim will not be paid.

Claim Payment

In the case of life insurance, payments are made to the designated beneficiary,

unless none is named, in which case, the payment will go to the insured’s estate.

The insured may also make a request to pay for medical services received.

Autopsy

The company has the right to order an autopsy of the insured’s body, as long as

it is within legal rights to do so.

Change of Beneficiary

This is not possible only in case when an irrevocable beneficiary is named.

Legal Action

The legal window of opportunity to file a dispute claim against the insurance

company is between 60 days and 5 years.

Optional Policy Provisions

Misstatement of Age

In this case, benefits due are adjusted to reflect benefits that would have been

earned taking into account the correct age.

Unpaid Premiums

At the time a claim becomes due, any unpaid premiums are adjusted from the

amount and paid to the insured or beneficiary.

Over Insurance

In case a similar risk coverage exists with another insurer, excess premiums will

be refunded to the policy owner.

Cancellation

The company has the right to cancel the policy with 20 days written notice to the

insured and the insured may cancel the policy following the expiration of the

policy's original term.

Change of Occupation

If during the tenor of a policy the insured moves to a more hazardous job without

notifying the insurance company, the benefit will be reduced. If the opposite

happens, a refund will be made in the event of a loss.

Per Party Limits

To limit the amount of single party exposure that a company accepts, this amount

is specified regardless of the number of policies issued. Excess premiums for

coverages will be refunded to the estate.

*** QUIZ NO 33***

LESSON 4E LONG-TERM CARE INSURANCE

This lesson focuses on the following topics:

• OPTIONAL LTC POLICY PROVISIONS CON’T • SUMMARY

State Statutes

Any conflict with state statues will be amended to conform automatically.

Earnings and Insurance

In case monthly benefits due at a time of disability exceed the insured’s monthly

earnings (or the average for the past two years), the insurance company is liable

only to the extent of the earnings.

Illegal Occupation

If a loss is incurred while perpetrating a felony or being involved in one, the

insurance claim is not payable.

Intoxicants and Narcotics

If a loss is incurred while under the influence of Intoxicants and Narcotics, unless

advised by a medical professional, a claim is not payable.

Non-forfeiture Options

As the popularity of long-term care policies grows, the insured is going to have to

be afforded non-forfeiture options that protect their policy values and benefits and

protect them from forfeiting the same. Life Insurance policies currently contain

three non-forfeiture options, but the wording of these non-forfeiture options will

be different for long-term care policies. The three non-forfeiture options are:

Cash Value

This would provide a guaranteed amount to be paid to the insured should

the policy be surrendered or lapsed.

Reduced Paid-up

This would provide that the daily benefit be reduced for the policy's benefit

period and that the insured not be required to continue payment of

premiums.

Extended Term

In this term there is extension of coverage for the full amounts that the

policy would have ordinarily paid without any future payments of premiums

for a limited extension of time.

Another type of non-forfeiture option that has come upon the long-term

care scene is a cash back feature. Under this provision, an insured might

typically receive 50, 60, 70, or 80% of total premiums paid upon

discontinuing the policy either by surrender or having the policy lapse. Of

course, as is the case in most cash back features, claims paid are

deducted from the amount of returned premiums.

SUMMARY

In this lesson we discussed Long Term Care Insurance. We covered the different

benefits for the insurer and the various policy matters related to this type of insurance.

We also learnt about different features of the Mandatory and Optional Provisions, which

are two different types of policy provisions under the Uniform Policy Provision Law. .

*** QUIZ NO 34***

LESSON 5A DISABILITY INSURANCE

This lesson focuses on the following topics:

• WHAT IS DISABILITY INCOME INSURANCE?

• ARE EMPLOYEES COVERED BY GROUP DISABILITY BENEFITS? • WHAT ABOUT SOCIAL SECURITY DISABILITY BENEFITS?

WHAT IS DISABILITY INCOME INSURANCE?

Disability income insurance provides the insured with income when he/she becomes

sick or injured and unable to work. It helps protect against family financial catastrophe

by giving you an income to meet daily expenses.

Disability income insurance is one of the most undersold and overlooked markets in the

insurance business. From the surveys, which are taken from time to time, it has been

found that 85% of workers surveyed in companies that employ 3 to 50 employees, have

NO SHORT TERM OR LONG TERM DISABILITY. It has been said that 97 out of 100

American families would be bankrupt if they missed just THREE PAYCHECKS!

Disability income insurance comes in two major forms:

A variety of employer-paid and government sponsored programs, generally

cost-free to the recipient, covering certain categories of workers.

Private policies (paid for by individuals) that protect income when there are no

applicable employer or government programs or when those programs do not

adequately meet income needs.

As with all insurance, disability income insurance operates on the principle that many

people pool small sums of money to benefit those who need help. The beneficiaries are

people who need adequate income should they become disabled.

ARE YOU COVERED BY GROUP DISABILITY BENEFITS?

First, find out exactly what benefits your employer offers in the event of a disabling

illness or injury. Most employers allow some short-term sick leave, which may last from

a few days to as much as six months, depending both on employer policy and on

duration of employment. In some states (for example, Hawaii, New Jersey, New York,

and Rhode Island), state law requires most employers to provide disability benefits for

up to 26 weeks. In California, most employers must provide coverage for up to 52

weeks.

No laws require employers to offer long-term disability (LTD) insurance, but it is

estimated that almost half of mid-size to large employers provide long-term benefits for

at least five years. Typical group long-term disability benefits replace about 60 percent

of salary, start when short-term benefits are exhausted, and continue anywhere from

five years to life. Often, group long-term insurance is fully paid for by employers without

contributions by employees. (That’s why employer-paid disability income benefits are

subject to income tax.)

Check with your employer’s benefits office to see if you are covered and, if so, what is

available to you. Find out how long you must wait before benefits begin and how long

payments will continue during your disability. Find out, too, whether your employer’s

plan takes other disability coverage (such as government programs) into account when

calculating your long-term disability pay. Ask for a booklet describing the disability

coverage your company offers.

WHAT ABOUT SOCIAL SECURITY DISABILITY BENEFITS?

Social Security

Most salaried workers in the United States participate in the federal government’s Social

Security program. Social Security is best known for its retirement benefits. But the

Social Security Administration (SSA) also administers disability benefits. In March of

1999, 4.2 billion dollars in Social Security disability payments were sent to 7.2 million

Americans.

Your salary and the number of years you have been covered under Social Security

determine how much you can receive. In March of 1999, the average monthly payment

for a disabled worker was $733.

*** QUIZ NO 35***

LESSON 5B

Eligibility

Eligibility is based on being unable to perform any gainful employment, not just the job

you were performing at the time the disability began.

Individuals are eligible for benefits after you have been disabled for 5 months and if the

disability is expected to last 12 months or to result in death. Claim processing may take

up to 3 months, so file as soon as possible.

Social Security Payments

Social Security payments may be reduced by disability entitlements under other

government programs. Why? Because total combined payments under Social Security,

workers’ compensation, civil service, and military programs generally cannot exceed 80

percent of average pre-disability earnings. A government pension also may reduce

Social Security disability payments.

Social Security disability payments are subject to federal income tax, if your "combined

income", adjusted gross income plus any nontaxable interest income and half of your

Social Security benefits exceeds certain limits.

Example

If you file an individual tax return, you may have to pay income tax on 50

percent of your Social Security disability payments if your combined income is

between $25,000 and $34,000.

If your combined income is greater than $34,000, then 85 percent of your

benefit payments are subject to income tax.

If you file a joint tax return, and your combined income is between $32,000

and $44,000, then you may have to pay taxes on 50 percent of your Social

Security disability benefits.

If your combined income exceeds $44,000, then 85 percent of your benefit

payments are subject to income tax.

Social Security disability payments can be an important part of your income should you

suffer a disabling illness or injury. Contact your local Social Security Administration

office for an estimate of the disability benefits to which you would be entitled.

Qualifying for Medicare

After 24 months of benefits, recipients qualify for Medicare. If you want the medical

insurance portion of Medicare, in addition to hospital coverage, you must enroll and pay

a monthly premium.

ARE YOU ELIGIBLE FOR OTHER DISABILITY INCOME?

Other Potential Sources of Income

There are many other potential sources of income if you become disabled:

Workers’ compensation benefits, if you suffer an accident at work or an illness that

results from your employment.

Veterans Administration pension disability benefits, for eligible veterans.

Civil service disability pay, for federal or state government workers.

Black lung program for miners.

State vocational rehabilitation programs.

Group union disability coverage.

Automobile insurance, if disability results from an auto accident.

Private insurance, such as credit disability insurance, that makes monthly loan

payments when you are disabled.

Supplemental Security Income (SSI) for persons with low incomes and limited

assets.

Medicaid, also for persons with low incomes and limited assets.

*** QUIZ NO 36***

LESSON 5C

Availability of Other Programs

The availability and extent of these and other programs vary widely. But, because one

or more may be an important source of income should you become disabled, it’s

important to determine whether you are eligible. If you are, you should also find out how

long benefits will be paid. And, of course, your own resources- the savings you’ve put

aside over the years- are another valuable source of income.

HOW MUCH DISABILITY INCOME WILL YOU NEED?

Calculation of Disability Income

Add up all the benefits you are entitled to under the public and private programs

mentioned, along with the monthly income you could count on from other sources such

as your savings. If the total approaches your required income after taxes, you can

assume that, should total disability strike, you would be able to pay your day-to-day bills

while recuperating.

Important Points

You must remember that eligibility for Social Security disability benefits is

contingent upon your disability being expected to last for at least 12 months or

lead to your death.

If the total from employer benefits, Social Security, and other programs along

with your own resources will not be close to your pre-disability, after-tax income

and will not be adequate to support your family, you will want to consider buying

additional disability income insurance to make up the difference.

The amount of long-term disability benefits you may receive through your employer’s

group plan or your personal insurance benefits may be reduced by the amount of Social

Security or other government benefits that may be paid.

A special note for employers

If you are your own employer, consider a group policy for you and your employees. If

you are a sole practitioner, or if you work for a business that does not provide benefits

under a group policy, an individual policy is a good idea. After all, if you do not receive

benefits, your entire business may suffer.

An agent can be helpful

Whether you are an employee or an employer, your insurance agent can help analyze

your sources of disability income, determine waiting periods for various benefits, and

determine whether additional coverage would be wise.

Elimination and Benefit Periods

The Elimination Period is the period in which the insured, in the event of a total

disability, is able to continue his/her present standard of living, before the insurance

company begins making payments.

Elimination periods are available in 14-day, 30-day, 60-day, 90-day, 180-day and 365-

day time frames.

The formula is the same:

The longer the elimination period, the lower the insurance cost.

Therefore in making this decision, the insured will have to make an accurate

assessment of the liquidity at hand, other sources of revenue, income from

spouse, investments etc.

Concurrently, a fixed expense schedule will help in determining cash flow

available, and for how long.

The Benefit period is the duration for which an insured is paid disability income. Typical

benefit periods are one year through five years, age 65 and lifetime. The kind of benefit

period that best suits an individual would vary from occupation to occupation.

*** QUIZ NO 37***

LESSON 5D DISABILITY INSURANCE

This lesson focuses on the following topics:

• IMPORTANT POLICY DEFINITIONS o DEFINITION OF DISABILITY o EXTENT OF DISABILITY o “RESIDUAL” BENEFITS o PRESUMPTIVE DISABILITY o BENEFIT SIZE o BENEFIT PERIOD o ELIMINATION PERIOD o RECURRENT DISABILITY o LENGTH OF COVERAGE

• MAJOR POLICY PROVISIONS o WAIVER OF PREMIUM o PREEXISTING CONDITIONS

• EXCLUSIONS o GRACE PERIOD

• COMMON OPTIONAL BENEFITS

o REDUCED ELIMINATION PERIOD IF HOSPITAL-CONFINED o HOSPITAL CONFINEMENT BENEFITS o ACCIDENTAL DEATH AND DISMEMBERMENT

• RENEWABILITY OF THE POLICY

• SUMMARY

IMPORTANT POLICY DEFINITIONS

Before deciding on how much to insure and whom to insure with, the following should

be clarified and agreed upon.

Definition of Disability

This may be defined as inability to perform usual duties/job, or a disability that precludes

gainful employment.

"Total disability" requires the individual to be totally disabled from engaging in any

employment or occupation for which he/she is or becomes qualified for by reason of

education, training, or experience, and such individual is not in fact engaged in any

employment or occupation for wage or profit.

"Total disability" may be defined in relation to the inability of the person to perform

duties, but such inability may not be based solely upon an individual's inability to

perform "any occupation whatsoever" or "any occupational duty" or engage in any

training or rehabilitation program; however, an insurer may specify the requirement of

the inability of the person to perform all of the substantial and material duties pertaining

to his/her regular occupation.

The definition may reasonably require regular care and attendance by a physician, other

than the insured or a member of the insured's immediate family.

The definition may require that the total disability be "continuous" or "uninterrupted"

for a specified period of time or to a specified age. If the insured's total disability

continues to a specified age or for a specified period and shall continue thereafter, the

definition may predicate continuance of benefits on the insured's inability to perform any

work or occupation for which he/she is reasonably trained or qualified by education or

experience.

Extent of Disability

There are policies that cover partial disability for a limited time, and only if it follows total

disability from the same accident/cause. Others require that an individual be totally

disabled before payments commence.

This term is defined in relation to the insured's inability to perform one or more, but not

all, of the "major," "important," or "essential" duties of employment or occupation or

may be related to a "percentage" of time worked or to a "specified number of hours"

or to "compensation." If a policy provides total disability benefits and partial disability

benefits, only one elimination period may be required.

"Residual" Benefits

Residual disability is defined in relation to the insured's reduction in earnings and may

be related either to the inability to perform one or more, but not all, of the "major,"

"important," or "essential" duties of employment or occupation, or to the inability to

perform all usual business duties.

A policy which provides for residual disability benefits, may require a qualification

period, during which the insured must be continuously, totally disabled before residual

disability benefits are payable. The qualification period for residual disability benefits

may be longer than the elimination period for total disability.

These supplement income to bring the insurer at par with pervious income in case this

is reduced due to inability to fulfill responsibilities. Residual benefit generally allows

partial payment without prior total disability.

Presumptive Disability

This provision qualifies an insured for the full benefits of his/her policy based on the fact

that specific conditions exist. These conditions include the loss of two or more limbs,

speech, sight or hearing. An insured can qualify for presumptive disability even if

he/she can perform all or some of his/her regular assignments.

Benefit Amount

The indemnity amount is usually stated in a monthly amount and bears a relationship to

the insured’s earned income. In an effort to discourage insureds from remaining at

home, some insurance companies limit the size of the benefit payments to 70 to 80% of

monthly income. Lower-paid workers can expect to receive more of their pre-disability

incomes while higher-paid workers generally receive less.

Benefit Period

The Benefit Period is the period of time that benefits contract are payable for a

particular claim under the disability. Usually, an insured may select a benefit period of

one year, 2 years, 3 years, 5 years, 10 years, or to age 65, 67, or even lifetime.

Elimination Period

Policies now offer the flexibility of choosing how long an insured wishes to wait before

payments begin. Typical elimination periods for both accident and sickness are 15

days, 30 days, 60 days, 90 days, 180 days and 365 days. This selected period will

depend on the cash flow available to the insured. Delaying the start of payments will

translate into reduced premiums.

RECURRENT DISABILITY The specific purpose of the clause is to state how long a period of time must elapse

between disabilities for the same physical impairment in order to be considered an

entirely separate disability. Any disability that recurs within 6 months following the

original disability is deemed to be a continuation of that original disability.

Length of Coverage

While benefits may be payable from one year to lifetime payments, it is important to

decide if this type of insurance coverage is needed beyond a person’s working life. A

shorter coverage means less premium dollars; however, disability insurance may be

required for securing a situation where a comeback into the workforce is not possible.

MAJOR POLICY PROVISIONS

WAIVER OF PREMIUM

This provision usually waives the payment of any premium that becomes due after 90

days of total disability.

PREEXISTING CONDITIONS

This provision provides for a contestable period of 2 years and at the same time states

that benefits are not payable for disabilities that manifest themselves prior to the

issuance of the contract. A preexisting condition cannot be challenged if it was

disclosed on the application or medical examination.

Exclusions

Most disability contracts today have exclusions for: • Acts or accidents of war

• Incarceration due to a criminal conviction

• Benefits for a normal pregnancy during the first 90 days of the disability

• Disability due to alcohol or drugs

• Self-inflicted injuries

GRACE PERIOD A period of time after the due date of a premium during which the policy remains in

force without penalty. The grace period is 30 days.

COMMON OPTIONAL BENEFITS The following are common optional benefits: REDUCED ELIMINATION PERIOD IF HOSPITAL-CONFINED This optional benefit waives the normal elimination period under the disability contract if

the individual is hospitalized.

HOSPITAL CONFINEMENT BENEFITS

This benefit, regardless of when an individual is hospitalized, pays an additional monthly

indemnity along with the basic monthly indemnity, while the insured is hospital-confined.

ACCIDENTAL DEATH AND DISMEMBERMENT This benefit provides a flat, face amount payment for accidental death and

dismemberment. Usually, the benefit is a multiple of the base monthly indemnity.

This option is a guaranteed insurability benefit that provides for periodic increases in the

basic indemnity, without evidence of insurability. Normally the options are available

every year or every other year up to age 45 or 50.

FUTURE-INCOME OPTION This option is a guaranteed insurability benefit that provides for periodic increases in the

basic indemnity, without evidence of insurability. Normally the options are available

every year or every other year up to age 45 or 50.

INFLATION ADJUSTMENT

The cost-of-living adjustment increases benefit payouts by a specified percentage after

each year of disability. Of course, this means higher premiums.

Renewability of the Policy

Some polices may include a waiver of premium clause if an insured is disabled for 90

days; others may offer the additional purchase of disability coverage without medical

examinations.

An important consideration is the renewability of the policy and most disability income

insurance comes with either the Non-cancelable policy clause or the Guaranteed

renewable policy clause. A non-cancelable policy ensures continuation of a policy by

making timely premium payments. The insurance company is not allowed to change

the premiums and benefits contained therein. Guaranteed renewable policies will be

automatically renewed, with the same benefits, but the premium may be increased if it is

changed for an entire class of policyholders.

SUMMARY

This lesson covered the details of Disability Insurance. We learned about the Social

Security benefits that come under disability insurance and also the conditions of

eligibility of a person for this type of insurance. We also discussed the different policy

definitions related to Disability Insurance.

*** QUIZ no 38***

LESSON 6A PROPERTY AND CASUALTY INSURANCE/ HOMEOWNER’S INSURANCE This lesson focuses on the following topics:

• WHAT IS HOMEOWNER’S INSURANCE? • TYPES OF HOMEOWNER’S POLICIES

WHAT IS HOMEOWNER’S INSURANCE?

Homeowner’s insurance, sometimes referred to simply as property insurance, covers a

wide array of misfortunes that might befall the policy owner. Homeowner’s insurance,

like auto insurance, is a packaged deal of various types of coverage. For example, if

one went on vacation and lost their camera, property insurance would cover the loss.

Property insurance also covers legal liability in instances where something

happens on the policyholder’s property which results in a lawsuit.

Example

If Mike, the pizza delivery boy, delivers a pizza to a policyholder’s house, trips on

a gardening tool, and sues for damages, their property insurance would cover

this.

Important Point

. The main intent of property insurance is that it insures property. It covers one's

house, garage, and other structures on the property, such as tool sheds, from

damages. Also if something occurs to the house and it became uninhabitable for

a time, property insurance covers the living expenses for the policyholder and his

or her family until the house is inhabitable again.

Property insurance covers a large number of unfortunate occurrences that may befall

the policyholder. This protection is paid for in a package deal with one premium. This

premium also includes all family members and pets, so if one of the children should hit

and injure another child on the property, it is covered by the property insurance.

Similarly, if one's dog should bite the mailman and a suit is filed, the property insurance

would cover that, as well.

TYPES OF HOMEOWNER’S POLICIES

Let’s look at the basic types of homeowner’s insurance policies. These particular

policies are not found with every insurance company, but generally these are the

standard options available with most companies.

HO-1

This is the "basic" plan of homeowner’s insurance. It is the cheapest and protects

against certain named perils that usually are:

Fire, lightning, and smoke damage

Windstorm and hail

Burglary and theft

Explosion

Glass breakage

Vehicle or aircraft damage

Riot or civil commotion

Vandalism and malicious mischief

Bodily injury liability

Damage to property of others

Cost of legal defense in liability cases

Medical payments

Personal property located at home

Personal property located away from home, while traveling

Additional living expenses.

Usually this policy is not enough, and it is recommended that another policy with better

coverage be used for the best protection. States are trying to phase out this program

and replace it with one more like HO-2.

*** QUIZ NO 39***

LESSON 6B PROPERTY AND CASUALTY INSURANCE/ HOMEOWNER’S INSURANCE This lesson focuses on the following topics:

• TYPES OF HOMEOWNER’S POLICIES CON’T

HO-2

This is referred to as the "broad" plan. It includes everything that the HO-1 does, plus a

few extra benefits for about 5 to 10% more in price. The extra benefits include

protection from:

Falling objects

Damage from weight of ice or snow

Water damage from the house's plumbing system

Freezing of the plumbing system

Electrical damage to appliances

Rupture of water heaters and heating systems.

HO-3

This plan is referred to as the “special” policy. It covers all risks except for a few,

specifically excluded risks. It generally does not cover normal wear and tear,

mechanical breakdown, and vandalism if the house has been unoccupied for more than

thirty days, and continuous water seepage over a specified time period. One benefit of

this plan is that the coverage is very extensive for the actual dwelling, but does not

cover personal belongings as much as HO-2. This is a benefit if one does not have

many items of any particular value and one could easily replace them with the smaller

amount of coverage that this policy provides.

Important Point

The HO-3 policy is the one most commonly used by homeowners. This offers all

risk coverage to the dwelling. This is a particularly valuable facet of this policy

and is what really sets the HO-3 policy apart from the HO-1 and HO-2.

HO-4

This plan is specifically for people who rent an apartment. It covers belongings and

damages against the renter. The landlord should have coverage for the building if

anything catastrophic occurs, but they are generally not responsible for the belongings

of their tenants.

HO-5

This plan is the most comprehensive coverage available. It is known as the "all-risk"

policy.

It covers everything except specifically named disasters that are:

Flood (that has it's own policy), Earthquake, War, and Nuclear Accident.

This plan is not always necessary because usually the other policies provide enough

coverage, but often cautious consumers will choose this policy because it is the

most conservative, though it also boasts the highest premiums.

HO-6

This policy is specifically for the owners of condominium apartments and works in the

same way as HO-4 for apartment buyers.

HO-7

There is no HO-7.

HO-8

This policy is a specialized plan for the owners of older buildings that are irreplaceable.

These structures are insured for the cash value of the home and not the replacement

value.

*** QUIZ NO 40***

LESSON 6C PROPERTY AND CASUALTY INSURANCE/ HOMEOWNER’S INSURANCE

This lesson focuses on the following topics:

• HOMEOWNER’S LIABILITY COVERAGE

• HOMEOWNER’S INSURANCE DISCOUNTS

HOMEOWNER’S LIABILITY COVERAGE

Most homeowner’s policies include liability protection that covers the homeowner for

incidents inside or outside the home. Homeowner’s policies come with a standard

amount, but, since each individual has different amount of assets to protect, this amount

can be varied.

Types of Coverage

There are two basic liability protections. Like all liability protections, they cover one

against injury to other people -- but not to the homeowner or any member of his or her

household. These liability protections are not subject to a deductible and include:

• Coverage E as Personal Liability

• Coverage F as Medical Payment

Coverage E

This plan protects the homeowner from claims and suits that are brought against him or

her because of bodily injuries or property damage to people other than the homeowner

or members of the household. Situations where Coverage E would apply are when a

golf ball hits an individual, or when someone is injured within the residence premises.

Coverage F

This plan applies to the payment of medical expenses that are the result of an accident

within the residence premises, regardless of fault. Coverage F will pay all reseanable

medical expenses for a period of three years from the date of the accident.

HOMEOWNER’S INSURANCE DISCOUNTS

Insurance is a very competitive business and the price one pays for his or her

homeowner’s insurance can vary by hundreds of dollars, depending on the insurance

company one buys the policy from. Companies offer several types of discounts, but they

do not offer the same discount or the same amount of discount in all states. Here are

some elements that the consumer will probably consider before he or she makes a

decision to purchase a homeowner’s insurance policy:

Shopping

After one option is presented to a consumer by an insurance agent, he or she will

probably go shopping around to get advice from friends, insurance companies, state

insurance department, and consumer guides. The wise consumer usually wants quality

even if it costs a bit more.

Deductibles

The consumer will probably want to lower the deductible in order to save some money.

Deductibles start at about $250 and by increasing it to $500, the homeowner could save

up to 12%; to $1,000, up to 24%; to $2,500, up to 30 percent; and to $5,000, up to 37%.

Group Purchase

A consumer will have many advantages to purchasing both auto and home insurance

policies from the same insurance company. An individual can save 5 to 15% of the

premium if he or she buys two or more policies from the same insurance company.

*** QUIZ NO 41***

LESSON 6D PROPERTY AND CASUALTY INSURANCE/ HOMEOWNER’S INSURANCE This lesson focuses on the following topics:

T HOMEOWNER’S INSURANCE DISCOUNTS

T PRINCIPLES OF COVERAGE

T EXCLUSIONS

Security

An individual can get discounts of at least 5% for a smoke detector, burglar alarm, or

dead-bolt locks. Some insurance companies give discounts on the premiums by as

much as 15 or 20% if an individual installs a sophisticated sprinkler system and a fire

and burglar alarm that rings at the police station or other monitoring facility. Jewelry,

currency and important papers are very costly to replace, so if the homeowner decides

to keep these things in a safety deposit box, insurers may offer a discount as high as

five percent.

Loyalty

If an individual keeps coverage with a company for several years, he or she may

receive special reductions in their premiums. If a policy owner has had insurance with

the same company for three to five years, he receives 5% reduction. If the policy owner

has had insurance with the same company for six years or more, he or she receives a

10% discount.

Quality

New houses are generally built with new and improved features that older houses do

not incorporate, such as general fireproofing of building materials. Insurance

companies recognize this and sometimes give a discount on the premiums because

these houses are safer.

PRINCIPLES OF COVERAGE

There are a number of options for coverage that enhance a homeowner’s policy, either

by adding or removing certain coverage. These are also called endorsements. These

endorsements include:

• Broadened Coverage for Contents

• Contents Replacement Cost Coverage

• Valuable Items Plus

• Additional Coverage Endorsement

• Water Back Up of Sewers or Drains

EXCLUSIONS

A homeowner’s policy does not provide coverage for the following perils:

• Loss due to flood, or water that backs up through sewers

• Loss to building by earthquake, aftershocks and mudslides

• Loss by enforcement law or ordinance regulating construction, repair or

demolition

• Loss due to power interruption when the interruption takes place off the

residence

• Loss due to neglect of the insured to save and preserve property following

a loss

• War and nuclear perils

• Intentional loss

*** QUIZ NO 42***

LESSON 6E PROPERTY AND CASUALTY INSURANCE/ HOMEOWNER’S INSURANCE

This lesson focuses on the following topics:

T EXCLUSIONS CON’T

T LIMITATIONS T TERMINATION OF POLICY

Certain classes of property are specifically excluded from coverage because of the

nature of what they are or because they are generally covered by other types of

policies:

• Animals, birds or fish

• Motorized vehicles or aircraft, including equipment and accessories

• Radios, CB radios, tape decks, etc., while in or on a motor vehicle

• Articles separately described and specifically insured in any other

insurance

• Watercraft, its furnishings and equipment while away from the premises

• Property of boarders

• Aircraft or aircraft parts

• Property in an apartment held for rental by the insured

• Property rented to others off the residential premises

Limitations

There are certain classes of property that have specialized limits of coverage. These

could include:

• Grave markers

• Loss by theft of jewelry or watches

• Money or related property, coins and precious metals other than tableware

• Property away from residence premises used for business purposes

• Trailers

• Liability arising out of ownership, maintenance, use, loading or unloading

of aircraft

• Motor vehicles or watercraft

• Securities and Manuscripts

• Loss or theft of firearms

• Liability arising from war or insurrection property on the residence

premises used for business purposes

TERMINATION OF POLICY

There are ways by which the policies can be terminated. These should be known to the

insured. These include:

Failure to Pay the Premium

Failure to pay the premium on one's insurance policy can result in termination of the

policy. Unlike other kinds of insurance, property and casualty insurance offers little to

no grace period on the time in which the premium must be paid.

Material Misrepresentation

Material misrepresentation is lying or not fully revealing one's circumstances on the

insurance application form. If the form asks if one has ever been convicted of arson and

one says no while in fact, they have indeed been convicted, the insurance company

may terminate the policy the moment they find out the truth.

Leaving The House or Insured Property Unattended

Leaving one's house or insured property unattended for a specified period of time can

result in the termination of the policy.

Knowingly Increasing the Risk of a Hazard

When the policy owner knowingly increases the risk of a hazard occurring on their

property, their policy can be terminated. An example of this would be if one stored

flammable chemicals in their house, instead of in their proper place. This increases the

risk to the insurance company and could terminate one's policy.

*** QUIZ NO 43***

LESSON 6F PROPERTY AND CASUALTY INSURANCE/ HOMEOWNER’S INSURANCE This lesson focuses on the following topics:

• TERMINATION OF POLICY CON’T

• SUMMARY

Major change in the property that makes it uninsurable

Any major change in the property that makes it uninsurable could result in policy

termination.

Lack of common sense in regards to safety

If the policy owner continually files claims that show a lack of common sense in regards

to safety, the company may terminate the policy. If in August, the gas stove was left on

and as a result parts of the house burned down, and then in September, the same thing

happened with the same result, the company might terminate one's policy.

Others

Also, the insurance policy providing one's coverage does not have to renew the policy

when the time of coverage is at an end. The company might be going in a different

direction with their coverage, and the policyholder has no control over this. They may

also choose not to renew one's policy if they live in a declining neighborhood that has

an ever-increasing risk of fire and theft damage. However, sometimes when these

policies are not renewed, it is due to a form of redlining. Redlining is an illegal

insurance practice that can be dealt with by contacting the state's superintendent of

insurance or insurance commissioner.

How to save your policy from termination?

The most effective way to keep from having one's insurance terminated is to read the

policy very carefully when one first gets it. Most policies are very strict in what one can

and cannot do, and reading the policy is the only way to know if one is violating the

conditions of agreement.

SUMMARY

The lesson we just finished covered Homeowner’s Insurance. In this lesson, we saw

seven different types of Homeowner’s policies and discussed the insurer’s personal and

medical coverage under this insurance. We also discussed different discounts that an

insurer enjoys with this insurance. At the end, we took a look at different conditions that

lead to the termination of policy and which should be avoided by the insurer.

*** QUIZ NO 44***

LESSON 7A PERSONAL PROPERTY INSURANCE/

INLAND MARINE INSURANCE

This lesson focuses on the following topics:

T WHAT IS PERSONAL PROPERTY INSURANCE/ INLAND MARINE INSURANCE?

T CHARACTERISTICS OF INLAND MARINE INSURANCE T POLICY PROVISIONS

WHAT IS PERSONAL PROPERTY INSURANCE/ INLAND MARINE INSURANCE?

This is intended to cover personal property / items that are transported from one place

to another using various modes of transportation (except over ocean). By adding

various floater policies, personal effects can be insured. Homeowner’s insurance is

limited in that it contains various limitations of coverage - the Inland Marine insurance

provides broader areas of coverage.

CHARACTERISTICS OF INLAND MARINE INSURANCE/ INLAND MARINE

INSURANCE

Specific coverage

Inland Marine Insurance provides a choice of various classes of personal property such

as Jewelry, Cameras etc. The insured is allowed the flexibility of having coverage

written for separate items falling within the broader categories.

Policy Limits

A floater policy is unencumbered by limitations as to the extent of coverage on certain

types of valuable property, as is the case with a basic homeowner’s policy. The

combined effect of a homeowner’s policy with these inland marine floaters will provide a

much larger coverage for property that is valuable and fetches a lower limit under the

homeowner’s policy.

Geographical Coverage.

Coverage is available worldwide in all classes of property, except Fine Arts.

POLICY PROVISIONS

The applicable policy terms are as follows:

Loss Value

The amounts that will be compensated by the insurance company are limited to one of

the following:

The current value of the property at the time of loss

The replacement cost of the property

The reasonable cost of repair of the property

The amount specified in the policy

Loss to a Pair

If a loss occurs to a pair, the insurance company will not treat it as a loss to the entire

set. It will either replace or repair a part of the set, or it will pay the difference in value of

the set before and after the loss.

Lost Item Settlement

If there is a total loss to the insured item, the insurance company will not reduce the

amount of insurance provided and will either refund the unearned premium, or allow the

unearned premium to be adjusted against the current premium due, in case the item is

replaced.

*** QUIZ NO 45***

LESSON 7B PERSONAL PROPERTY INSURANCE/

INLAND MARINE INSURANCE

This lesson focuses on the following topics:

T POLICY PROVISIONS CON’T T INSURANCE EXCLUSIONS T SCHEDULED PERSONAL PROPERTY FLOATER T PERSONAL EFFECTS FLOATER (PEF) T SUMMARY

Claims against others

In case a loss is caused by a third party, the insurer will try to recover the amount from

this third party. In the meantime, the insured will be paid by an extension of loan by the

insurer to be settled once the recovery from the third party is made. If the recovery

efforts are unsuccessful, then the loan amount will be adjusted against the loss

settlement.

Insurance not to benefit others

This clause is put in place so that no third person may evade paying for damage caused

by them on the pretext that the property is insured. This third person, for example, may

be someone who has custody of the property.

Insurance Exclusions

In addition to the general exclusions of War, Nuclear Reactions and Radiation, the

following are some of the exclusions that apply for physical loss to covered property:

Insect infestation

Inherent Vice

Wear and tear

Gradual deterioration

Important Point

The Personal Articles floater is designed to provide coverage to nine classes of

personal property including:

• Jewelry

• Furs

• Stamp and Coin collections

• Cameras

• Golfing equipment

• Fine Arts (Rare books, paintings, antique furniture etc)

SCHEDULED PERSONAL PROPERTY FLOATER

A scheduled personal property floater is used to insure categories other than the nine

classes covered under the Personal articles floater. These additional items may be

Typewriters, wheelchairs etc. In effect, any kind of personal property can be insured

under this floater, and coverage can be adapted to meet individual needs. Newly

acquired property will be subject to a loss coverage of the lower of either 10% of the

total amount of Insurance or $2,500.

Important Points

• A personal property floater may be used for unscheduled property such as

Silverware, Clothing, Rugs, Appliances and Musical Instruments etc. (there are

13 categories).

• In terms of policy limits, the total amount of insurance in each of the categories is

the maximum coverage provided in case of each loss in that category.

• Similarly, the total amount of coverage of the 13 categories is the maximum

coverage limit of the policy.

PERSONAL EFFECTS FLOATER (PEF)

• Designed for travelers who want to insure their personal effects while traveling.

• The PEF is applicable only when the property has left the residence of the insured.

• This coverage on this floater includes:

The insured

His or her spouse

Children who are unmarried and living with the insured

• Coverage includes:

Luggage

Clothes

Sporting equipment and items counted as personal effects

• Those which are excluded from the PEF are:

Property such as cars, motorcycles, bicycles

Currency

Property that is placed in storage or is in the possession of children while

in school

SUMMARY

This lesson covered Inland Marine Insurance. We discussed different features of inland

marine insurance and also looked at the different policy provisions for this type of

insurance. At the end, we looked at the two personal property floaters related to inland

marine insurance.

*** QUIZ NO 46***

LESSON 8A FIRE INSURANCE This lesson focuses on the following topics:

• WHAT IS FIRE INSURANCE? • COVERED PERILS • PROVISIONS OF A STANDARD FIRE POLICY (SFP) (TSP in Texas) • CANCELLATION OF INSURANCE • LOSS NOTIFICATION PROCEDURE • CONDITIONS OF SFP (TSP in Texas) • SUMMARY

WHAT IS FIRE INSURANCE?

For the purpose of Insurance, fire is defined as a rapid oxidation, which causes a flame

or a glow at the minimum. Also, it must be a hostile fire, if the insured is to collect for a

fire loss; the immediate cause of loss must be fire, whether directly or indirectly.

Example

If there has been a discernable amount of water damage when fire-fighting efforts were

underway, the coverage would be admissible. Thus, when fire insurance is purchased, it

already contains a number of specified related perils.

COVERED PERILS

The SFP (TSP in Texas) is a named peril policy and usually covers the

following specific perils:

P Fire and Lightning P Extended Coverage P Explosion P Rents or Rental Value

PROVISIONS OF A STANDARD FIRE POLICY (SFP)

The legal representatives of the insured, or the insured himself, are covered through

the SFP. A person who has interest in the property, but has not been named, does

not qualify for coverage.

Settlements are made only on the face amount of the policy to the extent that it

takes to repair or replace the property with similar material.

No coverage is allowed for an indirect loss. For example: Loss of business income

Any allowable loss must necessarily have been sustained by reason of a fire, or

another insured peril.

The policy may be assigned in favor of another person, but only with the consent of

the insured.

CANCELLATION OF INSURANCE

Insurance will be suspended under the following circumstances:

If there is a significant increase in fire hazard

If the property is left vacant for more than sixty days

Riot or explosion damage will not be covered, unless a fire breaks out.

LOSS NOTIFICATION PROCEDURE

In case of a loss, the insurer needs to proceed as follows:

Immediate written notice of the loss to the insurance company

Insured must take adequate steps to protect the property from further loss

Must provide proof of loss within sixty days

Important Point

When the insured and the insurer cannot come to an agreement regarding the value of

the loss, an appraisal clause is enforced. This is done to reduce chances of litigation

and try to introduce an equitable procedure to come to an understanding of the amount

of loss.

CONDITIONS OF SFP

The contract would be deemed null and void in the following circumstances:

In case the insured willfully conceals or misrepresents a significant fact

In case of excluded property that is mentioned from the insurance contract

And other instances such as:

• Excluded perils

• Invasions

• Civil war

• Neglect of the insured in protecting the property

• Theft

SUMMARY

We just finished the lesson covering the information about Fire Insurance. This lesson

covers the Provisions of a Standard Fire Policy (SFP), Cancellation of Insurance, Loss

Notification Procedure and Conditions of SFP.

*** QUIZ NO 47***

LESSON 9A AUTOMOBILE INSURANCE This lesson focuses on the following topics:

• WHAT IS AUTOMOBILE INSURANCE? • PURPOSE OF AUTOMOBILE INSURANCE • PERSONAL AUTO COVERAGE

WHAT IS AUTOMOBILE INSURANCE?

Auto insurance is one of the most important insurances that a consumer must think

about. It obviously falls under the category of property insurance, and one's automobile

is often the most expensive and necessary pieces of property that one owns.

It is estimated that there are between 40,000 & 50,000 deaths each year due to

automobile accidents. Then there are over 5 million additional injuries. These two

statistics stem from more than 30 million auto accidents each year. Then of course

there are the economic losses. This puts auto insurance in the # 1 position as the

largest form of Property & Casualty coverage.

PURPOSE OF AUTOMOBILE INSURANCE

• Personal auto insurance protects the insured and his or her family when operating or

riding in the automobile and covers any injury sustained in an auto accident.

• It pays for medical expenses and for lost work.

• Auto insurance protects the insured’s financial security in case of a lawsuit that

results from loss or injuries to other parties, following an accident involving a

member of the family, a friend or a relative that had been given permission, by

the insured or the insured’s spouse, to drive the car.

Important Points

• Most states now require proof of financial responsibility if one is involved in an

accident, ticketed, or renewing a license.

• Most states also require owners of automobiles to carry a minimum amount of

bodily injury and property damage liability insurance.

PERSONAL AUTO COVERAGE

The most common policy in force now is the personal auto policy. It breaks down the

insurance protection into four areas:

• Liability Coverage

• Medical Payments

• Uninsured Motorist Coverage

• Physical Damage to an Automobile

*** QUIZ NO 48***

LESSON 9B

Liability Coverage

The liability portion of the auto insurance contract covers damages that the insured is

responsible for, by virtue of an accident. The policy will cover:

• The named insured

• Members of his or her family

• Any person using the covered auto

Automobile liability insurance is divided into two parts:

Bodily Injury Liability Insurance

The bodily injury liability insurance is in case the insured causes an accident in

which someone else is hurt or killed.

Property Damage Liability Insurance

The property damage liability insurance is if the insured damages someone

else’s property. Usually, of course, the damaged property is someone else’s car;

but other types of property like buildings, lampposts, garage doors, and others

are covered.

If the insured causes an accident which results in the death or injury of another,

monetary damages due to medical payments, lost wages, pain and suffering and

loss of consortium are covered.

One of the major decisions with regard to the purchase of insurance is the amount of

protection that you will buy. You may purchase insurance one of two ways: Single limit

and Split limit.

Important Points

• This coverage is mandatory in many states across the United States.

Each state sets the minimum amounts of coverage a vehicle should have

before it is allowed to operate on the road.

• The insurance company also agrees, in the policy, to defend the insured

individual in any litigation that results under the policy. But they also

reserve the right to settle any litigation without the insured’s permission.

Lawsuits are basically decided, not on the principle of who’s right, but

instead, are negotiated on the basis of dollars and cents.

Single Limit Coverage

The single limit coverage provides a one-limit of $400,000, $500,000, or

$600,000 protection for the insured for all bodily injury and property damage

losses suffered by the other party.

Split/ Dual Limit Coverage

A dual limit coverage provides a separate limit for bodily injury per person, a

separate limit for every bodily injury per accident, regardless of the number of

people injured or dead, and another limit for property damage in that accident.

The dual limits of $100,000 / $300,000 / $50,000 mean that the insurance

company will pay up to $100,000 to each injured, but no more than a total of

$300,000 to all injured people in that one accident. The insurance company will

also pay up to $50,000 for the repair or replacement of the other party’s property

damaged in that accident.

Important Point

In comparing benefit value of single and split limits, the circumstances of the

accident become very important. Also note that coverage is self-reinstating for

each accident.

*** QUIZ NO 49***

LESSON 9C AUTOMOBILE INSURANCE This lesson focuses on the following topics:

• PERSONAL AUTO COVERAGE

Liability Exclusions

There are several liability exclusions that should be considered:

Intentionally inflicted bodily injury or property damage is excluded. It

would be bad public policy to allow persons who deliberately cause

damage to be protected.

Property owned by the insured, rented by the insured, or in the care and

custody of the insured is usually excluded, primarily because it ought to

be covered elsewhere (under a homeowner’s policy or under personal

property floaters).

Business usage of the automobile is also usually excluded, including

renting the vehicle out for hire or in use by employees for business

reasons.

The policy form excludes coverage for persons who use the car without

the belief that they were authorized to do so.

Medical Payments Coverage

Medical Payments Coverage pays hospital bills, doctors’ bills, funeral expenses and

other related medical cost to the insured or to family members following an auto

accident. It makes no difference if the accident was the insured’s fault or not, nor does it

matter whether the insured or the covered family members were struck while occupying

a vehicle or while walking, etc.

The policy’s basic unit of coverage is $1,000, but one can expand the coverage to

$10,000 for a reasonable premium increase. The policy covers:

The insured and family members of the insured

Injuries while occupying the covered auto, including getting into and out of

the car

The insured and named family members while pedestrians

Other persons while occupying the covered automobile

The exclusions are usually similar to the exclusions under the liability provisions,

especially auto for hire and autos operated without a reasonable belief that the user had

the authority.

Important Point

The additional benefit of medical coverage is that it provides coverage for funeral

expenses, which is not covered by health insurance provided either by employers

or through private coverage.

PERSONAL AUTO COVERAGE

PERSONAL INJURY PROTECTION

In several states, personal injury protection is offered. PIP is a no-fault coverage

for insured victims of auto accidents. PIP coverage provides the following

benefits:

B Reasonable expenses for necessary medical and funeral services B 80% of an insured’s loss of income from employment B Reasonable expenses for obtaining services (house-keeping, child

care, etc.) that an insured would normally have performed without pay if not injured

The limit of insurance is usually $2,500 per person, with optional higher

limits of $5,000, $10,000 and up to $100,000.

Uninsured/Underinsured Motorists Coverage

This auto insurance protection covers the insured and his or her family members and

passengers who are injured by a variety of incidents. Some people drive without

insurance despite the laws to the contrary. The uninsured motorist provision covers the

losses from their lack of responsibility. The policy pays an amount that the insured

could have collected had the uninsured driver carried the minimum required coverage in

that state. This contractual promise is limited to the minimum. This protection extends

to three situations:

An uninsured or under-insured automobile under the state laws

Hit-and-run accidents

Insured autos with insurance companies that become insolvent

*** QUIZ NO 50 ***

LESSON 9D AUTOMOBILE INSURANCE This lesson focuses on the following topics:

• PERSONAL AUTO COVERAGE

Uninsured motorist protection deals only with losses for bodily injury and not property

damage.

Important Point

The Underinsured Motorists Coverage protects the insured and the covered

family members for the loss he or she sustained after the other drivers coverage

has been exhausted. So, when the other driver does not have enough auto

insurance liability coverage to pay the full claim amount, the injured individual’s

insurance takes over.

If you cause an accident, the only way that you can collect if the other driver was

insured. If he is not, you will only be paid a sum equal to the amount you would have

received if the other driver was properly insured.

Example

If the declaration page shows an uninsured liability limit of $150,00/300,000, this

means that per individual maximum coverage is $150,000 and $300,000 is the

limit of per accident coverage. To compensate for a situation where the person

causing the accident is at fault and is also underinsured, the underinsured

motorist coverage will pay for any shortfall in the coverage paid by the other

persons insurance.

Physical Damage Coverage

The physical damage section of the policy insures the covered automobile for damages

due to collision or any other peril, such as theft or weather. The policy can cover all the

physical damage to the car. This is usually provided under comprehensive coverage,

which is really coverage for all risks of physical damage. Collision is a separate

coverage item that includes damage to the auto from a collision with another car or any

other object. The comprehensive coverage then would cover losses due to:

Fire

Theft

Vandalism

Storms

Hitting animals

Explosions

Important Point

• The collision coverage will usually be scheduled separately. And it will relate to

the value of the car. This is important, because not all cars are worth enough to

insure against collision.

• Comprehensive coverage can be issued alone without including collision

coverage, but collision coverage will not be issued unless comprehensive

coverage is included.

• Collision coverage is not dependent on fault. Regardless of who caused the

accident, you are entitled to collision benefits. Collision benefits can be paid to

vehicles you don't own. Should you be driving a car you do not own, and are

involved in an accident, or the car is stolen while in your possession, benefits will

be paid.

Exclusions

Some of the more common exclusions include damage to tape players and other

sound systems, antennas, and custom furnishings. The policy again typically

excludes damage while the car is for hire.

*** QUIZ NO 51***

LESSON 9E AUTOMOBILE INSURANCE This lesson focuses on the following topics:

• PERSONAL AUTO COVERAGE • COMMERCIAL (BUSINESS) AUTO COVERAGE

Auto Insurance Discounts

Discounts could be bigger than one might think and there are more discounts than the

average driver knows. Let’s look at some of the discounts available with some

insurance companies.

Good Driver Discount

5% to 15% discount is given if an individual has a three-year accident-free driving

record. Some states give up to 20% discount.

Airbag and Automatic Seatbelt Discount

5% to 45% discount off the No-Fault and Medical Payments premium is offered if

the individual has air bags and or automatic seatbelts.

Multi-Car Discount

An auto driver is given up to 30% discount if he or she insures more than one

automobile.

Home Insurance Discount

If an individual obtains homeowner’s insurance or renters insurance from the

same company as their auto insurance, he or she receives a discount of up to

15%.

Defensive Driver Discount

The auto driver will receive up to 10% discount if he or she has completed a state

approved defensive driving course with the past three years. With some

companies, one must have successfully passed the course within one year.

Safe Vehicle Discount

An individual is eligible for a discount of up to 10% if he or she does not drive a

high-performance automobile and is insuring automobiles that have been

determined to be very safe.

COMMERCIAL AUTO COVERAGE

Commercial autos are those used to transport members of the public such as bus

companies, taxi companies, livery / sedan companies and school buses. Business

automobiles are company owned automobiles not used in transporting members of the

public or for hauling. Truckers are vehicles used to transport or haul goods for other

parties.

A business auto coverage part consists of:

• Business auto coverage form

• The business auto coverage physical damage form • Garage coverage form

• Truckers Coverage Form

The coverage part can be included in a commercial package policy or, as is usually the

case, issued in a mono-line policy.

Commercial Auto Insurance

It protects an individual and his or her business when he or she or drivers and

passengers are injured in an auto accident. It pays for medical expenses and for lost

work. Then it protects the insured and his or her financial security in case there is a

lawsuit filed against him following an at-fault accident.

*** QUIZ NO 52***

The commercial automobile is a very important business asset. The commercial auto

insurance policy protects that investment. It pays for the replacement or repair of the

commercial auto in case it is:

• A comprehensive loss. The coverage pays for loss from any cause, except collision with another object or overturn of the vehicle.

• Specified causes of losses. The coverage will only pay for loss

caused by any of the specific perils of fire, lightning, explosion, theft, windstorm, hail, earthquake, flood, vandalism or mischief, or the sinking, burning, collision or derailment of any conveyance transporting the covered auto.

• A collision loss. It will pay for loss caused by collision with another

object or the overturn of the auto.

Liability Commercial Auto Insurance

This commercial auto insurance coverage is mandatory in many states across the

United States. Each state sets the minimum amounts of coverage that a vehicle should

have before it is permitted to operate on the road. This coverage protects one from

being financially drained when he or she is liable for any injury or death of other parties

in an auto accident. It does not pay for the individual or for any of the covered

employees, but it pays for the other party – the innocent party.

Bodily Injury

Bodily Injury pays, up to the policy limit that has been pre-selected, medical bills, lost

wages and income, pain and suffering and even funeral costs suffered by the other

party. It may also pay for legal or court costs that one would have otherwise had to pay

for.

Property Damage

Property Damage pays for the repair and replacement of the other party’s property

when the insured or the insured’s drivers are deemed liable for the accident. It pays

to fix or replace the other automobile(s), their garage door that the commercial

automobile damaged, or any other property or object that is affected.

The commercial auto insurance policy has a choice of:

Single Limit Coverage

The single limit coverage provides a lone-limit protection for the insured for all

bodily injury and property damage losses suffered by the other party.

Split Limit Coverage

The dual limit coverage provides a separate limit for bodily injury per person, a

separate limit for every bodily injury per accident and another limit for property.

Comprehensive (All-Risk) Commercial Auto Insurance

Comprehensive Commercial Auto Insurance provides all liability coverage for

commercial automobiles. Commercial automobiles are big investments because they

are driven by a variety of people and while transporting multiple persons there is more

risk of bodily damage. The cost of commercial vehicle repair is usually significantly

higher. All-risk coverage pays to fix or to replace a vehicle whether or not the insured or

the covered drivers are at fault or not.

Losses from a commercial auto accident can be catastrophic, and can ruin a business

that does not have adequate policy coverage. The needs and requirements should be

reviewed carefully, so as to help the consumer select the best coverage for his or her

commercial automobiles.

SUMMARY

Automobile Insurance is perhaps the largest selling insurance policy. This lesson

discusses the purposes of automobile insurance, as well as the two types of

automobile insurance policies, Commercial and Personal.

*** QUIZ NO 53***

LESSON 10 INSURANCE FRAUD

WHAT IS INSURANCE FRAUD?

Insurance fraud occurs when someone tries to make money from insurance

transactions by deceiving others. Insurance fraud – including selling insurance without a

license, filing fake or padded claims, and making or possessing counterfeit proof-of-

insurance cards – is a criminal offense.

WHAT ARE THE MOST COMMON KINDS OF INSURANCE FRAUD?

Agent Fraud

Some examples of this kind of fraud are:

A couple pays an agent $500 in cash for a car insurance policy. The agent provides

the couple with fake proof-of-insurance cards and pockets their premium, leaving

them unprotected.

An agent persuades a couple in their 80s to invest $47,000 in a "savings plan"

paying 11.25 percent interest. Interest payments stop after three months, and the

agent ignores their requests for their money back.

A customer pays a full years $800 homeowners insurance premium to an agent,

who keeps the premium instead of sending it to the insurance company. The

company later cancels the policy for nonpayment of premium. The customer

telephones the agent, who says not to worry because the cancellation was "just a

mistake."

Unauthorized Insurance

In this kind of fraud, the unlicensed insurance companies and insurance agents sell

their insurance policies to the clients. Some examples of this kind of fraud are:

A physician pays $14,000 for medical malpractice insurance before discovering that

the insurer, based on a tiny Caribbean island, is doing business illegally in Texas

and has no reserves for paying claims.

A small business pays an employee leasing company for workers´ compensation

and health insurance for its "leased" employees. The employee leasing company

never buys an insurance policy, choosing instead to pay the employees´ medical

bills from its cash flow. Eventually, the leasing company stops paying the workers´

claims, leaving the workers or their employers responsible for their hospital and

doctor bills.

Fraudulent Insurance Claims

In this type of fraud persons and other service providers like: hospitals, doctors, stores,

workshops etc., send the false bills to insurance companies. Some examples of this

type of fraud are:

A hospital bills patients´ insurance companies for procedures not performed.

A criminal ring buys automobile liability insurance, fills two cars with passengers,

then stages an accident in which all claim injuries.

*** QUIZ NO 54***

LESSON 10B INSURANCE FRAUD This lesson focuses on the following topics:

• WHY IS AN INSURANCE LICENSE SO IMPORTANT? • WHAT DOES THE DEPARTMENT OF INSURANCE DO ABOUT INSURANCE

FRAUD?

o PYRAMID SCHEMES

WHY IS A LICENSE SO IMPORTANT?

A license helps protect the consumer from unscrupulous agents and companies. Selling

insurance without a license is a felony in many states. To receive and keep a license:

An insurance company must satisfy The Department of Insurance that it is

financially sound and competently and honestly managed.

Many states require an agent to be fingerprinted, undergo a criminal

background check and, in most cases, pass an examination on the kind of

insurance that will be sold. The Department of Insurance can revoke an

agent’s license for committing fraudulent and dishonest acts.

In addition, claims against unlicensed insurance companies could go unpaid if the

company fails. Guaranty associations, which pay claims of insurance companies that

fail, cover only licensed companies.

WHAT DOES THE DEPARTMENT OF INSURANCE DO ABOUT INSURANCE

FRAUD?

The Department of Insurance’s Insurance Fraud, Legal and Compliance, and

Financial programs investigate insurance fraud cases. The Fraud Unit helps federal,

state and local criminal justice agencies prosecute the perpetrators. The Commissioner

of Insurance revokes the licenses of agents and adjusters who commit fraudulent acts

and issues cease-and-desist orders to halt unlicensed insurance operations and

deceptive trade practices. The Department of Insurance informs the public of these

actions through news releases. In many instances, the Department of Insurance works

through the State Office of the Attorney General to secure court injunctions against

fraudulent companies and restitution for their victims.

Pyramid Schemes

Fraudulent products involving insurance sometimes are sold through multi-level

marketing or "pyramid" schemes that usually are promoted through low-budget means

like fliers, word of mouth, and grocery store bulletin board notices.

At the heart of all pyramid schemes is the recruitment of salespeople who share their

commissions with the recruiter. Theoretically, a super recruiter can sit back and collect

commission checks without selling anything. These grandiose dreams seldom, if ever,

come true.

Multi-level marketing is legal when commissions and other payments are tied to the

actual sale of goods. It is usually illegal, however, when one’s income depends solely

on recruiting new salespeople. Pyramid schemes in the sale of insurance are illegal

because licensed agents cannot legally share commissions with someone who is not

licensed.

Here is another scenario from a Department of Insurance’s files:

For a $99 "membership fee," one pyramid operation promised to buy life

insurance policies for members, borrow against the policies and use the loan

proceeds to get credit cards and certificates of deposits for the members. In

addition, members could become sales representatives and receive $3,000 for

each new member they recruited. The promoters didn’t tell their victims that you

can borrow only up to a policy’s cash value, which usually is $0 in the first year

and takes years to reach a significant amount. The promoters would have

needed millions of dollars to buy policies big enough to generate sufficient early

cash value to make good on their promises. A $99 membership fee would not

produce that kind of money. The Department of Insurance´s Insurance Fraud

Unit investigated this operation and obtained a cease-and-desist order, shutting it

down.

*** QUIZ NO 55***

LESSON 10C INSURANCE FRAUD

This lesson focuses on the following topics:

• WHAT DOES THE DEPARTMENT OF INSURANCE DO ABOUT INSURANCE FRAUD?

o HEALTH INSURANCE SCAMS o CLAIM FRAUD

• SUMMARY

Health Insurance Scams

Most health insurance fraud cases that the Department of Insurance investigates

involve group health plans sold to employers for their workers.

Multiple Employer Welfare Arrangements (MEWAs)

Multiple employer welfare arrangements (MEWAs) are a way for small employers

to self-insure employee health benefits. "Self-insure" means the MEWA pays

medical claims directly from funds contributed by its members and their

employees, rather than buying an insurance policy.

For example: In Texas, valid trade associations and other employer groups in the

same or similar line of business can be licensed as self-funded MEWAs. To get

and keep their licenses, the MEWA must be competently managed, pass TDI

financial examinations, and obey Texas´ insurance laws.

Health insurance scams almost always take the form of unlicensed, self-insured

MEWAs that seduce employers with unusually low premiums for covering their

workers. They often masquerade as labor union plans or employer "trusts."

Illegal MEWAs have victimized teachers, missionaries, city workers, and

employees of small businesses. After getting an employer’s business, they

typically create a false sense of security by paying small, early claims before

denying or ignoring larger claims for serious illnesses or surgeries. Operating an

unlicensed MEWA is a felony. The consumer should contact the Department of

Insurance to learn if a MEWA is licensed.

Unlicensed, self-insured MEWAs should not be confused with fully insured

Multiple Employer Trusts (METs), which are a legal way for several

employers to pool their buying power in the purchase of group health

coverage from a licensed insurance company.

Federal Government’s Employee Retirement Income Security Act (ERISA)

People selling bogus multiple-employer health plans typically claim that the

federal government’s Employee Retirement Income Security Act (ERISA) of 1974

exempts them from state licensing and regulation. Congress, however, has

authorized the states to license and regulate self-insured MEWAs, as Texas and

many other states do. Bona fide single-employer ERISA plans can operate

legally without a license in Texas as well as other states, but self-funded multiple

employer plans cannot, unless they fit into one of very few narrowly defined

exceptions. These exceptions include rural electric cooperatives and bona fide

union plans established through collective bargaining between actual employers

and legitimate unions.

As a rule, valid ERISA plans are not "sold." Employers or employees establish a

plan themselves rather than buy into one marketed by an outside promoter. The

consumer should refuse to do business with anyone who tries to sell a multiple-

employer health plan, unless it is licensed by the Department of Insurance or

buys its coverage from a licensed insurance company. This warning applies to

plans claiming to be "trusts" for groups of employers. It also applies to plans

offered by sham unions that do not engage in legitimate collective bargaining and

exist only to market fraudulent health plans.

Claim Fraud

Insurance claim fraud drives up insurance costs. The Department of Insurance’s

Insurance Fraud Unit works with insurance company special investigative units and

local prosecutors to convict those who commit fraud. Two of the most common types of

claim fraud involve auto accidents and health care providers.

Automobile Accident Fraud

People commit auto accident fraud to collect from insurance companies for

injuries never received or repairs never performed. Sometimes doctors and

lawyers collude with "victims" to inflate a claim, make it more credible and

pressure insurers to settle. The four most common types of auto accident frauds

are:

Staged accidents in which the drivers collide intentionally

Caused accidents in which the criminal involves you in a wreck that

is made to look like your fault

Auto repair shop fraud, which involves billing for unperformed work

or charging to replace parts that were merely repaired

Fake accident reports

Health Care Provider Fraud

Health care fraud includes over-billing by providers and caring for sick people

with useless and often dangerous treatments. Over-billing includes:

Providing uncovered services while billing the insurance company

for covered services that were not performed

Performing unnecessary tests

Charging for services not given or supplies not received

Billing for long-term, repetitive and costly treatments for unspecified

illnesses

SUMMARY

This lesson covered insurance frauds and their features. We discussed the importance

of license and learned about the Department of Insurance and their efforts to control

insurance frauds. The lesson was concluded with a discussion on the different types of

claim frauds.

*** QUIZ NO 56***

LESSON 11 GROUP INSURANCE

WHAT IS GROUP INSURANCE?

It usually includes life insurance, health insurance and disability income insurance that

is offered to employees as a group by their employers. With rising health care costs,

“Group Insurance Packages” are fast becoming important criteria for job selection and

retention.

ADVANTAGES OF GROUP INSURANCE

No limit on number of insured

Lower cost and a larger range of coverages

Flexibility in terms of coverages offered and variations in specific terms of the

package such as deductibles and benefits.

BENEFITS OF CORPORATE INSURANCE

It is possible for some companies to self-insure risks that they anticipate. However, in

matters of significance such as medical insurance, it is wiser to employ the services of

an insurance carrier and use their expertise in developing a program that is not only

cost-effective, but also tailor made in terms of requirements and resources available.

Certainly, there are some outstanding advantages to choosing the services of an

insurance carrier, such as having a pre-determined cost of insurance instead of leaving

it as an open-ended question. Also, it is best to leave tasks such as defining disabilities

etc to the experts, and relieve the company of the duty of settling insurance claims as

they happen. Lets review quickly the benefits of using a corporate insurer:

Security

A fixed, stated number and value of benefits from an insurance carrier conveys a feeling

of security to the group that is insured and regulation of the industry lends further

credibility.

Range of Services

These include legal, financial and other insurance related services to deal with complex

employee problems.

Fixed Insurance Cost

Costs are predefined. Besides, it is best to leave the art of diversifying risk to

companies that make money from these very tasks.

Tax Advantage

Group insurance plans attract certain tax advantages that may not be available to self-

insured plans, or these advantages may be subject to certain limits under the latter.

EMPLOYEES AND DEPENDANTS DEFINED

In the interest of keeping premiums as low as possible, and also to determine the

effectiveness of such group insurance plans, employers must define as closely as

possible employees and the dependants who will be covered under these programs.

• Full time employees are those that work a minimum of 30 hours a week

(although there are other acceptable terms). Also, insurance companies set the

upper age limit for working persons at 65. Staying within the purview of the law,

the terms of the Group term life insurance may be structured to suit the particular

needs of a particular group within the company.

• A spouse is a dependant if he/she is living with the employee, and a spouse

cannot be insured both as a dependant and an employee as in the case of both

spouses working for the same company.

• Children are usually covered from birth until they attain the age of 19, or they get

married whichever comes first. If children are studying and dependant, coverage

will continue in some cases till age 25. Furthermore, coverage for handicapped

children are covered by law in many states.

*** QUIZ NO 57***

LESSON 11B GROUP INSURANCE This lesson focuses on the following topics:

• EMPLOYEES AND DEPENDANTS DEFINED o NEW EMPLOYEES

• NEW GROUP INSURANCE FIELDS • UNDERWRITING GROUP INSURANCE • TAKE-OVER CASES

New Employees

Here are some of the procedures that affect a new employee:

Pre-Existing Condition

If the insured or a dependant received treatment for a condition within three months

prior to the effective date of the insurance policy being effective, the insurance

company will not pay claims made within say the first three months and possibly

even a year.

Medical Evidence

The Internal Revenue Code disallows the use of medical exams in groups of less

than 10 insureds, although a statement of health may be required. Unusual

circumstances may require a medical exam such as a known history of some

medical problem. Also, in cases where a program insures more than 35 to 50 lives,

the medical evidence requirement does not come into play. Upon joining a small

group insurance program, an employee is required to satisfy this condition.

Waiting Period

A waiting period clause is put into place to control per-existing condition abuses.

Waiting periods range from one month to six months, averaging at about 3 months

and is usually set by the insurer.

Eligibility

Once the waiting period is over, the employee usually has 30 days to decide to join a

group insurance program or not. In case he/she decides against coverage, proof of

this is retained by the company. Should the employee decide to join at a later date,

he must provide a medical exam to prove insurability. An employee must also

register a new dependant within 30 days to avoid future complications.

NEW GROUP INSURANCE FIELDS

In addition to the more conventional kinds of Group Insurance available, other areas are

also picking up in popularity. Worth mentioning are:

Group Long-Term Care

Vision Care Insurance

Group Auto Insurance

Legal Insurance

UNDERWRITING GROUP INSURANCE

It is harder to modify and correct problems that arise out of Group insurance plans, and

therefore, insurers tend to be very careful when it comes to putting together a new

Group insurance plan.. Much of the screening is done so that the pool premium of the

Group is not adversely affected; repeated claims by some members affect premiums

paid by all.

Some areas of concern for insurers may be the following:

High employee turnover

Disproportionate number of seasonal employees

Disproportionate number of employees in the older age bracket.

TAKE-OVER CASES

Take over cases are scrutinized just as much as new groups, although some insurance

companies waive waiting periods for employees and their dependants. Just as in the

case of forming a new small insurance Group Plan, proof of insurability is a must.

Here are some basic considerations/rules in a situation where an insurer is taking over

a group insurance from another carrier

Employees and Dependants will mean essentially the same thing as it did in the

previous plan.

Coverage for certain things like waiver of premium for a disabled employee, or a

dependant over 18 with a permanent disability may be discontinued.

The new carrier might review the financial experience of the previous carrier to

determine what kind of risk the potential take over poses.

*** QUIZ NO 58***

LESSON 11C GROUP INSURANCE This lesson focuses on the following topics:

• PARTICIPATION – AN IMPORTANT CONCEPT • RENEWALS OF GROUP INSURANCE • DIVERSIFYING RISK

o REINSURANCE o COINSURANCE o GEOGRAPHICAL DIVERSIFICATION

PARTICIPATION – AN IMPORTANT CONCEPT

Basic participation rules in a Group Insurance Plan cover issues like:

Number of lives insured

Number of employees and dependants covered

Quantum of contributions required

Some states regulate the minimum number of individuals covered, but even in the

absence of these regulations. such a rule may be imposed by the carrier. Also, there

are rules that require at least a 75% participation of employees in a company. The

smaller the group, the higher the participation requirement will be. The same applies to

dependant coverage; 75% of all families must participate in the Dependant coverage

program.

Insurance companies also affix a certain level of employee contributions such as total

contributions by employees not to exceed 75% of the cost of all coverage.

RENEWALS OF GROUP INSURANCE

Since most policies are issued on a one-year basis, renewals are manual and are the

responsibility of a specific department. Several things are considered while scrutinizing

a renewal case, such as participation levels and the risk performance of the group for

the year in question and also past years to identify an patterns that may help increase

the performance of the group. If an insurer is not satisfied with the performance, it will

raise premium rates to compensate for a higher risk profile on the particular group.

DIVERSIFYING RISK

Reinsurance

Reinsurance is used by insurance companies to spread their risk on large exposures.

Even life insurance companies will not go beyond a certain limit in taking on risk for one

party. Reinsurance is a method of dispersing this risk with other insurance companies.

The way that this works is that the primary insurer issues a master contract to the

employer, informing the company that only a certain percentage of the risk will be

covered by them, the remainder going to second and third insurance companies.

Premiums are shared by the insurance companies involved, and are paid net of their

shares of claims lodged. The primary insurer will also charge a certain amount for

administrative costs.

Coinsurance

Coinsurance is another method of risk diversification whereby a separate policy is

issued by each company to cover its share of the insurance on each policy.

Geographical Diversification

Risk may also be shared on a geographical basis, by insurance companies sharing

business depending on where they are located. In the case of a company where plants

are located in separate communities, this method is the most convenient.

In summary, the crux of the matter in evaluating a group for underwriting insurance is

the nature of the group—specifically, whether or not the members are bound by a pre-

existing relationship either by virtue of their jobs or in some other way. The most

important tool available to an insurance company in a group insurance situation

is the diversity of the group in terms of backgrounds, ages, number of

dependants, and medical histories – a background that is too similar would

defeat the purpose for the insurer.

.

SUMMARY

This lesson covered the information about group insurance. We discussed the

advantages of group insurance and its benefits for the insurers. We also defined

employees and dependants, New Group Insurance Fields, underwriting group

insurance, “Take-over” cases, participation, renewals of group insurance, and

diversifying risk.

*** QUIZ NO 59***

LESSON 12 COMMERCIAL GENERAL LIABILITY

WHAT IS COMMERCIAL GENERAL LIABILITY?

Commercial General Liability (CGL) is a means of safeguarding a business enterprise

against liability in various fields. It attempts to anticipate the possible liability claims that

may confront a company in the course of its business. In recent years, the phenomenal

rise in the number of liability cases against companies with reference to negligence,

product liability etc., have made this kind of insurance virtually mandatory.

LIABILITY SOURCES FOR COMMERCIAL LIABILITY

There are two basic sources of commercial liability, which present a legal responsibility

for injury or damage:

Civil Liability

Criminal Liability

Civil Liability

Civil Liability, also known as Tort Liability, has to do with a wrongful invasion of another

person’s rights, but is not a criminal act. Such a liability may be caused by:

Negligence

A breach of the legal duty owed to the plaintiff by the defendant thatresulted in

injury or damages.

Intentional Torts

An example of this would be a libel suit, slander, defamation of character etc.

Strict Liability

A manufacturer of a product is held liable for any products that prove to be

hazardous to the safety of consumers, and all entities involved in the

manufacture of such a product are held responsible for injury or damage.

Contractual Liability

A breach in a contract between two parties may result in injury or damage, and

the party committing the breach according to the terms of the contract will be

held liable for such injury or damage.

Criminal Liability

This is defined as the social responsibility that is imposed by government, through law

enforcement agencies, on acts that are considered harmful to public Welfare.

COVERAGE FORMS

Coverage for Commercial Liability

Different coverages exist for bodily injury, Personal and Advertising injury, and Medical

Payments. Before we discuss the various coverages, it is important to take a look at the

conditions that apply before coverage is actually paid. These are:

Occurrence

Injury or damage must occur during the term of the policy. However, claims may be

made during a subsequent period, limited only to the statute of limitations clause,

which specifies the outer limit for such claims.

Claims-Made

This refers to claims made during the term of the policy. The policy has a retroactive

date, which may be inapplicable in some cases, or it may be the inception date of

the policy or some specified date before inception.

*** QUIZ NO 60***

LESSON 12B

CGL COVERAGES

Coverage A – Bodily Injury and Property Damage Liability

Bodily injury refers to claims made by a person or even an organization for loss of

services, injury resulting from sickness, disease or death resulting from a particular

occurrence. An occurrence could be an accident, or continuous exposure resulting

from harmful conditions.

Property damage is physical harm caused to tangible assets/property, which may

cause loss of use of that property. The loss of use could still occur even if no

physical harm has come to it.

Conditions of Eligibility

The loss must be incurred within the period that the insured is covered

under the policy

The loss must be the direct result of an event, or occurrence.

Must occur in the area in which the coverage is valid.

Exclusions

This coverage does not apply to:

Expected or intended injury

Contractual Liability (where the insured is obliged to pay damages by

reason of having entered into a contractual agreement)

Liquor Liability (for example, where the insured is held liable for

assisting in or contributing to, in any form, the intoxication of a person)

Workers Compensation (obligations under a worker’s compensation or

other similar law)

Employer’s Liability (liability arising out of injury to employee, spouse

or other dependants in the course of employment)

War

Mobile Equipment (used in transportation, either owned or rented)

Property owned, rented, occupied by Insured.

Product owned by Insured

Work damaged, such work being owned by the named Insured (does not

apply in the case of subcontracting).

Property damage to already impaired property

Coverage B – Personal and Advertising Injury Liability

“Personal Injury” refers to injury other than bodily harm arising out of slander,

wrongful eviction, malicious prosecution etc.

“Advertising Injury” refers to injury arising out of violation of a person’s privacy,

copyright infringement of slogan, logo or title etc.

Conditions of Eligibility

• The personal injury must be caused by the business of the insured and not

through advertising, publishing etc done by or for you.

• Advertising Injury is caused by advertising your product, goods and services.

Exclusions

This coverage does not apply to

Personal or Advertising Injury arising out of the publication of material

either oral or written, having full knowledge of its falsity

If the first of the publication containing objectionable material causing

Personal or Advertising injury has been published before the beginning

of the policy term

A willful violation of an ordinance or the like

In a case where liability is assumed in the execution of a contract.

Advertising injury arising from a breach of contract, or in a case where

an inaccurate description of price, products etc is provided, or where

the goods advertised do not conform to the attributes advertised.

*** QUIZ NO 61***

LESSON 12C

Coverage C – Medical Payments

These are expenses paid for “bodily injury” either on the premises of the insured, or off

the premises in carrying out business for the insured.

Conditions of Eligibility

These include all emergency services like ambulance, hospital and professional

nursing services, as well as surgical, x-ray expenditure etc. The Medical

payments insurance also covers funeral expenses.

Exclusions

The following “bodily injury” expenses will be excluded

For someone hired to work on behalf of the insured, or a tenant

If such benefits are included under some compensation law

To a participating athlete

If they are included in the Product hazard

If they are part of the exclusions in coverage A

Important Point

There are some additional expenses that will be paid by the insurer known as

Supplementary payments, and these do not form part of the insurance coverage or

reduce it to any extent. Some of these are cost of bail bonds due to accidents, costs

taxed against the insured in a lawsuit, etc.

LIMITS OF CGL

The limits are the total payments made by way of losses. There are two categories of

these limits, namely:

• General Aggregate

• Products-Completed Operation Aggregate

The General Aggregate is the maximum amount the company will pay during a year for

losses claimed under Coverages A, B and C. These are further broken down into Sub-

limits:

Personal and Advertising Injury Limit

This is the maximum damage payment for the two categories. The Limits on

each occurrence are the sum of damages for bodily injury or property damage

under Coverage A, and Medical Expenses under Coverage C.

Also, each occurrence is limited by way of coverage in the following way: Fire

Damage Limit under Coverage A is the maximum damage per fire. The Medical

expense limit is the maximum medical expense for bodily injury by one person.

BUSINESS LIABILITY EXPOSURES

Business Liability Exposures are of four types:

Premises Liability Exposures

Premises Liability Exposures arise out of ownership, or control of premises; to maintain

premises in the way a normal person would.

Operations Liability Exposures

Involves activity like processing, manufacturing

Products Liability Exposures

Legal liability of manufacturers/sellers to cover injuries to consumers or bystanders.

Company may become liable due to Negligence, Breach of Warranty (either expressed

or implied)

Completed Operations Liability Exposures

Refers to operations that have been completed, if the accident occurs away from

premises owned/rented.

Contingent Liability Exposures

This refers to the liability of an employer (or any other person) arising out of the acts of

an employee, or independent contractors.

Contractual Liability Exposures

This refers to liabilities assumed under contract, and is created when parties enter into

an agreement.

SUMMARY

This lesson covered commercial general liability. The lesson discussed the different

types of liability coverages, coverage forms, CGL coverages, Limits of CGL and

business liability exposures.

*** QUIZ NO 62***

LESSON 13A PRINCIPLES OF RISK MANAGEMENT

This lesson focuses on the following topics:

• WHAT IS RISK MANAGEMENT? • STEPS INVOLVED IN RISK MANAGEMENT • FOCUS OF RISK MANAGEMENT • BUSINESS OR SPECULATIVE RISKS • IDENTIFYING EXPOSURE TO LOSS

WHAT IS RISK MANAGEMENT?

Risk Management is the process which controls the effectiveness of an organization by

planning, organizing, leading and controlling the activities of an organization with the

goal of minimizing the risk of accidental losses to the organization.

STEPS INVOLVED IN RISK MANAGEMENT

As a process, risk management has the following steps

Identifying exposures to accidental loss that may interfere with an organization’s

basic objectives

Examining feasible alternative risk management techniques for dealing with

these exposures

Selecting the apparently best risk management technique(s)

Implementing the chosen risk management technique(s)

Monitoring the results of the chosen technique(s) to ensure that the risk

management program remains effective

FOCUS OF RISK MANAGEMENT

Risk Management focuses on accidental losses, i.e., pure losses. The definition of

these pure losses, in simple terms, is incidents that will result either in a loss or no loss

when confronted with potential loss situations such as fire, machinery breakdown or

illness.

BUSINESS OR SPECULATIVE RISKS

As opposed to pure risks, speculative risks may lead to three types of outcomes:

• Gain

• Loss

• Status quo

Much of these risks are undertaken in the hope of gain, and cover a range of

decisions from investing in a particular security to launching a new product.

Casualty risks, which are a part of accidental risk, include those arising from:

• Liquidity risks

• Market risks

• Political risks

• Technological risks

Comprehensive risk management techniques pay equal attention to managing,

preventing or refinancing recovery from sudden, damaging events. The techniques also

better equip the company to cope with losses, regardless of whether those losses stem

from such casualties as fires and lawsuits.

IDENTIFYING EXPOSURE TO LOSS

There are three aspects of the risk evaluation exercise that a company must be aware

of to ensure that all potential risks are brought to light. They are:

A system of classification to identify all potential risks

A method to identify specific loss exposures that organizations face at a

particular time

A mechanism to test the impact of such losses on the organizational

objectives

*** QUIZ NO 63***

LESSON 13B PRINCIPLES OF RISK MANAGEMENT

This lesson focuses on the following topics:

• LOSS CATEGORIES o PROPERTY LOSSES o NET INCOME LOSSES o LIABILITY LOSSES o PERSONNEL LOSSES

• LOSS IDENTIFICATION METHODS • RISK CONTROL

o TECHNIQUES OF RISK CONTROL

LOSS CATEGORIES

All financial losses can be classified as:

Property Losses

These types of losses include physical damages to property.

Net Income Losses

This includes additional costs incurred to allow the company to operate at the same

level of efficiency and quality as before the incident. This also includes loss of income

caused as a direct result of the risk having materialized.

Liability Losses

This is the Lawsuits brought against the company by people affected by damage and/or

injury.

Personnel Losses

This type includes losses from death, disability and resignation. This may leave the task

of a vital employee undone, resulting in loss to the company.

LOSS IDENTIFICATION METHODS

One or more of the following may be used to identify potential loss situations:

Surveys/ questionnaires

A historical review of losses

Analysis of Financial statements

Analysis of other relevant data available within the company

Flow charts

Inspection of Premises

Expert Consultations

RISK CONTROL

Techniques of Risk Control

As this has been discussed before, risk management is the prevention of losses before

they occur and also the financial outflow of paying for those losses when they actually

occur. Different techniques that can be used for preventing of risks are:

Exposure Avoidance

This is a technique that works to completely eliminate any possibility of a loss.

This could include avoiding to undertake any new ventures, which may well occur

at the expense of growth and diversification.

Loss Prevention

This technique aims to reduce the probability of a loss.

Loss Reduction

This would attempt to minimize the severity of the loss, and not do away with the

loss altogether.

Segregation of Loss Exposure

This involves arranging an organization’s activities and resources such that no

single event can cause simultaneous losses to all of them.

Duplication

This involves the use of duplicates or spares to continue activities that are very

important in the business process.

Contractual Transfer

This is a mechanism of transferring legal and financial responsibility of a loss.

*** QUIZ NO 64***

LESSON 13C PRINCIPLES OF RISK MANAGEMENT

This lesson focuses on the following topics:

• RISK CONTROL o RISK MANAGEMENT PROGRAM o IMPLEMENTATION STEP o MONITORING OF RISK MANAGEMENT PROGRAM

Risk Management Program

Selecting the best risk management technique or combination of risk control and risk

financing techniques, is a two-step activity.

• The first step is to forecast the effects the available risk management

options are likely to have on the organization’s ability to fulfill its

objectives.

• The second step is to define and apply criteria that measure how well each

alternative risk management technique contributes to each organizational

objective in cost-effective ways.

A risk management program must, from the start, be planned and organized on the

principle that every risk management technique an organization chooses to use

must be one it can successfully implement and monitor. A technique that cannot be

put into practice and then assessed for its effectiveness cannot be part of a well-

managed program.

Implementation Step

In the implementation step, a risk management professional must:

Devote attention to the technical risk management decisions that he or she

must personally make to put a chosen technique into practice.

Attention has to be devoted to the managerial decisions that must be made

in cooperation with other managers throughout the organization to

implement the chosen technique.

Monitoring of Risk Management Program

Once implemented, a risk management program needs to be monitored to ensure that it

is achieving the results expected of it and to adjust the program for changes in loss

exposures and the availability or costs of alternative risk management techniques. The

monitoring and adjusting process requires each of the following elements of the general

management function:

Standards of what constitutes acceptable performance

Comparison of actual results with these standards

Correction of substandard performance and alteration of unrealistic

standards

The process of risk management generates both benefits and costs for a particular

organization, for the entire economy, and for a given community. For an organization,

these benefits include reduced cost of risk and lowered deterrence effects from loss

exposures.

SUMMARY

This lesson covered risk management techniques and the different steps of dealing

with risk management. The lesson also discussed the different types of losses and

different techniques of dealing with these losses.

*** QUIZ NO 65***

LESSON 14A PRINCIPLES OF REINSURANCE

This lesson focuses on the following topics:

• WHAT IS REINSURANCE? • THE CONTRACT

LESSON 14 PRINCIPLES OF REINSURANCE

WHAT IS REINSURANCE?

The practice of spreading the risk on a large primary policy was accomplished on an

individual basis between primary insurers. The policy-writing insurer would approach

another insurance company and suggest that it accept a portion of the risk in return for

a portion of the premium. The practice of reciprocity grew as insurers become more

comfortable with each other’s capabilities and willingness to exchange certain types of

risks.

From individual risks, reinsurance developed as a matter of general insurance practice

to the point where some companies started to specialize in this branch of the business,

either as a part of their overall portfolio, or a complete specialty as its entire portfolio.

Reinsurers accept not only portions of individual risks, but assume reinsurance for all or

a line of the business written by smaller companies that want to increase their premium

volume or want to get into new lines of insurance coverage, but can’tt afford the risk of

overextension.

THE CONTRACT

Generally speaking, it is the form of insurance whereby the policy writing insurance

company spreads its risk of loss by sharing part of its premiums with the reinsurer. It is

the insurance company’s insurer.

Reinsurance has been defined as:

A contract whereby one insurer, for a consideration, agrees to indemnify

another insurer, either in whole or in part, against loss or liability, the risk of

which the latter has assumed under a separate and distinct contract as insurer

of a third party.

Reinsurance Contract

A contract of reinsurance is one by which an insurer procures a third person to insure

him against loss or liability by reason of such original insurance. A reinsurance policy is

thus a contract of indemnity that one insurer makes with another to protect the first

insurer from a risk it has already assumed.

A reinsurance contract or policy - usually referred to as a treaty - is one of indemnity. In

most cases, the reinsured or ceding company is reimbursed for claims, suits, or losses

paid. Sometimes, as a result of long-time association, a reinsurer will advance part of a

loss before actual payment has been made to the ceding company. For the most part

they are contracts of indemnity and not promises to pay. The rapid development and

use of bad faith and punitive damages as causes of action in the courtroom has affected

the relationship between ceding companies and their reinsurers. Today reinsurers have

had to develop claim departments with highly trained, experienced, and sophisticated

claim supervisors.

Each party to the treaty has its responsibilities and its duties. In the past, the reinsurer

usually did not want to be burdened with the details of the investigation and settlement

negotiations of an individual claim. It was satisfied with periodic summary notices

concerning the suggested reserve to be carried by the reinsurer.

Today the reinsurer no longer assumes that the ceding company will investigate

adequately and defend properly, or use the best judgment in a decision of whether or

not to settle a claim or suit. The reinsurer wants not only to be kept advised promptly

concerning all developments, but also to be involved in some of the decisions,

particularly as to whether the claim is to be settled or tried.

*** QUIZ NO 66***

LESSON 14B PRINCIPLES OF REINSURANCE This lesson focuses on the following topics:

• THE NEED TO REINSURE o PURPOSE o WHAT REINSURANCE CAN DO O REINSURANCE – A CONTRACTUAL AGREEMENT

• TYPES OF REINSURANCE PLANS

O EXCESS OF LOSS, PRO RATA, OR PROPORTIONAL

THE NEED TO REINSURE

Purpose

The purpose of entering into a contract is the expectation of making a profit. In

reinsurance, transferring the liabilities above a certain amount also includes ceding a

portion of the premium received. Both parties profit in that the ceding company gains

security and other benefits in exchange for sharing some of the premiums on the

business written.

What can Reinsurance do?

Reinsurance can:

Protect the reinsured company against the immediate impact of shock

losses

Avoid undue drain on surplus

Contribute toward stabilizing operating results

Enlarge the capacity of the reinsured company to accept risks

Permit writing lines on which full experience has not as yet been obtained

Provide decision-sharing responsibility on large claims

Reinsurance – A Contractual Agreement

Reinsurance cannot make good business out of bad, or relieve the reinsured company

from the primary responsibility concerning claims, handling and disposition.

All reinsurance is a contractual agreement, whether it is a facultative reinsurance

contract, a treaty, or simply a verbal agreement. Like all contracts, there must be:

• A specific offer and acceptance

• Legality of purpose

• Capacity to contract

• Some form of contract

Many times the ceding insurer is paid a commission by the reinsurer based on the

amount of premium involved. This commission can be added to the surplus of the

ceding insurer, allowing it to build its own assets and financial strength and allowing it to

take on additional risk.

Corporate auditors and state insurance regulators often audit and monitor the

reinsurance arrangements between corporations and reinsurers and between insurers

and their reinsurers.

TYPES OF REINSURANCE PLANS

Excess of Loss, Pro Rata, or Proportional

These types represent the most common forms, whereby the reinsurer pays a

predetermined share of the settled claim or suit, plus allocated expenses in return for a

predetermined share of the premiums that were paid to the reinsured or ceding

company.

Allocated expenses are those actual out-of-pocket expenditures that include:

Attorney’s fees

Fees of experts needed for trial or for a determination of severity of injury

or amount of loss

Payments for records and other such expenditures

Important Point

They do not include the regular expense of running a claim department, like rental

costs, wages, and office equipment.

Such insurance may be written on an annual or continuing term for a line of business or

for all of the ceding company’s business. Premium is set on an overall experience basis

depending on lines of insurance, previous loss experience, and other similar facts.

***QUIZ NO 67***

LESSON 14C

Quota Share Reinsurance

This is a form of pro rata reinsurance in which the reinsurer assumes an agreed

percentage of an individual risk, or one of a specific group or lines, or on any basis

agreed to, and receives the same proportional share of the premium or premiums in

return. This form of reinsurance is more often applied to the property lines of insurance.

Facultative Reinsurance

This is also more common to property lines. It is a type of reinsurance required by a

ceding company for one specific policy or risk with a high loss potential. The ceding

company offers a portion of a risk to one or more reinsurers, each accepting some

share. All agreements and conditions are obviously discussed in advance, and a

certificate reflecting the terms and conditions of the contract is issued by the

reinsurer(s). This type of insurance may be purchased on an excess of loss or pro rata

share basis.

Surplus Reinsurance

This is a form of pro rata reinsurance indemnifying the ceding company against loss for

the surplus liability ceded. It can be viewed as a variable quota share contract wherein

the reinsurer’s pro rata share of insurance on individual risks will increase as the

amount of insurance increases, in order that the primary company can limit its net

exposure regardless of the amount of insurance written.

Aggregate Excess-of-Loss Reinsurance

This indemnifies the ceding company against the amount by which the ceding

company’s losses incurred during a specific period exceeding either an agreed amount

or an agreed percentage of aggregate net premiums, or average insurance in force for

the same period. This is also known as stop-loss-ratio or excess-of-loss ratio

reinsurance.

Working Excess Reinsurance

This plan covers an area of excess reinsurance in which loss frequency is anticipated,

as opposed to loss severity. A working treaty would usually have a low indemnity and

become effective above a relatively low retention.

Property Catastrophe

This contract was designed principally to reinsure the ceding company against an

accumulation of losses resulting from a single disaster, such as earthquake, flood,

hurricane, or tornado. It is usually accomplished by the ceding company purchasing a

series of layers of coverage exceeding a predetermined retention by the ceding

company and subject to a predetermined limit of reinsurance. This coverage is only a

part of the ceding company’s reinsurance program. It is a kind of reinsurance where the

reinsurer’s claim department takes an active role in the handling on large or potentially

large losses, in cooperation with the claim department of the ceding company.

Fronting Contracts

In most fronting contracts, 100% of the risk is accepted by the reinsurer through a

ceding insurer who writes the policy. Such arrangements can be made for a variety of

reasons. A reinsurer may wish to write a risk, but be unable to do so because it is not an

admitted insurer in the involved jurisdiction, or the fronting insurer may wish to provide

coverage for its insured in a line of business that it does not itself wish to underwrite.

*** QUIZ NO 68***

LESSON 14 D

METHODS OF PROCESSING

The process of reinsurance can be used in many ways. Two of them are discussed

here:

Portfolio Reinsurance

This is one of the methods of reinsurance in which the reinsurer assumes the entire

portfolio of the ceding insurer. This is generally because the ceding insurer is going out

of a particular line of business.

Runoff Contract

In a runoff contract a ceding insurer agrees to accept the risk of future losses on expired

contracts. This is similar to tail insurance on claims made on liability contracts, where

the incurred but not reported losses from an expired policy term are accepted for an

agreed extension of reporting period.

PURCHASING REINSURANCE

Reinsurance can be purchased from three distinct sources:

Domestic reinsurance companies

Reinsurance affiliates of primary U.S. insurance companies

Alien reinsurers that are located outside the U.S. and are not licensed here

Important Point

The ceding insurer may purchase reinsurance directly from a reinsurer or through a

broker or reinsurance intermediary.

BENEFITS OF REINSURANCE

Insurers purchase reinsurance for essentially four reasons:

To limit liability on specific risks

To stabilize loss experience

To protect against catastrophes

To increase capacity

Reinsurance allows the reinsured to write larger amounts of insurance. It protects

against a single, catastrophic loss of multiple large losses. Reinsurance is a

stabilizer, helping to smooth the overall operating results from year to year and

easing the strain on the reinsured’s surplus during rapid premium growth. It provides

a means for the reinsured to withdraw from a line of business or geographic area or

production source.

Another benefit of reinsurance is that it helps the reinsured spread the risk on new

lines of business until premium volume reaches a certain point of maturity and it can

add confidence when in unfamiliar coverage areas. It provides the reinsured with a

source of underwriting information when entering a new line of insurance or a new

market.

SUMMARY

This lesson covered the important concept of reinsurance. It also covered the

reinsurance contract and the need to reinsure for the insurers, as well as the

reinsurance plans and different methods of processing of reinsurance. We also

discussed the different benefits of reinsurance.

*** QUIZ NO 69***

COURSE SUMMARY

There are many kinds of insurance, and each type protects the insured from a different

type of financial loss.

In life insurance, the insurance company provides money to the insured’s beneficiary

when the insured dies. People purchase life insurance for many reasons: To provide

financial security to surviving family members upon the death of the insured, to cover a

particular need such as paying off a mortgage or consumer debt upon the insured’s

death, to provide funds to pay estate taxes, or other final obligations necessary to settle

a deceased person’s estate.

As a rule, minors - mostly persons of age less than 18 - are not allowed to enter

contracts. However, life insurance allows an exception: A person is a minor only until

age 15.

There are two basic types of life insurance, with many variations on both of these. One

is Term Insurance, which provides life insurance for a specified period of time and

provides benefits in the event of death, but generates no “cash value,” or savings. The

other is Permanent Insurance, which combines death benefits with an accumulation

feature.

Permanent life policies differ from term life policies in several ways, including higher

initial premiums, greater flexibility and much higher agent commissions.

Another kind of insurance is health insurance, which provides payment of benefits for

the loss of income and/or the medical expenses arising from illness or injury. It is also

known as accident and sickness insurance, or accident and health insurance.

Health insurance includes policies and government-provided benefits. There are fee-for-

service plans, also referred to as indemnity insurance, and managed care plans such as

Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs),

and Point-of-Service (POS). Managed care imposes controls on the use of health care

services and the providers of health care services, usually through Health Maintenance

Organizations (HMOs) or Preferred Provider Organizations (PPOs), whereas with fee-

for-service insurance, the insured is free to choose his/her doctor and free to choose a

different one for any reason, anytime.

In addition to personal health care coverage, there also exists a type of insurance

designed to guard against any injuries or disabilities arising from occupational injuries

and disabilities known as Worker’s Compensation (WC). It is administered at the state

level and requires that employers provide compensation benefits for their employees.

WC covers injuries and diseases arising out of, and in the course of, employment. The

most important eligibility criteria is that the individual must be employed in an industry

that is covered under the Workers’ Compensation plan and must sustain an injury that is

directly related to his/her occupation.

Long-term Disability Income insurance (LTD) provides income to meet daily expenses

when the insured becomes sick or injured and is unable to work.

Homeowner’s insurance, sometimes referred to simply as property insurance, covers a

wide array of misfortunes that might befall the policy owner and also covers legal liability

in instances where something happens on one's property and he gets sued for it.

Personal property insurance/inland marine insurance covers personal property/items

that are transported from one place to another using various modes of transportation,

except over the ocean. By adding various floater policies, personal effects can also be

insured.

In the case of fire insurance, the damage must be a result of a hostile fire, if the insured

is to collect for a fire loss; the immediate cause of loss must be fire, whether directly or

indirectly.

Auto insurance is one of the most important insurances that a consumer must think

about, and is also the largest form of Property & Casualty coverage. Personal auto

insurance protects the insured and his/her family while riding in the automobile and

covers any injury sustained in an auto accident. It pays for medical expenses and for

lost work. Auto insurance also protects the insured’s financial security in the case that

he/she is sued as a result of loss or injuries to other parties following an accident.

Commercial General Liability (CGL) is a means of safeguarding a business enterprise

against liability and attempts to anticipate the possible liability claims that may confront

a company in the course of its business.

A working knowledge of all of these coverages is essential for anyone involved in the

insurance industry.

***QUIZ 70***