Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003Page 1 of 110 TABLE OF CONTENTS CHAPTER 1: INTRODUCTION AND INDIVIDUAL LIFE INSURANCE .......................3 CHAPTER 2: REGULATION OF THE INSURANCE INDUSTRY ...................................5 CHAPTER 3: INTRODUCTION TO RISK AND INSURANCE .........................................8 CHAPTER 4: MEETING NEEDS FOR LIFE INSURANCE .............................................14 CHAPTER 5: THE INSURANCE POLICY ........................................................................18 CHARTER 6: PRICING LIFE INSURANCE. ....................................................................21 CHAPTER 7: TERM LIFE INSURANCE...........................................................................25 CHAPTER 8: PERMANENT LIFE INSURANCE AND ENDOWMENT INSURANCE.28 CHAPTER 9: SUPPLEMENTARY BENEFITS .................................................................34 CHAPTER 10: LIFE INSURANCE POLICY PROVISIONS.............................................40 CHAPTER 11: LIFE INSURANCE BENEFICIARY POLICIES.......................................46 CHAPTER 12: ADDITIONAL OWNERSHIP RIGHTS.....................................................48 CHAPTER 13: PAYING LIFE INSURANCE POLICY PROCEEDS................................55 CHAPTER 14: PRINCIPLES OF GROUP INSURANCE POLICY...................................59 CHAPTER 15: GROUP LIFE INSURANCE. .....................................................................64 CHAPTER 16: ANNUITIES AND INDIVIDUAL RETIREMENT SAVINGS PLANS ...68 CHAPTER 17: GROUP RETIREMENT AND SAVINGS PLAN......................................78 CHAPTER 18: MEDICAL EXPENSE COVERAGE..........................................................83 CHAPTER 19: DISABILITY INCOME COVERAGE. ......................................................87 CHAPTER 20:TRADITIONAL GROUP HEALTH INSURANCE PLANS ......................91 CHAPTER 21: TRADITIONAL INDIVIDUAL HEALTH INSURANCE POLICIES......97 CHAPTER 22: MANAGED CARE PLANS .....................................................................102 CHAPTER 23: REGULATION OF HEALTH INSURANCE ..........................................105 Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 2 of 110 CHAPTER 1: INTRODUCTION AND INDIVIDUAL LIFE INSURANCE Insurance companies are organized as either Stock Insurance companies Company has stock that is bought by shareholders. So company is owned by shareholders. These share holders get dividends. No. of companies: 1604 Income from Premium: 226 billion Dollar amount of Life Insurance in force: 9.8 trillion Mutual Insurance companies This type of company is owned by its policy owners. Policy owners receive dividends out of operating profits. No. of companies: 91 Income from Premium: 127 billion Dollar amount of Life Insurance in force: 6 trillion Fraternal Benefit companies Provided by a society to its members who share a common ethnic, religious etc. background. No. of companies: 135 Income from Premium: 4.1 billion Dollar amount of Life Insurance in force: 238 billion Mutualization: It is harder to raise money being mutual insurance companies. So most companies start as stock company and then convert to mutual companies when they have enough funds. This process of converting from share insurance company to Mutual Insurance Company is called mutualization. Demutualization: Self explanatory Home office: Headquarter of Insurance Company. Home office Reg. Off Reg. Off Reg. Off Field Off Field Off Field Off Field office also known as Branch office or agency office. Insurance companies are financial intermediaries. Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 3 of 110 A financial intermediary is an organization which uses surplus amount of savers ( for insurance company it is premium) and invests that in other sectors. Individual and Group Insurance: Individual Insurance covers individuals where as Group Insurance covers a group of people. Life Insurance: A policy where insurance company provides some benefits if insured person dies. They are of 3 types: Term Insurance: Pays benefit if insured dies within the covered time period. No cash value Permanent Insurance: Provides coverage throughout insured’s lifetime. Cash value available Endowment Insurance: Is similar to Term since pays benefit if insured dies while covered or till a stated date. Has cash value available. Annuity: Annuity is a series of periodic payments. If insured’s die then instead of paying a lump some benefit to the nominees, it can be spaced out in equal installments. Health Insurance: Protection towards sickness, accident and disability. Types of coverage: Medical expense coverage: o Hospital expense o Surgery expense o Physician expense Specified expense coverage: Long Term care: like for old people who need constant care and treatment Dental coverage Prescription Drug Vision care Dread disease coverage Critical illness coverage Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 4 of 110 CHAPTER 2: REGULATION OF THE INSURANCE INDUSTRY Every business must comply with several federal, state and provincial laws so that it operates in a fair manner. Insurance Regulation requires that the Insurance companies remain: 1. Solvent: They are able to meet their debts and to pay policy benefits when they come due 2. Conduct business fairly and ethically USA Regulations According to the McCarran-Ferguson Act (Public Law 15), regulations are made by State Government until the regulation made is adequate. If not, Congress interferes. Constitutional authority remains with Federal government State Government owns primary authority. State Regulations State Insurance administration is governed by State Insurance Department (SID) under an Insurance Commissioner or State Superintendent of Insurance. SID ensures that the companies within the state comply with all state insurance laws and regulations. Most state regulations are similar in nature since they are based on a model by National Association Insurance Commissioners (NAIC). NAIC is a non-governmental organization consists of all state Insurance Commissioners. The NAIC develop model bill, a sample law that state insurance regulators are encouraged to use as a basis of state laws. To start business in a state, any insurance company requires two certificates: Certificate of incorporation or corporate chapter: issued by state, required for any corporation to start its business in a state Certificate of authority or license: issued by SID, only for insurance companies Solvency Regulation As per this regulation, the SID imposes a minimum limit on the amount of assets, liabilities and on owners’ equity. Assets = Liabilities + Owners’ Equity Assets: Cash and Investment Liabilities: Debts and future obligations (Policy reserves shares the large portion of liabilities for a insurance company) Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 5 of 110 Owners’ Equity: Capital + Surplus (Capital is the money invested in the company by its owners, zero in case of a mutual insurer) The states oversee the Annual Statement, which each insurer prepares each calendar year and files with SID. This is the accounting report of a company. The NAIC has developed the format of this statement that is accepted by all state. Also the state regulators conduct an on-site examination to manually check the insurer’s business records, usually on every 3 to 5 yrs. In case an insurer become financially unsound, the State Insurance Commissioner have the authority to take certain actions: In case of domestic insurer (incorporated by the state): It can rehabilitate or liquidate, depending on the condition of the company. In case of a foreign insurer (incorporated under the laws of another state): Revoke or suspend the insurer’s license to operate in the state. Life and Health Guaranty Association: An organization that operates under the supervision of the SIC to protect policy owners, beneficiaries and specified others against losses that may occur in case of insolvency. This association provides funds to guarantee payment for certain policies up to stated limits. Regulation of Market Conduct Market Conduct Laws: This law regulates how insurance companies conduct their business within the state. As per this law, they perform periodic market conduct examinations of the insurers. Marketing of Insurance products: In order to obtain an agent’s license, a prospective agent must Be sponsored for licensing by a licensed insurance company Complete approved educational course work/ or pass a written examination Provide a reputable character certificate The agent’s license must be typically renewed each year. A state may revoke a license if he/she engages in certain unethical practices and violates the state’s insurance laws. Policy Forms: It is a standardized contract forms that shows the terms, conditions, benefits and ownership rights of a particular insurance product. An insurance company must file this forms and receive the SID’s approval before launching a new product. SID may ask the company to revisit the form for reducing jargons so that it could be clearer to the general public. Federal Regulations This applies to the sale of investment type insurance product. Businesses that sell securities must comply with Securities and Exchange Commission (SEC). Ex: Variable life insurance, Variable annuities Page 6 of 110 Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 but it may be anytime) SFI may take control or declare a company as insolvent or obtain a court order to liquidate to company if finds it financially unsound. 2003 Page 7 of 110 . CANADA Regulations Unlike a US insurance company. Companies that must comply with this act are: Federally incorporated insurers. Federal Regulations The Insurance Companies Act is the primary Federal law that governs specified insurance companies operating in Canada. This institute runs under the direction of Superintendents of financial institutions (SFI). Employee benefit plans must comply with the terms of Employee Retirement Income Security Act (ERISA). Canadian Life and Health Insurance Association (CLHIA): An industry association of life and health insurance Company operating in Canada. Principles of Insurance: Life. Every insurance company must file an Annual Return with the OSFI. a Canadian company may be incorporated under the authority of either the Fed government or one of the provincial governments. laws to regulate insurance companies operating in different provinces are similar in all provinces except from Laws of Quebec. Foreign Insurers (insurers incorporated in countries other than Canada) and specified provincially incorporated insurers. Health & Annuities Dated: 26th Feb. Before selling these products. non-profit company established by CLHIA to protect Canadian consumers against loss of benefits in the event of a life and health insurance company becomes insolvent. CompCorp collects money from all its member companies to fund these guaranteed payments. the sales agent must be registered with the National Association of Securities Dealership (NASD). Office of the superintendents of financial institutions (OSFI): A federal agency that is responsible for overseeing all financial institutions in Canada including all life and health insurance companies. Provincial Regulations In most respects. Canadian Life and Health Insurance Compensation Corporation (CompCorp): It is a federally incorporated. This is because the Quebec law is based on a Civil Law system but other jurisdictions’ laws are based on a common law system. OSFI also examine financial conditions of a company on a periodic basis (usually on every 3 year. This gives the financial statement of the company. These guidelines were developed in cooperation with the insurance industry. a) Speculative risk. Types of Risk: Both individual and businesses experience 2 kinds of risk. CHAPTER 3: INTRODUCTION TO RISK AND INSURANCE Concept of Risk: Risk exists when there is uncertainty about the future. Also the insurance company should obtain a license from the office to start business in a particular province. the CLHIA. Regulation of Market Conduct Unlike requirements in the US. Solvency Regulation These laws require the Office of the Superintendent of Insurance to supervise companies that were incorporated by the province and to examine those companies periodically. b) Pure risk. It operates under the direction of an individual known as the Superintendent of Insurance. established in each province to enforce the province’s insurance laws and regulations. Health & Annuities Dated: 26th Feb.Office of the Superintendent of Insurance: An administrative agency. however the provinces do not require that all policy forms be filed before being issued but the insurers are required to file policy forms in only two situations: 1) As a condition of obtaining a license to conduct an insurance business within the province 2) Before marketing a variable life insurance contract in the province The provinces also regulate many of the marketing activities of the companies to: 1) Prohibit from unfair trade practices. 2003 Page 8 of 110 . working through its industry association. false or misleading advertisement 2) Agent should get the license form the state before marketing in that state. Most of the licensing requirements seek to ensure that insurance companies are financially able to provide the benefits they promise to pay when they issue insurance policies. The various provincial Superintendents of Insurance have voluntarily formed a collective body known as the Canadian Council of Insurance Regulators (CCIR). Principles of Insurance: Life. a series of recommendations that concerns a variety of matters. The licensing requirements are similar to requirements in the United States. The CCIR has adopted Superintendents’ Guidelines. The purpose of CCIR is to discuss insurance issues and to recommend uniform insurance legislation to the provinces. What is pure risk? This involves no possibility of gain. If the value of the stock raises you gain. b) Controlling risk We can try to control risk by taking steps to prevent or reduce losses. Example: Your purchase shares of stock. In order to eliminate or reduce our exposure to a specific financial risk we may choose any of at least 4 options: a) Avoiding risk For example: One can avoid the risk of personal injury that may result from an air crash by avoiding travel by airplane. Speculative risk has the possibility of financial gain. If the value of the stock falls you lose. This way he reduces the likelihood of a fire breaking in his shop and also lessens the extent of damage in case of a fire. Health & Annuities Dated: 26th Feb. If the professional does not get disabled he will incur no loss from that risk. If the disability renders the professional incapable of continuing in his profession. Risk Management: Risk management involves identifying and assessing the financial risks we face. This is a speculative risk you are taking. Example: The possibility of a professional getting physically disabled. he suffers from a financial loss. If the value of the stock remains the same there is no change. Either there is a loss or no loss occurs. For example: A shop owner might control the risk of suffering financial loss due to his shop burning down by installing fire extinguishers and banning smoking inside the shop. gain or no-change. Hence speculative risk is not insurable. 2003 Page 9 of 110 . Principles of Insurance: Life. Which type of risk is insurable and why? Pure risk is insurable. The purpose of insurance is to compensate for financial loss. c) Accepting risk When an individual or a business assumes all the financial responsibility for a risk.What is speculative risk? This involves 3 possible outcomes: loss. theft. Property and Casualty insurance or Property and Liability insurance Covers a property risk as well as a liability risk. outliving one’s savings. This is a legally enforceable contract. What are the three types of pure risks that are generally covered by insurance companies? Property damage risk: risk of economic loss to your automobile. 2003 Page 10 of 110 . Liability insurance covers a liability risk. Policy benefits or policy proceeds The amount of money that the insurance company agrees to pay – when a specific loss covered by that policy occurs. fire or natural disaster. Health & Annuities Dated: 26th Feb. Personal risk: Risk of economic loss associated with death. Life and health insurers sell insurance policies to provide financial security from personal risk. d) Transferring risk When the financial responsibility for an associated risk is transferred from one party to another (generally in exchange of a fee). if the specific risk covered by the policy occurs. poor health. How an insurance company can afford to be financially responsible for the economic risks of its insureds? Principles of Insurance: Life.Self-insurance This is a risk management technique by which a person or business accepts the financial responsibility for financial losses associated with a particular risk. A most common example is purchasing an insurance coverage. Liability risk: risk of economic loss resulting from you being responsible for harming others or their property. Property insurance covers a property damage risk. home or other personal belongings due to accident. Premium The fee that the insurance company takes from the owner of the policy in exchange of assuming the financial responsibility for losses incurred. Policy Written document that contains the terms of the agreement between the insurance company and the owner of the policy. it is called transferring of risk. The insurance company offering such insurance is called a Property and Casualty insurer or a Property and Liability insurer. regardless of the actual amount of the loss that was incurred. every insurance policy can be classified as being either of the following: Contract of indemnity: amount of the policy benefit payable for a covered loss is equal to the amount of the covered financial loss determined at the time of the loss or a maximum amount stated in the contract.000 or more) who are likely to die at each age. 2003 Page 11 of 110 . such as disability. by age. Health & Annuities Dated: 26th Feb. (In terms of time and amount) 3) The loss must be significant. If the economic losses that actually result from a given peril.Insurers use a concept called risk pooling. Valued Contract: specifies the amount of benefit that will be payable when a covered loss occurs. the more times we observe a particular event. the more likely is it that our observed results will approximate the “true” probability that the event will occur. Characteristics of Insurable risks: 1) The loss must occur by chance. Principles of Insurance: Life. whichever is less. typically. can be shared by large numbers of people who are all subject to the risk of such losses and the probability of loss is relatively small for each person. Claim: The request for payment under the terms of the policy. Example: Most life insurance policies. (A single or few occurrence of the loss must not cause or contribute to catastrophic financial damage to the insurer) Classification of policies: Depending on the way in which a policy states the amount of the policy benefit. Some other important terms: Face amount: The amount of the benefit that is listed in the policy. (The probable rate of the loss must be predictable) 5) The loss must not be catastrophic to the insurer. then the cost to each person will be relatively small. (Unexpected event. (In financial terms) 4) The loss rate must be predictable. occurring among a given group of people. not intentionally caused by the person covered) 2) The loss must be definite. Morbidity tables: Charts that indicate to a great degree of accuracy the incidence of sickness and accidents. Law of large numbers: It states that. Mortality tables: Charts that indicate to a great degree of accuracy the number of people in a given group (of 100. Example: Many types of health insurance policies. Principles of Insurance: Life. There are 2 primary stages in this process: 1) Identifying the risks that a proposed insured presents. Assessing the Degree of Risk Underwriting: This is the process of identifying and classifying the degree of risk represented by a proposed insured. become injured. The reinsurer to which the risk has been ceded is called a retrocessionaire.known as the ceding company-sells to another insurance company-known as the reinsurer. or suffer from illness. Third-party policy: When one person purchases insurance on the life of another person. People who are involved in the creation and operation of an insurance policy Applicant: The person or business that applies for an insurance policy. Retention limit: The maximum amount of insurance that the insurer is willing to carry at its own risk on any one life without transferring some of the risk to a reinsurer. Underwriter: The employee of the insurance company who is responsible for underwriting.Reinsurance: is the insurance that one insurance company. 2) Classifying the degree of risk that a proposed insured represents. The most important of these factors are the following: Physical hazard: Physical characteristic that may increase the likelihood of a loss. Moral hazard: The likelihood that a person may act dishonestly in the insurance transaction. 2003 Page 12 of 110 . Health & Annuities Dated: 26th Feb. Retrocession: When a reinsurer cedes risks to another reinsurer then that transaction is called a retrocession. Beneficiary: The person or party the policy owner named to receive the policy benefit. Insured: The person whose life or health is insured under the policy. Policy owner: The person or business that owns the insurance policy. But there are a number of factors that can increase or decrease the likelihood that an individual will suffer a loss. Example: A person with a history of heart attacks possesses a physical hazard that will increase the likelihood that the person will die sooner than a person of the same age group and sex without such a physical hazard. Identifying risks Insurers cannot predict when a specific individual will die. Example: An individual with a confirmed record of illegal behavior is more likely to defraud an insurer than is a person with no such records. Insurable interest requirement in life insurance An insurable interest exists when the policy owner is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies. Generally the risk categories that are identified by all underwriting guidelines are: a) Standard risks: Proposed insureds that have the likelihood of loss that is not significantly greater-than-average. The figure below shows the family tree of a certain insured. This category is called special class risks. Insurable Interest Requirement Laws in all states and provinces require that when an insurance policy is issued the policy owner must have an insurable interest in the risk that is insured. Premium rates that they are charged are higher and are called the substandard premium rate or special class rate. Premium rates that they are charged are standard premium rates. Classifying risks The purpose of classifying a proposed insured into an appropriate risk category is to enable the insurer to determine the equitable premium rate to charge for the requested coverage. The circles in the bold outline depict the relationships that create an insurable interest in the life of the insured. The insurer establishes these guidelines. d) Preferred risks / Super Preferred risks: Proposed insureds that present a significantly less-than-average likelihood of loss. Insurable interest requirement in health insurance For health insurance an insurable interest exists if the applicant can demonstrate a genuine risk of economic loss should the proposed insured require medical care or become disabled. Underwriting guidelines: Rules of risk selection that are applied by underwriters to classify proposes insureds.the policy owner must be likely to suffer a genuine loss or detriment should the event insured against occurs. c) Declined risk: Proposed insureds that are considered to present a risk that is too great for the insurer to cover. Principles of Insurance: Life. Health & Annuities Dated: 26th Feb. 2003 Page 13 of 110 . b) Substandard risks: Proposed insured who have significantly greater –thanaverage likelihood of loss but are still found insurable. They are generally charged a lower than standard premium rate. I. Funds to cover final expenses Estate: All things of value. Education costs IV. in its dealings with applicants for insurance. 2) Insurance meets (a) Individual / Personal needs I.Grandfather Grandmother Aunt Uncle Father Mother Cousin Spouse Sister-inlaw Brother Sister Insure Child Niece Nephew Child’s spouse Grandchild CHAPTER 4: MEETING NEEDS FOR LIFE INSURANCE Points to remember: 1) Insurance Agent / Sales Agent is an authorized person by an insurance Co.a. Principles of Insurance: Life. Retirement income V. called “Assets”. Assets include cash. Funds to cover final expenses II. and ownership interests in business. 2003 Page 14 of 110 . Dependents’ support III. bank & investment A/Cs. real estate. to represent the Co. Health & Annuities Dated: 26th Feb. Others (b) Business needs 2. collecting all debts owed to the deceased. LIP (Life Insurance Policy) can be used to supplement the family’s expense. such as a Church or an Educational Institution. Other Personal needs for LI To donate the proceeds of the LIP to a charitable organization. Health & Annuities Dated: 26th Feb. Permanent Insurance the policy his funds. until they obtain new methods of support or until they adjust to a lower income. 2003 Page 15 of 110 . Education costs To insure the education of the children even after the death of the parents. the premiums are deductible for federal income tax purposes. and paying all outstanding debts owed by the deceased. In this case.a. rather guarantees that owner will earn at least a specified interest rate on Moreover.V.a. 2.a. A Business Continuation Insurance Plan is an insurance plan designed to enable a business owner (or owners) to continue business operation if the owner or the Key Person dies. LIP’s accumulated savings will not be reduced if the Company’s investments lose money. 2. Retirement income To provide support to individuals with retirement income. 2.b.III. Dependents’ support To provide funds to support the family members. The Estate Plan considers the amount of assets and debts that one is likely to have when one dies and how best one can preserve those assets so that that can be passed to one’s heirs.a. Principles of Insurance: Life. LIPs provide income tax advantages. 2. 2.Estate Plans: A plan to settle one’s Estate as per one’s wishes. if the financially supporting member dies. which is tax-free as well. filing any required tax forms.IV. In addition. Business needs A Key Person is a person / employee whose continued participation in the business is necessary to the success of the business and whose death would cause a significant financial loss.II. Note: Settling an estate means identifying & collecting the deceased’s property. The BSAs vary based upon the form of the business organization as follows: Buy-Sell Agreements Partnership BSA Sole Proprietorship BSA Closely Held Corporation BSA 1) Sole Proprietorship BSA: Here the 1st party is the owner and the 2nd party is an employee having the ability & the drive to take over the business after the owner’s death. and using that cash to pay the business’s debts. inventory.A Closely Held Business is a sole proprietorship / partnership / corporation that is owned by only a few individuals. Principles of Insurance: Life. each partner agrees to purchase a proportionate share of the deceased partner’s interest in the partnership. The 1st party will identify the 2nd party. Health & Annuities Dated: 26th Feb. such as its building. The 2nd party. Thus each partner owns. other partners receive the proceeds of a LIP and can use those proceeds to purchase the proportionate of the deceased partner’s ownership interest in the partnership. Any funds remaining are then distributed among the owners of the business. The purchase of the deceased partner can be accomplished by one of the two methods – (I) Cross Purchase Method or (II) Entity Method. individual LIP is the common way to fund for him. This might need to establish a BCIP. Liquidation is the process of selling off for cash a business’ assets of the deceased. (I) In Cross Purchase Method. 2) Partnership BSA: Here the 1st party is one partner & the 2nd party is the other partner(s). When a partner dies. may not have sufficient assets to fund the purchase of the business. however. In that case. etc. and is the named beneficiary of a policy on the life of each of the other partners. 2003 Page 16 of 110 . Each partner funds the BSA by purchasing an insurance policy on the life of each of the other partners. pays the premium on. Buy-Sell Agreement is an agreement in which (1) one party agrees to purchase the financial interest that the 2nd party holds in the business following the 2nd party’s death and (2) the 2nd party agrees to direct his estate to sell his interest in the business to the purchasing party. (I) Split-Dollar LIP is an agreement under which a business provides individual LIPs for certain selected employees who share in paying the cost of the policies. the Corporation buys the policies on each of the owners’ lives. In the Entity Method. When a partner dies. The partnership purchases an LIP on the life of each of the partners. the employer will receive an amount equal to what it paid for the policy. the employee will be the owner of the policy but must reimburse the employer for the premiums it paid on the employee’s behalf. The employer agrees to pay the portion of each annual premium that is equal to the amount by which the policy’s cash value will increase that year. pays the premiums and is the named beneficiary of each policy. 2003 Page 17 of 110 . rather than the individual partners.(II) In Entity Method. The employee agrees to pay the remainder of the premium. Key Person Life Insurance: A key person could be an owner / a partner / an employee of the business. (II) Deferred Compensation Plans is a plan established by an employer to provide income benefits to an employee at a later date. the beneficiary named by the employee will receive the remainder of the policy proceeds. In Key Person Life Insurance. and is the beneficiary of the Insurance Plan. Here also they can have their BSA either in Cross Purchase Method or in Entity Method. Employers may even offer individual benefit plans to certain employees along with the one that all other employees receive. If the employee dies while the policy is in force. such as the Principles of Insurance: Life. Life Insurance as an Employee Benefit: Here Employers pay for all or part of the employee benefits as part of the total package under which the Co. compensate its employees. 3) Closely Held Corporation BSA: It is similar to the Partnership BSA. pays the premiums on. the partnership. agrees to purchase the share of the deceased partner and distribute a proportionate share of that ownership interest to the surviving partners. the corporation owns. There are two types of individual life insurance benefit plans – (I) SplitDollar LIP and (II) Deferred Compensation Plan. in most such cases. If the employee retires or leaves the firm. Health & Annuities Dated: 26th Feb. the partnership uses the LIP proceeds to purchase the deceased partner’s share in the business from the deceased’s estate. Types of Contracts: 1) Formal and Informal contracts. In Canada provincial laws require Document should have some form Seal however to be legally enforceable Insurance contracts to be in writing. 2003 Page 18 of 110 . E. UNILATERAL (I) * BILATERAL (I) * Only one party makes the legally Both parties make legally enforceable enforceable promises. Should be in written form and the Can be Written or Oral. Without it legal problems might arise. Promises so that both are contractually bound. E. Note that. INFORMAL (I) * The type of contract in which the requirement concerning the substance of agreement are met. The employer uses this deferred compensation to purchase an insurance policy on the employee’s life. The parties are bound to carry out the promises they made when entering into the contract. if the employee does not voluntarily terminate the employment before that date.employee’s retirement.A life insurance policy is a Principles of Insurance: Life. Advantages of written contracts in case of life and health insuarnce contracts a) The written contract puts to rest any sort of confusion over the terms of Agreement. any violation would be termed as breach of contract and can be legally challenged. Health & Annuities Dated: 26th Feb. pays the premium for and is the named beneficiary of that policy. Thus the employer owns. 2) Unilateral & Bilateral contracts. FORMAL The type of contract in which the requirements concerning the form of agreement are met E.g:. For this the employee needs to defer a part of his/her current compensation until some future date.Lease deed agreement which an owner and tenant have to enter before the tenant can occupy the house.g:. b) The written contract provides a permanent record of agreement. CHAPTER 5: THE INSURANCE POLICY Contract: A contract is a legally enforceable agreement between 2 or more parties. rather is the funding instrument for the agreement.Life and health insurance contracts. the policy is not a part of the Deferred Compensation Agreement between the employer & the employee.g:. Unilateral contract in the sense that Policy holder can discontinue as and when he wishes. Principles of Insurance: Life. 2003 Page 19 of 110 . Formation of valid Life/Health insurance contract involves 4 general requirements. 3) Commutative and Aleatory contracts.Life insurance policy in which the E. In case of life/health insurance policies the parties reach this mutual assent through a process of “Offer” and “Acceptance” in which one party makes an offer and another accepts it.g:Construction of house where insurer pays the insured certain sum only owner pays the contractor a promised if the insured dies. COMMUTATIVE The parties specify values in advance that they would exchange. sum when the house is completed. * The (I) indicates that insurance contract fall under this category. ADHESION (I) * One party prepares it and the other accepts or rejects as a whole. Voidable: A contract which is otherwise enforceable may have grounds to reject or to avoid it. Valid contract: One that is enforceable at law.g:. Void: One that was never enforceable at law. E. ALEATORY (I) * One party provides something of value to another in exchange for a conditional promise. however the Insurer is legally bound to provide to provide coverage in return for Stated premium as long as the Premium is paid. BARGAINING Both parties as equals set terms and conditions of the agreement. Only if the event occurs promise must be performed. Services can be of unequal values. 4) Bargaining and Adhesion contracts. Contracts can also be classified on the basis of their legal status. moreover items and services are exchanged between parties are of relatively equal values. The parties to the contract must manifest their mutual assent to terms of contract. Health & Annuities Dated: 26th Feb. 2003 Page 20 of 110 . The contract entered into by a mentally incompetent person is void. A minor is a person who has not attained the age of majority (18 in Canada and in most states in the US). Principles of Insurance: Life. furniture. E. These requirements must be met when life/health insurance policies are formed. Real Property: is land and whatever is growing on or affixed to the land. Personal Property: All property other than the real property. The parties to the contract must exchange legally adequate consideration. The application and the first premium are usually considered for a life insurance contract. If a minor takes an insurance policy then the beneficiary must be a member of the minor’s immediate family. as well as intangible property such as contractual rights. drunker. No contract can be made for a purpose which is unlawful. Health & Annuities Dated: 26th Feb. however avoid the policy and the company would have to return the paid premiums. However if the insurable interest is met at the Time the contract was made. and automobiles. In case an insurer issues a policy to a minor. Insurance policy as a property Property: A bundle of rights a person has with respect to something. As far as the individual is concerned he/she shouldn’t be a minor or lack mental capacity. The contract must be for a lawful purpose. If the insurable interest are not met A valid contract is not formed. not to Provide means of possible financial gain. a continuing insurable interest is not reqd. as it represents intangible legal rights that have value and that can be enforced by the courts. The primary purpose of all insurance is to protect against financial loss. The insurance policies are Intangible personal property. The minor. It includes tangible goods such as clothing. The parties to the contract must have contractual capacity. or insane) is generally voidable by the mentally impaired person. Until the first premium is paid a valid contract is not entered into. They should be licensed or authorised by proper regualtory authority to do business. The contract entered into by a mentally impaired (drug addicts. It is of two types.g.:.A contract that requires one person to kill would never be legally enforceable. Such a contract is a void contract. The insurance company must have the legal capacity to issue policy. then the company has to provide the promised insurance protection. Health & Annuities Dated: 26th Feb. This method was also known as post death assessment method. Rights of policy owner: 1) Right to name the beneficiary. Mutual Benefit Method: . Each member of a mutual benefit society agreed to pay an equal amount of money when any other member died. This method also faced the same drawbacks as the above method. who are responsible for calculating the premium rates the company will charge for its products. 3) As the members grew older. Principles of Insurance: Life. Premium Rate Calculations. In this chapter we shall discus the methods evolved over the years for determining life insurance premiums Methods of Funding Life Insurance.Ownership of Property: is the sum of all the legal rights that exist in that property. The following factors govern the premium calculations: Rate of mortality. usually for one year. Rate of Mortality. CHARTER 6: PRICING LIFE INSURANCE.1) Collection of money.Here the money is collected after the death of the person who was insured. the number of deaths increased in each year. Assessment Method: . The legal rights an owner has in property include the right to use and enjoy the property and the right to dispose of the property. 2) Right to dispose the policy.This is the modern pricing system and is based on proper calculation and collection of premiums for the death benefit of the insured. 2) Recruitment of new members. known as actuaries. Investment earnings. This method had three main drawbacks---. Insurance Company employs specialist. Premium rates must be adequate for the company to have enough money to pay policy benefits. Legal Reserve System: .Under this method the insurance company estimated their cost for certain period of time. the insurer determines the premium the company must charge for the specific insurance coverage. Premium rates must be equitable so that each policy owner is charged premiums that reflect the degree of the risk covered. The organization then divided this amount among the participants. This system is based on laws requiring that insurance company should maintain Policy Reserves. In order for an insurer to have enough money available to pay policy benefits when they become due. The premium is directly related to the amount of risk covered. 2003 Page 21 of 110 . Expenses. Following are the key points: 1. A policies net premium is the amount that the insurer should pay in order to provide the benefits. The net premium depends on 3 factors: Mortality rate. 2003 Page 22 of 110 . the higher the mortality rate. Following are the important points about the Mortality Tables: For both the sexes mortality rates start high at birth and decreases dramatically at age 1. Mortality Tables. For males the mortality rates increases sharply during teenage years. Although the rates that actually occur may fluctuate from group to group. the fluctuations will tend to offset one another. Block of policies. For both sexes the mortality rates steadily decreases until about an age of 10. Lapse rate. Any investment earning can be expressed as rate of return. Expenses. known as loading. (The rate at which the policies are dropped due to nonpayment of premiums. being higher in one group and lower in the other. b) Mortality experience. Because most policies are in force for some time before they become payable. Mortality Tables. Premium dollars are the primary source of funds used to pay life insurance claims. Investment Earnings. The risk is generally categorized as – Standard Risk. This total amount is known as gross premium.) To this net premium the Insurance Company adds their operating costs. Principles of Insurance: Life. insurance companies have premium dollars to invest. 2. Substandard Risk. the higher the premium will be charged. are charts that show the death rates an insurer may reasonably anticipate among a particular group of insured lives at certain ages-that is. a) Expected mortality. decreases in the mid 20s and then rises again in the early 30s At any given age the mortality rate for the women is lower than the corresponding mortality rate of males. how many people in each age group may be expected to die in a particular year. Decline Risk. Health & Annuities Dated: 26th Feb. The earnings from these investments provide the company to charge fewer premiums. In general. It is the task of the underwriter to evaluate the risk of a group and to fix the premium for the group. Investment Earnings. therefore. term insurance that provides coverage for than one year. Laws in the United States and Canada do not require insurance companies to declare regular policy dividends. yet establish premium rates that will be sufficient to meet unfavorable conditions. The second method is by changing pricing elements as the policy is in force. The extra money charged is invested and the return is used to meet greater risks during the later stage of the policy. during the early years of the policy. and endowment insurance. These choices are known as dividend options. For several type of policy the price can change even after it has been issued The first method is by paying policy dividends. Surplus is the amount by which company’s assets exceed company’s liabilities.The Level Premium Pricing System. however. than what required. Insurance policies. we have assumed that once each pricing element is assigned a value and the premium is set for a particular policy. A participating policy contains a policy dividend provision that gives the policy owner several choices in the way policy dividends can be used. Non participating policies. Health & Annuities Dated: 26th Feb. insurance companies can return money to the policy owner when the condition is favorable. Policy Dividends. Generally the premium paid for non-participating policies is less than the premium paid for participating policies of the same type. In this system higher premium rates are charged. Policies with Nonguranteed Returns. In our discussion. the only thing that they need to indicate is when they will declare policy dividends. Participating policies. By issuing participating policies. That is not always the case. Non-participating policies are the one where the policy owners do not share the divisible surplus. 2003 Page 23 of 110 . the pricing process is finished. The level premium system allows the purchaser to pay the same amount of premium amount each year the policy is in force. Participating policies are the one where the policy owners share the company’s divisible surplus. Principles of Insurance: Life. It is used to price whole life insurance. The share of the divisible surplus that the policy owner receives is known as policy dividend. In order to cope up with this kind of situations. Therefore with time policy reserve increases and the net amount of risk decreases. Contingency Reserves. If the experienced mortality rate is less than expected mortality rate then the price of the policy is effectively reduced. Policy Reserves represents the amount an insurer estimates it will need to policy benefits.An insurance company must be able to pay death claims even when the conditions are not favorable. Insurance companies must acquire assets that will exceed policy reserve so that they have funds to claims. Contingency Reserves: . a part of the loading added to net premium is kept as a reserve.Changes in Pricing Factors. Based on these such a policy may declare a minimum or maximum rate of return. When the insurer gives a high rate of return the cost of the policy is reduced. Life Insurance Reserves Liabilities for the Policy Reserves. Principles of Insurance: Life. In the past Mutual Fund Companies issued only participating policies. Today Mutual Companies issues non-participating policies (with changing pricing factors) but in order to do so it demutualizes a part of it as a subsidiary Stock Company. At any moment of time the difference between the Face amount – the amount that will be paid as a death benefit – and the policy reserve is known as the insurance company’s net amount at risk for the policy. The cost also depends on mortality rate. To calculate the policy reserve liability the companies uses conservative mortality table that shows higher mortality rate than other available tables. This is known as Contingency Reserve. With reference to Chp-1 Stock Companies can issue both participating and nonparticipating policies. By using conservative mortality table the companies set aside a greater amount of assets against policy reserve than it will be necessary to pay the claims. Health & Annuities Dated: 26th Feb. 2003 Page 24 of 110 . Life Insurance Reserves. As for example during an epidemic the mortality rate will increase rapidly and the policy reserve may not be sufficient to pay the death claims. Certain policies mention all the cost elements and their minimum and maximum value. Level Term Life Insurance: 1. Decreasing Term Life Insurance: The death benefit keeps on going down with time. Example: A $50. The policy expires if both insured live throughout the policy term. Thus Amount of each renewable premium remains same. Term policy can be an independent policy or a rider also. 2. 2. 2003 Page 25 of 110 . If it is not continued then the policy coverage ends there. The renewal premium of the policy is generally level throughout. Principles of Insurance: Life. becomes $40. Policy is in effect. Policy anniversary: The date on which policy became effective. It is designed so that the amount of benefit payable at any point of time equals the amount the borrower owes on the loan. Insured dies during the specified time and 2. But the beneficiary is not bound legally to make the payoff.000 policy in 2nd year and so on. After the policy term ends insurance provides option of continuing insurance. Health & Annuities Dated: 26th Feb.000 policy in first year. Types of Decreasing Term Life Insurance: Mortgage Redemption Insurance This policy is designed to provide a death benefit amount that corresponds to the decreasing amount owed on a mortgage loan. When the insured dies the benefit is paid to the beneficiary. Joint Mortgage Redemption Insurance: Same as Mortgage Redemption Insurance but covers a couple. The specific period of time when the policy is active is called policy term. mortgage lender puts condition to purchase this policy and put the name of the lender as beneficiary. A rider. Therefore. The amount of renewable premium remains same . Policy Benefit is payable if: 1. If one of them dies other gets the benefit.CHAPTER 7: TERM LIFE INSURANCE The type of policy where the insured is covered only for a particular period of time. The intent is that the beneficiaries will payoff the balance on the loan using the benefit received. Death benefit remains the same throughout the policy term. Types of Term Insurance: 1. is an amendment to an existing policy to either extend or curtail the benefits payable under the contract. also known as endorsement. The amount of the outstanding principal balance on a mortgage loan gradually decreases with time. 000 This policy can also be purchased as rider with a whole life insurance. One year term policies and riders are usually renewable. If X dies within the term 2 years from start of policy then benefit = $1000 * 12 months * 8years = $96. The benefit continues till the end of the term specified.000 If X dies within the term 8 years from start of policy then benefit = $1000 * 12 months * 3years = $36.000 policy may start like that and keep on increasing by 5% on every anniversary. Features of Term Life Insurance Policies: Renewable Term Life Insurance: This is a feature which allows a insured to renew the policy without submitting proof of insurability for the same term and face amount. personal loan.000 If X dies within the term 6 years from start of policy then benefit = $1000 * 12 months * 4years = $48. The policy might be added like a rider to a whole life insurance. Credit Life Insurance This is a similar product but protects against loan or credit card bills. Health & Annuities Dated: 26th Feb. Family Income Coverage This policy provides a stated monthly income benefit amount to the insured’s surviving spouse if insured dies with policy term. Usually there is a minimum stated number of months that insurer ensures to pay. 2003 Page 26 of 110 . Increasing Term Life Insurance Just opposite of Decreasing Term Life Insurance. The insured may choose to freeze this increase at some point of time. lesser the amount insurer has to pay out as monthly benefit. They are known as YRT ( Yearly Renewable Term) or ART( Annually Renewable Term) insurance. This is decreasing term since more the insured lives. The premium increases with the increase in benefit. For this the lender is tied up as beneficiary and gets the payoff for the credit card balance from the benefit of the insurance The loan could be furniture loan. So suppose a $10. 3. Example: A 10-year term policy which provides $1000 monthly family coverage benefit is owned by X and Y. Principles of Insurance: Life.The minimum stated year is 3. car loan etc. Use: This policy is used to encounter the rising living cost etc. The new premium also depends on the effective date of conversion: The effective date could be of 2 types: 1. Principles of Insurance: Life. Renewal might be limited to happen only during a certain time period of the term.Limitations: 1. Since permanent insurance provides a cash value factor hence the premium also increases due to that. Renewal might be limited to happen only a certain number of times. Only factor to be considered is attained age. This causes an increase since mortality risk of a person increases with age. Original age conversion is not allowed in most cases. If allowed then there might be limitation that attained age is not more than 5 years. Renewable policies are usually costlier than non-renewable ones. 2003 Page 27 of 110 . Health & Annuities Dated: 26th Feb. During renewal. Renewal might be limited to be continued till a certain age. Even if the health of the insured has deteriorated he cannot be excluded since proof of insurability cannot be demanded. The premium rate calculated using the attained age conversion is costlier than the original age conversion since the later is based on a younger age. Limitations: 1. Renewal might be limited to be continued till a certain age. Neither the health condition be used to calculate premium. Convertible Term Life Insurance: This is a feature which allows a insured to convert the policy to a whole life without submitting proof of insurability. the premium is recalculated based on the attained age of the insured. 2. Attained age Conversion: This is the age of the insured when the conversion took place. Convertible policies are usually costlier than non-convertible ones. 2. Original Age Conversion: This is the age when insured had the original term policy issued. 2. Term Insurance does not provide cash value whereas permanent does. If Insured dies before the end of specified last premium year then insurance will pay the death benefit to the beneficiary and no premium is payable Single premium policy: special case of limited payment policy. At that age cash value equals face amount. Term Insurance provides coverage for a specific period of time whereas Permanent Insurance provides coverage throughout the lifetime of insured provided policy is inforce. Face amount: Typically. may be till certain age After all premiums have been paid it is called paid-up policy. Thus from faster to slower order: Single Premium Policy-Limited payment policy-Continuous Payment Policy Principles of Insurance: Life. Cash Surrender value: The amount policy owner will get if he surrenders the policy at any point of time. 2. Limited payment policy – fixed number of payments a.CHAPTER 8: PERMANENT LIFE INSURANCE AND ENDOWMENT INSURANCE Difference between Term Insurance and Permanent Insurance: 1. This does not happen until the age 99 or 100. Policy Loan: Any whole life policy which has accrued a cash value can be used to take loan known as policy loan using the cash value as security. Health & Annuities Dated: 26th Feb. Only one premium payable. active.e. 2003 Page 28 of 110 . i. Permanent Insurance also known as whole life Insurance. b. may be specific number of yrs. Reserve buildup speed: Golden rule: Shorter the installments faster the buildup. every policy has a cash value which keeps on increasing and eventually equals the face amount on the policy. Continuous premium policy Premium is payable throughout the life of the Insured Since premium is payable throughout the life thus premium is usually less than any other policy type Also known as straight life or ordinary life insurance policy 2. Premium payment period: 1. like house loan paid off. Premiums are payable only until first survivor dies or may be payable until both dies.000 Term Total coverage for Family Policy: 75. 2003 Page 29 of 110 . Advantage: If Insured thinks his coverage required might go down later in his/her life then this is an ideal choice. Extra premium maybe charged for added children.Modified Whole Life Insurance: 2 types: 1. 1 joint permanent insurance Advantage: For couples who want to provide funds to pay estate taxes that maybe levied after the after their deaths. Family Policies: This is a combination of one whole life insurance for the primary insured and term insurance for spouse and each child. If one of them dies then survivor couple gets the benefit and coverage terminates. The coverage starts usually after 15 years of age. After the death of one spouse the surviving spouse Last Survivor Life Insurance: The benefit is paid only after both the insured has died and is paid to the beneficiary.000 Each children born in the family is automatically covered on production of proof. Also known as second-to-die life insurance. Father 50. Sometimes. 2 Individual Permanent insurance 2. Advantage: Policy owner can afford to buy a policy with higher face amount than he can presently afford. Modified Coverage: Coverage is changed with increasing age. Also known as first-to-die life insurance. With time financial obligation of people goes down. children no more dependent etc. The amount on term insurance is a fraction of the whole life insurance on primary. Modified Premiums: Premium is low in beginning years and then it rises after that period one time to attain a level premium and that continues for the rest of the life. The price is less than cost of either 1. Example. if the change of premium frequency is >1 and is attained after a series of change then it is known as Graded Premium Policy. Joint Whole Life Insurance: Coverage to a couple. This is modified premiums. Principles of Insurance: Life. 2. Health & Annuities Dated: 26th Feb.000 Whole Life Spouse 30% 15000 Term Son 20% 10. Pre Need Funeral Insurance: Coverage to handle funeral and burial expenses Sold by funeral homes who are themselves agents Small face amount Funeral homes are mentioned as beneficiary Universal Life Insurance: Flexible premium Flexible face amounts Flexible Death Benefit amounts Unbundling of pricing factors o Mortality o Interest o Expenses Policy owners can determine premium which translates into coverage Unbundled Pricing factors: There are 3 factors: 1.Monthly Debit Ordinary: This is a whole life insurance but provides less face amount. Health & Annuities Dated: 26th Feb. Could be tied to rate of government investment tool like Treasury bills 3. agency or account. Could be that if a policy loan has been taken then interest will be less but greater than the guaranteed minimum 3. Could be that it will pay guaranteed interest for first $1000 and higher interest for amount above $1000 4. The charge is expressed in terms of charge /$1000 of net amount of risk. The policy is sold under home service distribution system by home service agents Agents provide personalized service like collection of premiums Monthly premium Assigned territory of agent is known as debit.Cash Value 2. Mortality charges: Pays the cost of the life Insurance coverage. Expenses: Charges to administer policy Principles of Insurance: Life. This charge is usually less than a specified amount. This charge typically increases with age since this charge is a measure of the mortality risk which increases with age. 2003 Page 30 of 110 . Interest: Guaranteed minimum Interest Rate on policy’s cash value each year Interest rate can be of many types: 1. Net Amount of risk = Death Benefit . Could be tied to the market interest rate 2. the face amount can be increased or decreased. Health & Annuities Dated: 26th Feb. Premium + Existing Cash Value should be enough to cover the mortality charges and Expenses. then care needs to be taken that the policy still meets the minimum limit for an insurance contract.How these matters: Cash value = ((Premium – Expenses . If increased. If the payment is not done the policy lapses. proof of continued insurability needs to be given since these increases the net risk. Principles of Insurance: Life.Mortality Charges + Existing Cash Value)(1 + Interest ) So evidently. If they become less then Insured is given 60 days time to make a premium payment to cover these expenses. If decreased. 2003 Page 31 of 110 . Relationship between Death Benefit and Face Amount: Option A Plan: F a c e A m o u n t Death Benefit Risk Cash Value Years Death Benefit = Face Amount Net Amount at risk = Death Benefit – Cash Value Option B Plan: F a c e A m o u n t Death Benefit Risk Cash Value Years Death Benefit = Face Amount + Cash Value Net Amount at risk = Face Amount Flexible Face Amount: After 1 year. Indeterminate Premium Life Insurance: In this type 2 premium rates is provided by Insurance companies. Policy Loan: Loans might be taken on the cash value accrued for the policy. Maximum Premium Rate The policy starts with the minimum rate for couple of years. In Canada. A certain % is fixed to limit the excess. This modification happens throughout the life of the policy. The Insurance products enjoy special benefits for tax purposes and thus this restriction is enforced. this rule is stricter and thus Universal Life is rarely sold in Canada. interest and expense bucket and comes up with a premium rate which lies between the previous 2 rates. Maximum Premium Rate Principles of Insurance: Life. 1. Interest Sensitive Whole Life Insurance: In this type 2 premium rates is provided by Insurance companies. insurer evaluates the actual mortality. The product can range from a term insurance to a limited payment whole life policy. Based on change to the premium or face amount either the term can be increased or frequency of premium payment can be reduced. Cash Value Terminology: Reserve Value Accumulation Value Cash Surrender Value Net Cash Value Adjustable Life Insurance: In this type. The insurance forces to pay a minimum initial premium amount. Some withdrawal charges are also applied. Health & Annuities Dated: 26th Feb. Also known as non-guaranteed premium life insurance or variable premium life insurance policy. Minimum Premium Rate 2. It enables insurer to be flexible in premium pricing since this way they can change the premium to counter all the expenses.Flexible Premium: The initial premium might be higher than renewal premiums but both should be sufficient to handle the expenses and mortality charges. 2003 Page 32 of 110 . Federal Regulation on Universal Life Policies: Federal Regulation Section 7702 Corridor controls that the cash value of a policy does not increase too much above face amount. insured specifies the face amount and premium he can pay and a plan of insurance is chalked out to provide insurance. 1. Minimum Premium Rate 2. In this time period . If it does then it violates the rule for being an insurance product for tax purposes and is considered as investment product. bonds. Premiums are leveled throughout the term Premium could be single premium or limited premium payment Principles of Insurance: Life. This reserve is then invested in stocks. If insured dies. Cash Value increase method Differences: Traditional Whole Life Universal Life Cash value increases by periodic premiums and interest accrued. funds etc. Returns can be anticipated Returns can be Returns can’t be anticipated anticipated Death Benefit stable Death Benefit stable Death benefit might get reduced with poor sock performance Considered as Insurance Considered as Insurance Considered as securities product product hence need to follow all SEC regulations Not Applicable Not Applicable Product needs to be registered with NASD Not Applicable Not Applicable Agents need to be licensed with NASD Not Applicable Not Applicable Funds can be changed once every year Variable Universal Life Insurance: Also called Universal Life II and Flexible-premium variable life insurance Combines flexible premium and flexible death benefits of Universal Life with investment flexibility and risk of Variable Life Endowment Insurance: Provides a specified benefit amount whether the insured lives to the end of the term of coverage or dies during that term. The policy reserves are maintained in a General Investment Account where insurer maintains fund from guaranteed insurance products. Each policy has a maturity date when the benefits are payable The cash value reaches face amount value on maturity date Thus cash value buildup is much faster. 2003 Page 33 of 110 . Variable Life Policy reserves are maintained separately from general investment account. Cash value increases by periodic premiums and interest accrued.This also provides the option to insured that whether he wants favorable changes in pricing assumptions to result in a lower premium or high cash value. The policy reserves are maintained in a General Investment Account where insurer maintains fund from guaranteed insurance products. death benefit is paid to beneficiary. These are separate known as account in USA and segregated account in Canada. Default is cash value increase. Health & Annuities Dated: 26th Feb. periodically. She may need to proof her total disability. In some cases the benefit is provided through standard policy provisions. Principles of Insurance: Life. In case of a universal life insurance policy. Who pays the premiums waived under a WP benefit? The insurance company pays it. to the insurance company. Target premium is the amount of premium that. SUPPLEMENTAL DISABILITY BENEFITS Generally classified as a type of health insurance coverage. if paid on a regular basis. I. Total disability: Usually in a WP rider. Some disability benefits however can be added to the coverage provided by a life insurance policy. 2003 Page 34 of 110 . OR 2) Insurer will waive the amount of target premium that become due while the insured is totally disabled. Mainly there are 3 types of disability benefits that a life insurance policy or policy rider may provide. In case of a participating policy. Here we describe some of the supplementary benefits that are fairly standard in the industry. total disability will be defined as the insured’s inability to perform essential acts of her own occupation or any other occupation for which she is reasonably suitable by education. These are provided by adding riders to the life insurance policy. will maintain the policy in force. the insurance company will continue to pay policy dividends as if the policy owner were paying premiums. the WP benefit can specify that the: 1) Insurer will waive any mortality and expense charges that become due while the insured is totally disabled. Premiums are waived throughout the life of the policy as long as the insured remains totally disabled. If the policy is one that builds up a cash value. it will continue doing so. training or experience.CHAPTER 9: SUPPLEMENTARY BENEFITS Policy Riders: A number of benefits can be added to various forms of life insurance policies. Health & Annuities Dated: 26th Feb. WAIVER OF PREMIUM FOR DISABILITY BENEFIT (WP) Under this rider the insurer promises to give up – to waive – its right to collect renewal premiums that become due while the insured is totally disabled. Juvenile insurance policy is issued on the life of a child but is owned and paid for by an adult. After the 2-year period. when the ownership and control typically passes to the insured. Some risks are typically excluded. before the insurer will waive renewable premiums. if she becomes totally disabled. Principles of Insurance: Life. once disability begins. In most WP riders. interval of payment of renewal premiums can’t be changed. Two important facts related to WP for payor benefit riders: 1) Policy owner generally must provide satisfactory evidence of his own insurability in addition to providing evidence of the insurability of the insured. This is the case when a WP for payor benefit is added as a rider to a juvenile insurance policy. WP benefit is usually available to cover only disabilities that begin during a specified age span. 2003 Page 35 of 110 . III. There may be a waiting time (usually 3-6 months) after the insured becomes totally disabled. 2. 2) Usually insurance company will waive premiums until the insured reaches 18 or 21.Some limitations in the WP benefit: 1. WAIVER OF PREMIUM FOR PAYOR BENEFIT This is designed for 3rd party policies such as juvenile insurance policies. WP for payor benefit provides that the insurance company will waive its right to collect a policy’s renewable premiums if the policy owner – the person responsible for paying the premiums – dies or becomes totally disabled. The definition of a total disability is usually the same in this rider as in WP benefit rider. 3. For example that age span may be between the age 15 to 65. usually the child’s parent or legal guardian. Health & Annuities Dated: 26th Feb. training or experience. the policy owner will be considered to be totally disabled if he is unable to perform the essential acts of any occupation for which he is reasonably suited by education. Some of them are: a) Intentionally self-inflicted injuries b) Injuries suffered while committing a crime c) Pre-existing conditions d) Injuries from any act of war while insured is in military service II. 4. DISABILITY INCOME BENEFIT Provides a monthly income benefit to he policy owner – insured. The two part definition of total disability in case of WP for payor benefits: During the first 2 years of the disability the policy owner is considered to be totally disabled only if he is unable to perform the essential acts of his own occupation. A point to note ** Policies issued with a disability income benefit generally include a WP benefit as well. the insurer will pay the beneficiary an amount of money in addition to the basic death benefit provided by the life insurance policy. Usually AD&D riders state that the insurance company will not pay both AD benefit as well as dismemberment benefit for injuries suffered in the same accident. Limitations and exclusions in AD benefits: Some exclusions are: a) Self-inflicted injuries (causing suicide). So the total death benefit that the beneficiary gets becomes twice the face amount of the policy. Generally most AD benefit riders expire when the insured reaches the age 65 or 70. Amount of the dismemberment benefit is usually equal or lower to the accidental death benefit.Typically the amount of the monthly disability income benefit is a stated dollar amount – such as $10 per $1000 of the life coverage. ACCIDENT BENEFITS Most commonly offered accident benefits are I. ACCIDENTAL DEATH BENEFIT A policy rider. 2003 Page 36 of 110 . DI benefit also usually includes a waiting period like the WP riders. Double indemnity benefit: When the amount paid due to the AD benefit is equal to the face amount of the policy. Principles of Insurance: Life. which specifies that if the insured dies as a result of an accident. during flight insured acted in any other capacities other than a passenger. Health & Annuities Dated: 26th Feb. II. b) War-related accidents. for example say 3 months. A limitation could be: AD benefit rider might be a payable only if the insured die during a certain time from the actual accident. d) An accident resulting from the insured’s engaging in any illegal activities. c) Accidents related to aviation activities. if. Sometimes laws might be there which will prevent the insurer from excluding some of these causes from a AD benefit rider. DISMEMBERMENT BENEFIT Accidental death and dismemberment (AD&D) rider specifies that the insurer will pay a stated benefit amount to the insured if an accident causes a loss of any two limbs or sight in both eyes. This rider provides that the policy owner may elect to receive a part or all of the policy’s death benefit before the insured’s death if certain conditions are met. DD benefit as it is popularly known is a benefit under which the insurer agrees to pay a portion of the policy’s face amount to a policy owner if the insurer suffers from one of a number of specified diseases. DREAD DISEASE BENEFIT This is one of the earliest forms of accelerated death benefit offered by insurers. But it is possible that the full face amount is paid as TI benefit in some types of policies. 2) Cost of health care has continued to increase. They require medical care. This rider has gained in popularity because of the following reasons: 1) Segment of the population consisting of elderly people is growing. The amount of TI benefit payable is generally a stated % of the policy’s face amount.ACCELERATED DEATH BENEFITS This sort of policy benefit became available from the late 1980’s. insurance companies usually don’t charge an additional premium for TI benefit rider. 2003 Page 37 of 110 . Commonly offered types of accelerated death benefit riders are discussed here: TERMINAL ILLNESS BENEFIT TI benefit is a benefit under which the insurer pays a portion of the policy’s death benefit to the policy owner if the insured suffers from a terminal illness and has a physician-certified life expectancy of 12 months or less. Point to note **: Another form of dread disease coverage can be purchased as a standalone health insurance policy. Principles of Insurance: Life. Accelerated death benefit riders are also called living benefit riders. Unlike other insurance policy riders. 3) Medical advances tend to postpone death and prolong the need for medical care. This is done to keep their administrative costs down. Health & Annuities Dated: 26th Feb. as they are prone to illness in frequent intervals. The payment of an accelerated death benefit will reduce the amount of the death benefit that will be available for the beneficiary at the insured’s death. Insurance companies usually offer accelerated death benefit coverage to only policies with large face amount. For example. an insured who has severe arthritis or advanced Alzheimer’s disease may need some form of constant care. getting in and out of bed or a wheelchair. usually 1 year or more. They usually include: Life-threatening cancer AIDS End-stage renal (kidney) failure Myocardial infarction (heart attack) Stroke Coronary bypass surgery May also include: Vital organ transplants Alzheimer’s disease LONG-TERM CARE BENEFIT A LTC benefit is payable as a monthly benefit to a policy owner if the insured requires constant care for a medical condition. The insurer usually continues to pay monthly LTC benefits until a specified percentage of the policy’s basic death benefit has been paid out.These specified diseases or medical procedures for which DD benefit is payable are known as insurable events. According to some LTC riders. Most LTC benefit riders impose a 90 day waiting period before they are payable. before the insured will qualify for LTC benefits. coverage must be in force for a given period of time. Activities of daily living (ADL) include activities such as eating. BENEFITS FOR ADDITIONAL INSUREDS Various riders can be added to life insurance policies to provide benefits if someone other than the policy’s insured dies. which specializes in ADL assessment. The types of care that an LTC benefit covers are specified in the rider. ADL assessment can be done by the following methods: 1) Rely on physician certification. bathing. 3) Develop own ADL assessment tools. Health & Annuities Dated: 26th Feb. going to the bathroom. Here we discuss some of the more common ones in the industry. dressing. and mobility. 2) Contract with firm. 2003 Page 38 of 110 . The amount of each monthly LTC benefit payment is generally equal to some stated percentage of the policy’s death benefit. Principles of Insurance: Life. These riders take several forms. ADLs are used to determine the eligibility of the insured to receive LTC benefits. II. Most insurance companies do not provide more than 5 to 10 coverage units. The premium for the children’s coverage is a specified flat amount. It does not change with the number of children in the family. The term insurance coverage on each child expires when that child attains a stated age . in the family insurance policy. The premium amount is based on the risk characteristics of the second insured and not that of the primary insured. SPOUSE AND CHILDREN’S INSURANCE RIDER A spouse and children’s insurance rider added to a permanent insurance policy provides a coverage similar to that provided by a family insurance policy(which is a whole life policy that provides coverage on the insured’s entire family). The amount of the coverage on this second insured is usually unrelated to the coverage that the basic policy provides. Health & Annuities Dated: 26th Feb. The spouse coverage is not present. in such a case. Principles of Insurance: Life. his relative or even an unrelated person. CHILDREN’S INSURANCE RIDER Similar to the spouse and children’s coverage in its functionality. GUARANTEED INSURABILITY BENEFIT GI benefit rider is also sometimes referred to as a guaranteed insurability option. This rider provides a term insurance coverage on the life of another individual other than the policy’s insured.I. INSURABILTY BENEFITS Two types of insurability benefits exist. and the coverage amount can also be changed to a certain number of times over the current amount. This rider when attached to a life insurance policy gives the policy owner the right to buy additional insurance of the same type as to which the rider is attached. Such riders usually have a provision for the child to convert his term insurance rider to an individual life insurance policy. I. SECOND INSURED RIDER Also called an optional insured rider or an additional insured rider. usually 21 or 25. In contrast. III. This second individual is called a Second insured. 2003 Page 39 of 110 . The coverage provided by this rider is typically sold on the basis of coverage units. the coverage provided is typically a percentage of the face amount provided on the life of the insured. This individual could be the spouse of the primary insured. Generally aimed at single parents. PAID-UP ADDITIONS OPTION BENEFIT This rider allows the owner of a whole life insurance policy to purchase single-premium paid-up additions to the policy on stated dates in the future and thus to increase the amount of coverage under the basic policy. Premiums for the paid-up additions are based on the net single premium rate for the coverage at the insured’s age at the time the paid-up additions were purchased. Other options may be included at the insurer’s options. GI rider guarantees that the policy owner will be able to purchase additional life insurance even though the insured may no longer be in good health. only on certain dates.To buy these insurance policies the insured does not have to provide evidence for insurability. Generally GI benefit can be exercised only up to a certain age (usually age 40). the insurance company automatically issues the additional life insurance coverage.the insurer and the policyowners. then the rider will terminate. These paid-up additions have their own cash values. Most riders state that if the policy owner does not exercise the purchase option for a stated number of years. 2003 Page 40 of 110 . CHAPTER 10: LIFE INSURANCE POLICY PROVISIONS An Insurance policy is a written document that describes the agreement between two parties . The SID reviews all these provisions in the Policy form and then approves the policies. II. state laws typically require individual life insurance policies to include specified provisions that spell out the rights of policyowners and the beneficiaries. If the life insurance policy with a GI rider also includes a WP rider and the insured is disabled at the time an option to purchase additional insurance goes into effect. The insurance company also waives the payment of the renewal premiums for all of the policy’s coverage’s to which the WP rider applies until recovery or death of the insured. Regulations of Policy Provisions In the USA. Principles of Insurance: Life. Many such riders allow the policy owner to purchase paid-up additional whole life insurance on each policy anniversary. whichever is smaller. Health & Annuities Dated: 26th Feb. At that time the number of paid-up additions already bought remains in force but the policy owner can no longer exercise the option to buy new paid-up additions. Typically the amount of coverage that the policy owner can buy is limited to the policy’s face amount to which the GI rider is attached or to an amount specified in the GI rider. Here we will know about all the provisions that are typically included in the individual life insurance policies. The GI rider can be exercised until this specified age. A misstatement of age or sex provision 7. after the policy is delivered in which to examine the policy. 2003 Page 41 of 110 . the province of Quebec has not adopted this law but that law is also very similar to this act. with minor variations. These provincial laws also directly grant certain rights to the policyowners and impose certain obligations on insurers. Standard Policy Provisions Individual life insurance policies generally contain the following standard provisions: 1. the insurer is free to include a provision that is more favorable to the policyowners than the required. participating life insurance policies include a policy dividends provision. all individual life insurance life policies issued in the USA and Canada are closed contracts. on the Uniform Life Insurance Act. or until the policyowner rejects the policy. The Uniform Life Insurance Act is a model law adopted by CCIR to regulate life insurance policies. any attached riders and the attached copy of the application for insurance. Free-Look Provision It is also known as free-examination provision that gives the policyowner a stated period of time (usually ten days). During this period. and permanent life insurance policies that build a cash value generally must include a nonforfeiture provision and a policy loan provision 1. A free-look provision 2. A reinstatement provision 6. This provision prevents oral statements from affecting the terms of the policy and prevents controversies from developing regarding the terms of the contractual agreement. An entire contract provision 3. A grace period provision 5. the policyowner has the right to cancel the policy and receive a full refund of the initial paid premium. Principles of Insurance: Life. These provincial laws require insurers to include certain provisions in the life insurance policies. When the applicable insurance laws (in the US or in Canada) require a policy provision. Although Canadian laws do not require policies to include provisions spelling out these rights and obligations but the insurers routinely do so. The insurance coverage is in effect throughout the free-look period. A settlement options provision In addition. Generally the contract can be classified as closed or open. Except fraternal insurers.In Canada. Health & Annuities Dated: 26th Feb. if sooner. Entire Contract Provision This provision defines the documents that constitute the contract between the parties. The entire contract consists of the policy. A closed contract is a contract for which only those terms and conditions that are printed in. An incontestability provision 4. Although. or attached to the contract are considered to be part of the contract. the common law provinces have all enacted insurance laws patterned. 2. if any. Fraudulent Misrepresentation: A misrepresentation that was made with the intent to induce the other party to enter into a contract and that did induce the innocent party to enter into the contract. Incontestability Provision According the rules of contract laws. the fraternal society’s charter/constitution/bylaws. Material Misrepresentation: A misrepresentation that would affect the insurance company’s evaluation of the proposed insured is called as material misrepresentation. The entire contract provision usually states that Only specified individuals (such as certain officers of the insurer) can change the contract. Representation: A representation is a statement made by a contracting party that will invalidate the contract if the statement is not substantially true. (Statements made in an application for insurance are considered to be representations rather that warranties. But if it has issued a Principles of Insurance: Life. if the company finds any material misrepresentation it has full right not to issue the policy. During evaluation of the application. The Incontestability Provision describes the time limit within which the insurer has the right to avoid the contract on the ground of material misrepresentation in the application. Warranty: A warranty is a statement made by a contracting party that will invalidate the contract if the statement is not literally true. but the enumerated documents are not all attached to the contract. No change is effective unless made in writing No change is effective will be made unless the policyowner agrees to it in writing 3. 2003 Page 42 of 110 .) Misrepresentation: A false or misleading statement in an application for insurance is known as misrepresentation. signed by the applicant. statements made by the parties when they enter into the contract can be classified as either warranties or representations. the attached declaration of insurability. Fraternal insurers (in US and Canada) generally issue policies as open contracts which state that the entire contract consists of the policy and any attached riders. Health & Annuities Dated: 26th Feb.An open contract is a contract that identifies the documents that constitute the contract between the parties. The provincial insurance laws also contain an exception that an insurer may contest a policy at anytime if the application contained a fraudulent misrepresentation. the grace period will begin on either: (1) the date on which the cash value is insufficient to cover the policy’s entire monthly mortality and expense charges. 2003 Page 43 of 110 . Minimum grace period: 30 or 31 days ( in US and Canada) If a renewal premium is not paid by the end of the grace period. However he may repay it partially or fully anytime. The provision also states that the insurer should notify (at least 30 or 31 days before) the policyowner that the cash value is insufficient to meet the policy charges and that the coverage will terminate if the policyowner does not make the payment that is large enough to cover these expenses. 5. Grace Period Provision Insurance laws in the US and Canada require every individual life insurance policy to state the period of grace within which a required renewal premium may be paid. The grace period is a specified length of time within which a renewal premium that is due may be paid without penalty. This 2 year contestable period is the maximum period permitted by the laws in most states. A period shorter than two years is permitted because that would be more favorable to the policyowner. Principles of Insurance: Life. grace period is 30 or 31 days. In case of a universal life insurance policy. the period is two years from when the policy takes effect or two years from the date it has been reinstated. grace period is 61 or 61 days (2) the date on which the cash value is zero. In Canada. if later. Health & Annuities Dated: 26th Feb. do not consider a policy as having lapsed if that policy has cash value (described later). Some insurers. Policy loan differs from a commercial loan in two ways: The policyowner is not legally obligated to repay a policy loan. however. In United States. 4.policy and at a later point of time it finds any such statements in the application then the provisions are different in the USA and Canada. the policy is said to be lapse. Policy Loans and Policy withdrawal Provision The Policy Loan Provision grants the owner of a life insurance policy the right to take out a loan for an amount that does not exceed the policy’s net cash value less one year’s interest on the loan. the contestable period is two years from the date the policy was issued. The Policy withdrawal Provision. During this new contestable period. Laws in Canadian provinces and territories also require individual life insurance policies to include a reinstatement provision. a new contestable period begins on the date on which the policy is reinstated. about one-half of the states require individual life insurance policies to include this provision and the laws require policies at least a 3-year period during which the policyowner has the right to reinstate a policy that has lapsed. Redating: Under this practice. 7. A policyowner must fulfill certain conditions to reinstate: The policyowner must complete a reinstatement application within the time frame stated in the reinstatement provision. 2003 Page 44 of 110 . Canadian laws specify the minimum reinstatement period as 2 years. the company may avoid a reinstated policy only on the basis of material misrepresentations made in the application for reinstatement. Also in most US states and provinces in Canada. Reinstatement Provision Reinstatement is the process by which a life insurance company puts back into force a policy that has either been terminated because of nonpayment of renewal premiums been continued under the extended term or reduced paid-up insurance nonforfeiture option Most insurers do not permit reinstatement if the policyowner has surrendered the policy for its cash surrender value. Health & Annuities Dated: 26th Feb. The policyowner must present satisfactory evidence of the insured’s continued insurability. It may be longer also depending on the insurer. permits the policyowner to reduce the amount in the policy’s cash value by withdrawing up to the amount of the cash value in cash. The insurance company does not perform a credit check on a policyowner who requests a policy loan. 6. Principles of Insurance: Life. The insurers do not charge any interest on policy withdrawals. the insurance company changes the policy date to the date on which the policy is reinstated. the premium rate charged for the redated policy will be based on the insured’s attained age and will be charged for the original policy. In the US. Misstatement of Age or Sex Provision This provision describes the action the insurer will take to adjust the amount of the policy benefit in the event that the age or sex of the insured is incorrectly stated. As a result. The policyowner may be required to either pay any outstanding policy loan or have the policy loan reinstated with the policy. also called as partial surrender provision. The policyowner must pay a specified amount of money. The face amount will be smaller than the face value of the original policy. State insurance laws require insurance companies to include non-forfeiture benefits in all individual life insurance policies that build a cash value. Principles of Insurance: Life. 9. Policy Dividends Provision This provision gives the policyowners the right to choose from among several dividend payout options. The net cash value is the actual amount that a policyowner gets after adjustments of paid-up additions. Nonforfeiture Benefits These benefits are available to the owner of a life insurance policy that builds a cash value. If the misstatement discovered before the death. Cash Surrender value nonforfeiture option: This states that a policyowner who discontinues premium payments can elect to surrender the policy and receive the policy’s cash surrender value. Following the surrender of a policy. The premium charged is based on the attained age of the insured. Continued Insurance Coverage Nonforfeiture Options Reduced Paid-Up Insurance: Under this option. Although provincial laws do not require insurance companies to include these in the policies but companies usually do it. then it adjust the face amount of the policy to the amount the premium actually paid would have purchased if the insured’s age or sex had been stated correctly. dividend accumulations. Such provision grant a policyowner the right to decide how the policy benefits will be paid. Laws throughout the US and Canada allows an insurer to reserve the right to defer payment of any policy’s cash surrender value for a period of up to six months after the owner of the policy requests payment. then the insurer may grant the policyowner the option to pay (or receive as a refund) any premium amount difference caused by the misstatement instead of having the insurer adjust the policy’s face amount.If the insurer finds such error after the death. The coverage issued under this option continues to have like building cash value. But any supplemental benefits that were available on the original policy such as accidental death benefits are usually not available with the reduced paid-up insurance. 8. Laws in most jurisdictions in the US and Canada require participating policies to describe the dividend options that are available to the policyowners. advance premium payments and policy loans outstanding. 10. right to surrender the policy and receiving dividends. the policy’s net cash value is used as a net single premium to purchase paid-up life insurance of the same plan as the original policy. 2003 Page 45 of 110 . all coverage under the policy terminates. Health & Annuities Dated: 26th Feb. Settlement Options Provision It is also called as payout option provision. However. the insurance company uses the policy’s net cash value to purchase term insurance for the full coverage amount provided under the original policy for as long a term as the net cash value can provide. The most typical automatic nonforfeiture benefit is the extended term insurance benefit. The provision in some policies states that the insurer will pay the larger of the policy’s cash value or the premiums paid for the policy in case it finds that the insured has committed suicide within the two year period after the issue of the policy. 2003 Page 46 of 110 . In order to receive policy proceed. is called a class designation. This provision states that the insurer will automatically pay an overdue premium for the policyowner by making a loan against the cash value as long as the cash value equals or exceeds the amount of the premium due. Proceed may be divided among the beneficiary if indicated by insured else it gets distributed evenly. beneficiary must survive the insured. amount of net cash value. Automatic Nonforfeiture Benefits: This benefit becomes effective automatically when a renewal premium is not paid by the end of the grace period and the insured has not elected another nonforfeiture option. aviation exclusion provision (except for military or experimental aircraft or privately owned aircraft’s pilots & crew members). Primary Beneficiary: Party designated to receive the policy proceeds following the death of the insured. CHAPTER 11: LIFE INSURANCE BENEFICIARY POLICIES Class Designation: A beneficiary designation that identifies a certain group of persons. sex of the insured and his attained age. rather than naming each person. the laws in a few jurisdictions require that policies include an Automatic Premium Loan (APL) provision and specify that the automatic nonforfeiture option is the automatic premium loan. Universal life insurance policies usually do not include this provision. Principles of Insurance: Life. Life Insurance Policy Exclusions Although laws permit but generally companies does not included these exclusions: war exclusions clause.Extended Term Insurance: Under this option. Health & Annuities Dated: 26th Feb. The term-length depends upon the amount of the coverage. But Suicide exclusion provision is still included in individual life insurance policies. USA: Community Property Sales A community property state is one in which . by law. Revocable Beneficiary: A beneficiary is called revocable if the policy owner has the unrestricted right to change the beneficiary while alive. Rights of any beneficiary. monthly debit ordinary etc contain a facility of payment clause which permits the insurance company to pay a little part of the proceed to someone who has incurred funeral expenses on behalf of the insured. Facility of Payment: Group Life. Policy owner volunteers to give up his rights 2. A contingent beneficiary receives the policy proceeds if all primary beneficiaries have predeceased the insured. Preference Beneficiary Clause: If the policy owner does not name a beneficiary then insured keeps a list of stated order of preference and proceed will be paid according to that order. are terminated with the death of the beneficiary and the policy owner can then nominate a new beneficiary. If policy owner is dead then the proceeds goes to policy owner’s estate. Right of revocation: Policy owner’s right to change beneficiary. No surviving Beneficiary: If the insured is dead and all named beneficiaries are also dead then the proceeds are paid to policy owner. Principles of Insurance: Life. Policy owner loose their right of revocation by one of the 2 methods: 1. If no list is also available then the proceed will be paid to the insured’s estate. A vested interest is a property right that has taken effect and cannot be altered or changed without the consent of the person who owns the right. each spouse is entitled to equal share earned by the other and property acquired during the marriage.Contingent Beneficiary: Also known as secondary or successor beneficiary. 2003 Page 47 of 110 . Legal limitations An irrevocable beneficiary has vested interest in the proceeds of the life insurance policy even during the lifetime of the insured. Irrevocable Beneficiary: Beneficiary where you cannot change your beneficiary without the consent of the beneficiary. Health & Annuities Dated: 26th Feb. including revocable ones. IDAHO. 2003 Page 48 of 110 . it might be required to take consent of the revocable beneficiary (spouse) to change the beneficiary if the change hurts the interest of the other spouse. 2. LOUISIANA. Alternatively. Recording method: Method of informing the insurance company in writing about the new beneficiary by policy owner. beneficiary can be changed for only half the proceeds. Among these some rights vary depending on the type of the policy. These laws were discontinued after the Universal Life Insurance Act of 1962 Beneficiary Change procedure: 1. Premium Payments. NEVADA. Beneficiary for Value: This group is also irrevocable beneficiary. WISCONSIN. the policy owner has a no# of other valuable rights. CHAPTER 12: ADDITIONAL OWNERSHIP RIGHTS Apart from the right to name the beneficiary. These rights with respect to 1. and TEXAS AND WASHINGTON. These people also have vested interest but their rights are not revoked as soon as the value beneficiary dies and his rights are passed to beneficiary’s estate. Thus. even if the other spouse is named as revocable beneficiary. Insurance policy is also a property in these states. All ownership rights are revoked as soon as the preferred beneficiary died. Canada: Common Law Jurisdiction 1962(applicable to policies before 1962 only) Preferred Beneficiary Law: A preferred beneficiary classification was maintained for a policy and policy owner can change the beneficiary only within this class without consent or can change to someone outside the group with consent of the group. Endorsement Method: Policies have a document attached to the insurance contact and that document contained the beneficiary name. Settlement Options. PREMIUM PAYMENTS : The policy owner has the right to choose Premium Payment Mode (frequency) Premium Payment Method Principles of Insurance: Life. This could be people like who lend money and policy owner names them beneficiary. NEW MEXICO. CALIFORNIA. 2. Health & Annuities Dated: 26th Feb. Policy Dividends 3.The states are: ARIZONA. B. The employer deducts insurance premium directly from the employee’s paycheck. The frequency can be annual/semiannual/quarterly/monthly. Health & Annuities Dated: 26th Feb. if the minimum premium for monthly mode is $20. c) By automatic payment techniques: . sends these checks there directly for payment. 1. However. A. Otherwise he would be required to choose a less frequent mode of payment. Principles of Insurance: Life. Co.The P/Owner receives a premium notice fro the Ins.The most common automatic payment techniques include Preauthorized Check (PAC): The P/Owner authorizes the Ins. such as quarterly or semi annually. PREMIUM PAYMENT METHOD The policy owner can pay the premium a) In person to the Home Office / an authorized Branch Office b) By mail: . Co. The P/Owner usually receives a notification of each such transaction on his/her bank statement. The Ins. The P/Owner may pay the premium in cash / by MO / by check. PREMIUM PAYMENT MODE This is the frequency at which renewal premiums are payable and both the insurer & the policy owner must agree to that mode of payment. The premium is simply transferred from the bank to the insurer w/o any paper check.1. For example. In most cases the P/Owner returns a portion of the notice along with the premium payment. the policy owner has to pay that. to generate checks against the P/Owner’s checking/savings A/C. the policy owner cannot select a mode that results in a premium less than the required minimum. The applicant selects anyone of these modes at the time of application but holds the right to change it after the policy is in force. Co. before each premium due date. Electronic Funds Transfer (EFT): The P/Owner authorizes his/her bank to pay the premiums automatically on premium due dates. The P/Owner also authorizes the Bank/the Savings Institution to honor these checks & deduct the funds directly from the P/Owner’s A/C. The P/Owner receives a notification only of each such transaction on his/her bank statement. 2003 Page 49 of 110 . Payroll Deduction: In this particular case the cooperation of the P/Owner’s employer is needed. There are five such options. 4) The policy must me in force for a certain (generally 2 years. The policy’s premium amount. 2003 Page 50 of 110 . Note: The sales agents are authorized to accept only the initial premium.Advantages of Automatic Premium Payment Methods: Reduced insurer’s administrative expenses for policies with monthly/quarterly premium payments mode. What does the dividend amount reflect? 1) 2) 3) 4) The insurer’s actual mortality. The P/Owner can select any of these five options at the time of application & that can be changed any time. 2. and expenses during that year. 4. Exception: Home service agents are authorized to accept renewal premium. General Terms & Conditions: 1) The policy must be a participating one. Reduced the instances in which the P/Owners forget to pay renewal premiums. Health & Annuities Dated: 26th Feb. 3. interest. 2) The policy is supposed be in force for a long period of time. may vary from one insurer to another) period of time before the policy is eligible for the dividend. The length of time the policy has been in force. The plan of insurance. So thru them the policy owner cannot pay his/her renewal premium. Principles of Insurance: Life. Some insurers offer quarterly/monthly premium payment modes only for those P/Owners who have selected an automatic payment technique. As a consequence. most insurers reduce the extra charges that would otherwise be added for semiannual/quarterly/monthly premium payment mode. Certain restrictions are applied for Additional Term Insurance Option. POLICY DIVIDEND OPTIONS: Policy Dividend: This is the insurer’s divisible surplus that is shared among the P/Owners having the participating policies. 1. 3) The dividend is payable on the policy’s anniversary date. (Generally the dividend amount increase substantially with the age of the policy) What is meant by Dividend Options? Dividend options refer to a number of different ways in which the P/Owners of participating LIPs receive policy dividends. 5) The amount payable as policy dividend is determined annually by the Board of Directors of the Insurance Co. In case the insured dies. then the paid-up additions purchased with policy dividends will also build cash value and the P/Owner has the right to surrender those additions for their cash value at any time while the policy is in force. if the check is not cashed within a stated period. between the premium amount & the amount of the policy dividend. then the insurer will apply the amount of the dividend under another option. D) Though the face amount of paid-up additions. C) If the basic policy is one that builds cash value. purchased each year. That could be purchased each year is often limited to the amount of the policy’s cash value. 3) Accumulation at Interest Dividend Option: The dividends are let on deposit with the insurer to accumulate at interest. This is often called the Fifth Option. 4) Paid-up Additional Insurance Dividend Option: The insurer uses any declared P/Dividend as a net single premium to purchase Paid-up Additional Insurance on the insured’s life and this is issued on the same plan as the basic policy and in whatever face amount the dividend can provide at the insured’s attained age. So the cost is lesser than a new LIP. the total additional insurance available can be substantial. The insurer notifies the P/Owner of the amount of the policy dividend and bills for the difference. the P/Owner wishes to change from another dividend option to this one. Principles of Insurance: Life.The Five Options are: 1) Cash Dividend Option: The insurer sends the P/Owner a check in the amount of the policy dividend that was declared. 5) Additional Term Insurance Dividend Option: The insurer uses each policy dividend as a net single premium to purchase one-year Term Insurance on the insured’s life. over the life of the policy. 2003 Page 51 of 110 . If the P/Owner surrenders the policy he is eligible to get the accumulated value of the policy dividends along with the surrender value of the policy. Advantages of this option: A) The premium charged. For some policies. is relatively small. B) Does not require establishing the insurable interest. Restrictions applied to the Fifth Option: A) The max amount of 1-year term insurance. Health & Annuities Dated: 26th Feb. does not include the amount to cover expenses. 2) Premium Reduction Dividend Option: The insurer applies the policy dividends towards the payment of the renewal premiums. Allows the P/Owner to withdraw a part/all of these dividends & the accumulated interest at any time during the life of the policy. if any. it goes to the named beneficiary. B) Does require establishing the insurable interest in case. What are the common settlement options? Four options are normally available. Ins. shift to some other option and select any of the settlement modes. This agreement governs the rights & the obligations of the parties after the insured’s death. What is Settlement Agreement? When the P/Owner selects an optional mode settlement mode at any time while the policy is in force. & the beneficiary when the later selects a settlement mode. is done. Normally insurer pays a lump sum directly to the beneficiary in the form of a check. A) Irrevocable: The beneficiary is not allowed to shift to any other settlement option once the proceeds become payable. Co. Apart from lump-sum settlements of policy proceeds. for the 1-year term ins.. as the insured did not.Note: If the annual policy dividend is larger than the premium reqd. The P/Owner has the right to select any such option. Two types of Settlement Mode are available. What is Supplementary Contract? This is a settlement agreement between the Ins. 1) Interest Option 2) Fixed-Period Option 3) Fixed-Amount Option 4) Life Income Option Principles of Insurance: Life. 2003 Page 52 of 110 . Who is a Payee? The person/party who is supposed to receive the proceeds as per the terms of a settlement agreement is referred to as the Payee. SETTLEMENT OPTIONS: This comes into the picture if LIP when it’s the time for the insurer to pay the proceeds to the beneficiaries after the insured dies. a contractual agreement. Health & Annuities Dated: 26th Feb. Default is revocable if the settlement mode is not specified at the time of application. the insurer will apply the remaining under any of the other options. B) Revocable: If not irrevocable. Who is a Contingent Payee? A Contingent payee / Successor payee is one who will receive any proceeds still payable at the time of the payee’s death. provide several alternative methods of receiving the proceeds of a LIP. Cos. These alternative methods are called Settlement Options. called Settlement Agreement. The beneficiary of a Life Income Option can choose one among of the several types of annuities and based upon the type of the annuity there are the following types of Life Income Option: Straight Life Income Option – The policy proceeds are used to purchase a straight life annuity. even after the annuitant dies before the end of that period. Each payment will consist partly of the policy proceeds & partly of the interest earned on the proceeds. Fixed-Period Option: Under this the insurer agrees to pay the policy proceeds in installments of equal amounts to the payee for a specified period of time. Here also at least a specified minimum interest rate is guaranteed. Co. Interest Option: Under this the insurer invests the policy proceeds and periodically pays the interest on those proceeds to the payee.The policy proceeds are used to purchase a life income with refund annuity. Life Income with Period Certain Option -. It guarantees that the periodic benefits will be made throughout the lifetime of the annuitant as well as guarantees that the payments will be made for at least a certain period. Here basically the Ins. It guarantees that the periodic benefits will be made throughout the lifetime of the annuitant. agrees to use the policy proceeds as the net single premium to purchase a life annuity for the beneficiary. Life Income Option: Under this the insurer agrees to pay the policy proceeds in periodic installments over the payee’s lifetime. Fixed-Amount Option: Under this the insurer pays equal installments of a stated amount until the (policy proceeds + interest earned) are exhausted. Health & Annuities Dated: 26th Feb.The policy proceeds are used to purchase a life income annuity with period certain. What is a Life Annuity? Life annuity is an annuity that provides periodic benefits for at least the lifetime of a named individual. 2003 Page 53 of 110 . Refund Life Income Option -. Principles of Insurance: Life. It guarantees at least a specified minimum interest rate. Here also at least a specified minimum interest rate is guaranteed. It provides the periodic benefits will be made throughout the lifetime of the annuitant as well as guarantees that at least the purchase price of the annuity will be paid in benefits. The restrictions to assignment are: . Absolute assignment is the one where complete transfer of rights occurs. It generally provided by the assignee. 2. or as a sale of the policy where an equivalent amount of money is exchanged. It provides a series of payments to two or more individuals & those payments will continue until both or all the individuals die. The transfer can be as a gift. Collateral assignment of a life insurance policy is a temporary assignment of the monetary value of a life insurance policy as collateral—security – for a loan. where there is no exchange of money.1) The assignor should have the contractual capacity.An assignment is an agreement under which one party transfers some or all of his rights in a particular property to another party. 2) In case of an irrevocable beneficiary or for a beneficiary of the preferred class in Canada. The insurance company is not obliged to act in accordance to the provision unless it receives a written document. the party to whom the rights are transferred is known as assignee. Most life insurance policies. Following are the two ways of transferring ownership: Transfer of ownership by Assignment: . Health & Annuities Dated: 26th Feb. Thus the assignor no longer has any right and the assignee becomes the policy owner. TRANSFER OF POLICY OWNERSHIP: If the owner of a life insurance policy has the contractual capacity. as for example the rights to select the beneficiary or the policy dividend option remains with the assignor. 2003 Page 54 of 110 . but the assignor can not take any policy loan or surrender the policy as these decision are related to the monetary value of the policy. Joint & Survivorship Life Income Option -. however. The assignment provision describes the roles of the insurer and the policyowner roles during an assignment. insurers are not required to give the policy owner notice of his rights to assign a life insurance policy. The property owner who transfers the right is known as assignor. then she has the right to transfer ownership of some or all of her rights in the policy. This type of assignment differs from the previous one as a) the collateral assignee’s rights are limited to those ownership rights that directly concern the monetary value of the policy. As the insurance company is not liable for the validity of an assignment it considers an assignment to be valid whenever it receives a written document. Types of assignment: 1.The policy proceeds are used to purchase a joint & survivor annuity. the assignment can only be done with the consent of the beneficiary. Because the right to assign any property is granted by law. Principles of Insurance: Life. However the insurer might check the validity where it has the preknowledge about the contractual inability of the policyowner. do not include assignment provisions. Upon being notified o the insured death.b) the collateral assignee has a vested right to a policy’s monetary values. In this chapter we shall discus the routine process followed by the Life Insurance Companies to process the life insurance claims. Thus when the policy proceeds will be paid the only the amount that the assignor owes will be paid to the assignee. The policy must be returned to the company to include the endorsement and to transfer the ownership. If the insurer was not notified of the assignment before it paid the policy benefits. If the assignor pays back the assignor then the assignment terminates. the insurance company typically provides the claimant with a claim form on which the claimant provides the insurer the information the insurer needs to begin processing the claim. Transfer of Ownership by Endorsement: . then it has no liability to pay the proceeds again to the assignee. but the rights are limited. in writing. ownership is transferred without requiring the owner to enter a separate contract.) CHAPTER 13: PAYING LIFE INSURANCE POLICY PROCEEDS.The most common problem arises when the assignment is not notified to the insurance company through a written document. But in certain situations only a written document can be considered to transfer the ownership (as for example in case of an unfriendly divorce. the person who claims for the policy proceed is the primary beneficiary. Typically. Health & Annuities Dated: 26th Feb. c) the collateral assignee’s right to the policy values are temporary. change actually becomes effective from the date when the policy owner signed the notification. The claim examination process begins when the claimant to policy proceeds notifies the insurance company that the insured has died. because of this the assignor has right over the amount of indebtedness. 2003 Page 55 of 110 .Many life insurance companies in United States specify endorsement method of transferring ownership. In United States it is mandatory to provide claim form within 15 days from the day of requisition but in Canada there is no such hard and fast rule. Principles of Insurance: Life. According to this provision. Once the loan is repaid the assignor secures a release from the assignee and forwards it to the insurance company to cancel the assignment. Under this method. Problems resulting from assignment: . This is generally used where the policy is transferred as a gift. in order to change the ownership the present owner must notify the insurance company. When the insurer records the change. Verification of Policy Coverage: . Claim Examination Process: The insurance company employee who is responsible for carrying out the claim examination process is generally known as claim examiner. if living. The policyowner. A claim is considered as fraudulent claim when the claimant intentionally attempts to collect policy proceeds by providing false information. A claim is considered as a mistaken claim when the claimant makes an honest mistake while making a claim. If the beneficiary does not survive that period then the policy proceeds will be given as if that the beneficiary deceased the insured. Policies that contain exclusion criteria provide that if the insurer dies if the insurer dies due to excluded causes then the insurer is not liable to pay the proceeds. In this case the general law of Unites States and Canada states that If the insured and the beneficiary die at the same time or under circumstances that make impossible to determine which of them died first. If the beneficiary survived the insured but died before the insurer paid the proceeds then it becomes payable to beneficiary’s estate. Approve to Pay Claims. Identification of the insured: . The examiner generally follows the following flow chart. according to this the beneficiary must survive the insured by a specified days. Identifying the Proper Payee: .The claim examiner examines the identity proof present in the Claim from and the Proof of loss form with the information provided in the company’s policy records. otherwise to Policy NO . an Attending Physician Statement (APS). may prefer that the proceeds be pad to someone other than the beneficiary’s heirs if the beneficiary survives the insured. 2003 Page 56 of 110 Proceeds Payable to policy owner. Health & Annuities Dated: 26th Feb. such as 30 or 60 days. Some insurance company includes common disaster clause or time clause.Once the validation of the claim has been done the examiner now needs to identify the rightful owner of the benefits. however. In United States generally the official death certificate is produced but in Canada. There are 3 situations that require further investigation by the claim examiner. Sometimes both the insured and the primary beneficiary die due to a common disaster. NO Principles of Insurance: Life.The examiner must review the terms of insurance to determine what type of coverage it provides. and conflicting claimants.The claim examiner must check whether the policy was in force when the insured died. The following things are determined: Status of Policy: . a coroner’s certificate of death. short-term survivorship.Proof of Loss: Along with the claim form the claimant must also provide the proof for the death of the insured. most insurance company will accept official death certificate.common disasters. then policy proceeds are payable as if the insured survived the beneficiary. The court may hold the policy proceeds and would release the insurer from any further liability. Determining the Amount of the Death Benefit: . also if the insured sex was misstated. NO Contingent Beneficiary ? YES NO Livin g? YES Pay the Contingent Beneficiary. In US in case of conflicting claims the insurance company can take the help of an interpleader. This is known as payment into court. 2003 Page 57 of 110 . The examiner first adds the following items: The amount of any basic death benefits payable ( In most cases this is equal to the face amount. In Quebec.YES Primary Beneficiary Livin g? YES Pay the Primary Beneficiary. Principles of Insurance: Life. After adding these. including interests. If the policy was in force under the reduced paid-up insurance nonforfeiture option then the basic death benefit may be reduced. In Canada. an insurance company may to the Minister of finance. The accumulated policy dividends. The Minister holds the proceeds until the court settles the rightful recipient. The amount of any unearned premiums paid in advance. The amount of any outstanding policy loans.) The accidental benefits payable. the examiner deducts the following things to determine the final proceeds payable. for common law system the insurer pays to the court and then the court judges the proper recipient. Health & Annuities Dated: 26th Feb. The face amount of any paid-up additions. The court would then judge the rightful owner.To calculate the policy proceeds the examiner will add certain things and would deduct other things. Other Contingent Beneficiar In most cases the primary beneficiary makes the claim. The amount of any premium due and unpaid. Interpleader is a procedure under which an insurance company that cannot determine the proper claimant may go to the court in order to seek advice or decision. [This item appears if the insured died during the policy grace period before the premium has been paid. then the court may be willing to find that the insured is dead.When a claim for accidental death benefit comes to an insurer the claim examiner will determine whether the claim falls under policy’s definition of “accidental”. 2. the policy provides accidental benefits. he must have the legal capacity required to provide the release. Claimants who are minors or does not have sound mental capacity do not have the capacity to provide a release. The insurance company requires the recipient of life insurance policy proceeds to sign a written document. Typically. courts typically will find that the insured is dead or presumed to be dead only if (1) the insured has been missing for certain period of time.If any policy contains misinterpretation. the insured disappeared or the beneficiary is responsible for insured death. If the insured disappeared without explanation. typically seven years (2) a diligent but unsuccessful search has Principles of Insurance: Life. the claimant states that he has received full payment of his claim to the proceeds of a life insurance policy and that he releases the company from all sort of claims. The claim examiner may pays attention to death claims where the policy is contestable. The claimant has the right to go to the court to declare the insured as dead. then the insurer has the right to avoid the contract during the policy’s contest period (which is usually 2 years from the date when the policy becomes effective). Proof of loss. is by paying the proceeds to a court-appointed guardian. In order to validate the examiner may ask for the following: 1. Special Claim Situations. Accidental Death Benefit Claim: . APS. 3. Insurers in Canada have the right of canceling the contract at moment of time based on fraud contracts. an insurance company may hold the proceeds at an interest to a future date. By signing this document. The examiner may demand the above documents in case where: . If the insured disappeared under circumstances that made it likely he is dead. In order for such a release form to be valid and binding on the claimant. This is generally the day when the minor reaches majority or the court appoints a guardian who can give a valid release to the insurance company. In this situation the insurance company cannot pay the proceeds. b) the policy provides accidental benefit. Autopsy report. There are policies that may contain exclusion criteria. One way in which the insurance company can obtain a valid release when the beneficiary does not have the legal capacity. the claim department consults the legal department of the company before contesting a policy on the ground of material misinterpretation.Payment of Policy Proceeds. c) the insured dies within the contest period of the policy. The expenses for appointing a guardian by the court are borne by the claimant.a) unusual circumstances surrounds the death of the insured.When a claim appears against the disappearance of the insured the claimant does not have enough proof to support his claim. then the insurance company may cancel the contract and may refund the premiums paid for the policy. Policy Contest: . Health & Annuities Dated: 26th Feb. Disappearance of the Insured: . 2003 Page 58 of 110 . In some situations where policy proceeds are payable to a minor. known as release. If the claim examiner has enough ground to prove the charge of material misinterpretation. even if the attempt fails. In certain states and throughout in Canada if the beneficiary is convicted of less crime. or any other interested party will have to pay the due renewal premiums that will be due to keep the policy in force. Thus when an insured disappears the beneficiary. In any case where the policy lapses before the court issues the order then the insurer will have no liability.Throughout Canada and United States.is not eligible to receive the policy proceeds. The contract is between the insurance company (Group Insurer) and the Group Policyholder. Principles of Insurance: Life. like naming the beneficiary. The role of Group Policyholder is almost same as that of a Policyowner of an individual insurance policy.like manslaughtering. CHAPTER 14: PRINCIPLES OF GROUP INSURANCE POLICY Group insurance policy covers a number of people rather than an individual or one family. for health insurance). the insured group members have to pay some or all of the premium part. then the lawful purpose requirement is not satisfied and the insurance policy becomes void. Health & Annuities Dated: 26th Feb. If however. which Group Policyholder doesn’t have. Contributory Plan: In this plan. it is proven that the policy was taken to earn benefit by killing the insured. the insured group members are not required to contribute any part of the premium. Upon receiving the court order the insurance company may pay the proceeds to the claimant if the policy is in force to the presumed death of the insured. 2003 Page 59 of 110 . a beneficiary who is convicted in a criminal court proceeding of intentionally killing the insured is not eligible to receive the proceeds. the Policyowner has some ownership rights. the policy owner. Formation of the Contract These are the four requirements for a group insurance contract. The insured people under the Group insurance policy is called as Group insured (in US). In Quebec the civil laws are more stringent as it revokes the beneficiary rights if the beneficiary attempts to kill the insured. and Group person insured (in Canada. In most cases where the beneficiary is denied of the proceeds the insurer is liable to pay to someone—may be the contingent beneficiary. Beneficiary Wrongfully Kills the Insured: . The Group insurance policy is of two types: Non-contributory Plan: In this plan. But here.been done for the insured (3) no one has had communication with the insured since he disappeared. Group life insured (in Canada. for life insurance). The Group insurance policy contract is called “Master Group Insurance Contract”. Without the outcome of the criminal court the civil can determine that the beneficiary has wrongfully killed the insured. 4. the purpose of benefit is sufficient to verify the fourth point. The creditor is the policyholder. and the employees are the insured group members. Multiple-employer Group: A group insurance contract insuring the employees of more than one employer may be issued to a trust that is created by a) two or more employers b) two or more labor unions or 3) one or more employers and one or more labor unions. 3. the benefits and the rights are mentioned in a booklet. 2003 Page 60 of 110 . the coverage. 5. These are 1. Health & Annuities Dated: 26th Feb. Mutually agree to the contract’s terms Both parties must have the contractual capacity Must exchange legally adequate considerations Must form the contract for a lawful purpose The first three are same as that of an individual policy contract. there are seven groups that are eligible for getting a group policy. the presence of insurable interest must be present for this. Debtor-Creditor Group: These groups consist primarily of persons who have borrowed funds from a lending institution. Labor union groups are also called as Taft-Hartley trustees or negotiated trusteeships. The Policyholder distributes a written document (Certificate of Insurance) to the group insureds that describes: Coverage the contract provides Group insureds’ rights under the contract Group Insureds are also called as Certificate holder. not necessarily the insurable interest. Special Benefit booklet. Labor Union Group: The contract is issued to a labor union to insure the members of the labor union. The last point is somewhat different here. called as. 2. Principles of Insurance: Life. Sometimes. Group Insurance Underwriting Since group insurance doesn’t require the evidence of insurability so the underwriter focuses on the characteristics of the group. Credit Union Group: This group consists of the members of one or more credit unions. Single-Employer Group: The policyholder of a single-employer group insurance contract is either the employer or the trustees of a trust fund created by the employer. A trust is a fiduciary relationship in which one or more persons (trustees) hold legal title to property (trust fund) for the benefit of another person (trust beneficiary). The federal Taft-Hartley Act in the US prohibits employers from making premium contributions on behalf of employees who belong to a labor union unless the contract is issued to a trust established for the purpose of purchasing insurance for union members. But in case of a group contract. In case of an individual contract. These are the Group Underwriting Considerations: Reason for the group’s existence: As per the insurance laws in the US. A fiduciary is a person who holds a position of special trust. such as a bank. Stability of the group: If the group does not remain a group for a reasonable length of time then the administrative cost in issuing a policy would become high. minimum 50 people were required in the group for policies. But in case of a contributory plan. Association Groups: These associations are formed for a purpose other than to obtain insurance. the more likely that the group will experience a loss rate that approximates the predicted loss rate. 2) to keep the age distribution of the group stable. insurers are issuing the group policies for 10 to 15 group insureds also. When the group policy was introduced. 2003 . a) Trade Association: An association of firms that operate in a specific industry b) Professional Association: An association of individuals who share a common occupation. Participation level of the group: In the US. or city government or by a state or local school board d) Common Interest Association: An association of individuals who share a common state or a common interest. Engineers. alumni of a specific college. Ex: Medical Doctors. The larger the group. But it varies from state to state. 7. attorneys c) Public Employee Association: An association of individuals employed by a state.6. Size of the group: The size of the group has a strong impact on the underwriter’s ability to predict the group’s probable loss rate. Health & Annuities Dated: 26th Feb. In case of small groups. Except Employee-Employer group. In evaluating whether to approve such a group. The provincial laws in Canada do not impose minimum participation requirements. participants of a specific sport. Flow of new member in the group: Young and new members are needed 1) to replace those who leave the group so that the size stable. Ex: a group of temporary and seasonal workers. Benefit levels: The group policyholder works with the insurer to establish the death benefit levels provided to the insureds in a fair manner to avoid Page 61 of 110 Principles of Insurance: Life. But now days. Discretionary Groups: Groups that does not fit in the above groups but SID approves for group insurance coverage in called as Discretionary group. group insurers may ask to submit satisfactory evidence of insurability for each group insureds separately. the participation level should be a minimum of 75%. other group policyholders usually are not required to pay a portion of the group insurance premium. county. Ex: retired persons. also depends upon the insurer. most state laws require all eligible employees to participate in a non-contributory plan (100% participation level). These are the associations that are eligible for group insurance. SID consider factors such as whether issuing the policy is in the best interest of the public and whether the policy benefits are reasonable in relation to the premiums that will be charged for the coverage. Termination Provisions: 1. Incontestability Provision: Contestable period is same as for the individual policies. This is the time during which a new member may first enroll for coverage. As part of the enrollment process. Health & Annuities Dated: 26th Feb. 2003 Page 62 of 110 . or length of employment. the employee must sign a written authorization to make payroll deduction. This period is called Probationary period. Some group policies provide coverage both for group members and for their dependents. occupation. these are the two provisions: Actively-at-work provision: An employee must be actively at work (rather than on leave or ill) on the day the coverage is to take effect Probationary Period provision: It states the length of time (usually 1 to 6 months) that a new member must wait before becoming eligible to enroll in the group insurance plan. then this period is followed by eligibility period (enrollment period). usually 31days. Grace period Provision: 31 days. Principles of Insurance: Life.antiselection. But if the policy terminates after the grace period because of non-payment of the renewal premiums. Substandard. The insurance company also has the right to terminate the policy on any premium due date. instead the group member will be the beneficiary for dependents’ coverage. Termination of the Group Insurance Policy: The group policyholder may terminate the policy at any time by notifying the insurer in writing. Some group policies allow covered group members to select additional coverage from a schedule of optional coverages. But in case of group policies this provision also allows an insurance company to contest an individual group member’s coverage without contesting the validity of the master group contract. if certain conditions are met like participation levels. For new members. In these situations the group insurer minimizes the effects of antiselection by 1) limiting the optional coverages and 2) retaining the right to reject an insureds’ election of the optional coverage if the benefit levels are high and the insureds cannot provide satisfactory evidence of insurability. Ex: a group of coal miners is sub-standard. But generally the dependents does not have the right to name the beneficiary of his coverage. Group Insurance Policy Provisions: Eligibility Requirements: Policies are permitted by law to define eligible employees related to conditions of employment such as salary. But if the plan is contributory. Activities of the group: A group is assigned a risk classification – Standard. the policyholder is legally obligated to pay the premium during the grace period. If any employee wants to enroll in the plan after eligibility period then she can join only after submitting satisfactory evidence of insurability. or declined based on the group’s normal activities. Group Plan Administration: Insurer-administered Plan: The insurer keeps the contain name of each plan participants. And in case of a contributory plan policyholder doesn’t share the refunds with the groupmembers until the refund exceeds the policyholder’s premium part and in case of excess. Insurers use three kind of ratings to establish the initial premium rate and to calculate the renewal premium rates in succeeding years. varies every month depending on the coverage Premium Refunds: It is usually called dividends. Companies that do not issue participating policies generally call these refunds as Experience refund. It is payable to group policyholder. 2003 Page 63 of 110 .000 of death benefit provided by the policy Premium Amount: Actual premium paid to the insurer for the coverage. Experience Rating: A method to calculation by which the insurer considers the particular group’s prior claims and expense experience. Health & Annuities Dated: 26th Feb. But in either case.The insurer must provide a written notification to the policyholder in advance regarding termination with the date. Blended Rating: : In this method. the insurer receives monthly reports regarding the composition of the group and any changes in the group. Group Insurance Premiums: Unlike individual policies. Termination of the Group Insured’s Coverage: The coverage of the group insured will terminate if the group insured a) ceases to be a member of specified class b) terminates her employment of group membership. the amount of insurance on each participant. Principles of Insurance: Life. Manual Rating: A method to calculation by which the insurer uses its own past experience (and other insurers’) to estimate a group’s expected claims and expenses. the premium rate for a group policy usually recalculated every year. the amount of insurance on each participant. or 3) fails to make a required contribution to the premium. and name of each beneficiary. 2. Premium Rate: Set every year and stated as a rate per $1. even if the plan is contributory. the employer may apply it to pay a portion of the employees’ contributions during next year or to pay for additional benefits for covered employees. and name of each beneficiary. Self-administered Plan: The group policyholder keeps the contain name of each plan participants. insurer uses a combination of Manual and Experience Ratings. Terms and condition includes employee benefits such as group life insurance. must comply with ERISA. State and Provincial Regulation of Insurance: . In Quebec. We begin our discussion of group life insurance by describing how group life insurance is regulated in the United States and Canada and some provisions that typically include group life insurance.State. advancement. individual and group insurance policies are according to the Quebec Civil Code. wage. Health & Annuities Dated: 26th Feb. ERISA also contains detailed provisions that regulate employer-sponsored retirement plans. Employment laws prohibit any sort of discrimination regarding hiring.S. Then we shall discuss the various types of group life insurance policies and finally we shall discuss how group creditor life insurance policies differ from other forms of group life insurance.S. Regulation of Group Life Insurance. Principles of Insurance: Life. provincial. An annual report must be filled to Internal Revenue Service (IRS). Regulation of Employee Benefits: . have enacted laws based on the NAIC Group Life Insurance Model Act (NAIC Model Act) and thus the laws are fairly uniform across the states. These laws list the groups that are eligible for group insurance and the various provisions that must be included in the policies.S. common law jurisdictions. ERISA imposes a lot of disclosure and reporting laws for a plan. Thus the employer must ensure that all benefit plans comply with laws.CHAPTER 15: GROUP LIFE INSURANCE. the insurance laws are based on the Uniform Insurance Act. A summary plan description must be providing to each of the participants and federal Department of Labor (DOL). Most of the employee-employer group life and health insurance in U. regulate the group insurance policies 1) Age Discrimination in Employment Act (ADEA) 2) Americans with Disabilities Act (ADA) 3) Employment Retirement Income Security Act(ERISA). which shall describe: The benefits that are provided by the plan How the plan be funded The procedure that will be followed to make amendments in the plan The written document must also mention the names of the fiduciaries. In addition to these the CLHIA governs certain aspects of group insurance. A number of federal laws in U. In case of any loss they are personally responsible.In most of U. ERISA defines any plan as a welfare benefit plan that an employer establishes to provide specified facilities to the plan participant and their beneficiary. federal legislature has enacted laws designed to ensure that all employers are treated equally in the workplace. 2003 Page 64 of 110 . In Canada. The plan administrator is responsible for ensuring that the welfare plan complies with the disclosure and reporting laws. and other terms and condition. ERISA sets detailed plan for them. They are responsible for the benefit of the plan. ERISA requires the welfare benefit plans to be maintained accordance a written document. The NAIC Model Act and the CLHIA Guidelines require group life insurance policies to include a conversion privilege. Benefit Amounts:. but most of the insurance company. (2) the group insurance terminates. unlike CLHIA Group Guidelines. In addition to this the CLHIA guidelines states that the face amount of such policy to limit to $20. many group life insurance companies allows conversion only after the age of 65 yrs.Every group life insurance policy must identify the amountor the method to determine the amount that the insurer will pay the group insured. In general the insured can buy any type of individual policy that insurer have at that time but the benefit of the policy is limited. If the policy has dependent coverage then the group insured has the right to designate the beneficiary in this case also. Health & Annuities Dated: 26th Feb.Under the terms of a group life insurance policy— unless it is a creditor group life policy—each insured group member has the right to name a beneficiary who will receive the insurance benefit that is payable when the group insured dies. In accordance to NAIC Model Act.000.Group Life Insurance Policy Provisions. Conversion Privilege: . 2. Many group insurance companies allows to convert to the face amount of the original group life insurance. as for example some multiple of the salary received by the group insured. The other type specifies amount coverage either (1) for all group insured or (2) for each class of group insured. The conversion privilege allows the group insured whose coverage terminates for certain reasons to convert her group insurance to individual coverage. One type is that the benefit may be calculated on the basis of a formula. Principles of Insurance: Life. 2003 Page 65 of 110 . 3. Insured’s Eligibility for Group Insurance Terminates: In order to execute the conversion privilege the insured must apply for the individual policy and must pay the initial premium within 31 days from the day of termination of his group insurance coverage. Beneficiary Designation: . Insurance company requirements and the laws of many jurisdictions require that the amount of coverage provided on the dependents should be less than the benefit paid to the group insured. The insured group member has the right of revocation and the not the policyowner. In this section we shall explain the typical provisions that are included in the group insurance policies: 1. According to NAIC model Act. in accordance to the NAIC Model Act and CLHIA Group guidelines. only sums up to $2000 can be paid as facility payment clause. Benefit schedule defines the amount for the group insured. If the insurance coverage covers the dependents then the policy includes a separate benefit schedule that defines the dependent benefit. state that the face amount of the individual policy may not exceed the difference between (1) the amount of the group insured’s coverage under the original group life policy and (2) the amount of the group coverage for which the insured will become entitled within the 31 days conversion period. There are two cases for which the group insured’s group coverage may terminate – (1) the group insured falls out of the group. most of the group insurance policy states that if the amount of the premium is wrong due to misstatement of age. 2003 Page 66 of 110 . The benefits paid to the surviving spouse will continue until the earlier of (1) to a certain time after the spouse remarries.000 of non-contributory group term insurance coverage. In such a situation the insured can buy a individual policy without submitting the proof of insurability within the conversion period of 31 days. then the disabled member’s plan will continue as though the policy remained in effect. then the insurer will retroactively adjust the amount of the premium required for the coverage to reflect the correct age. In Canada.000 (2) the amount of coverage in force under the group plan minus the amount of group coverage for which the insured becomes entitled within 31 days of the policy’s termination. except for certain policies. gives a certain tax relaxation regarding this matter. Health & Annuities Dated: 26th Feb. 5.000. These term policies do not build any cash value and the insurer has the right to change the premium amount every year. 4. Group Term Life Insurance: . In Canada there is no such provision but the insurance companies generally put a similar provisions. For example the plan may pay (1) 20% of the Salary to the survivor spouse if there is no dependent child. Sometimes settlement options are given.99% of the group life insurance polices are of YRT. Thus if any coverage exceeds $50. Group Life Insurance Plans. (2) 30% if there is any dependent child. the CLHIA Guidelines direct that group life insurance policy to include WP rider.Generally the policy proceeds are paid in the lump-sum mode. Evidence of the insurability is not required from the group insureds each year when the coverage is renewed. Extension of Death Benefit: The NAIC Model Act states that if the group insured dies within the conversion period without converting her policy to an individual policy then the insurer is bound to pay the amount that would have been covered if the insured had opted for an individual policy. as for example survivor income plan. In United States. For this an employee can receive up to $50. Most of the policies pay a certain percentage of the group insured salary at the death time.000 then the employer has to pay income tax for the employer contribution for the excess of $50. then in that case all the usual modes of settlement options are made available. Federal income tax laws consider the employer’s contribution to policy premium as a taxable income.The amount of the benefit payable is decided by the benefit schedule.Group Life Insurance Policy Terminates: According to the NAIC Model Act the Conversion privilege remains to a group insured if the group insurance policy remained in force for five years before termination. (2) the spouse Principles of Insurance: Life. The maximum coverage is equal to the lesser of either (1) $10. Misstatement of Age: . Group YRT is sometimes used to pay supplementary benefits. Thus in case of a misstatement of age. This plan provides periodic payments to the survived dependents. 1. So incase the policy terminates. Settlement Options: . Because these policies have cash value. In such a situation the benefit is given if the accident occurs if an accident occurs while travelling for the company. Level Premium Whole Life Plans: Level premium group policies are also available. the time by when she becomes a full-time student (2) till the child is no longer a full time student or she reaches an age of 23 years. The premium paid by the employer is used to provide the group decreasing term insurance coverage.AD&D benefits may be included as a part of the group insurance or they may be given as separate plans. The low cost of AD&D makes it an attractive policy. Accidental Death and Dismemberment Plans: . Generally the employer does not pay anything. If the plan is contributory then the employee has the vested right upon the amount of the cash value accrued by the premium paid by her. thus it the policy terminates then the accumulated cash value goes to the employer. When accidental death benefit is added to a group insurance policy. The total coverage under the paid up policies increases every year and the term coverage decreases every year thus keeping the total coverage to a predetermined limit. Health & Annuities Dated: 26th Feb. The benefit paid to the unmarried child may continue to (1) 19 years of age. This means that the coverage is provided as optional basis or as additions to group term insurance coverage. Many companies provide accidental death benefit due to travel to its employees. 3. The employee may also increase or decrease the coverage. Group Universal Life Insurance Policies are known as portable coverage. In most cases the group permanent policies are issued as supplementary coverage. then the employee must pay income tax on the premium amounts that the employer pays for the excess coverage.000.Group permanent plans are less popular since they do not receive any tax privilege. but if the coverage is very high then the insurer may ask for the proof of insurability. Group Universal Life Plans: Group Universal Life Plans are very similar to individual life insurance policies. Generally the following plans are available under this plan: Group Paid-Up Plans: The plan is generally coupled with decreasing term insurance. whichever earlier. Group Permanent Plans: . The same logic regarding the income tax also applies in this case. The expenses for group universal life insurance coverage are less than corresponding individual universal insurance policy. employers use these to provide retirement benefit.reaches age of 65 years. then generally the coverage is equal to basic benefit of the group insurance coverage. Here the employee has the right to choose the premium he wants to pay. It is generally paid-up whole life policy at the age 65 years. in case of increment the insurer may ask for proof of insurability. the premium paid by the employee is used for buying single premium paid-up permanent policy. If the plan is non-contributory then the employee does not have any vested right on the policy. As in the pervious case if the total the total coverage exceeds $50. which means that the group universal plans can be carried as group plans even if the group insured falls out of the group. 2. Principles of Insurance: Life. 2003 Page 67 of 110 . Group underwriting methods may be used. A small portion of the premium paid by the employer for this type of policies. The plans are contributory. It is generally expressed as the amount per $1000 of the coverage. The insurer will issue a policy to the contract holder. which will contain all the terms of the contractual agreement entered into by the parties. Who can issue annuity? Historically. Health & Annuities Dated: 26th Feb. The State and Provincial laws states a limit to premium paid by the debtor. Some of these providers may wish to issue annuities in the long run. here the creditor is the named beneficiary.4. known as the contract holder. Other providers of financial services now market annuity products issued by insurers. CHAPTER 16: ANNUITIES AND INDIVIDUAL RETIREMENT SAVINGS PLANS Definition of Annuity: In general terms an annuity is a series of periodic payments. In the financial services industry. The premium for the group life insurance coverage is usually paid by the debtor. only insurance companies. The debtor needs to buy any sort of insurance against the loan but the creditor can not bound him to but the group creditor life insurance. Group Creditor Life Insurance: . Unlike all group life insurance plans. the term annuity means a contract under which one party-the insurer-promises to make a series of periodic payments in exchange for a premium or a series of premiums. Annuities can be of two types: Individual Group Principles of Insurance: Life. The need of annuity: Annuity protect against the financial risk of outliving one’s financial resources. The Annuity Contract: The terms of an annuity contract govern the rights and duties of the contracting parties. The parties to an annuity contract are the The insurer that issued the contract and The person who applied for and purchased the contract. by law. Most insurance company limits the amount of the coverage and the time period irrespective of the loan. At any time the amount of the benefit is the outstanding loan. 2003 Page 68 of 110 .This sort of plans is issued to creditors to cover the life of the present or the future debtors. although it may be entirely paid by the creditor or the may be shared by the debtor and the creditor. If the debtor has to pay the premium then the debtor has the right to refuse to buy such a policy. Single-premium annuities are the most popular followed by Flexible-premium annuities. Some important facts and figures: Individual and Group Annuities in force in 1998 (as a percentage of premiums): In USA: Group 54%. Individual 58% Classifications of Annuities Annuities can be classified on the following criterion: How the annuity was purchased How often periodic annuity benefits are to be paid When annuity benefit payments are scheduled to begin The number of annuitants covered by the annuity policy Whether annuity values are guaranteed or variable How the annuity was purchased: The categories of annuities under this parameter are the following: Single-premium annuity: An annuity that is purchased by the payment of a single. known as principal. The insurer calculates the amount of the periodic annuity benefit payments that it will be liable to pay under as annuity policy based on the following basic mathematical concept: A sum of money. Benefit payments under a single-premium annuity may begin shortly after the premium is paid or may begin after a considerable duration of time from the premium payment date. How often benefits are paid Annuity period: The time span between each of the payments in the series of periodic annuity benefit payments. 2003 Page 69 of 110 . The requirement is to pay the minimum stated premium for a year. lump-sum premium. such as monthly or annually. that is invested for a certain period of time at a stated rate of interest can be paid out in a series of periodic payments-in an annuity-over a stated period of time. Periodic level-premium annuity: The contract holder pays equal premium for the annuity at regularly scheduled intervals.As per the terms of the contract the contract holder will pay the insurer a series of premiums or a single premium. Amount. until some pre-determined future date. Periodic level-premium annuities are the least preferred. Premiums that the insurers receive for annuities are generally referred to as annuity considerations. Health & Annuities Dated: 26th Feb. Flexible-premium annuity: The contract holder pays premiums on a periodic basis over a stated period of time. the amount of each premium payment. and max. Principles of Insurance: Life. can vary between a set min. Individual 46% In Canada: Group 42%. The contract holder may choose to even skip the payment of premium of a particular installment. Generally these are singlepremium annuities. Deferred annuities could be both Single-premium deferred annuities (SPDA) and Flexible-premium deferred annuities (FPDA). Depending on when the insurer is to begin making periodic annuity benefit payments we could have Immediate annuities and Deferred annuities. Immediate annuity: These are annuities where the benefit payments are scheduled to begin one annuity period after the annuity is purchased. When Benefit payments begin The date on which the insurer begins to make the annuity benefit payments is known as the annuity’s maturity date or the annuity date. Deferred Annuity: An annuity under which the periodic benefits are scheduled to begin more than one annuity period after the date on which the annuity was purchased. Withdrawal provision: This provision grants the contract holder the right to withdraw all or a portion of the annuity’s accumulated value during the accumulation period. There could be quarterly or semiannual annuities also. Annual annuity: When the annuity period for an annuity policy is 1 year. 2003 Page 70 of 110 . Monthly annuity: When the annuity period for an annuity policy is 1 month. A point to note is that any annuity purchased with the payment of periodic premiums is by definition a deferred annuity. The period during which the insurer makes the annuity benefit payments is known as the payout period or liquidation period. Health & Annuities Dated: 26th Feb.The frequency of periodic annuity benefit payments depends on the length of the annuity period. Principles of Insurance: Life. Accumulated value of a deferred annuity = Net amount paid for annuity + Interest – Withdrawals The manner in which the policy provides for investment earnings on the accumulated value depends on whether the deferred annuity is a fixed-benefit annuity or a variable annuity. The period between the contract-holder’s purchase of the policy annuity and the onset of the payout period is known as the accumulation period. Such an annuity policy is called single-premium immediate annuity (SPIA). The stated period over which the insurer will make benefit payments is called the period certain. Cash Surrender Value on deferred annuity = Accumulated value – Surrender Charges Payout option provision is an annuity policy that lists and describes each of the payout options from which the contract holder may select. At the end of the period certain the annuity payments cease. Principles of Insurance: Life. Cash surrender value: At any point of the accumulation period the contract holder has the right to surrender the policy for its accumulated value less any surrender charges included in the policy. Temporary Life Annuity provides periodic benefit payments until the end of a specified number of years or until the death of the annuitant. Payee is the person who receives the annuity benefit payments during the payout period. then the insurer generally imposes a withdrawal charge. Annuity Beneficiary is the person or party that the contract holder names to receive any survivor benefits that are payable during the accumulation period of a deferred annuity. whichever occurs first. Health & Annuities Dated: 26th Feb. The named individual whose lifetime is used as the measuring life in a life annuity is often referred to as the annuitant. The amount of surrender charge usually decreases over time. Some life annuities also provide further payment guarantees. Annuity Certain is an annuity policy. 2003 Page 71 of 110 .Withdrawal Charge: Most policies imposes a ceiling on the amount withdraw able from the accumulated value for a deferred annuity per year without charge. the annuity benefits cease. When Benefit Payments End There are three general types of payout options available: Life annuity Annuity certain Temporary life annuity Life Annuity is an annuity that provides periodic benefit payments for at least the lifetime of a named individual. If the contract holder wants to withdraw more than this amount. Once the stated period expires or the annuitant dies. which will provide periodic payments over a period of time that is unrelated to the lifetime of an annuitant. Surrender Charge: This is typically imposed if the policy is surrendered within a stated number of years after it was purchased. Whether Annuity values are Guaranteed or Variable The investors to annuities have different purposes in mind with those funds and also have different capacities for assuming financial risk when they place money in annuities. Length of time in which the annuity benefits will be payable is 5 years. In case of single premium immediate annuities the benefit amount is generally fixed. A fixed-benefit deferred annuity policy also describes the manner in which the insurer will credit investment earnings to the policy’s accumulated value. Variable Annuities are annuities in which the amount of the policy’s accumulated value and the amount of the monthly annuity benefit payment fluctuate in accordance with the performance of a separate account. which provides benefit payments throughout the lives of both the annuitants. This chart will list the amount of annuity benefit that is guaranteed per $1000 of accumulated value. the amount of the benefit payment may not change. The number of annuitants covered by the policy Joint and survivor annuity or joint and last survivor annuity is an annuity. Health & Annuities Dated: 26th Feb. instead. 2003 Page 72 of 110 . Most fixed-benefit annuities specify that once the insurer begins paying the annuity benefits. But this is not a rule. The terms of a Joint and survivor annuity determines whether the amount of each periodic benefit payment remains the same after the death of one of the annuitants or whether it decreases and in that case by what percentage or amount. But if the annuitant dies before that time the payment ceases. Many insurers offer 2 general options to annuity purchasers: Guarantee to pay at least a stated interest on the annuity funds it holds Or Pay interest at a rate that is not guaranteed. In case of deferred annuities annuity policy includes a chart of annuity values. Because the insurer makes no guarantees regarding the investment earnings or the amount of a variable annuity’s benefit payments. Fixed-Benefit Annuities are annuities under which the insurer guarantees that at least a defined amount of monthly annuity benefit will be provided for each $ applied to purchasing the annuity.For example in a 5 years temporary life annuity the max. Principles of Insurance: Life. the interest rate will vary according to the earnings of certain investments held by the insurer. In some cases the insurer may declare a change of the amount of the benefit amount. The individual who purchases a variable annuity assumes the investment risk of the policy. the insurer retains no risk under the policy. Mortality rates depending on gender and annuity premium rates: Mortality stats show those females as a group may anticipate living longer than males as a group. The number of units that a contract holder can own depends on the premium that he pays. In recent years. So the life expectancy factor is considered when calculating the amount of periodic annuity benefit that can be provided for a specified premium amount. The value of a separate account may increase or decrease depending on the performance of the account’s investments. Annuity mortality rates-the mortality rates experienced by persons purchasing life annuities-are not identical to the mortality rates experienced by persons insured by LI policies for a given age and gender. This is called the segregated account in Canada. Principles of Insurance: Life. Health & Annuities Dated: 26th Feb. As premiums are paid throughout the accumulation period. the length of payout period is linked to the annuitant’s lifetime. This account is completely separate from the insurer’s general investment account. Accumulation units represent the ownership shares of a variable annuity contract holder in a separate account. This is why. legislatures and courts are examining whether the use of gender-based premium rate is a form of unlawful discrimination on the basis of gender.The mechanism that allows this investment risk transfer from the insurer to the purchaser is the separate account. Variable annuity contract holders may select from this list of separate accounts and may periodically transfer funds from one such account to another. insurers generally tend to charge higher premium rates from females than for males of the same age. The difference in form of antiselection in the case of annuities compared to that in LI policies: People in good health and who anticipate a long life are more interested in purchasing life annuities then are those in poor health. 2003 Page 73 of 110 . the number of accumulation units that a contract holder owns increases. Life Expectancy Factor In the case of life annuities. The insurer then recalculates the amount of the periodic benefit payment by multiplying the total number of annuity unit times the current value of an annuity unit. The insurer must periodically recalculate the value of an annuity unit based on the investment experience of the separate account. Insurers typically offer a number of different separate accounts and they follow a different investment strategy for each such account. This is just the opposite of that happens in the case of a LI policy. This guarantees that if the annuitant dies before the total benefit payments equal the purchase price of the annuity. Installment refund annuity where the refund is payable in a series of periodic payments.Some insurers use unisex mortality tables and charge males and females with the same premium rates for annuities. Annuity Contract Provisions: Entire contract provision: Same as that of LI Free-look provision: Same as that of LI Incontestability provision: Typically an application of an annuity does not contain questions regarding the insurability of the applicant. This form of annuity is the least popular as there is a risk of the annuitant paying much more money as premium than he actually receives as payout from the annuity. as he expired early during the payout period. Life income annuity with period certain guarantees that the annuity benefits will be paid thru out the annuitant’s life and guarantees that the payments will be made for at least a certain period. Life income with refund annuity also known as a refund annuity. a refund will be made to the contingent payee. the no extra benefits are paid to the contingent payee. Straight life annuity 2. Please note that if the annuitant dies after the expiration of the period certain. Comparison of Premium Rates: Premium rates for the straight life annuities are the lowest. 2003 . Types of Life Annuities: The 3 variations of life annuity that insurers commonly offer are 1. So he does not need to provide any representations on which the insurer bases his decision of issuing an Page 74 of 110 Principles of Insurance: Life. Refund annuity is available in 2 forms: Cash refund annuity where the refund is paid as a lump sum. provides annuity benefits thru out the lifetime of the annuitant and guarantees that at least the purchase price of the annuity will be paid in benefits. the contract holder selects a contingent payee who receives the payout benefits in case the annuitant dies. Life income with refund annuity Straight life annuity provides periodic payments for only as long as the annuitant lives. In this case. This refund is the difference between the purchase price of the annuity and the total amount of benefits that had been paid during the lifetime of the annuitant. Health & Annuities Dated: 26th Feb. even if the annuitant dies before the end of that period. Life income annuity with period certain 3. its only insurance companies which are allowed to sell annuities. assigned. Health & Annuities Dated: 26th Feb. Settlement options or Payout options provision: identifies and describes each of the payout options that a contract holder may elect for the payment of annuity benefits. Fixed-premium annuities generally include the following additional provisions: Grace period provision: Same as in LI. based on the type of the annuity contract are: Beneficiary provision: gives the contract holder the right to name the beneficiary who will receive any survivor benefits payable if the annuitant or the contract holder dies before annuity benefit payments begin. transferred. which are possible. the insurer may not contest the validity of the contract. Surrender provision: the right to surrender the annuity for its surrender value during the accumulation period. then the contract may not be sold. Some additional provisions. Such contracts are not assignable by federal laws. Regulation of Annuities The regulations are same in both USA and Canada. In such a case the incontestability provision gives the insurer a specified period – such as one or two years – in which to contest the validity of the coverage provided by the rider based on a material misrepresentation in the application. then the annuity benefits payable will be those that the premiums paid would have for the correct age or sex. or pledged as collateral for a loan or any other purpose to any other person. Withdrawal provision: right to withdraw all or part of the annuity’s accumulated value during the accumulation period. here the contracts generally state that if the contract is part of specified types of qualified retirement plans. the incontestability provision states that. as is in the case of LI policies. Misstatement of age or sex provision: states that if the annuitant’s age or sex was misstated. Reinstatement provision: Same as LI. In such cases. 2003 Page 75 of 110 . For variable annuities the regulations are the same as is in the case of variable LI policies. annuity. once the contract becomes effective. Assignment provision: Unlike in the case of LI policies. This is because. Principles of Insurance: Life. In case the annuity product has any supplementary benefit riders associated with it then the applicant for such a rider generally must provide proof of insurability. In United States of America: There are 2 types of individual retirement savings plans.Taxation of Annuities Annuities are an increasingly popular product in the US and the fact that a product that qualifies as an annuity in accordance with federal tax laws provides favorable federal tax treatment is partly responsible for that. 2003 Page 76 of 110 . The remainder portion of each benefit payment is considered taxable investment income because the purchaser has never paid income taxes on the policy’s investment earnings. the amount that certain individuals deposit into qualified retirement savings plans-up to a stated maximum-are usually deductible from their gross incomes in the year in which those funds were deposited into the plans. Establish rules for the taxation of plan withdrawals. The one exception is annuity used to fund a qualified retirement plan. For federal IT purposes. Investment incomes for annuities are taxable incomes thru out the life of the annuity. the investment earnings on a qualified account generally are not taxed until the funds are withdrawn. which qualify to receive favorable federal IT treatment: IRA Keogh (HR 10) plans Federal laws Define which individuals may establish each type of qualified plan. focusing on the plans that may be marketed by LI companies. Health & Annuities Dated: 26th Feb. Individual Retirement Savings Plans Both the Govt. Here we will describe some of these qualified individual retirement savings plans. of USA and Canada have enacted laws that provide federal IT advantages to individuals who deposit funds into government-qualified retirement savings plans. Principles of Insurance: Life. Canada’s tax laws do not provide this favorable treatment for annuities. In addition. Place limits on the amounts a taxpayer may contribute to each type of qualified plan. each annuity benefit payment is considered to consist of the following 2 parts: 1. which is not taxable because the purchaser has already paid income taxes on that amount. For the purpose of income taxes. One portion is the return of principal. 2. By contrast. whereas Regular IRA contributions are made with pre-tax dollars. Health & Annuities Dated: 26th Feb. Individual retirement annuity is an individual annuity issued by an insurance company. 1998. investment company. however. 3. The sponsoring financial institution handles the administrative aspects of an IRA plan. Insurance companies market individual annuity contracts that qualify as Keogh plans. Anyone who is less than age 70 1/2 and who has earned income may contribute up to $2000 per year of the earned income into a regular IRA. Roth IRA contributions are made with after-tax dollars. Qualified withdrawal includes withdrawals taken after the age 59 ½ and the withdrawals made by a 1st time homebuyer. the trustee must be a bank. Thus. 2003 Page 77 of 110 . penalties are imposed on withdrawals made before the taxpayer attains age 59 ½. It ensures that the IRA plan meets the legislative requirements to qualify as an IRA arrangement and obtain approval from the Internal Revenue Service (IRS) that the plan qualifies. Unlike Regular IRAs.IRA (Individual Retirement Arrangement) IRA may take one of the following 2forms: Individual retirement account is a trust account created in the US for the exclusive benefit of an individual and his beneficiaries. Tax treatment on IRAs varies on the basis of whether it’s a Regular IRA or a Roth IRA. or similar organization. must sponsor the plan. Roth IRAs aren’t subject to minimum distribution requirements. Taxpayers must begin making annual withdrawals of at least a specified minimum amount when they reach age 70% and after that time they may not make additional contributions to their IRAs. Keogh Plans (HR 10 Plans) Available for self-employed individuals. Qualified withdrawals from a Roth IRA that the taxpayer has held for at least 5 years aren’t subject to income taxation. Taxation of investment earnings is deferred until funds are withdrawn. such as an insurance company or an investment company. With only a few exceptions. Insurers use the acronym IRA to refer to an individual retirement annuity. A financial institution. The primary difference in the tax treatment of a Roth IRA and a Regular IRA are as follows: No current tax deductions are allowed for contributions to a Roth IRA. The following is a summary of the tax treatment on a regular IRA: 1. Principles of Insurance: Life. 2. Regular IRA has been established in 1974. Roth IRAs have been established since Jan 1. stock brokerage. CHAPTER 17: GROUP RETIREMENT AND SAVINGS PLAN. or real estates etc. The contribution to an RRSP is deductible from taxable income up to a stated maximum. Health & Annuities Dated: 26th Feb. IRS approval is necessary for Keogh plans. In Canada the plans have to be approved and registered with Revenue Canada prior to the establishment of such plans. Funds of the Keogh plans may be placed in any of the several types of investments. can establish this RRSP. GOVERNMENT SPONSERED RETIREMENT PLANS. Regulation of retirement plans. such as stocks. Such an individual will have a lower ceiling to the contribution eligible for deduction from taxable incomes. The deposit to a Keogh plan is deductible from taxable income up to a certain limit. Any gainfully employed individual. Withdrawals from a Keogh account are taxable as income. In order to encourage employers and labor union to buy retirement plans for the members. TYPES OF RETIREMENT PLANS. The following is a summary of information about RRSP. Penalties on the withdrawals may be payable if the legislatively defined requirements for making withdrawals are not met. 2003 Page 78 of 110 . In United States. In this chapter we shall learn about the following: REGULATION OF RETIREMENT PLANS. bonds.The administrative aspects of the Keogh are handled by the sponsoring organization. and the plan participants – the employees. plan sponsors are not required to obtain prior approval of Internal Revenue Principles of Insurance: Life. RRSP accounts must begin withdrawing the accumulated funds by the time they reach age 69. This may also depend on whether the individual is an active participant in a qualified pension plan. Following is a summary of important information about Keogh plans. In United States these plans are known as qualified plans and in Canada they are known as registered plans. federal income tax laws provide income tax benefits to both the plan sponsors – the employers that establish the plan. In order to have the tax benefit the plans have to meet certain regulations. including an employee who is covered by an employer-sponsored pension plan. both in United States and in Canada. In Canada: A qualified retirement account is known as a registered retirement savings plan (RRSP). COMPONENTS OF RETIREMENT PLANS. Funds in RRSP may be placed in a number of investment vehicles. 2. 4. Since there is no tax benefit on the employee’s contribution most of the retirement plans in U. In order to get favorable tax benefits the plan must be approved and registered by Revenue Canada. The different requirements for the Pension Benefit Act are: 1. b) The employer’s contribution to thee plan is not considered as taxable income for the employee.Service. 1.Most of the legislation part comes from Employee Retirement Income Security Act (ERISA). which are quite similar with requirements imposed by ERISA. 6. it must be registered with a specified government agency. yet they choose to obtain prior approval form IRS. Health & Annuities Dated: 26th Feb. and in Canada. 5. Tax benefits: a) Within stated limits the contributions made from the employers end is considered as a part of employer’s current expense and hence is not considered as taxable income. 2. We shall now discus the salient laws that govern the formulation of such plans in U.e. Retirement plans can either be contributory or non-contributory. Security requirements must be fulfilled to safeguard the interest of the plan participants.S. Following are the requirements that ERISA imposes on retirement plans. In order to get registered by Revenue Canada the plan must be Principles of Insurance: Life. are of non-contributory type. Vesting requirements must be clearly stated in a plan. Fiduciaries are responsible to administrate the plan and to hold the plan assets. Canada: . This requirement should clearly state that when the employee has the right to policy benefits and when does she have the vested interest on the employer’s contribution. 3. Non discrimination requirements prohibit qualified plans from going for the benefit of highly paid employees. In order to qualify for registration it must comply various numbers of rules. The plan must be portable. i.S. 2003 Page 79 of 110 . Reporting has to be done by the plan sponsor to government agencies and to the plan participants regarding the plan provisions.The Canadian federal government and all the provincial government have each enacted a Pension Benefits Act. Plan assets must be invested in accordance to PBA. They are bound to do their duty in accordance to the statutory guidelines mentioned in ERSIA. The tax on employer’s contribution is deferred till she actually receives the benefits from the plan. The plan must contain specified minimum vesting requirements. The Pension Benefits Acts require that when an employer establishes a pension plan. The plan participant actually pays the tax on the interest earnings on receiving the benefits from the plan. 3. United States: . the benefits can be transferred from one registered plan to the other. c) All the interest earnings are allowed to accrue tax-free. This right give vested interest of the employee on the benefits of plan even he leaves the service prior to retirement. 4. In Canada such a plan is known as a registered pension plan (RPP). are deductible from employer’s current taxable income. the employer knows the amount that will be paid for the plan in advance. Moreover ERSIA imposes more complicated laws for Benefit Plans. In Canada these plans are known as deferred profit sharing plan (DPSP). are qualified pension plans and are referred as qualified plan. Pension plans: . within specified limits. Defined Contribution Pension Plans: In this plan the employer states the amount of contribution that will be paid for each plan participants. 3. in U. the employer does not have to depend on the actuary’s estimation.S. secondly. There are advantages that the Defined Contribution Plans have over Defined Benefit Plans—firstly. The benefit is usually given as monthly annuity. but those are not as stringent as 1-% rule. Since the employer is making contribution from the profits. Health & Annuities Dated: 26th Feb. The services of an actuary are typically required to determine the amount of contribution required for the plan. states that employer’s contribution must be substantial and recurring and should not benefit high paid employees. Employer’s contributions. a plan that defines the amount of the employer’s contributions “by reference to profits” must provide that at least 1% of those profits will be contributed. The participants get the entire accrued amount as a lump sum or as monthly annuity.. so it might not pay the contributions when the contribution warrants them. The requirements that are mentioned for Revenue Canada are: 1.S.This is a retirement plan that is primarily funded from the employer’s profits.registered in accordance to Pension Benefit Act. employee’s contributions are tax fee. The features are quite similar to the defined contribution plans. Most employers sponsored pension plans. Profit Sharing Plans: . To qualify as DPSP in Canada. Contributions made for all the plan participants are pooled into one investment account and are allocated to individual plan participants as they retire according to the plan’s provision. Types of Retirement Plans. If the plan defines the amount of the employer’s contributions “out of profit” then limitations are imposed. Investment earnings are allowed to accrue tax-free until participants receive the benefits. Principles of Insurance: Life. Within specified limits. Both qualified and registered can be categorized as the following: Defined Benefit Plans: This plan defines that the participant will receive a fixed amount as retirement benefit. 2. Employers establish three general types of qualified (registered) retirement plans in the United States and in Canada. The contributions are invested into separate accounts for each participant. 2003 Page 80 of 110 . Qualification rules in U.These are plans according to which the employer promises to pay pension to the employees after their retirement. Employer’s contribution is not considered as employee’s taxable income. The employee is required to establish her own IRA in which the employer will add her contribution. but she is allowed to take certain tax deductions. This type of plan is known as Savings Incentive Match Plans for Employees (SIMPLE plan). The contributions made by the employer are deductible from his present taxable income. In order to provide tax benefits laws in U.S. There is clause for nondiscrimination and other regulations are quite simple. The deductible for the contribution maid to SEP IRA is more than in other IRAs. Another type of qualified retirement plan that is established for employer with not more than 100 employees in the preceding year. and within stated limits can deduct from his current taxable income. allows the employees to participate in special type of thrift and savings plan known as 401(k) plan. Contributions must be made every year. the only difference is that the employer’s contribution is obligatory. The employee’s contribution is considered as taxable income. We shall now discuss the nonqualified retirement plans in U. Principles of Insurance: Life.Qualified Retirement Savings Plans. An account is established for each plan participants. All contributions to a SIMPLE IRA accounts must be vested in the employee. Canada: An individual who wishes to establish a retirement plan in Canada can buy Registered Retirement Savings Plan. SEP are easier to administrate since it involves less amount of paper work. Health & Annuities Dated: 26th Feb. United States: For small employers there is simplified employee pension (SEP) plan.S. The employee’s contribution to this plan does not enjoy any federal income tax benefits. The employer also needs to contribute to the plans. This plan works in the same way as Profit Sharing Plans. Canada: Some Canadian employers have established employee’s profit sharing plans (EPSPs) that are nonregistered saving plans. but she has to pay tax when she withdraws the money from such a plan. The employee’s contribution is subjected to statutory limits and the employer generally pays an amount equal to the employee’s contribution. In order to participate in 401(k) plan the employee enters into a salary reduction agreement. United States: An employer may provide a thrift and savings plan. To get the tax benefit the employer must share the profit under “reference to profit” that is the share must be 1%. Any contribution to the plan is tax-free. Hence the employee has the vested right over the amount of the plan form very beginning. and in Canada. Nonqualified Retirement Savings Plans. The limitations to the contribution to the SIMPLE IRA are generally higher than other type of IRAs but that is lower than the limitations provided to other qualified plans. 2003 Page 81 of 110 . The employee agrees to reduce her compensation but the reduction is also taxable. Many nonqualified plans are established to avoid the complex legislative norms that govern the qualified (registered) plans. but within certain limits. The employer’s contribution is considered as taxable income for the employee. Employees and employers are permitted to make contribution to the plan but the contribution from the employer’s end is considered as that the employee made them. Many employers buy group RRSP. The employee has to pay tax on both the contributions made by the employer and herself. The contribution made by the employer is considered as her expenses and hence deductible from her current income. Components of a Retirement Plan. The plan: The terms of a plan are written in a document known as plan document. Group Deferred Annuity: Each year the contributions made for each plan participants. Plan administrator: The plan sponsor names a plan administrator who is responsible for various aspects of the plan’s operation. etc. life insurance contract. Separate account Contracts: This is sometimes called as investment facility contract. the insurer invests the assets in stocks. as for example: the plan must state the eligibility criteria for the plan participants. 2003 . Funding vehicles: A funding vehicle is the means of investing the plan’s assets as they are accumulated. In many cases the administrator may require many other services in order to maintain the plan. 2. but this contract does not guarantee against investment losses. short-term investments. these plans are also known as fully insured products. the time by when she will receive the benefits form the assets of the plan. When the participant retires the insurer buys an immediate annuity with the amount of his share from the account. However there is a limit to which the sponsor shares the loss of the insurer. The administrator uses these records to provide reports to the governmental agencies and to the plan participants. The various funding vehicle provided by the insurance company are: 1. The means can be an annuity. the time by when the participants are fully vested. Page 82 of 110 Principles of Insurance: Life. mutual funds. Immediate Participation Guarantee Contracts (IPG): Here also the assets of the plan are placed in the General Investment Account of the insurer. Health & Annuities Dated: 26th Feb. She is responsible for hiring these services. The plan sponsor is required to follow certain limits while selecting the funding vehicle for the plan. and the sponsor chooses one or more accounts in which the assets will be invested. others. Generally the separate accounts do not guarantee the performance of the account. The insurer generally guarantees against investment losses and states a minimum amount that the participant will receive. Funding vehicle provided by the insurance companies are guaranteed against certain financial loss and mortality rates. This document spells out the different provisions. Because the contributions are used to buy plans before the retirement of the of the participants. mutual fund. Deposit Administration Contracts: The plan sponsor places the assets of the plan in the General Investment Account of the insurer. When the participant retires the benefits from the plan are given as usual retirement benefits. Instead the contract allows the sponsor to participate in the gain and the loss of the insurer. 3. Life insurers provide both plans and administrative services. The administrator is responsible for maintaining the records for all participants. The administrator can be the sponsoring employer or a board of committee that will be established by the employer. The insurer maintains investment strategies for different accounts. 4. are used to buy single premium deferred annuity. The interest is generally guaranteed. Participation for all workers in these plans is mandatory. Government Sponsored Retirement Plans. Canada Pension Plan and Quebec Pension Plan: These are federal programs that provide pension to workers who have contributed money into the plan during their working years. Health & Annuities Dated: 26th Feb. Guaranteed Investment Contracts (GIC): Here the insurer accepts the assets form the sponsor for a certain number of years. The interest earned on the investment can be annually returned to the sponsor or can be accumulated till the period ends. etc. excepting few groups. railroad workers are covered by Railroad Retirement Act. The money to fund these pensions is taken form federal government general tax revenues. CHAPTER 18: MEDICAL EXPENSE COVERAGE Medical expense coverage are indemnity benefits. The monthly benefit is increased in order to reflect the increase in cost of living measured by CPI. current occupation. Other states have voluntarily joined the Social Security. Disability and Health Insurance (OASDHI) Act. As for example federal civil service workers are covered by Civil Service Retirement Act. At present moment it is not mandatory for state civil workers to participate in Social Security and most of the state covers their civil workers in their own retirement programs. Everyone who has reached an age of 65 and has met certain residential criteria is eligible to receive the pension. The benefit of the plan depends on the amount contributed but is limited to a legislatively established amount. The CPP and QPP work very closely and hence the participants can be easily transferred from one plan to another. Survivors. United States: Nearly all people in U.S. Principles of Insurance: Life. and some state and municipal civil workers. The self-employed worker needs to pay a higher amount. however people retiring before 65 years receive a less amount of pension. At the end of the period the accumulated sum is returned to the sponsor. The employer also need o contribute the same amount as the employee. The workers must contribute a percentage of their annual income to the plan. or better known as Social Security. The pension amount is not dependent on the preretirement wage. marital status. The act also covers the disabled. Canada: In Canada we have the following retirement plans that are sponsored by the government: Old age Security Act: This act provides pension to all Canadians of age above 65 years. 2003 Page 83 of 110 . Medical expense coverage are maintained by Managed care plans. The act covers the dependant spouse or children in case the covered dies. Social Security provides pension to the covered persons of age more than 62 years. The covered employee must pay a certain amount of her income into the plan and the employer has to pay the same amount as the employee. are covered by the Old Age.5. The amount of the monthly benefit is dependent on the contribution made by the individual. 2 types available: 1. Usual. Principles of Insurance: Life. When a claim is processed the proceed is determined whether the amount is within UCR or not. Most plan are of this type. 2 Managed care plans are: 1. Major medical insurance: This medical expense plan provides substantial benefit to the same category of expenses provided by basic expense coverage and sometimes also contains preventive care. lab tests etc.Managed care Plans are medical expense plans that combine financing and delivery of health care within a system that manages the cost . a standard expense level is set for a locality for a certain covered expenses by applying a predetermined formula. Expense participation: Encourages insured(s) to keep benefit amount to a minimum and thus help in reducing the coverage premium. Health Maintenance Organizations (HMO) 2. These are also known as first-dollar coverage since insurance companies starts reimbursing right from the first dollar of the expense and no contribution is asked from insured. Based on statistics from national study of fees. Health & Annuities Dated: 26th Feb. medication. This benefit amount is UCR fee. Preferred Provider Organizations (PPO) Basic medical expense coverage: Consists of separate benefits for each covered medical care cost. Comprehensive Major medical policy: Combination of basic medical coverage and supplemental medical coverage. Some common basic expense coverages: Hospital expense: Hospital expenses like room. 2003 Page 84 of 110 . Supplemental major medical policy: Provides coverage for amount that exceed the limit that comes with basic medical coverage or coverages that can be bought separately. There could be one policy for each coverage or one policy of all kinds of coverages. A maximum benefit limit or lifetime unlimited maximum benefit is specified. accessibility and quality of care. reasonable and customary fees: UCR is the maximum dollar amount of a given covered expenses that the insurer will find eligible for reimbursement. board. Surgical expenses: Inpatient and Outpatient surgery Physician’s expense coverage: Physician’s visit both in and out of the hospital. 2. This provision states that once the insured has paid the max.Stop Loss provision: All expenses incurred during a year are totaled as out-ofpocket expense. There is a limit on the out-of-pocket expense.Calendar year deductible: Total maximum deductible incurred in a year for various covered expenses.Deductible: A flat amount that insured needs to pay first before the coverage level starts. Treatment of Injury while In military service 4. Routine dental. Vision care 1 routine eye checkup each year Limit on benefit for lenses. Supplemental medical expense coverage: 1. out-of-pocket the rest of the claims will be paid at 100% Common exclusions: 1. facility or that is paid by any other organization. The deductible of group policies is usually lower than individuals ones. Dental Covers routine dental exams. 4. However this provision states that for this level also insured needs to pay a percentage of the expense. 3. 2003 Page 85 of 110 . Prescription Drugs: Benefit to purchase drugs and medicines Usually contains a small deductible of $5-$10 called co-payment Pharmacist submits a claim for the rest of the amount to the insurer Sometimes insured might also be needed to file a claim 3. eye exams and corrective lenses 5.2 kinds of participation: 1. Self inflicted injury treatment 3. dental procedures and preventive work Both coinsurance and deductible applied 2. Treatment in a free of charge govt. Dread disease Coverage for a special specified disease like cancer Can supplement basic medical expense coverage and can serve the same purpose as supplemental major medical coverage. Critical Illness This plan pays a lump some money if the insured is diagnosed with a particular disease. Principles of Insurance: Life. Like first $20. Not sellable in many states 5. Cosmetic surgery for beautification 2. Health & Annuities Dated: 26th Feb. frames and contacts 4. 2.Coinsurance: After the deductible has been paid the benefit reimbursement level starts. Financed by payroll tax imposed on employees through Social Security program. Part B: Supplementary coverage can be bought by paying premium of 45. Confinement in an extended care facility after hospitalization and 3. 6. Govt. the Old Age. life threatening stroke Typically includes return of premium if the insured dies without incurring the disease. Finance by premium of people insured and federal government general revenues. Intermediaries: Third parties who administer Part A. home health care services. Sponsored Programs: Medicare and Medicaid Medicare: Eligibility: 1. 2003 . Medicaid must cover long-term custodial nursing-home care. Medicare Supplement Coverage: In USA. Carriers: Third parties who administer Part B. Age 65+ and have social security benefits 2. Each state administers its own program and establishes its own eligibility criteria. Hospitalization 2. Long Term Care: This plan provides coverage for people who because of old age or any other cause. State and federal funded program. Insurance companies have insurance products which provide supplemental coverage over Medicare. Those who are afflicted with – or are the dependent of a person afflicted with – kidney disease that requires dialysis or transplant There are 2 parts of this program: Part A: Basic insurance coverage and is automatically extended to everyone without any premium. Have retirement benefits under Railroad retirement act 4. Includes 1. Have 2 years of eligible disability income benefits 3. Person receiving Supplemental Social Security (SSI) must receive Medicaid. These are known as Medigap policies.Example: Heart attack. stroke. Thus Medicaid varies hugely from state to state must all follow a minimum federal mandate for requirements. Disabled and blind person must receive Medicaid Medicaid is always the secondary payor of benefits Page 86 of 110 Principles of Insurance: Life. Survivors. Health & Annuities Dated: 26th Feb. Deductible and coinsurance provision is present.50. Medicaid: Program for poor people. Disability and Health Insurance ( OASDHI ) also known as social security provides medical coverage under Medicare program. Principles of Insurance: Life. the disability prevents him from performing the essential duties of his regular occupation. Because of the strict sense of the definition most of the covered person will never be entitled to the benefits. For each type the claim cost is calculated as: Claim Cost: Frequency of expected claim * Avg. Thus the insurance companies now use a more liberal definition. 2003 Page 87 of 110 . Surgery 2. Physician fee 4. Effected by geographical location Independent Claim Costs: Cost the insurer predicts that it will incur to provide the policy benefits promised. Each disability income policy specifies the definition of total disability that the insurer uses to determine whether a covered person is entitled to get the disability benefits. Hospital expense 3. major medical expense. so insurer always adds an extra amount to actual Loading to counter unforeseen contingency conditions Loss Ratio: Ratio of Benefits an insurer paid out for a block of policies to the premium received. At the end of the specified period. amount of each claim Gross premium = Net premium + Loading. CHAPTER 19: DISABILITY INCOME COVERAGE. periodic income replacement benefits to an insured that becomes unable to work because of an illness or an accidental injury. Definition of Total Disability. Individual and commercial insurance companies provide disability income coverage that provides a specified. Any Occupation: At one time the disability was defined as the state where the covered person becomes disable to perform any sort of occupation. Health & Annuities Dated: 26th Feb. Current Usual Definition: This provides that an insured is considered totally disabled if at the start of disability.Major Differences between Life and Health Insurance: Life Insurance Valued Contact One time payment Smaller Effect Health Insurance Contract of Indemnity Multiple Effect of inflation. It is calculated for every type of expenses like : 1. changes in economy and changes in medical practice effect the amount of benefits largely. Since number of claims for Health Insurance is much more. Loss Ratio is calculated to keep a check on the insurer so that they cannot add too much to the Loading as a measure of protection against contingency situations. Based on this the policy can either be classified into short term or long term. This generally includes total and permanent blindness. or 52 weeks. the maximum benefit period commonly extends to the insured’s normal retirement age or to age 70. Income Loss: This definition is generally included in disability coverage known as income protection coverage. Principles of Insurance: Life. he is entitled to receive the benefits. The benefit period in this case may extend until the insured reaches 65years of age. or experience. Policies that use this definition however may state that the insured will not be considered as disabled if he voluntarily returns to any occupation. Health & Annuities Dated: 26th Feb. Short-term group disability income coverage provides a maximum benefit period of less than one year. if present. Long-term individual disability income coverage provides a maximum benefit period of at least five years. thus the insured will receive the full benefits even he resumes his original occupation. Benefit Period. Thus even if the insured starts working at any other gainful occupation different from his previous occupation. The policy specifies both (1) a maximum benefit amount that will be paid when an insured will be completely unable to work and (2) a method of determining the amount of lost income when the disabled insured is working. Presumptive Disabilities: A presumptive disability is a stated condition that. an insured is considered as totally disabled if his disability prevents him from working at any occupation for which he is reasonably fitted by education. Benefit period is time for which the insurer pays the disability income benefits. in some cases. usually two or five years. Individual disability income coverage is seldom offered with a maximum benefit period of less than one year. automatically causes the insured to be considered totally disabled. 2003 Page 88 of 110 . states that the policy will pay disability benefits if the insured becomes unable to perform the acts of her own previous occupation. and loss of speech or hearing. Thus. 26. As a result. such coverage commonly specifies maximum benefit period of 13. loss of the use of any two limbs. Long-term group disability income coverage provides a maximum benefit period of more than one year. Own Previous Occupation: This definition which is generally included in individual policies rather than group policies. The definition of total disability for the insured states that the insured is disabled if he suffers an income loss for his disability. short-term individual disability income coverage provides a maximum benefit period of one to five years. benefits are provided for the insured’s lifetime. the insurer pays the benefit both while the insured is totally unable to work and while he is able to work but his disability has reduced his income. training. For example. Instead the benefits are limited. such as dividends and the interest. The amount of the benefit depends on the insured’s earnings at the time he purchased the policy. Here the insurer states the benefit as some percentage of the insured’s predisability income. In general. Most long-term disability coverage has an elimination period of 30 days to 6 months. The length of elimination period for both short and long-term individual disability income coverage last from 30 days to 6 months. 2. But here the benefit does not depend on earnings form any other source. Additional income during disability. Longer the elimination period shorter will be the cost of the coverage. Disability income amounts however should not be so low that the insured faces a drastic income loss. The amount of the applicant’s unearned income. Here the insurer mentions a flat amount to be paid when the insured becomes totally disabled. Health & Annuities Dated: 26th Feb. The insurer carefully limits the maximum benefit for which the insured can buy the policy. 2003 Page 89 of 110 . As a general rule. Principles of Insurance: Life. 4. 3. Group short-term disability income coverage has this percentage as 90-100%.Elimination Period. that will continue when the insured become disabled. Most short-term group life disability income coverage contains no elimination period for disability due to accidents and an elimination period of 1 week for disability for sickness. The methodology depends on whether the policy is a group policy or individual policy or on whether the policy is a short-term or long-term policy. Income Benefit Formula: This is generally used for group disability income benefit policies. The elimination period reduces the cost for providing the benefits for disability that lasts for very short periods. before tax. For group long-term disability income coverage the benefit generally amounts to 65-75 % of the predisability income. The insurer generally considers the following factors while setting up the maximum benefit from the policy: 1. The insurer considers all sort of disability income. such as income benefits from group policy and government sponsored policy. Flat Amount: This is generally used for individual policies. The amount of the applicant’s usual earned income. the maximum amount of disability income benefit that insurer will provide is 50 to 70 % of his pre-tax earnings. An elimination period is the waiting period for which the insured has to be disabled to receive the benefits. The applicant’s current tax bracket. the insurer may state that the insured will receive 70% of his predisability income and the benefits will be reduced if he receives disability income form any other sources. Benefit Amount. The insurer generally uses either of the following two methods to determine the benefit amounts. the benefit amount available through disability income coverage is not intended to replace fully an individual’s predisability income. Injuries receive as a result of active participation in a riot. This coverage provides disability benefits to cope up with the overhead expenses. Here the benefits are provided to buyout the partner’s or owner’s interest should he become disabled. Insurers describe overhead expenses as the usual and necessary business expense including employee’s salary. Occupation-related disabilities or sickness for which the insured is entitled to receive income benefits under some group or government disability program. We shall now describe certain supplemental benefits that are usually added to disability income coverage. Specialized Types of Disability Coverage. Generally the increment depends on certain standard indices such as CPI. The insurer does not need to provide proof of insurability to increase the benefit amount. Principles of Insurance: Life. The benefit goes to the company. telephone. 3. still he might incur expenses to operate his business. These coverage are designed to provide benefits.Supplemental Benefits. Business Overhead Expense Coverage: Should the owner gets disabled. rent. Using the formula method the benefit may vary depending on the insured’s loss of income due to partial disability. Health & Annuities Dated: 26th Feb. electricity. declared or undeclared. Key Person Disability Coverage: This coverage provides benefits to offset the losses that a business suffers if the key person gets disabled. which grants the insured to increase the benefits as his income increases. Future Purchase Option Benefit: In case of flat benefit the insurer may provide a future purchase option. 2. gas. For example office rent. 4. However the increment of such benefits is limited. other than loss in come if the insured gets disabled. Partial Disability Benefits: In this case certain benefit is provided to the insured if he has partial disability—a disability that prevents the insured from performing certain acts of his own occupation or prevents him from being a full time employee of his present occupation. Intentionally self-inflicted injuries. Disability Buyout Coverage: This for the BSA. and other expenses that are required to keep the business open. Exclusion: Following are the exclusion criteria for the disability income benefits: 1. In Chapter 4 we described that a closely held business will suffer from a financial loss if the key person or any of the partners dies. Cost of Living Adjustment Benefit: COLA benefit states that the insured will provide the disabled insured a benefit amount that increases to reflect the increase in cost of living. Injuries or sickness that result from war. The option is generally provided if the insured can show that his income will increase considerably in the future. mortgage payments. 2003 Page 90 of 110 . This amount is typically either a flat amount or often 50% of the total disability benefit. etc. Likewise the business may suffer from a loss of income if the key person or any of the partners gets disabled. These are either added automatically with the policy or are added as an option by paying extra premium for such benefits. (2) the insured dies. The monthly benefit is equal to the amount of retirement benefit that the person would have received. However there is a limit to the maximum family coverage. The benefit does not begin until the insured is disabled for 5 months. The benefit continues up to (1) 2 months after the disability ends. (3) the insured reaches 65 years of age when he becomes entitled to receive retirement benefits. or till the insured reaches an age of 65 years or till he dies. Hence approximately the benefits start after 6 months. workers who are under age 65 and who have paid a specified amount of Social Security Tax for a prescribed number of quarter-year periods are eligible to receive Social Security Disability Income (SSDI). Health & Annuities Dated: 26th Feb. Group Health Insurance Policy Group Medical Expense Policy Group Disability Income Policy Page 91 of 110 Principles of Insurance: Life. The disability plan might also provide dependent benefits. The benefit begins after a short waiting period if the absence from work is result due to an accident or sickness or pregnancy. The amount of the benefit depends on the worker’s predisability wage and his contribution to the plan. In this case the private plans are the first payor. The plan is financed by compulsory contribution of the employee and the employer. For this the disability is described as a person’s inability to work because of a physical or mental sickness or injury that have lasted or expected to last at least for one year or might lead to death of the insured.S. The employer can reduce his contribution by getting insured through private plans. of weeks in the preceding 52 weeks period. Long-term disability is available from CPP and QPP. Dependent children benefit is also present in these plans. United States: U. (3) be afflicted with severe and prolonged disability. To qualify the worker must (1) have made contribution for a stated period. This is given to all workers who have worked for a specified no. (2) be under 65 years of age.Government-Sponsored Disability Income Programs. The benefit continues the disability is recovered. Severe disability prevents the worker from engaging himself into any gainful occupation and prolonged disability states that the disability is going to last long or might cause the covered worker’s death. CHAPTER 20: TRADITIONAL GROUP HEALTH INSURANCE PLANS Group Health Insurance Policy: It’s a contract between the Insurer & the GPH (group policyholder) that purchased the group insurance coverage. Canada: Short-term income benefits are available under the federal Unemployment Insurance Act. 2003 . 2.S. 2003 . Conversion provision. According to this act the maximum look-back period against “ Pre-existing Conditions” is six months. What are/is the criteria/n that decide/s the eligibility of an insured for the coverage? 1. This Act imposes a no# of requirements on employer sponsored group health insurance plans. It was enacted by the U. 3. 2. What does the Group Disability Income IP specify? 1. a pre-existing condition is defined to be a condition for which an individual receives medical cares during the three months immediately prior to the effective date of his/her coverage. health insurance companies & health maintenance organizations. The insured has not received treatment for that condition for 3 consecutive months Or 2. What are the extra provisions included only in the Group Health Insurance Policies & not in The Group Life Insurance Policies? There are 4 such provisions & they are: 1. Important points to remember 1) Group Medical Expense Policies (GMEP) provide an option to cover employees’ dependents. The type of medical expenses to be covered. Health & Annuities Dated: 26th Feb. 3. 2) Group Disability Income Policies (GDIP) do not provide the option at all. Congress in ’96. This provision states that the benefits are not payable for pre-existing conditions until the insured has been covered under the policy for a specified length of time. The coinsurance features. 4. What is HIPPA? HIPPA stands for Health Insurance Portability and Accountability Act. But for this the employee cum insured has to bear the additional premium for the dependent(s). Pre-existing conditions provision. The method of determining the amount of the disability income benefit. 3. 4. 2. Coordination of benefits provision. Physical examination provision.What does the Group Medical Expense IP specify? 1. The insured has been covered under the policy for 12 consecutive months. The elimination period. The maximum benefit period. The benefit maximums (if any). The deductible amount. 1) Pre-Existing Conditions Provision: In Group Policies. Page 92 of 110 Principles of Insurance: Life. In most states in the U. Disadvantages of Conversion from GMEP to IMEP: 1. who is covered under more than one GMEP. require to include this provision for GMEP. What is Allowable Expense? This is the reasonable & customary expense that the insured incurred & that is covered under at least one of the insured GMEP. How is it taken care of? By defining one Plan as the Primary & the other as the Secondary. Under this type of a COB. 2. are eligible for coverage under their own employers’ group policy & their spouses’ group policy. along with the description of the benefit amounts the primary plan paid. 2. this is not a mandatory provision to be included in GMEP in Canada 3) Coordination of Benefits (COB) Provision: COB is designed to prevent a group-insured. What are the different types of COB Provision? 1. the insured could receive full benefits from both the policies & consequently would profit from an illness or injury. For instance.2) Conversion Provision: This provision grants an insured. The Primary Provider pays the full benefit promised under the plan. and then the insured can claim to the secondary plan. Non-duplication of Benefits.S. 2003 Page 93 of 110 . If benefits payable under such duplicate coverage were not coordinated. The Secondary Provider then determines the amount payable for the claim in accordance with the terms of that plan. For instance. Note here that the Secondary Provider pays the difference between the amount of Allowable Expense & the amount already received from the Primary Plan. spouses. a limited right to purchase an Individual MEP with the presenting the evidence of insurability. from receiving benefit amounts greater than the medical expenses actually incurred. Once the insured receives this benefit. who both work. Health & Annuities Dated: 26th Feb. Principles of Insurance: Life. However. Benefits provided are more restricted. the insured does not pay any portion of the expenses. who is leaving the group. an employee who’s changing his/her job & will be eligible for GMEP from his/her new employer would be considered over-insured if he were also issued an Individual MEP. The right is limited in that the insurer can refuse to issue the individual policy if the coverage results in the insured group member becoming over-insured. Allowable Expenses. Higher premium is charged. (Please go thru the examples. substandard. then the primary payor is the former plan. or declined – will be established on the basis of the group’s morbidity rate. What is Non-duplication of Benefits? It’s a COB provision. The distribution of the males & the females in the group. Funding Mechanisms: The way in which a group insurance plan’s claim costs & administrative expenses are paid is known as the plan’s Funding Mechanism. This provision requires the insured to bear a portion of the of covered medical expenses. The nature of the industry the group members work 2. If an individual is covered by two plans one of which has the COB provision then it becomes the primary payor. then according to “Early Birthday Rule” the primary payor will be the plan of the parent who has the earlier Birthday. If individual is covered as dependant by two plans. had that plan been the primary plan. The age distribution of the group. 4) Physical Examination Provision: This is included in most GDIP & grants the insurer the right to examine the insured. The rate increases as increases the age of the group members. if any. Females experience higher morbidity rates than do males of the same age. Group Health Insurance Underwriting: A group’s risk classification – standard. one in which she acts as the employee and the other in which she acts as the dependant. who has claimed a disability income.379-381]) A few facts about COB: If an individual is covered by two plans. limits the amount payable by the secondary plan to the difference. [Pg No. This provision also allows the insurer to make the disabled undergo medical examinations at regular intervals so that the insurer can verify that the insured is still disabled. What are the factors that decide the expected morbidity rate of a group? 1. Principles of Insurance: Life. Health & Annuities Dated: 26th Feb. 3. such as a child covered by plans of her parents.. by a doctor of the insurer’s choice & at the insurer’s expense. 2003 Page 94 of 110 . if included in a secondary provider’s plan. between the amount paid by the primary plan & the amount that would have been payable by the secondary plan. Minimum Premium Plans Under MPP. Fully Insured Plans – Here the group policyholder makes the monthly premium payments to the Insurance Co and the Insurance Co. Other funding mechanisms fall between those two. the insurer is responsible for paying the claims from its own fund against a very nominal premium from the group policyholder. the group’s claim experience becomes unfavorable. 2003 Page 95 of 110 . to the insurer when the contract terminates. The insurer pays the claims until this fund is exhausted. Thereafter. if any. the insurer will refund some amount to the group policyholder. the group policyholder deposits into a special account funds an amount that is sufficient to pay a stated amount of claims. What are the two main funding mechanisms for Group Insurance Plans? 1. 3. 2. Health & Annuities Dated: 26th Feb. Fully Self Insured Plans – Here the employer takes the complete responsibility for all the claim payments & related expenses. Following three mechanisms are built upon the Fully Insured Plans: Retrospective Rating Arrangements Under this the insurer agrees to charge the group policyholder a lower monthly premium than it would normally charge based upon the group’s prior claim experience. On the other hand. Stop Loss Coverage If a self-insured group experiences several catastrophic medical claims in one year. Following three mechanisms are built upon the Self Insured Plans: Salary Continuation Plan Under this plan. This helps the group policyholder to make use of that amount in its own purpose. RRA usually includes an experience refund feature. the employer provides 100% of the insured employee’s salary on the first day of the employee’s absence due to sickness or injury & continuing that for some specified time. To deal with such situations many employers purchase Stop-Loss Insurance from an Principles of Insurance: Life. bears the responsibility for all claim payments. the Group Policy Holder agrees to pay an additional amount to the insurer if at the end the policy year. This is also known as Traditional Funding Arrangement. But the group policyholder must pay the deferred premiums. which means if the group’s claim experience is favorable. In MPP the premium taxes get considerably reduced. the employer may not have that much fund to cover all such claims. Premium Delay Arrangements This allows the group policyholder to postpone paying monthly group insurance premium for a stated period of time (usually 60 or 90 days) beyond the expiration of the policy’s grace period. There are two types of stop-loss coverage available. 5) Employer retains the money for the premium with it. the employer pays a fee in exchange for the administrative services provided by the insurer or the TPA. 2003 Page 96 of 110 . when the claims exceed a certain dollar amount. Under Aggregate Stop-Loss Coverage the insurer pays when the employer’s total claims exceed a stated dollar amount within a stated period of time (usually 12 months). 3) Avoids paying profit of the insurer. 2) The carrier does not pay the benefits directly to the insured. Health & Annuities Dated: 26th Feb. 2) So avoids insurer’s expense charges. Plan Administration Some self-insuring employers purchase Administrative Service Only (ASO) contracts from any insurance company or a Third Party Administrator (TPA) to deal with the administrative aspects of a group insurance plan. A TPA is an organization other than an insurance company that provides administrative services to the sponsors of Group Benefit Plans. These fees are not subject to state premium taxes. who stands responsible for making the payments to the group insured. Under an ASO contract. Principles of Insurance: Life. self-insured plans are exempted from State Laws providing more freedom to the self-insurance employer in designing the plans.insurance co. It reimburses the employer. are subject to regulation by the federal ERISA. which leads having an improved cash flow & earning interest on that. so that they can transfer their liability to the insurance co. However. Under Individual Stop-Loss Coverage / Specific Stop-Loss Coverage the insurer pays a portion of the each claim that exceeds a stated amount. What are the benefits of Fully Self Insurance to the Fully Insured Plans? 1) No premiums need to be paid any insurer. many selfinsured plans in the US. More importantly. Note: 1) The insurer in Stop-Loss Coverage is known as the Stop-Loss Carrier. 4) Avoids paying commissions to agents. The insurer typically pays the benefits directly to that person or to a medical-care provider on behalf of that person. 2003 Page 97 of 110 . The policy will describe the coverage provided. The policy owner and the insured are usually the same person. Cancelable Policy. and the premium amounts and their due dates. Non-cancelable policy. This is a contract between the insurer and the policy owner. But the applicant of an individual health insurance policy is generally permitted to make choices concerning the following: Benefit levels Renewal provisions Amount of the policy’s deductible (for individual medical expense policies) Combinations of elimination periods and maximum benefit periods (for individual disability income policies) Individual Health Insurance Policy Provisions Many of the provisions for Individual Health Insurance policies are same as with the Group Health Insurance policies.CHAPTER 21: TRADITIONAL INDIVIDUAL HEALTH INSURANCE POLICIES People who are otherwise not eligible for group health insurance coverage generally purchase individual health insurance policies. Optionally renewable policy. The insurer’s right to increase the policy’s premium rate. Traditionally. Canadian insurers and US have used the following 5 general classifications of individual health insurance policies. Guaranteed renewable policy. Conditionally renewable policy. Principles of Insurance: Life. Renewal Provision This provision describes The circumstances under which the insurer has the right to refuse to renew or the right to cancel the coverage. Health & Annuities Dated: 26th Feb. the benefits payable. The number of coverage options that insurers offer to group policyholders is usually not available to individual policy owners. Here we discuss some of the provisions typically included in the Individual Health Insurance policies. Optionally Renewable Policy gives the insurer the right to refuse a policy on certain dates specified in the policy-usually either the policy anniversary date or any premium due date. The age and employment status of the insured are often listed as reasons for possible nonrenewal. In common-law jurisdictions of Canada. Some states in the US do not permit insurers to issue cancelable policies. Health & Annuities Dated: 26th Feb. Insurer is also allowed to add coverage limitations and to increase the premium rate if it does so for an optionally renewable policy. Non-cancelable Policy is guaranteed to be renewable until the insured reaches the limiting age stated in the policy. Guaranteed Renewable Policy means that the insurer must renew the policy-as long as premium payments are made-at least until the insured attains the age limit stated in the policy. the guaranteed premium rate is specified in the policy. In the US. Premium rates for non-cancelable policies are higher than equivalent policies in the other classifications. from which the applicant can choose the one to purchase. A class of policies consists of all policies of a particular type or all policies issued to a particular group of insured. medical expense policies are rarely non-cancelable. The decision must be based on one or more specific reasons stated in the policy. 2003 Page 98 of 110 . most individual medical expense policies are cancelable and most disability income policies are non-cancelable. Mostly this age is 60 or 65. for any reason. In addition. the insurer does not have the right to increase the premium rate for a non-cancelable policy under any circumstances. simply by notifying the policy owner that the policy is cancelled and by refunding any advance premium that has been paid for the policy. HIPAA enacted in 1996 imposes a general requirement that the insurers must renew or continue an individual medical expense insurance policy in force at the option of the policy owner. Conditionally Renewable Policy grants the insurer a limited right to refuse to renew an individual health policy at the end of a premium payment period. Sometimes it could be 70 and there are cases when the policy is a guaranteed renewable policy through the lifetime of the insured. The reasons cannot be related to the insured’s health. Principles of Insurance: Life. individual health insurance policies have several classifications. In the province of Quebec. Disability income policies typically are non-cancelable.Cancelable Policy grants the insurer the right to terminate the policy at any time. the insurer can’t contest the policy’s validity on the ground of material misrepresentations in the application. This states that after the policy has been force for a specified period. Reinstatement Provision States that if certain conditions are met. A pre-existing condition is usually defined in individual health insurance policies as an injury that occurred or a sickness that first appeared or manifested itself within a specified period-usually 2 years-before the policy was issued and that was not disclosed on the application. Most individual disability expense policies contain a incontestability provision which states that after the policy has been force for a specified period. the insurer will reinstate a policy that has lapsed for nonpayment of premiums. 45 days-after receiving the reinstatement application. Pre-Existing Conditions Provision Most individual health insurance policies include a pre-existing conditions provision stating that until the insured has been covered under the policy for a certain period. Coverage under a reinstated policy is limited to accidents that occur after the date of reinstatement and to sicknesses that begin more than 10 days after the date of reinstatement. Health & Annuities Dated: 26th Feb. Insurer has the right to evaluate the reinstatement application and to decline to reinstate the policy on the basis of statements in that application. Incontestability provision Most individual medical expense policies contain a provision entitled time limit on certain defenses.Grace Period Provision Allows the policy owner to pay a renewal premium within a stated grace period following the premium due date. Generally policies with monthly renewal premiums have a 10-day grace period. The length of the grace period varies. then the policy is usually considered to be automatically reinstated. or if the insurer accepts an overdue premium without a reinstatement application. Policies with less frequent renewal premium periods have typically a 31-day grace period. Principles of Insurance: Life. 2003 Page 99 of 110 . The policy owner usually must pay any overdue premiums and must complete a reinstatement application. the insurer will not pay benefits for a pre-existing condition. This does not include a reference to fraudulent misrepresentation. depending on how frequently renewal premiums are payable. This is also known as incontestable clause or incontestability provision. usually 2 or 3 years. If the insurer does not complete the evaluation within a stated number of days-in most states. the insurer can’t use material misrepresentations in the application either to void the policy or to deny a claim unless the misrepresentations were fraudulent. Essentially this is same as that of the incontestability provision in LI policies in USA. usually 2 or 3 years. the insurer has the right to have the insured examined by a doctor of the insurer’s choice. the policy usually requires the insured to notify the insurer of a claim in writing within 30 days from the date the claim arose and to furnish the insurer with proof of loss within 90 days from the date the claim arose. 2 years is the maximum period during which an insurer is permitted to exclude pre-existing conditions from coverage. Change of Occupation Provision This allows the insurer to adjust the policy’s premium rate or the amount of benefits payable under a policy if the policy owner changes his occupation. Physical Examination Provision After the insured submits a claim. This provision states that the benefits payable under the policy will be reduced if the insured is over insured. at the insurer’s expense. Claims Provisions This defines both the insured’s obligation to provide timely notification of loss to the insurer and the insurer’s obligation to make prompt benefit payments to the insured. HIPAA prohibits insurers from including a pre-existing condition in the individual health insurance policy issued to specified individuals. but varies between 1 to 3 years after the claimant provides the insurer with proof of the loss. Policies issued in the US contain similar requirements. the provision permits the insurer to reduce the policy’s premium rate. If the insured changes to a less hazardous occupation. In USA. Health & Annuities Dated: 26th Feb. The insurer is typically permitted to reduce the maximum benefit payment amount payable under the policy if the insured changes to a more hazardous occupation. In most states and throughout Canada. has the ability to verify the validity of disability income claims. can specifically exclude the condition from the policy’s coverage. The insurer. Principles of Insurance: Life. The insurer must pay benefits within 60 days of receipt of proof of loss for a medical expense claim and within 30 days of receipt of proof of loss for a disability income claim. thus. The length of this time period varies from jurisdiction to jurisdiction. Insurers are permitted to specify a shorter exclusion period because a shorter exclusion is more favorable to the insured. In Canada.The insurer has the opportunity to evaluate such a condition and. 2003 Page 100 of 110 . Over insurance provision This is intended to prevent an insured from profiting from a sickness or injury. Legal Actions Provision This provision limits the time during which a claimant who disagrees with the insurer’s claim decision has the right to sue the insurer to collect the amount the claimant believes is owed under the policy. therefore. and habits and lifestyle. 2003 Page 101 of 110 . avocations. Individual Health Insurance Underwriting The underwriter evaluates an application for individual health insurance policy to determine the degree of morbidity risk represented by the proposed insured. An individual’s risk classification and corresponding premium rate correspond to the individual’s occupation class.An over insured person is one who is entitled to receive either More in benefits from his medical expense policies than the actual costs incurred by treatment. Avocations: The individual’s avocations also have a strong bearing on his potential health insurance risk. Age: Morbidity rates generally increase with age. specifies that benefits will not be provided for any loss that results from the condition specified in the rider. Habits and Lifestyle: The person’s habits and lifestyle can expose him to a high degree of risk and accidental injury or illness. Morbidity Factors The primary factors that affect the degree of morbidity risk presented by a proposed insured are the individual’s age. occupation. Sex: Females have a higher morbidity rate than males of the same age. Occupation: The morbidity risk also depends on the applicant’s occupation. Risk Classifications The risk classifications are: Standard risk Substandard risk Declined risk Exclusion rider. sex. A greater income amount during disability than he earns while working. Health: The current health and the individual’s health history are required in determining the morbidity risk. also called the impairment rider. Principles of Insurance: Life. current and past health. Work history: An individual’s work history can also have a bearing on her morbidity risk. Health & Annuities Dated: 26th Feb. work history. UR includes: 1. Utilization management broadens and combines utilization review and case management techniques. Concurrent review: While patient is in hospital. This is a concurrent review step of the whole analysis. 2003 Page 102 of 110 . This might reveal erroneous charges and billing errors. Utilization Review is a process by which a plan evaluates the necessary and quality of a patient’s medical care. Health care coverage Continuum: Traditional Indemnity Plans PPO Gatekeeper PPO Open ended HMO HMO Pure Managed Care plans Principles of Insurance: Life. 2. Health & Annuities Dated: 26th Feb. Retrospective reviews: Same as preadmission but is done after the patient’s release from hospital. Health care providers should be encouraged to deliver the necessary care in a cost-effective way. Eliminate the fact that more frequent visit by patient to doctor means more financial benefit for doctors.CHAPTER 22: MANAGED CARE PLANS Managed Care Plans were created to: 1. UR agents then determines the kind of service needed and makes proper arrangements 2. Case Management Case Management is an extension of UR and is a process by which a plan evaluates not only the medical necessity of care but also alternative treatments or medical care. high quality care in a cost effective manner. Utilization management: Process by which a plan manages an insured’s use of medical services and assures that she receives necessary. Broaden the circle of financial risk to include health care providers. UR staffs monitors the condition 3. Preadmission certification: Insured must contact a UR agent if he wishes to get admitted to hospital. appropriate. Health Maintenance Organizations (HMO) A HMO is a health care financing and delivering system that provides comprehensive health care services for subscribing members (Subscribers) in a particular geographic area. HMOs can be owned or sponsored by many different types of organizations: by national HMO organizations, by commercial insurers, and by medical schools and hospitals. HMOs can be operated as either not-for-profit or for-profit organizations. Characteristics of HMOs 1) Comprehensive Care: HMO subscribers are eligible to receive comprehensive health care services, including impatient and outpatient treatment in a hospital. Unlike traditional indemnity plans, HMO emphasize the practice of preventive care, including routine physical examinations, diagnostic tests, pre-natal and well-baby care, and immunizations. 2) Prepaid Care: In a traditional HMO, subscribers receive comprehensive health care in exchange for the payment of a periodic fixed fee. Most HMOs require the subscriber to pay an additional fee (co-payment) for certain medical services. HMOs shift all or part of the financial risk to the health care providers. 3) Network Providers and Negotiated Fees: HMOs contract with physicians and hospitals to make up a network of health care providers. HMO subscribers must choose their medical care providers from within this network. By Contracting, HMOs achieve advantages like: Can control the quality of the providers Can negotiate fees and thus reduce the cost These are the fee structure arrangements that are used to pay the providers. Capitation: Under this arrangement the providers gets paid PMPM (per member per month) for a subscriber regardless of number of visits. But PMPM may be different for each HMO subscriber Salary: Physicians get a pre-determined salary based on the average salaries of local physicians in the same field. They also receive certain types of performance bonuses or incentive pay. Discounted fee-for-service: HMO pays physicians a certain percentage of their normal fees (like 90%). It is not as widely used as other fee structures. Fee Schedule: The HMO will pay up to a specified maximum fee for each procedure. In this case it is transferring more risk to the service providers. 4) Intensive Use of Managed Care Techniques: HMO requires subscribers to select Primary care physician (PCP) who serves as the first contact with the HMO. If additional care needed, PCP refers the subscriber to specialists within the network. That is why they are often called gatekeepers. Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 103 of 110 Types OF HMOs Open Panel HMO: any physician or provider who meets the HMO’s specific standards can contract with the HMO (2 type) Closed Panel HMO: physicians either must belong to a special group of physicians that has contracted with the HMO or must be employees of the HMO (2 type) Mixed Models: combine characteristics of two or more methods. Open Panel Individual Practice Association (IPA) model: Under this arrangement, HMO enters into a contract with an IPA, which is an association of physicians (independent practitioners) that agrees to provide services. Physicians provide services to their own patients as well as to the HMO subscribers. This model requires less start-up capital and can offer a broad range of specialists. IPA model is generally compensated by ‘capitation’ or ‘discounted fee-for-service’ arrangements. Some HMO requires subscribers to pay co-payment also. But in this case the financial risk rests with an IPA. Direct Contract HMO: HMO contracts directly with the physicians (primary care physicians or specialists), not thru any associations or middleman. Fee structure, financial risk, less start-up capital (own clinic and staff) – same as above Closed Panel Staff Model: Physicians are actually employees of the HMO and generally out of offices in the HMO’s facilities. The staff model HMO may own or contract with hospitals, laboratories, pharmacies, and other organizations to provide nonphysician medical services. Uses ‘Salary’ structures. Financial risks on the HMO, costly to start up but have greater control over physicians so can manage utilization of health care services better than other models. Group Model: Functions same as a staff model, except that the physicians are employees of a physicians’ group practice, rather than employees of the HMO. The physicians in such a group share office space, staff, and medical equipment at a common health center or clinic. Ex: Kaiser Permanentre in the US. If the group HMO contracts with more than a group, then it is called a network model HMO. Pay to the group by ‘capitation’ method, group pays the physician ‘salaries’ based on their performance, expertise and amount of administrative work. Financial risk on the physicians’ group. Preferred Provider Organizations (PPO) Unlike HMO, PPO does not provide health care directly rather it acts as a broker or middleman by contracting between health care providers and health care purchasers (employers, third-party administrations, insurance companies, and unions). PPOs can be organized or sponsored by group of physicians, hospitals, Blue Cross or Blue shield Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 104 of 110 plans, TPAs, or employers. In the US, insurance companies are the dominant sponsors of PPOs. PPOs also use a network of providers but also offer some coverage for members who choose to use the services of non-network or out-of-network providers. Out-of-pocket expense (generally 30%) will be more in case of out-of-network provider selection, only to encourage the subscribers to choose the network provider. PPOs typically compensate health care providers on a fee-for-service basis. As a result, PPOs do not accept the financial risk of providing health care services to insureds but they pass it on to either the insurer or the policyholder. Hybrid Plans Open-ended HMOs or Point of service (POS) Plan: This plan has some features of a traditional HMO and some of a traditional indemnity plan. The subscriber of this plan either uses the HMO network or may choose to use a provider that does not participate in the HMO. The subscriber typically pays higher out-of-pocket expense than under a traditional indemnity plan. But this plan contains financial incentives to encourage subscribers to use network providers. Gatekeeper PPOs: This PPO plan requires plan members to choose PCP (gatekeepers) within the PPO network of physicians. In this case, the out-ofpocket expense will be lower than the usual PPO. Another difference is this plan is the compensation method to the providers. Here PCP is compensated on a capitation basis. Thus gatekeeper PPOs transfer financial risk to providers. CHAPTER 23: REGULATION OF HEALTH INSURANCE Regulation in the United States State Regulation of Health Insurance: NAIC has developed these model laws to regulate the health insurance: Uniform Individual Accident and Sickness Policy Provision Law Group Health Insurance Definition and Group Health Insurance Standard Provisions Model Act Model Newborn Children Bill Group Health Insurance Mandatory Conversion Privilege Model Act Group Coordination of Benefits Regulations and Guidelines Most state regulations for individual health insurance are similar as they are patterned with the NAIC model laws, but state regulations for group health insurance differs widely from state to state as they are not patterned with the NAIC model laws. Principles of Insurance: Life, Health & Annuities Dated: 26th Feb, 2003 Page 105 of 110 treatment of alcoholism and drug addiction.Policy Provisions: Most state insurance laws require including these provisions in the policy: Minimum grace period be included in individual and group policies Incontestable clause in individual and group policies Most states limit the time within which pre-existing conditions can be excluded from coverage (in individual and group policies) Cancellation and renewal provisions (in individual policies) Reinstatement provision (in individual policies). or a discretionary group. Health & Annuities Dated: 26th Feb. Principles of Insurance: Life. NAIC model laws states that the group should be an employer. coverage of certain diagnostic tests such as mammograms. a trust established by an employer or union. 2003 Page 106 of 110 . In order to qualify. coverage of newborn children. an employer may deduct as a business expense any group health insurance premiums it paid on behalf of the employees. The states do not tax to self-funded health insurance. Most state laws also states the eligibility requirements for a group to have a group health insurance policy. Regulation of Alternative Providers: In addition to regulating the insurance industry and traditional health insurance. The insurer can rely solely on its own underwriting requirements to decide the minimum group size if state doesn’t require any minimum number. PPOs. a credit union. The benefits that have been mandated include. among others. a labor union. an HMO must provide certain basic health care services and must meet a number of statutory requirements designed to ensure the financial and operational viability of the plan. Employees also generally are not taxed on premiums paid on their behalf except for disability income benefits. and overinsurance provision in individual policies. the states also regulate HMOs. But these benefits widely vary from state to state. In states. State laws for regulating HMOs are based on the NAIC Model HMO Act. Most states impose a premium tax on insurance premiums received by insurers operating within the state. The states generally do not tax premiums paid to the Blue Cross and Blue Shield and HMOs. an association. and Conversion provision (in group policies) Coordination of Benefit (COB) provision in group policies. Mandated Benefits: Applicable to both group and individual policies. psychologists and podiatrists. Taxation: Health insurers are subject to state. Regulations Unique to Group Health Insurance: About half of the states require a minimum number (usually 5 or 10) under a group policy. a creditor. coverage of services provided by chiropractors. as well as federal. and other alternative health care plans. taxes. 18 month period in case of job termination. surgical. This act prohibits employment discrimination on the basis of race. (Applicable for employees as well as to their wives) Family and Medical Leave Act: An employer having 50 or more employees must comply with this act.Federal Regulation of Health Insurance: Age Discrimination in Employment Act (ADEA): An employer having 20 or more employees must comply with this act. The covered individuals have a specified time within which they can elect to continue. must be eligible for the same health care coverages. to care for a seriously ill family member. The Act also requires that the employers continue to provide group health insurance to workers while they are on family and medical leave. regardless of age. As per this act. Pregnancy Discrimination Act. an employee can take up to 12 weeks of unpaid leave within any 12-month period upon the birth or adoption of a child. only disability income coverage) and insurers Principles of Insurance: Life. all active employees. Retired employees are not protected by the ADEA. A 1978 amendment to this act. As per this act. disability. Upon the occurrence of a qualifying period. ERISA requires group plans to have a written plan document. hospital. childbirth. sex. Health & Annuities Dated: 26th Feb. and to file an annual report with the IRS. Health Insurance Portability and Accountability Act (HIPAA): This act imposes requirements on employer-sponsored group medical expense insurance plans (exception: accident only coverage. This Act protects workers who are age 40 and older from being discriminated against because of their age. The insurer can also add 2 percent of the actual premium as an administrative fee. and older employees cannot be required to pay more for that coverage than younger employer pay. Consolidated Omnibus Budget Reconciliation Act (COBRA): An employer having 20 or more employees must comply with this act. 2003 Page 107 of 110 . and establishes standards of conduct for plan fiduciaries. An employer that sponsor welfare benefit plans (medical. requires employers to treat pregnancy. 36 month period for a dependent child. or national origin. plan administrator must notify the covered individuals of their rights under COBRA. to have a summary plan description. Title VII of the Civil Rights Act of 1964: An employer having 15 or more employees and that are engaged in interstate commerce must comply with this act. unemployment benefits. or while the worker is ill. etc. Employee Retirement Income Security Act (ERISA): The terms of ERISA take precedence over any state laws that regulate employee benefit plans. 36 month period in case of a death or divorce. color. death. religion. COBRA requires that certain persons whose group health coverage would otherwise terminate be allowed to continue the coverage at their own expense for a stated period following a qualifying event. or related medical conditions the same as any other medical conditions.) must comply with this act. HIPAA does not preempt state insurance laws that are more favorable to the insureds. The insurers are exempt from this requirement if the state implements an alternative mechanism by which such eligible individuals may obtain coverage. 2003 Page 108 of 110 . HIPAA prohibits group health benefits plans from establishing eligibility rules for group health coverage based on health status. insured no longer resides or works in the network’s geographic (in case of a network health care plan) or no longer an association member (in case coverage available thru an association). Such policies must provide coverage for at least 48-hour hospital stay following a normal delivery and 96 hours for a cesarean section. fraud or intentional misrepresentation. Mental Health Parity Act: This Act imposes that if the plan is offering the mental health plan then it may not set an annual or lifetime maximum mental benefits limit that is lower than any such limits for medical and surgical benefits. Insurers that offer group health coverages must renew such coverage at the option of the group policyholder. Newborns’ and Mothers’ Health Protection Act of 1996: This law does not require policies to provide benefits for maternity and newborn care but it imposes specific requirements on plan that do provide such benefits. However the insurer can discontinue the coverage in case of nonpayment of premium. medical condition.that issue individual medical expense insurance coverage. and disability. HIPAA requires the guaranteed availability of individual medical expense coverage to certain individuals who have had group medical coverage. And if it does not set a limit on medical benefits may not impose such a limit on mental health benefits. genetic information. Principles of Insurance: Life. These limits are designed to allow group insureds that have a pre-existing condition to change the job without losing coverage for the coverage. Although HIPAA permits insurers to increase the premium rates charged for such renewal charges. Women’s Health and Cancer Rights Act of 1998: According to this act. HIPAA requires a group health benefits plan to provide a special enrollment period for specified individuals who declined the coverage first time. Regulation of Group Medical Expense Policies: HIPAA imposes a number of requirements on group medical plans including indemnity plans and managed care plans: HIPAA places limits on the pre-existing condition exclusion. Regulation of individual Medical Expense Policies: HIPAA imposes that insurers must renew or continue an individual policy in force at the option of the policyowner. complying with statutory requirements. Health & Annuities Dated: 26th Feb. The maximum look-back period under HIPPA for pre-existing condition is six months. claims experience. insureds who receive benefits in connection with a mastectomy and who elect to have breast reconstruction following the mastectomy are entitled to receive benefits for the reconstruction. Plan benefits must be portable. and dentists. the employer’s contributions are not considered taxable income to the employee. Taxation: In most cases. In order to qualify for registration. Principles of Insurance: Life. Regulation in the Canada Federal Regulation of Health Insurance: The federal Canada health Act establishes the following criteria that provincial hospital and medical expense plans must meet in order to qualify for federal financial assistance: The plan must be administered on a nonprofit basis by the province or a provincial agency. These requirements include standards concerning plan solvency. The benefit level must be at least 60 percent of insurable earnings. covering specified health services provided by hospitals. The HMO act encouraged the establishment and development of HMOs by providing grants and low-interest loans to start up HMOs that met federal qualification requirements. Health & Annuities Dated: 26th Feb. The plan must be comprehensive. The plan must provide universal coverage (cover all residents of province). if it fails to meet the nondiscrimination requirements of the federal tax laws then the part of the benefits that highly compensated employees receive are considered taxable income to those employees. Medical expense benefits that employees receive are not considered taxable except disability income benefits. In order to encourage the continuance of private disability income plans. Employees must become eligible for benefits after completing no more than three months of continuation service. plan design and benefits. a private plan must meet the following criteria: Benefits must begin no later than the 15th day of disability and must continue for at least 15 weeks. But in case of a self-funded group health plan. 2003 Page 109 of 110 .Health Maintenance Organization (HMO) Act of 1973: Federally qualified HMOs and employers that have 25 or more employees and that make contributions to an employee health care plan must comply with this act. private disability income plans with Human Resources Development Canada. The plan must provide insured services on a nondiscriminatory basis. and plan administration. the Unemployment Insurance Act allows employers to register qualified. Disability income benefits are not taxable income when received under an individual disability income policy purchased by the insured. medical practitioners. Coordination of Benefits (COB) Guidelines: to ensure that the COB provisions included in group health insurance policies throughout Canada are consistent. reinstatement provision. The CLHIA group guidelines. In case of a disability benefits.Provincial Regulation of Health Insurance Provincial Insurance Laws: In most respect. Health & Annuities Dated: 26th Feb. for example. grace period provision. CLHIA Guidelines: The CLHIA has issued: Guidelines Governing Individual Accident and Sickness Insurance: addresses matters such as the renewal provision in an individual health insurance policy. Group Life and Group Health Insurance Guidelines: provide a minimum standard for group insurance policies. Otherwise it is non-taxable everywhere. conversion provision. The provincial insurance laws contain requirements relating to several provisions that are typically included in health insurance policies: Incontestability Provision: 2 years for misrepresentation. A number of provisions that insurers typically not required by provincial insurance laws to include in the policies like. Principles of Insurance: Life. Taxation: Province of Quebec treats contributions an employer pays on behalf of an employee under a private health insurance plan as taxable income to the employee. 2003 Page 110 of 110 . the taxable amount part is the one for which the employer (and not the taxpayer) has paid the premium. include a number of provisions designed to protect group members when the policyholder has changed insurers. anytime in case of a fraudulent misrepresentation Pre-existing Condition: 2 years Continuation of coverage when a group policy terminates How disability income benefits must be paid when an insured person is overinsured. the regulation of health insurance is similar throughout Canada since they have adopted the Uniform Accident and Sickness Insurance Act (Uniform A&S Act) developed by CCIR.