Module 2: Principles of Insurance

Punitive damages

awards made to plaintiffs not as compensation for injuries suffered, but as a means of punishing defendants for outrageously offensive acts. What constitutes such an act is a question of fact -usually imply gross negligence: two main lines of defense are contributory negligence and assumption of the risk

assignment provision & absolute assignment & collateral assignment

Provision: allows ownership rights in life insurance policies to be transferred by the current owner to another person Absolute: the complete transfer, by the existing policy owner of all his or her rights in the policy to another person. (change in ownership). most common use is with viatical settlements collateral assignment: temporary transfer of only some policy ownership rights to another person. ordinarily used in connection with loans from banks or other lending institutions and persons

The gross estate

the starting point for estate tax computation, and is the total of the decedents interest in all property owned

Types of insurance

Industrial Insurance: purchased by individuals in small amounts ordinary insurance: purchased in larger amounts group insurance: purchased by employers for employees credit life insurance: issued to customers marking credit purchases

Taxation of Premiums on life insurance

Premiums are not tax deductible, but when you receive benefits, that's tax deductible for federal income tax

Life Annuity

contract made with an insurance company. conditions: -insurance company promises to pay the owner a certain guaranteed minimum income every year for as long as the individual lives. -payment ceases on death, unless it has refund feature -the life insurance company is able to liquidate both the capital sum and the interest in making these payments

surgical schedules

identify a maximum dollar amount for the most difficult procedure and provide a representative list of other procedures and their reimbursement rates.

joint and several liability

if a party is one of several responsible for a loss, even if that parties' contribution was the slightest of all, then that party is fully responsible for making restitution to the injured party if the other defendants are financially unable to do so -"deep pockets" approach to recovery

The Federal Estate Tax

imposed on a persons right to transfer property after death, but it is not a property tax taxable estate + adjusted taxable gifts

Three steps in estimating income lost

1. expected and post loss income 2. potential income loss 3. estimated income loss

Industrial insurance policies

issued to individuals in small amounts.

key elements to look for in a quality long-term care insurance policy?

1. financial strength 2. adequate daily benefit 3. inflation protection 4. comprehensive coverage 5. claims 6. stable premiums

Requirements of a good insurance policy

1. meets the consumers needs 2. policy amount is no more than required property insurance: home & auto are main and standardized. life insurance is not standardized

Categories of loss

1. property losses (direct & indirect): 2. liability losses 3. income losses related to human life

vicarious liability

can arise for people or organizations, when parties they hire as contractors (or subcontractors) injure others

Property ownership rights - include:

Rights of possession Rights of control, and Rights of disposition.

Environmental impairment liability

(EIL) describes a class of legal claims against individuals and organizations whose actions damage the environment -pollution: implies destruction of the environment by the introduction of toxic substances, heat or noise, lots of money has been spent in liabilities by people responsible for pollution -Product liability arises when a manufactured item injures a consumer. A manufacturer of a product has a legal liability to design and produce a product that will not injure people in normal use. -triple trigger: If several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage. the three triggers are exposure, manifestation, & exposure in residence period

Health maintenance organizations

(HMOs) operate in limited geographic areas, providing members with broad health care coverage in exchange for a set fee called a capitation payment. The employer pays a fixed periodic premium in advance to cover medical care services for each participant in the HMO plan. -HMOs typically cover physicians' charges, hospital costs, surgery, X-ray films, and emergency care. -Because it receives a set fee, the HMO has a profit incentive to keep members healthy. -Health Maintenance Act of 1973 (as amended) dramatically increased the use of HMOs. This federal law required certain employers to offer an HMO option in addition to their regular health insurance plan. Individual practice HMO: contracts with specific physicians and hospitals. Group practice HMO: limited number of medical providers that a member may use.

Preferred provider organizations

(PPOs) are another alternative to traditional health care provision. PPOs, usually an association of cooperating physicians and hospitals, agree to provide employers with health care services for their employees at discount prices. PPOs differ from HMOs, in the following 3 ways: 1. the employer's cost with PPOs is determined by use. A fee is charged for each use, but the fee is lower than the provider's usual charge for the service provided. 2. covered employees do not have to use the personnel or facilities of the PPO. If employees use non-PPO providers, however, the employees pay higher costs. For example, physicians may agree to charge PPO members less than their customary fee for a particular service. In addition, the employer's health care plan may provide reimbursement for 80 percent of the cost if a PPO provider is used, and only 60 percent if the employee uses a non-PPO physician. 3. the PPO arrangement may not provide coverage for annual physical examinations as HMOs do.

Long Term Care Insurance

-(LTC): LTC refers to a broad range of supportive medical, personal, and social services needed by people who are unable to meet their basic living needs for an extended period of time because of accident, illness, or frailty. -LTC insurance promises to pay expenses incurred if the insured is unable to engage safely in certain activities of daily living. -why consider LTC? -high risk, high cost, your cost -broad range of service including nursing home care, assisted living facilities & adult day care -Long-term care insurance coverage provides financial protection against those insured incurring exceptional long-term care expenses -The LTC options are Nursing Home Care, Community Care and Home Health Care.

Firms that provide financial ratings for insurance companies

-A.M. Best Company -Standard & Poors -Moody's Investor's Services -Duff & Phelps -Weiss Research

A personal risk management plan involves the following steps:

-Establish Objectives -Identify potential loss exposure -Measure potential loss exposure -Develop a risk management plan -Implement a risk management plan -Regularly review the plan

The following rules help in choosing the proper amount of insurance:

-Insure first exposures to loss those that are most likely to cause the greatest amount of damage. -Never over expose to lose more than you can afford to lose. -Never risk great loss in exchange for a small gain.

Self-insurance

-a firm or other organization decides to deal with potential risks and losses using own funds -operate much like a commercial insurance company and will engage in activities as a commercial insurer requirements: 1. law of large numbers: firm is big enough to combine sufficiently large numbers of exposure units so as to make a loss predictable 2. Financial reliability: firm should be able to accumulate funds to meet losses that may occur 3. Geographic distribution of risk in the event of a catastrophe advantages: avoid expenses of the commercial market, losses may be less than average experience, build up reserves if there's a long time between losses, avoid having to support high risk firms disadvantages: no protection from catastrophic loss, variation of costs from year to year, may create adverse PR, can't take adv of expertise of commercial issuer

peril of legal liability

-arises out of the general rule of law that people are responsible for any loss (injury) they cause another to suffer situations in which one injures another: 1. breach of contract: involves a failure, without a legal excuse, to perform contractual duties 2. criminal acts: a wrong against society 3. torts, or civil wrongs: private, civil wrong or injury, other than breach of contract, for which the court will provide a remedy in the form of an action for damages.

viatical settlements

-cash payments made to individuals who sell their life insurance for a substantial percentage of the death benefit. -governed by legal principles that include ethical concepts and pricing guidelines that regulate the settlement offer amount. -viatical settlement firm is a specialized company, or group of investors, that purchases life insurance policies from terminally ill individuals for lump sum cash payment. It is a private enterprise and not considered an insurance company.

General Liability / Business insurance package

-comprehensive policy: combines different types of business coverage under a single contract, purchased by businesses to insure their liability exposures -commercial policy: includes an occurrence-based liability (carrier providing insurance must pay claim no matter when it's file) and claims-made form obligates the insurer to pay only for claims first made against the insured during policy period (CGL) -worker's compensation: provides benefits to workers and their dependents when a worker suffers an occupational injury or disease -long-tail claims: claims that are filed many years after the injury takes place -Tail coverage: if a contractor ceased operations but wanted liability insurance for a few years in case some lawsuits were filed over previously completed work; extended reporting period.

Contract Terminology

-contract: a legally binding agreement creating rights and duties for those who are parties to it. -voidable contract: allows one party the option of breaking the agreement because of an act or omission of an act (a breach) by the other party -void contract: a contract that court will not enforce because from its beginning it lacked one or more features of a valid contract. Or if created by an incompetent person -binder: a temporary contract in property insurance, and often used before the issuance of the formal insurance policy (valid for 30 days or less) -conditional receipt: can provide temporary coverage, contingent on an applicants ability to present evidence of insurability

ISO Homeowners Insurance Program (six forms)

1. HO-1, 2, 3 & 8: used to insure an owners interest in a home and its contents and provide personal liability coverage 2. HO-3: provides more coverage than HO-1 and HO-2 3. HO-8: covers houses having a replacement cost greater than market value 4. HO-4: covers the contents and personal liability of renters 5. HO-6 covers the property interest, contents and personal liability of people owning a unit in a condominium or a cooperative building. 6. HO: cannot be used to cover mobile homes or house trailers.

How to determine how much loss exposure to retain or transfer

-deductibles or retention: the first dollars of loss that the insurance contract causes to be borne by the insured. Retention is the excess of premiums over claims payments and dividends. It covers the expenses and profit, and compensates the insurer for absorbing the risk. -policy limits: determine the maximum insurance recovery Overinsurance: deductibles are so small that the company is insuring expenses, that is, predictable losses or maintenance costs, or so much insurance is purchased that the firm's profitability is adversely affected because the firm is trying to protect itself against the maximum possible loss rather than the maximum probably loss underinsurance: a firm could not afford to pay for retentions and deductions from "normal" cash flow or a probable loss could result in the firms insolvency, that is, its inability to pay currently due sums, or bankruptcy where the firm's debts exceed its available assets

Three categories of comprehensive business general liability exposure:

-direct liability: arises out of the firms own actions. fall into these categories - premises & operation, work liability, & products liability -vicarious liability: indirect liability. arises when a firm hires an independent subcontractor. If third party gets injured, firm can get in trouble for hiring the subcontractor -contractual liability: occurs if a firm accepts by contract a liability it otherwise would not have. ex: having to build something through someone else's property

Three categories of liability insurance

-general liability: insures a business against accidents and injury that might happen on its premises, as well as exposures related to its products -specialized liability -work's compensation

why is the insurance industry so heavily regulated?

-guarantee financially strong companies -prevent unfair treatment of consumers -provide fair contracts at fair prices

McCarren Ferguson Act

-it allows insurers to share related information that lowers their cost of doing business -it explicitly empowers the states to regulate and tax insurance -it provides insurers with a narrow and limited exemption from federal antitrust laws as long as states regulate that activity. * each state has its own insurance code

Business Umbrella Policies

-may cover some exposures left uncovered by underlying policies -commercial umbrella policy: can be purchased to provide coverage after underlying liability policies have been exhausted

All valid contracts must have:

-offer and acceptance: proposal to make an exchange, and the second person agrees (oral or writing) -consideration: the value exchanged between the parties to the contract; what each party gives to the other -capacity: of age, insurer needs to be licensed, -legal purpose: must have an end or intention permitted by law, bilateral contracts: both parties make enforceable contracts (not insurance)

Insurance Exclusions

-ordinance or law: eliminates coverage for additional expenses if current zoning laws or building codes prevent rebuilding a structure comparable to the damaged home -earth movement -water damage -power failure -neglect -war -nuclear hazard -intentional loss

Discharge of contracts - can be discharged on the following conditions:

-performance: each party does what it has agreed to do, the normal discharge -condition precedent: something that must be done by one party to activate the other party's duty to perform -condition subsequent: ends an existing duty of immediate performance -rescission: an agreement (contract) by both parties to end a contract -reformed: if mistakes have been made to the policy, it may be corrected so one party cannot take advantage of the other party's mistake

Major Medical Coverage

-provide coverage for potentially large medical expenses rather than paying for the first dollar of loss. -expensive Deductible Provision: This deductible lowers the insurer's costs since the first dollars of all losses are not covered. deductibles are a form of risk retention Participation Provision: the insurer agrees to pay only a percentage of the insured's bills. insured must pay the difference. Typically, the insurer pays 75 to 80 percent of the bills after the deductible requirement is met. The more the insured shares (risk), the lower the premium High Limit of Liability: such as $50,000, $100,000, or even larger. A common limit these days is $1 million.

Personal Auto Policy (PAP)

-provides protection against damage and theft of the insured's car -provides liability protection -begins with a declaration page, insuring agreement & definitions. -to be eligible for coverage under a PAP, the vehicle must be owned by an individual, must be a private passenger auto and must not be used as livery conveyance *vary from state to state, example in MA it doesn't matter who's fault it was category 1: The named insured and resident family members are covered for the ownership, maintenance, or use of any auto, whether it is owned or borrowed category 2: Covers any person using the named insured's covered auto category 3 & 4: In some situations, people or organizations other than a driver can be sued due to a driver's negligence

Long-Term Care Insurance Model Act

-specifies minimum standards that products must meet to be considered long-term care insurance. must outline coverage

Benefit Provision Components (that establish the premium and define the payment of benefits under disability income policies)

-the elimination period: refers to the number of days at the start of disability during which no benefits are paid. somewhat like a deductible, meant to exclude the inconsequential illness or injury that disables the insured for only a few days and that is more economically met from personal funds. (form of risk retention) 30 days to 1 year -the benefit period: longest period of time for which benefits will be paid under the disability policy. Usually the benefit period is the same for sickness and injury and is available for durations of two to five years, to age 65, and for life provided continuous, total disability begins before age 55 or age 60. the longer the benefit period, the higher the premium. -the amount of monthly indemnity: selected when applying for disability insurance. example - contracts are more expensive if benefits can be paid for life. calculated as a % of the insured's income, usually 60% to 70% up to the company's liability limits

Subrogation

-the legal substitution of one person in anothers place. it's supported by the theory that if a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party -gives the insurer the right to collect from a third party after paying its insured's claim (collision claim) -prevents insureds from profiting on their insurance by collecting twice for the same loss -prevents negligent parties from escaping payment for their acts.

Insurable Loss

-undesired, unplanned, reduction of economic value arising from chance. (losses not resulting from chance is depreciation expenses) direct losses: immediate, or first, result of an insured peril. example - fire destroys home, home is the direct loss indirect losses: consequential losses (items in the home like a ring) *there must be a direct loss first

Health Insurance (three categories)

1. Medical Expense Insurance: encompasses a broad range of benefit arrangements that cover virtually any expenses connected with hospital and medical care and related services for the insured and covered family members 2. Long-term care insurance: Provides financial protection against the insured incurring exceptional expenses because of their need to assistance in connection with the essential activities of daily living 3. disability income insurance: also called loss of time or loss of income insurance; provides periodic payments when an insured loses income because of injury or sickness

Responses to Risk

1. Risk Avoidance 2. Risk Reduction: exercise to try not to get a heart attack 3. Risk Transfer: transferring the financial consequences of any loss to some other party 4. Risk Retention: not taking any action to transfer a risk means it is retained 5. Risk Diversification: considering options to mitigate risk Six steps of risk management are - -establish risk management objectives, -gather information, -analyze information, -develop the risk management plan, -implement the risk management plan, and -monitor and revise the risk management plan.

Other Benefit Provisions

1. Transplant Benefit: if the insured is totally disabled because of the transplant of an organ from his or her body to the body of someone else, the insurer will deem him or her to be disabled as a result of sickness. This provision also includes cosmetic surgery performed to correct appearance or disfigurement 2. Rehabilitation benefit: allows a specific sum, often 12x the sum of the monthly indemnity and any supplemental indemnities to cover costs not paid by other insurance or public funding when the insured enrolls in a formal retraining program that will help him or her return to work 3. non-disabling injury benefit: pays up to a specific sum, usually one-quarter of the monthly indemnity, to reimburse the insured for medical expenses incurred for treatment of an injury that did not result in total disability 4. Principal sum benefit: lump-sum amount payable if the insured dies accidentally. provision requires that death be caused directly and independently by injury and that it occur within a specified number of days, usually 90 or 180, following the date of the accident.

Advantages of owning an insurance policy

1. assists with savings 2. furnishes a safe and profitable investment: accumulation devices 3. encourages thrift: encourages good spending and savings habits 4. minimizes worry 5. provides an assured income in the form of annuities: hedge risk of outliving money or living with more money than you need 6. helps preserve an estate

Liability Coverage: 3 types

1. business general liability: direct, vicarious, contractual 2. commercial general liability; occurrence based and claims made liability 3. auto liability

Appleton Rule

1. companies doing business in NY are subject to NY regulations. Companies doing business in other states are also subject to NY regulations 2. NY insurance code has an impact beyond state borders 3. non-NY residents benefit from NY legislation

Most common optional or supplemental disability benefits

1. residual disability benefit: provides reduced monthly indemnity in proportion to the insured's loss of income when he or she has returned to work at reduced earnings. loss of income / prior income * monthly indemnity benefit = residual indemnity 2. partial disability benefit: optional benefit for their less-favorable occupational risks. typical benefit is 50% of the monthly indemnity for total disability and is payable for up to six months or, if less, for the remainder of the policy benefit period when the insured has returned to work on a limited basis after a period of compensable total disability. 3. social insurance supplement: a disability income policy rider that pays an additional benefit if the insured is disabled and not receiving benefits from social security or any other named social insurance program. 4. inflation-protection benefit: provides for adjustments of benefits each year during a long-term claim so as to reflect changes in the cost of living from the time that the claim began. 5. increased future benefit: at stated intervals, usually early in contract, the insurer offers to increase the monthly benefit. Typically the increase is by a certain percentage (e.g. 5%). help the insured keep pace with pay raises and inflation; if accepted, the premium will also increase by a small amount 6. guaranteed insurability option: allows for a larger monthly benefit increase. Important for people who are starting careers with the expectation of higher incomes such as doctors. allows individual to purchase more protection without having to provide evidence of health.

International Operations problems

1. valuation of property in foreign countries may prove to be a problem due to currency fluctuations 2. lack of local insurance facilities

life insurance policy's can serve as accumulating devices...

Accumulation devices are policies that can be reasonable long-term savings instruments, if they are selected carefully. Interest credited to policy cash values is typically tax deferred.

Coverage A & B settlement

Buildings under Coverage A & B are settled at replacement cost without deduction for depreciation if the insurance is 80% or MORE of the full replacement cost of the building at the time of loss. -settled at an actual cash value of the damaged property up to the policy's liability limit, if the amount of the insurance is LESS than 80% of the full replacement cost of the building prior to the loss.

Two most common approaches to determining income objectives (at death)

Capital Liquidation: assumes that both principal (capital) and int rates are liquidated over the relevant time period to provide the desired income. Requires a smaller capital sum to provide given income level than the retention approach. Can be approached in one of two ways: 1. could be funded through the purchase of a life annuity 2. could provide for the complete liquidation of principal and interest between the present and the max age to which the income recipient is likely to live. Capital Retention: assumes that the desired income is provided from investment earnings on the principal, and no part of the desired income is from the capital. Capital is retrained undiminished even after death. capital liquidation + capital retention = income objective

Financial Objectives (in death)

Cash Objectives: require a single-sum cash amount to fulfill. Objectives arise from the need to pay outstanding liabilities (loans, cc balance, etc.) Income Objectives: requires assumptions that render approximations. Involves: 1. determination of the annual net amount needed 2. for life insurance planning purposes, these annual net income amounts are converted to a single-sum (present value) equivalent. cash objectives + income objectives = Financial Objectives

Health insurance taxation

Employers can deduct medical and health insurance premiums, and the premiums are deductible to employees subject to 7.5% of AGI limits. -medical insurance benefits: are employer-provided or self-insured. The employer-provided medical expense insurance benefits are not taxable income for the employee. Benefits to highly compensated employees may be taxable, if the plan discriminates in favor of such individuals under self-insured medical expense reimbursement plans. -disability income benefits: disability income insurance for employees are generally tax deductible by the employer and are not taxable income to the employee. Employee contributions, on the other hand, are not tax deductible by the employee. -long-term care plans and its tax treatment: In general, benefits are excluded from taxable income. Insurance premiums and out-of-pocket spending for LTC services qualify as medical expense deductions, and are 100% deductible up to specified age limits.

Special Limits of Liability

Establishes the maximum dollar amounts that an insured can recover when the specifically identified property is damaged or stolen. -some types of property such as jewelry can be covered on a scheduled personal property endorsement.

Life Insurance policies must include the following provisions:

Grace period: 31 days to pay the premium after due date Reinstatement: provides the opportunity to renew a lapsed policy Incontestable clause: prevents insurer from contesting the policy after a certain period in order to void it entire contract provision: written policy must include an attached copy of the hand-written application Misstatement of age provision: causes the insurer to change the face value of the policy to reflect the insured's true age, instead of voiding it annual apportionment of divisible surplus: if there is a divisible surplus, the insurer must pay dividends Suicide clause: allows a life insurer to exclude payment for death by suicide within two years from policy issue date Dividend options: let the policy owner choose the form dividends take (cash, reduction of the next premium payment, accumulation of int, purchase of single-premium paid-up insurance

Contributory Negligence

If it can be shown the plaintiff's own negligence contributed to or led to the injury sustained, the court will not allow recovery of damages from the defendant under the contributory negligence rule. -very harsh. Even slight negligence on a plaintiff's part can relieve a grossly negligent defendant of responsibility for an accident. -The comparative negligence doctrine allows plaintiffs some recovery despite contributing to their own injuries. -doctrine of last clear chance: Assume that, despite the plaintiff's negligence, the defendant had a clear chance to avoid the injury

Definitions of Insurance

Insurance: a financial arrangement that redistributes the costs of unexpected losses. Involves the transfer of potential losses to a group of individuals exposed to the same risk through what is referred to as an insurance "pool" (financial definition) a contractual arrangement whereby one party agrees to compensate another party for losses, in exchange for consideration paid (i.e. premium) (legal definition) can be categorized as either social or private. private can either be defined from the financial and legal perspective

Insurance terms

Insurer: the party agreeing to pay for losses Insured: the party whose loss causes the insurer to make a claims payment Premium: the payment received by the insurer Policy: what the insurance contract is known as exposure to loss: insured's possibility of loss. If the insured purchases an insurance policy, he transfers the exposure to loss to the insurer

Need Analysis Approad (insurance planning - death)

Looks at how that income was being used, instead of simply replacing lost income. 3 steps: 1. identify the needs that would arise or continue following death of a person 2. total the resources that would be available such as life insurance, SS survivor benefits, etc. 3. measure the difference between the needs and the resources available. The resulting shortfall is the insurance need.

Sections of homeowners insurance

Section 1: Coverage A: Dwelling Coverage B: Other Structures Coverage C: Personal Property Coverage D: Loss of Use Additional Coverages Section 2: Coverage E: Personal Liability Coverage F: Medical Payments to others Additional Coverages

Tests for choosing the right insurance company

Strength: financial strength is not questionable Claims: honors insureds' legit claims Agents: trained Coverage: as valuable or better than other companies

Major types of life insurance

Term Life: covers a set time pd and promises to pay benefits only if the insured dies during the policy term, with nothing paid if the insured survives the term. renew-ability & convertibility Whole Life: policy that provides permanent coverage for the whole of the insured's life. Universal Life: is a policy which provides the low cost nature of term life insurance and the cash value features of whole life insurance. Variable Life: policy that increases the opportunity for the cash value fund to grow, but also exposes the insured to greater investment risk.

Personal Property Insurance: provisions

The following provisions are found in most standard property & liability insurance contracts: Declarations: name the insured and the property covered, general facts Insuring Agreements: set forth the coverage provided by the contract Deductibles: out-of-pocket costs the insured must have for an insured loss. Definitions: glossary of important words throughout the policy Exclusions: types of things that aren't covered Endorsements: & riders change standard insurance contracts by adding or eliminating coverage to meet the insured specific insurance needs Conditions: explain the relationships, rights and duties of the insurer and those of the insured.

Financial risk management

a company optimizes the procedure in which it takes risks. It is based on recognition of the fact that all companies accumulate resources. These resources are invested in business activities that are uncertain. Successful organizations take risks that are necessary for their goals and avoid other risks.

The unified credit

a credit that is used to offset an estate tax liability of $5,430,000 in 2015

Medicare supplement insurance

also known as medigap insurance. designed specifically to supplement benefits provided under the medicare program The National Association of Insurance Commissioners (NAIC) has developed 10 standardized Medicare supplement insurance plans with each covering a core group of minimum benefits. The law imposes a $25,000 fine for insurers selling contracts not meeting the following standards: Open Enrollment - Insurers must accept individuals age 65 or older who buy Medigap policies within six months of enrolling in Medicare, regardless of their health status, claims experience, or medical condition. Preexisting Conditions - Insureres can exclude benefits for conditions diagnosed six months before the policy was issued. Duplicate Coverages - Insureres cannot sell a Medigap policy to a person who already has a Medigap policy unless it is a replacement policy. Loss Ratios - Medigap policies must return in benefits at least 60 percent of the premium earned on individually purchased Medigap policies, and at least 75 percent of the earned premium on group policies. Guaranteed Renewable - Insurers cannot cancel or refuse to renew Medigap policies solely because of the insured's health condition. Policies can be cancelled only for nonpayment of premiums or material misrepresentation.

Dividends of life insurance

an amount paid on participating insurance policies. -dividends received from a mutual life insurance company are not subject to federal income tax -The IRS views these dividends as a return of part of the premium and not as earned income. But, if dividends are paid to owners of stock, such dividends are a taxable return on their investment.

Incidents of Ownership (life insurance)

any economic benefits in a life insurance policy, including the right to designate a beneficiary, make a loan, or receive the cash surrender value from a life insurance policy

The Gift Tax law

calculated by adding all the donor's lifetime taxable gifts. A unified rate schedule to the total taxable gift is applied to derive the tentative tax. The unified tax credit is subtracted from this, to yield the gift tax payable in the current period Benefits: include gift-splitting privileges, deductions, gift of life insurance, gift of insurance contracts, gift of premiums, and gift of proceeds

Employment Practices Liability

arises from hiring, terminating, and supervising personnel. The following are some of the reasons employers have been sued: negligent hiring, invasion of privacy, negligent supervision, negligent discharge, wrongful discipline and negligent evaluation.

Human Life Value formula (insurance planning - death)

based on the person's income earning ability. Human life value is the present value of income lost as a result of the person's death. Question: how much money is needed for investment now, in order to provide replacement income for a set number of years?

Life insurance used for funding of business agreements

buy and sell agreement: provides funds for continuation of a business cross purchase plan: allows each partner or shareholder to purchase life insurance on every other partner or shareholder entity plan: when the partnership or corporation purchases insurance on each partner or shareholder.

Riders and options (life insurance)

can be purchased at extra cost to provide additional coverage. Riders include: -guaranteed insurability option: permits the purchase of additional coverage without proof of insurability -waiver of premium option: permits disabled individuals to stop making premium payments while maintaining full policy benefits and coverage -double indemnity option: insurer pays greater death benefit amounts for certain accidents

Professional Liability Insurance

caused by errors of professionals. It is sometimes called malpractice liability, or errors and omissions coverage. The types of liability coverage include, doctors' liability, hospital liability, druggists' liability, directors and officers liability, and omissions insurance and completed operations.

Legal Terminology: choses

choses in possession: ownership rights by tangible objects such as jewels. choses in action: example is an insurance policy. not actually tangible

Homeowners Insurance Policies (HO)

combine property and casualty coverage such as fire, theft and personal liability insurance into one insurance contract. -Homeowners policies provide protection for homes and personal property, and liability coverage for bodily injury or property damage caused by an insured. Named-peril coverage: lists the specific perils covered in the homeowners policy Open-peril coverage: the insurer pays for damages by any peril, except for those excluded in the policy. three levels of coverage: basic/standard, broad form, & special coverage

Hazards (Insurance)

conditions that increase the probability of loss from a peril, by increasing either the frequency or the severity of potential losses. -Physical Hazards: type of construction, location, occupancy of building, frayed wires, smoking in bed -Moral Hazards: exaggerating losses (ex: intentionally getting into an accident and reporting injuries) -Morale Hazards: increase in losses due to knowledge of insurance coverage (leaving car door unlocked) "why should I care, I'm insured" attitude -Legal Hazards: increased frequency and severity of losses such as legislative action

death proceeds taxation (life insurance)

death proceeds: the policy face amount and any additional insurance amounts paid by reason of the insured's death, less any loans taken against the policy and past due premiums during the grass period federal income tax is not applied to death proceeds taken as a lump sum of cash. On the other hand, the interest earned on death proceeds taken as a series of payments is taxes

own occupation clause

deems the insured to be totally disabled when they cannot perform the major duties of their regular occupations. It's the most liberal definition of disability available

Benefits provisions

describe the circumstances of loss, the way in which the company will pay benefits, and at what point benefits may end. common benefit provisions of total disability: -you must become totally disabled while the policy is in force -you must remain disabled until the end of the elimination period. no indemnity is payable during that period •After that, monthly indemnity will be payable at the end of each month while you are totally disabled. •Monthly indemnity will stop at the end of the benefit period or, if earlier, on the date you are no longer totally disabled. *waiver of premium benefits: waives any premiums that fall due after the insured has been totally disabled for the lessor of 90 consecutive days or the elimination period, and it allows for refund of any premiums paid during the period.

Taxation of living benefits (life insurance)

dividends: are not subject to federal income tax as they are a "return of premium" Savings: the excess of the adjusted basis is subject to federal income tax when received as cash accelerated death benefits: tax-free if all the regulations are met

total disability

due to injuries or sickness: 1. you are unable to engage in any gainful occupation in which you might reasonable be expected to engage because of edu, training, or experience, with due regard to your vocation and earnings at the start of disability 2. you are under the care and attendance of a physician

Policyholder loans (life insurance)

give the policy owner the right to borrow an amount of money lesser than or equal to the cash value of the policy

Life insurance used in businesses

group life insurance: purchased by the employer for the benefit of employees Key employee life insurance: covers the financial loss incurred by loss of key persons in the business split dollar life insurance: allow businesses to reward and retain valuable personnel. Both the employer and the employee share payment of premiums and the benefits

Medicare

health insurance for people 65 or older, under 65 with certain disabilities and any age with permanent kidney failure -Most people get their Medicare health coverage in one of two ways, the original Medicare Plan or the Medicare Advantage plans like HMO's and PPO's which is called Part C. The Part C alternative combines Part A (Hospital Insurance) and Part B (Medical Insurance). Most Part C plans cover prescription drugs. If it does not, then it may be possible to purchase Part D (Prescription Drug Coverage). -Medicare Part D (Prescription Drug Coverage) is available through private companies that work with Medicare to provide prescription coverage.

Federal Gift Tax Law

imposed upon the right to transfer property to another person, and does not include the ordinary exchange of gifts associated with occasions like birthdays and holidays

Basic Medical Expense Insurance

includes a combination of hospital insurance, surgical insurance, and physician insurance. Basic medical insurance policies often have no deductible provision and the insurer pays covered losses from the first dollar forward.

Credit insurance policies

issued through lending institutions to cover debtors' obligations.

life insurance reserves

legal reserve = present value of future death claims - present value of future net premiums

Indemnity

means the insured should be restored to the same financial position occupied before the insured's loss. -Insurers enforce the principle of indemnity through the insurable interest requirement, actual cash value settlements, and the operation of subrogation clauses. three exceptions: 1. life insurance: Because the economic value of a human life cannot be measured precisely before death. 2. replacement-cost insurance: written when the insurer promises to pay an amount equal to the full cost of repairing or replacing the property without deduction for depreciation 3. valued insurance: value of the insured property is agreed to before the policy is written

Indirect losses

occur after physical damage loss of income: the decrease in revenue while your repair the damage continuing expenses: expenses that continue even though the property has been damaged (ex: taxes and mortgage) extra expenses: additional expenses incurred to keep your business going

unilateral contracts

only one party makes an enforceable promise. example: insurance contracts - only the insurer makes a binding promise, the insured can cancel the policy at any time without recourse, while the insurer is limited to specific situations (such as failure to pay premiums)

Life Insurance Policies

pay benefits on death of an individual, or pay benefits on survival to a certain age or for a set number of years.

Chance of Loss

predicted chance of loss = expected # of losses / number of exposed units (priori chance of loss)

surgical contracts

provide coverage for the costs of surgical procedures. -some specify a maximum amount of coverage for a representative group of surgical procedures -stated amount is the most the insurer will pay for a procedure -If a patient needs two procedures during one hospitalization, the more expensive treatment determines the payment.

Life Insurance non-forfeiture options

provide that those life insurance policies having a savings value are not forfeited. the types of non-forfeiture options are: cash surrender value extended term reduced paid up option

Legal liability insurance

provides protection against the financial impact of lawsuits direct loss: attorney fees & court costs indirect loss: higher costs for goods and services, elimination of products and services, and a hostile environment where fear of lawsuits inhibits business and personal activity

Actual Cash Value (ACV)

replacement cost at the time of loss, less depreciation -one of the strategies used to implement the principle of indemnity -insured can only cover the amount of the loss, even if the face val of the policy was higher because the property was over-insured. replacement cost - depreciation = actual cash value depreciation is calculated as a percentage...numerator is number of years the structure was in use, denominator is an estimate of the useful life of the structure

Financial responsibility laws

require drivers to furnish evidence of financial responsibility to retain their driver's license or their auto's registration. -Most drivers purchase liability insurance, which is acceptable evidence of financial responsibility. Alternative evidence would be a surety bond or a deposit of assets.

settlement options (life insurance)

specify how death proceeds are paid -cash -fixed amount -fixed period -interest only -life income

Adverse selection

when one party to a transaction has more relevant information or more control of outcomes than another party to the transaction, the party with more information has advantage of situation example: home insurance when someone threatened to destroy your home

Living benefits (life insurance) taxation

the excess amount withdrawn from the savings value of insurance by an insured. It is subject to federal income tax. -if the insured withdraws the savings value of the insurance and if this value exceeds the insured adjusted basis, (premiums paid less dividends received), the excess is subject to federal income tax in the year of the withdrawal

law of large numbers

the greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result -the insurance company must have a large enough number of exposures from which to gather their loss experience, and then must have enough insured units so that the actual number of losses will be closer to the predicted number

the adjusted gross estate

the gross estate value - funeral and admin expenses, debts and taxes, and casualty loses from the adjusted gross estate the decedents marital deduction, charitable deduction and state death tax deduction are applied to determine the tentative estate tax

Risk Management

the logical development and execution of a plan to deal with potential losses. Personal plan has fewer options than a business and insurance plays the role of a risk financing option as opposed to other risk management tools

Single limit policy vs split limit policy

the single limit policy may provide more compensation to a single victim of the insured than the other type of liability coverage, known as split limits liability -single limit sets limit for all types of damage an insured may cause in one occurrence equal to this stated amount.

1035 Exchange

the tax-free transfer of existing life insurance policies or annuity contracts for similar new contracts with different insurance companies

Intentional torts

the tortfeaser acts deliberately with the desire to harm the plaintiff. safeguarding a person's physical or mental well being from intentional interference include: -assault and battery -false imprisonment, hostage situation -intentional infliction of emotional distress -defamation (libel and slander)

Risk

the variation in possible outcomes of an event based on chance. degree of risk - measure of the accuracy with which the outcome of an event based on chance can be predicted pure risk - refers to possibilities that can result in only loss or no change. factory fire is an example, it either burns or it does not. speculative risk - refers to those exposures to price change that may result in gain or loss. ex; stock market investments (risk is man made), gambling

Ordinary insurance policies

those whose benefit amounts are larger than industrial insurance.

tort

tort law provides compensation for legal wrongs committed against a person or his or her property arising independently of any contract between the parties. -a person who commits a tort is a tortfeasor -acts or omissions constituting torts are tortious -most torts are not crimes tort liability 1. intentional torts: defendants actions are calculated to cause injury to another 2. negligent torts: defendant unintentionally acts or fails to act in a prudent matter 3. strict liability torts: damages result from dangerous activities