Basic Principles Flashcards
The Insurance Principle
- Contribution of each insured = Frequency (chance) of loss x Severity (amount) of loss
Problems with a Fraternal Society providing Death Benefits under a flat assessment plan
- With a flat assessment plan , the same assessment is levied on all members of the fraternal society, regardless of age
- Asessment based on theory that continual inflow of new members at younger age will provide little variation in average age of group, thus, mortality rates would not increase.
- Problem is that mortality rates for older members increases faster for older members
- Young and healthy members might withdraw to get cheaper protection elsewhere
Yearly Renewable Term Insurance Premium
- Yearly Renewable Term provides insurance for a period of 1 year and allows the policyowner to renew the policy for additional 1 year period, without showing evidence of insurability
- The premium is readjusted higher every year to account for the increase in death rate for each successive age attained.
Why is the period of renewability for yearly renewable term sometimes limited?
Adverse selection, since only unhealth members would continue to renew at policy years
Ordinary Life Policies from Date of Issue to 119
- An ordinary life policy is a whole life policy where level premiums are paid until the insured dies, or until 119
- In early years, net level premiums are greater than policy share of death claims.
- Excess premiums accumulate with compound interest to pay in later years, when policy share of death claims are greater than level premiums
- Grows to an amount equal to the face value of the policy at the end of age 119
Important of Level Premium Plan to operation of Life Insurance company and insured
- Level premiums provide a reserve that, from the insurance companies perspective, reduce the effective amount of insurance
- Level premiums create a system of cash values and surrender options instead of forfeiting all prior premiums, like with terms
- Level premium assets account for a considerable portion of composite assets in the United States and, thus, contribute to the growth of the economy
Risk Pooling
Group Sharing of losses. That is, combining risks among a crowd of people who agree to share in the losses on an equitable basis.
Assessment Insurance
An older form of insurance whereby assessments would be levied against members of a fraternal society to replenish a pool of funds to pay out future claims, as the pool is depleted from past claims.
Graded Assessments
A modified form of Assessment Insurance, whereby assessments adjust based on member age
Legal Reserve
A reserve is the accumulation of excess level remiums, which are held in trust for the benefit and to the credit of policyowners. Because the manner is which this fund is invested and managed is strictly regulated by law, if it oftern referred to as legal reserve
Transfer-for-value rule
- The most important exception to the general rule that life insuranc proceeds are free from federal income taxation
- The policy beneficiary, in cases where a policy is transferred from one owner to another for valuable consideration, will only recover their basis tax-free
Cash Value Accumulation Test
- One of 2 tests that may be used to determine if a policy qualifies as life insurance.
- Applies to traditional cash value policiies, like whole like.
- The cash value generally cannot exceed the net single premiums needed to fund the policies death benefit
Guideline Premium and Corridor Test
- The guidleline premium and corridor test is a two-pronged test. Both requirements must be met.
- The guideline premium requirement limits the total premium that may be paid into the policy
- The limit vaires with the insurer’s own expenses, mortality experience and interest assumptions.
- The policy meets the corridor or death benefit requirement, if the contract’s death benefit exceeds a specifed multiple of cash value– multiple varies with insured’s attained age
Inside Buildup
Incident of Ownership
