RMIN test 3
Coinsurance Formula
(amount of insurance carried/amount of insurance required) x loss = insurers loss payment ***(did/should) x loss***
Health Coinsurance Example: $1,000 deductible. 80/20 coinsurance (insurance pays 80%). $5,000 medical expense. how much does the health insurer pay?
- 5,000-1,000=4,000 - 4,000 x .80= 3,200 *$3,200*
needs approach calculation should consider:
- estate clearing fund (burial, medical bills, debts, attorney's fees, taxes). - one- or two-year readjustment period (same income as prior to death). - dependency period for children (until youngest is at least 18). - income for surviving spouse (if needed). - special needs (college education, mortgage, emergencies). - retirement needs
costs of premature death
- future earnings are lost forever. - additional expenses incurred: funeral expenses, uninsured medical bills, higher childcare costs, estate settlement expenses, and outstanding debts. - possible reduction of standard living.
Offer and Acceptance
- insured completes an application (the offer) - insurance company issues a binder or policy (acceptance) *company can also reject - conditional premium receipt: receipt given to applicant for life insurance. If policy is approved, coverage becomes effective as of the date of the application
replacement cost (RC)
- the cost to replace property with an item of like kind and quality (similar workmanship and materials) - not the same as historical cost!!!
example of aggregate deductible
-$1,000 annual aggregate deductible -dr. appt. 1 on 1/31 cost $600. Insured pays $600, insurer pays $0 -dr. appt. 2 on 2/17 cost $900. Insured pays $400, insurer pays $500.
Example of Straight Deductible
-$1,000 deductible -accident 1 on 4/20, $10,000 in damages. so the insured pays $1,000 and insurer pays $9,000 -accident 2 on 6/15, $900 in damages. insured pays $900, insurer pays $0
Property Coinsurance Example: commercial building with reconstruction cost of $500,000 owner has insured the building for $300,000. policy includes 80% coinsurance clause. fire causes $200,000 in damages. how much would insurer pay?
-500,000 x .80 = 400,000 *not insured for this* -(300,000/400,000) x 200,000 = 150,000 - $150,000
Pro-rata example: building insured for $500,000. for underwriting reasons, it is split between 3 insurers: A($300,000), B($100,000), C($100,000). how much would you pay for $100,000 loss?
-A(300,000/500,000) x 100,000= $60,000 -B: '' '' = $20,000 -C: '' ''= $20,000 -total loss payment: $100,000
disadvantages of human life value approach
-Ignores assets and other sources of income (Social Security, retirement plans) -Earnings & expenses assumed to be constant (most people get a raise each year) -Based on income rather than need -Effects of inflation on earnings and expenses are ignored.
Examples of Insurable Interest (4)
-Ownership of property (house, car) -Potential legal liability (business owner) -Secured creditors (mortgage company, auto lender) -Contractual right (goods in transit)
Legal principles of insurance (4)
-Principle of Indemnity -Principle of Insurable Interest -Principle of Subrogation -Principle of Utmost Good Faith
When must an insurable interest exist?
-Property insurance: at the time of the loss (can't collect on an insurance policy after you sell your home) -Life insurance: only at inception of the policy (ex-spouse can collect on life insurance if listed as policy beneficiary)
other-insurance provisions
-Provisions for when multiple insurance policies apply. -Prevents the insured from profiting from a loss. -pro-rata liability and contribution by equal shares
ACV example: a warehouse building cost $2,500,000 when built in 2015. Its useful life is 20 years but the fire completely destroys the building in 2021. current reconstruction cost is $3,000,000, what is the ACV?
-RC=3,000,000 -depreciation=(6/20) x 3,000,000 - 3,000,000-900,000 -ACV= 2,100,000
ACV example: A samsung 50" TV cost $750 when purchased in 2017. its useful life is 10 years and a current model (like kind/quality) is $450. what is the ACV?
-RC=450 -depreciation=(4/10) x 450 - 450-180 -ACV= 270
law of agency
-There is no presumption of an agency relationship -An agent must be authorized to represent the principal (there has to be visual evidence that the agency exists) -A principal is responsible for the acts of agents acting within the scope of their authority -Limitations can be placed on the powers of agents
distinct legal characteristics of insurance contracts (5)
-aleatory contract -unilateral contract -conditional contract -personal contract -contract of adhesion
Why might someone not purchase (enough) life insurance?
-belief that life insurance is too expensive to purchase -difficulty in making the correct decisions about its purchase -procrasination -they simply don't understand its importance -opportunity cost
Why are exclusions necessary?
-certain perils considered uninsurable (flood, war) -presence of extraordinary hazards (using personal vehicle as a taxi) -coverage provided by other contracts (use of auto is excluded by homeowners policy) -moral hazard (money limited to $200 within homeowners policy) -attitudinal hazard (losses due to freezing of pipes are not covered if there was a reasonable care to maintain heat in the building) -coverage not needed by typical insureds (homeowners policy does not cover aircraft)
term insurance
-death benefit only -temporary protection (10,20,30 years) Premiums paid during the term are level, but increase if renewed -most policies are RENEWABLE and CONVERTIBLE
reduce moral and morale (attitudinal) hazard -why have deductibles?)
-dishonest people may not be able to afford deductible -people are less careless if they know it will cost them money (skin in the game)
why have deductibles?
-eliminate small claims -reduce premiums -reduce moral and morale hazard
eliminate small claims -why have deductibles?-
-it is expensive (relatively) for an insurance company to adjust small claims -may cost $300 in expense for a $200,000 claim
other types of indemnity (3)
-market value -valued policy -valued policy law (in some states)
examples of aleatory contract
-mia pays $1,000 for homeowners insurance. her house burns down and the insurance company pays her $200,000 -jules has paid $1,000 a year every year for 20 years for homeowners insurance. he's never filed a claim so his insurer has never paid him any money
types of insured
-named of insured -first named insured -other insureds -additional insureds
Why principal of insurance interest?
-prevents gambling on losses -reduces moral hazard
reasons for subrogation
-prevents insured from collecting twice (once from insurer, once from responsible party) - holds the negligent party responsible for the loss - reduces insurance claims costs and therefore rates
examples of conditions (5)
-prompt notification of loss -protect property from further loss -valuation/loss settlement- ACV vs. RC -no concealment or fraud -subrogation
reduce premiums -why have deductibles?-
-pure premium=frequency x severity -both frequency and severity are reduced
examples of endorsements/riders
-replacement cost coverage for personal property -wind/hail exclusion -language to comply with state law (uninsured motorists)
legal doctrines that support principle of utmost good faith (3)
-representations -concealment -warranty
two general types of life insurance
-term insurance -cash-value life insurance
basic parts of an insurance contract (6)
1. Declarations 2. Definitions 3. Insuring agreement 4. Exclusions 5. Conditions 6. Endorsement/riders
human life value approach steps
1. Estimate the individual's average annual earnings over his/her productive lifetime. 2. Deduct taxes and self-maintenance costs. 3. Using a discount rate, determine the present value of the family's share of earnings for the number of years until retirement.
Principle of Utmost Good Faith
A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts -supported by legal doctrines: representations, concealment, and warranty
Actual Cash Value formula
ACV=RC-depreciation
Coinsurance in Property Insurance
Encourages the insured to insure the property to a stated percentage of its insurable value. -If the coinsurance requirement is not met at the time of loss, the insured must share in the loss (as a coininsurer) *(amount of insured carried/amount of insurance required) x loss = insurers loss payment
what is replacement cost NOT the same as?
Historical Cost
conditional premium receipt
Receipt given to applicant for life insurance. If policy is approved, coverage becomes effective as of the date of the application.
representations
Statements made by the applicant for insurance -contract is voidable if the misrepresentation (false statement) is: material, false, and relied on by insurer
insuring agreement
Summary of the major promises of the insurer (what the policy covers) -named perils -open perils
Actual Cash Value (ACV)
The required amount to pay damages or for property loss, which is calculated based on the property's current replacement value minus depreciation. (ACV=RC-depreciation) -in property insurance, indemnification is usually based on the actual cash value of the property at the time of loss
a smoker lies on their life insurance application and later dies in an auto accident. Insured's birthday on application is listed as August 1st when its August 11th. is the contract voidable?
Yes (even though the death had nothing to do with smoking, he still lied because it is a material fact)
valued policy
a policy that pays the face amount of insurance if a total loss occurs (life insurance)
deductible
a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable
Coinsurance in Health Insurance
a provision that requires the insured to pay a specified percentage of covered medical expenses AFTER THE DEDUCTIBLE is met -reduces premiums and prevents over-utilization of policy benefits -if you have to pay for a portion of it, are you going to bet a medical test you don't think you need?
elimination (waiting) period
a stated period of time at the beginning of a loss during which no insurance benefits are paid -common in disability insurance-typically cannot collect until you've been out of work for 30,60,90 days
warranty
a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects -a condition agreed to by an insured in order to receive coverage -violation of a warranty may result in a claim being denied
Open Perils (All Perils, Special Coverage)
all perils are covered except for those that are specifically excluded -typically life insurance, suicide is frequently excluded
principle of reasonable expectations
an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions
what do the doctrines of waiver and estoppel may require
an insurer to pay a claim that it ordinarily would not have to pay
when should insurable interest exist in life insurance?
at the inception of policy -ex-spouse can collect on life insurance if listed as policy beneficiary
when should insurable interest exist in property insurance?
at the time of the loss -cant collect on an insurance policy after you sell your home
what if the statements are false (misrepresentations)?
contract is voidable if the misrepresentation is -material -false -relied on by insurer
legal purpose
contract that encourages something illegal or immoral is contrary to public interest and cannot be enforced -can walter white buy property insurance to cover his meth lab? NO
how much life insurance is needed?
depends on family size, income levels, existing financial assets, and financial goals -human life value approach -needs approach
contribution by equal shares
each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid
pro rata liability
each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property
first named insured
has certain additional rights and responsibilities that do not apply to other named insureds
Contract of Adhesion
insured must accept the entire contract, with all of its terms and conditions -insured doesn't get a say -because this is imbalanced, courts have ruled that any ambiguities or uncertainties in the contract are constructed against the insurer -principle of reasonable expectations
concealment
intentional failure of the applicant for insurance to reveal a material fact to the insurer -contract can be voided if: concealment was known by the insured to be material, insured intended to defraud the insurer
definitions
key words or phrases are defined so that coverage under the policy can be determined more easily -we us and you refer to the insurer -you and your refer to the insured -for any words NOT defined by the policy, the standard definition applies -sometimes on first page, sometimes on last
bad faith
law that allows lawsuits against insurance companies for: -improper denial of claims -improper delay of claims
Unilateral Contract
only one party (insurer) makes a legally enforceable promise -insurer makes legally enforceable promise to pay claims -insured cannot be legally required to pay premiums
named perils
only those perils specifically named in the policy are covered
is open perils or named perils better?
open perils is better for the insured-more expensive -with named perils, the burden is on the insured to prove that the loss was caused by one of the named peril
exclusions
perils or property that are not covered under the policy -examples: *flood *war *intentional loss *money (cash) limited to $200
additional insureds
person or party added to the policy by an endorsement
other insureds
persons or parties who are insured under the named insured's policy even though they are not specifically named in the policy
human life value approach example
phil ,age 27, is married and has 3 children. Phil plans to retire in 40 years. 1. earns $50,000 per year 2. of that, $20,000 spent on taxes and personal needs 3. using a discount rate of 5%, the remaining $30,000 per year for 40 years has a present value of $514,800
Market Value
price a buyer would be willing to pay in a free market
conditions
provisions in the policy that qualify or place limitations on the insurer's promise to perform -examples:prompt notification of loss, protect property from further loss, valuation/loss settlement- ACV vs. RC, no concealment or fraud, subrogation
endorsement/riders
provisions that add to, delete, from, or modify the original/main policy examples: replacement cost coverage for personal property, wind/hail exclusion, language to comply with state law (uninsured motorists)
Valued Policy Law (in some states)
requires payment of the face amount of insurance if a total loss to real property occurs from a peril specified in law
example of principle of subrogation
someone steals your car, your insurance company pays you for the damages to your vehicle, your insurance company sues the other driver for reimbursement
declarations
statements that provide information about the particular property or activity to be insured -names of the insurer and insured -policy period (dates) -amount(s) of insurance (limits) -premium: how much are you paying for the policies? -deductible(s) -other relevant information (endorsements)
principle of subrogation
substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance -example: someone steals your car, your insurance company pays you for the damages to your vehicle, your insurance company sues the other driver for reimbursement
needs approach
the amount needed depends on the financial needs that must be met if the family head should die (assets - needs)
aggregate deductible
the amount the insured is responsible for IN TOTAL (over all losses during the policy period) before the insurer pays anything
straight deductible
the amount the insured is responsible for PER LOSS before the insurer pays anything
personal contract
the contract is between the insured and the insurer -policy cannot be validly assigned to another party without the insurers consent
premature death
the death of a family head with outstanding unfulfilled financial obligations
conditional contract
the insured must comply with all policy conditions to collect for a covered loss -conditions-provisions within the policy that qualify or place limitations on the insurer's promise to perform
principal of insurance interest
the insured/beneficiary must be in a position to lose financially if a covered loss occurs -why? *prevents gambling on losses *reduces moral hazard
Principle of Indemnity
the insurer agrees to pay no more than the actual amount of the loss -purpose is to prevent the insured from profiting the loss
estoppel
the loss of a legal defense because of previous actions that are now inconsistent with that defense
Competent Parties
the parties must have legal capacity to enter into a binding contract -insured must: be old enough to enter into contract, not intoxicated, and not insane -insurer must be legally competent and licensed to sell within the state
named of insured
the person or persons named in the declarations section of the policy
human life value approach
the present value of the family's share of the deceased breadwinner's future earnings
exchange of consideration
the value that each party gives to the other -insured pays premium -insurer promises to pay future claims covered by contract (policy)
waiver
the voluntary relinquishment of a known legal right
Requirements of an Insurance Contract (4)
to be legally enforceable an insurance contract and must meet the following requirements: -offer of acceptance -exchange of consideration -competent parties -legal purpose
what is the purpose of the principle of indemnity?
to prevent the insured from profiting from the loss
aleatory contract
values exchanged may not be equal but depend on an uncertain event
can bad faith damages exceed policy limits?
yes and include: -attorney's fees -emotional distress -punitive damages
example of conditional contract
your duties after a loss: - give immediate notice to us or our agent - protect the property from further damage
disadvantages of needs approach
• Difficult to estimate the cost of future needs (what will college cost in 20 years?) • Assumptions can be construed in different ways causing a large range of values. • Needs may be different (what if spouse remarries?)
