Principles of Insurance: Life, Health and Annuities

Chapter - I Introduction to RISK and INSURANCE 3

RISK ................................................................................................................................................................................ 3
RISK Management ........................................................................................................................................................... 3
Characteristics of Insurable RISK ..................................................................................................................................... 4
Chapter - II The Life and Health Insurance Industry 6
Life and Health insurance products ................................................................................................................................... 7
Other Providers of Life and Health Insurance .................................................................................................................. 8
Chapter - III Meeting Needs for Life and Health Insurance 9
Personal needs met by Life Insurance and Annuity products ............................................................................................. 9
Business needs met by Life Insurance and Annuity products............................................................................................. 9
Life insurance and Annuity products a employee benefits ............................................................................................... 10
Chapter - IV Regulations Of the Insurance Industry 10
Regulation on Business conduct .................................................................................................................................. 11
Chapter - V The Insurance Policy 13
Type of contracts ........................................................................................................................................................ 13
General requirements for a contract ............................................................................................................................ 13
Chapter - VI Pricing Life Insurance 15
Method for funding Life Insurance ................................................................................................................................. 15
Premium Rate Calculations ............................................................................................................................................. 15
Chapter - VII Term Life Insurance 17
Chapter - VIII Permanent Life Insurance and Endowment Insurance 19
Chapter - IX Supplementary Benefits 22
Chapter X Annuities and individual retirement savings plans 23
Annuity Contract ................................................................................................................................................ 23
Classification of Annuities .................................................................................................................................. 23
Types of life annuities ......................................................................................................................................... 24
Regulation of Annuities ...................................................................................................................................... 24
Taxation of Annuities ......................................................................................................................................... 24
Individual retirement plans ................................................................................................................................. 25
Chapter XI POLICY PROVISIONS 26
Chapter - XII Additional Ownership Rights 28
Method of Premium Payment: ........................................................................................................................................ 28
Policy Dividend Options: ............................................................................................................................................ 29
Settlement Options ......................................................................................................................................................... 29
Settlement Agreement..................................................................................................................................................... 30
Supplementary Contract ................................................................................................................................................. 30
Payee .............................................................................................................................................................................. 30
Contingent payee ............................................................................................................................................................ 30
Transfer of Policy Ownership ......................................................................................................................................... 30
Chapter –XIII Additional Policy Ownership Rights 31
Premium Payments ......................................................................................................................................................... 31
Transfer Of Policy Ownership .................................................................................................................................... 32
 Assignment Provision ..................................................................................................................................... 32
 Transfer of Ownership by Endorsement ..................................................................................................... 33
Chapter - XIV Paying Life Insurance Policy Proceeds 37
Chapter XV Principles of Group Insurance 40
Group Insurance Contracts ............................................................................................................................................ 40
Formation of the contract ............................................................................................................................................... 40
Certificates of Insurance ................................................................................................................................................. 40
Group Insurance Underwriting ....................................................................................................................................... 40
Group Underwriting Considerations ............................................................................................................................... 40
 Reasons for the group’s existence ................................................................................................................................... 41
Size of the group ............................................................................................................................................................ 42
Flow of new members into the group ............................................................................................................................. 42
Stability of the group ...................................................................................................................................................... 42
Participation levels .......................................................................................................................................................... 42
Determination of benefit levels ....................................................................................................................................... 42
Activities of the group .................................................................................................................................................... 42
Group Insurance Policy Provisions ................................................................................................................................. 42
Eligibility Requirements .................................................................................................................................................. 43
Termination Provisions................................................................................................................................................... 43
Group Insurance Premiums ............................................................................................................................................ 43
Premium Amounts ......................................................................................................................................................... 44
Premium refunds ............................................................................................................................................................ 44
Group Plan Administration ............................................................................................................................................ 44
Chapter - XVI Group Life Insurance 45
Regulation of Employee Benefits. ................................................................................................................................... 45
State and Provincial Regulation of Insurance: ................................................................................................................. 45
Chapter-XVII Group Pension and Retirement Savings Plans 49
REGULATIONS: .......................................................................................................................................................... 49
Regulations in USA: .................................................................................................................................................... 49
Regulations in Canada: ................................................................................................................................................ 49
Types of Retirement Plans: ............................................................................................................................................. 50
Components of a Retirement Plan : ................................................................................................................................ 52
Chapter – XVIII Medical Expense Coverage 53
Chapter XIX Disability Income coverage 57
Supplemental Benefits......................................................................................................................................... 57
Chapter XX TRADITIONAL GROUP HEALTH INSURANCE PLANS 57
Chapter – XXI Traditional Individual Health Insurance Policies 61
Individual Health Insurance Policies ............................................................................................................................... 61
Individual Health Insurance Policy Provisions ................................................................................................................ 61
Chapter – XXII Managed care Plans 64
This chapter describes Blue Cross and Blue Shield plans, government-sponsored health insurance programs
in the United States and Canada and also workers’ compensation programs in the United States and Canada. ................. 64
Blue Cross and Blue Shield Plans .................................................................................................................................... 64
Social Security Disability Income: 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) benefit payments if they become disabled. ........................................... 65
 Canada .................................................................................................................................................... 65
Workers’ Compensation ..................................................................................................................................... 66
Chapter – XXIII Traditional Alternative Health Insurance Providers 67
Blue Cross and Blue Shield Plans .................................................................................................................................... 67
Workers’ Compensation ..................................................................................................................................... 69
1 Chapter - I Introduction to RISK and
INSURANCE
Purpose of Insurance: To provide protection against the RISK of financial loss.
1.1
1.2 RISK
 Speculative Risk: This can have 3 outcomes, Gain, Loss or No change. For
example Purchase of shares, gambling
 Pure Risk: This involves no possibility of gain. It has only 2 outcomes, Loss or
No Loss. For example House destroyed by Fire
Pure Risk is the only kind of RISK that can be insured.
Insurance is there to compensate against the financial loss, not to provide an
opportunity for financial gains.

1.3 RISK Management

 Avoid RISK: Some time it is not practical to avoid the RISK. Just not to get
injured, you will not leave your office that is far from your home and you need to
take a bus to reach there.
 Controlling RISK: By taking precautions, one can control the potential of LOSS
from the RISK
 Accepting RISK: Take the total responsibility of the loss due to some RISK
 Transferring RISK: Transfer the RISK to another party, generally is exchange
of some fee and this is known as insurance.

When an insurance company agrees to provide a person or a business with insurance

coverage, the insurer issues an insurance policy.
 Policy: A written agreement that contains the terms of the
contractual agreement between an insurance company and the owner of the
policy.
 Policy Benefit: A specified amount of the money that an insurer
agrees to pay when a specified loss occurs
 Premium: A specified amount of money that an insurer receives
in exchange for its promise to provide a policy benefit when a specified loss
occurs.

In general there are 3 types of RISK covered through insurance

 Property Damage RISK: Financial loss due to damage of
automobiles, home, or personal belongings because of accident, theft, fire or
natural disaster.
 Liability RISK: Financial loss that arises from your being held
responsible for harming others or their property.
 Personal RISK: Financial loss associated with death, poor health and
outliving one’s savings
Life & Health insurance companies provide the insurance against personal risks only.
Insurance company uses concept of “RISK Pooling” to manage the RISK of others.
1.4 Characteristics of Insurable RISK
1. The loss must occur by Chance
2. The loss must be definite in terms of time and amount
3. The loss must be significant
4. The loss rate must be predictable
5. The loss must not be catastrophic to the insurer
Any potential loss that does not have above characteristics is generally not
considered to be an insurable RISK
Every insurance policy can be of two types
 Contract of Indemnity: An insurance policy under which the amount of the
policy benefit payable for a covered loss is based on the actual amount of the
resulting financial loss, as determined at the time of the loss. This payable loss
can’t be more than the amount stated in the policy.
 Valued contract: An insurance policy that specifies the amount of the benefit
that will be payable when a covered loss occurs, regardless of the amount of loss
that was incurred.

Some of the terms related to policy

 CLAIM: A request for the payment under the terms of an insurance policy
 FACE AMOUNT: The amount payable under a life insurance policy if the
insured person dies while the policy is in-force.
 LOSS RATE: The rate at which covered losses are expected to occur in specific
group of insured.
 PROBABILITY: The likelihood that given event will occur in the future.
The "Law of Large Numbers" states that typically the more times we observe a
particular event, the more likely it is that our observed results will approximate the
"TRUE" probability that event will occur. By using following 2 tables accurately,
insurance companies can predict the probable loss rates for given group of insured
to come up with the premium rates that would suffice to take care of probable
claims.
 Mortality Tables: Display the rates of mortality, or incidences of death, by
age, among a given group of people. These figures are shown in large groups
100000 or more.
 Morbidity Tables: Display the incidences of sickness or accidents, by age,
among a given group of people.

 REINSURANCE: A type of insurance that one insurance company purchases

from another insurance company in order to transfer risks on insurance policies
that the ceding company issued
 CEDE: To obtain reinsurance on insurance policies by transferring all or
part of the risk to re-insurer.
 RETENTION LIMIT: The maximum amount of insurance that an
insurer is willing to carry at its own risk on any one life.
 RETROCESSION: A transaction in which a re-insurer cedes a portion
of its risk to another re-insurer.
 The insurance company that issued the policy collects the premium and
pays the policy benefits to the proper recipients when due.
 People involved in creation and operation of an insurance policy
 Applicant: The person or business that applies for an insurance policy
 Policy Owner: The person or the business that owns an insurance policy
(In most of the cases applicant is also the policy owner)
 Insured: The person whose life or health is insured under an insurance
policy
 Third-Party policy: When one person purchases insurance on the life of
another person, the policy is known as third-party policy.
 Beneficiary: The person or party, the owner of the policy names to,
receive the policy benefit if, event insured against, occurs.
Insurable interest requirements (When an insurance policy is issued, the policy owner must
have an insurable interest in the risk that is insured)
 Insurable Interest: The likelihood that a policy-owner or beneficiary will suffer
a genuine loss or detriment if, event insured against, occurs.
 Life Insurance Insurable Interest: An insurable interest exists when the policy
owner is likely to benefit if insured continues to live and is likely to suffer some
loss or detriment if the insured dies.
 According to law in most jurisdictions, the insured's spouse, mother, father,
child, grandparent, grandchild, brother and sister are deemed to have an
insurable interest in the life of insured.
 If policy owner or beneficiaries are not related to blood or marriage to the
insured, a financial interest in the continued life of the insured must be
demonstrated in order to satisfy the insurable interest requirements.
 Once policy is in force the presence or absence of an insurable interest is of no
relevance.

Assessing the degree of risk and classifying the risk

 Anti-selection: The tendency of individuals who believe that they have more-
than-average likelihood of loss to seek insurance protection to a greater extent
than do those who believe they have an average or a less-than-average likelihood
of loss.
 Underwriting: The proces of identifying or classifying the degree of risk
represented by a proposed insured. Employees who are responsible for
evaluating the risk are called underwriters.
 Physical Hazards: A physical characteristic that may increase the likelihood of
loss.
 Moral Hazards: The likelihood that a person involved in the insurance
transaction may act dishonestly in that transaction.
 Standard Risk: The risk category that is composed of proposed insured who
have likelihood of loss that is not significantly greater than average.
 Substandard Risk: The risk category that is composed of proposed insured who
have likelihood of loss that is significantly greater than average.
 Declined Risk: The risk category that is composed has proposed insured that
are considered to present a risk that is too great for insurer to cover.
 Preferred Risk: The risk category that is composed has proposed insured that
have likelihood of loss that is significantly less than average.

2 Chapter – II The Life and Health Insurance

Industry
Insurance company as business organization
 A business can be defined as an organization established for the purpose of
producing some good or providing some services that consumer want or need,
typically for a profit.
  Profit is the money or revenue that a business receives for its goods or services
minus the cost.
 Each business is organized in one of the three ways
 Sole Proprietorship: A business that is owned and operated by one
individual
 Partnership: A business that is owned and operated by two or more person.
 Corporation: A legal entity, separate from its owners, that is created by the
authority of a government and continues beyond the death of any or all of its
owners.
 Laws in Canada and US require insurance companies to operate as corporations.
 Insurance companies can be of two types though both of them would be
corporation
 Stock Insurance Company: An insurance company owned by people who
purchase stock in the corporation. People who purchase stocks are known as
stockholders and they get the portion of the operating profit of the
company in the form of stockholder dividends.
 Mutual Insurance Company: An insurance company that is owned by its
policy owners. Operating profits of the company are distributed to the
owners of the company in the form of Policy Dividends.
 Mutualization: Process of converting stock company to mutual company.
 Adv. - No body can buy this kind of company, as there are no stocks
available to sell.
 Disadv. - You need to have certain number of policies even before this
kind of company can be started.
 De-Mutualization: Process of converting mutual company to stock
company.
 Adv. - Can generate funds more easily by selling the stocks
 Organizational Operations
 Home Office (Head office): Often located in the state or province in
which company was incorporated to do business.
 Regional Office: Office that provide many of the same functions as home
office but is located near to the market it serves and generally reports to the
home office.
 Field Office: insurance Company’s local sales office.
 Insurance Companies as financial institutions
 Financial Institution: An organization that channels the funds through an
economy by accepting the surplus funds of savers and supplying that money
to borrowers who pay to use the money.
 Financial Service Industry: Group of financial institutions that help
consumers and business organizations to save, borrow, invest, and otherwise
manage money.

2.1 Life and Health insurance products

 Individual Insurance Policy: Policy that is issued to insure the life or health of
a named person
  Group Insurance Policy: Policy that is issued to an organization that is
purchasing insurance coverage for a specific group of people.
 Life Insurance Policy: Policy under which insurance company promises to pay
a benefit upon the death of the person who is insured.
 Term Life Insurance: provide a death benefit if the insured dies during a
specified period.
 Permanent Life Insurance: Provides life insurance coverage through out
the life of the insured and provides a saving element also.
 Endowment Insurance: Provides a policy benefit that is paid either when
the insured dies or on a stated date if the insured lives until then. It has
provisions of both term (Fixed Time) and permanent (Saving element) life.
 Annuities and investment products: Annuity is a policy under which an
insurance company make a series of periodic payments to a named individual in
exchange for a premium or a series of premiums
 Health Insurance: A type of insurance that provides protection against the risk
of financial loss resulting from the insured person's sickness, accidental injury or
disability.
 Medical Expense Coverage: Provides benefits to pay for the treatment of
an insured's illness and injury.
 Disability income Coverage: provides income replacement benefits to an
insured who is unable to work because of illness or injury.
2.2 Other Providers of Life and Health Insurance
 Fraternal Benefit Societies: An organization to provide social as well as
insurance benefits to its members.
 Members of such societies often share common ethnic, or vocation
background etc.
 One of the legal requirements for such a society that the fraternal must have
a representative form of government - members must elect the office of the
fraternal society.
 Only members of the society and their family members are permitted to get
the insurance from these societies.
 Banks: In certain states and situations Banks are also doing insurance business in
USA.
 Governments: Federal, State and provincial programs provide various health
insurance and retirement income coverage to residents of the USA and Canada.
 Medical care plans: Various types of medical care plans provide health care
benefits to individual or groups.
3 Chapter - III Meeting Needs for Life and
Health Insurance
3.1
3.2 Personal needs met by Life Insurance and Annuity
products
 Final Expense and Estate Planning
 Estate: Consists of all things of value - the assets - owned by the person
when he dies. These assets could be cash, bank & investment accounts, real
estate and stocks etc.
 Estate Plan: A plan that addresses how best to preserve an individual's
assets after the individual dies.
 Life insurance is often an important component of an estate plan
 Dependant's Support
 Education Cost: Parents can purchase term life or permanent life insurance
to help ensure that funds will be available when needed to provide for their
children's education.
 Retirement Income: To meet the need for retirement income, many
individuals purchase annuities during their working years so that annuity
benefits will be payable after retirement.
 Investment Income: Life insurance policies that accumulate savings can
also be used as vehicle for personal savings and investments.

3.3 Business needs met by Life Insurance and Annuity

products
 Business Continuation Insurance: This is an insurance plan
designed to enable a business owner to provide for the business continued
operation if owner or a key person dies.
 Key Person: Any person or employee whose continued participation
in a business is necessary to the success of the business and whose death
would cause a significant financial loss to the business.
 Closely held business: A sole proprietorship, a partnership, or a
corporation that is owned by only a few individuals.
 Buy-sell agreements: An agreement in which one party agrees to
purchase a second party's financial interests is a business following the
second party's death.
 Sole proprietorship buy-sell agreement: owner of sole
proprietorship can ensure the continuation of the business after his death by
entering into a buy-sell agreement with an individual who agrees to purchase
the business from the owner's estate.
 Partnership buy-sell agreement: Partners often plan for the
continuation of the business after the death of a partner by entering into a
buy-sell agreement that sets out the terms on which a deceased partner's
interest in the partnership will be purchased.
  Cross-purchase method: A method of purchasing a deceased
partner's interest in which each partner agrees to purchase a proportionate
share of a deceased partner's interest.
 Entity Method: A method of purchasing a deceased partner's
interest in a partnership in which the partnership agrees to purchase the
interest and to distribute a proportionate share of that ownership interest to
each surviving partner.
 In all the above buy-sell agreements buyers purchase a life insurance
on would be deceased's life and pay premium till he survives.
 Key Person life insurance: Insurance that a business purchases on
the life of a key person.

3.4 Life insurance and Annuity products a employee benefits

 Split-dollar life insurance: An agreement under which a business
provides individual life insurance policies for selected employees and
shares the cost of those with employees.
 Deferred compensation plan: A plan established by an employer to
provide income benefits to an employee at a later date if the employee
does not voluntarily terminate employment before that.

4 Chapter - IV Regulations Of the Insurance

Industry
Primary goals of Insurance regulation are to ensure that insurance companies:
 Remain Solvent: That they are able to meet their debts and to pay policy benefits
when they come due
 Conduct their business fairly and ethically

In USA State governments have primary authority to regulate the insurance industry.

McCarran-Ferguson Act: A law enacted by the US Congress agreeing to allow

states to regulate the insurance industry, as long as state regulation is deemed to be
adequate.

State insurance department: A state administrative agency charged with ensuring

that insurance companies operating within the state comply with all the state
insurance laws and regulations.

National Association of Insurance Commissioners (NAIC): A non-

governmental organization consisting of the commissioners or superintendents of
the various state insurance departments.
 Model Bill: Sample legislation that is developed by the NAIC to encourage
uniformity of state insurance regulation.

Solvency Regulations: To achieve this goal, the states impose minimum

requirements on the amount of the insurer's assets, liabilities, capital, and surplus.
 Assets: All the things of value owned by the company.
 Liabilities: Company's debts and future obligations. Policy Reserve is a
large portion of the company's liability.
 Policy Reserve: The amount, insurer estimates it will need to pay as
policy benefits as they come due.
 Owner's Equity: This represents the difference between company's
assets and the liabilities and represents the owner's financial interest in
the company. (Capital + surplus)
 Capital: is the amount of money invested by the owners in the company.
 Surplus: is the amount by which the company's assets exceed its liability
and capital.
 Basic accounting equation: assets = liabilities + owner's equity

Annual Statement: An accounting report prepared by the insurance company and

filed with the insurance department in each state in which the insurer operates.
NAIC has developed an Annual Statement form that is accepted by all the states.

Domestic Insurer: An insurance company incorporated by the state in which the

company is doing the business.
** If a domestic insurer becomes financially unsound, the insurance commissioner can take steps to
either rehabilitate or liquidate the company. When an out-of-state insurance company becomes
financially unsound, the state insurance commissioner has authority to revoke or suspend the
insurer's license to operate in the state.

Guaranty association: An association formed by the life and health insurance

companies within a state to cover the financial obligation of the member companies
that fail.

4.1.1 Regulation on Business conduct

Marketing of Insurance Product: Persons (Agents) licensed by the state insurance
authorities can sell the life and health insurance. In order to obtain an agent's license
the prospective agent must
 be sponsored for licensing by a licensed insurance company
 complete approved educational course work and/or pass a written
examination
 provide assurance that he is of reputable character.
A state may revoke or suspend an agent's license if he engages in certain unethical
practices that violate the state's insurance laws.
 Policy Forms: Insurance company must file with the state insurance department a
copy of each policy that it is going to use. Some states also impose the readability
requirements on insurance policies.

Federal Regulations:
 The major focus area of the federal regulations is to look into the sales of the
investment-type of products of the insurance companies.
 The federal agency to oversee the security industry is the Securities and Exchange
Commission (SEC). SEC has determined that some insurance products (Variable
life insurance & variable annuities) are investment products as well as life
insurance products.
 A sales agent selling these investment type products must be registered with the
National Association of Securities Dealers (NASD) as a broker/dealer and must also
be licensed by the state as insurance agent.
 Federal laws are also there to take care of the employee benefit plans.

In CANADA both federal government and provincial governments can regulate the
insurance industry.

Insurance Companies Act: The primary federal law that governs insurance
companies operating in Canada.

A federal agency the Office of the Superintendent of Financial Institutions (OSFI), under the
direction of Superintendent of Financial Institutions is responsible for overseeing all
financial institutions in Canada.

Annual Return: An accounting form filed with the OSFI by every insurance
company subject to federal regulation in Canada.

Canadian Life and Health Insurance compensation corporation (CompCorp):

A federally incorporated non-profit company established by the CLHIA to guarantee
payments, up to specified limits, under covered policies of an insolvent member
company.

Canadian Life and Health Insurance Association (CLHIA): An association of

life and health insurance companies operating in Canada.

Provincial Regulation
Office of the Superintendent of Insurance: An administrative agency established
in each Canadian province to enforce the province's insurance laws and regulations.
This operates under the direction Of Superintendent of Insurance.

Canadian Council of Insurance Regulators (CCIR): A collective body that is

formed of the various Canadian provincial superintendents of insurance and that
recommends uniform insurance legislation to the provinces
 Superintendent's Guidelines: A series of recommendations adopted by the CCIR
with the inputs of the insurance industry through CLHIA.

CLHIA Guidelines: A series of recommendations concerning insurance matters

issued by CLHIA

5 Chapter - V The Insurance Policy

Contract: A legally enforceable agreement between two or more parties. An insurance
policy is a contract. Two parties are Insurer and Insured.

5.1.1 Type of contracts

Formal Contract: A contract that is enforceable because the parties to the
contract met certain formalities concerning the form of the agreement.
Informal contract: A contract that is enforceable because the parties to the
contract met requirements concerning the substance of the agreement.
Insurance agreement is an informal contract.

Bilateral Contract: A contract in which both parties made legally

enforceable promises when entering into the contract.
Unilateral Contract: A contract in which only one party made legally
enforceable promises when entering into the contract

Commutative Contract: An agreement under which parties specified in

advance that they would exchange items or services of relatively equal value.
Aleatory Contract: An agreement under which one party provides
something of value to another party in exchange for a conditional promise.
Life and health insurance agreements are of this type.
Conditional Promise: A promise to perform a stated act is a specified,
uncertain event occurred.

Bargaining Contract: An agreement in which both parties, as equal, set the

terms and conditions of the contract.
Contract of Adhesion: A contract that is prepared by one party and that
must be accepted or rejected as a whole by the other party.

5.1.2 General requirements for a contract

 Valid: A valid contract is one that is enforceable at law.
 Void: Something that was never valid. A void contract is one that was
never enforceable at law.
  Voidable: A Voidable contract is one in which one party has the rights
to avoid his obligations under the contract without incurring legal
liability.
 A valid, informal contract can be made if following 4 requirements are
met
1. There must be a manifestation of mutual assent to the general
requirements by each of the parties to the contract
2. The parties to the contract must have contractual capacity
3. The parties to the contract must exchange legally adequate
considerations
4. The contract must be for a lawful purpose

 Mutual Assent: A requirement for the formation of a valid informal

contract in which parties reach a meeting of the minds about the terms of
their agreement
 Contractual Capacity: The legal capacity to make a contract. Every
individual is presumed to have the legal capacity to enter into a valid
contract. However some people do not have full contractual capacity like
minors and mentally insane people. Generally contract entered into by
these people are Voidable.
 Legally adequate consideration
 Consideration: One party's offer or promise of something that will
of value to other party.
 The consideration exchange must be legally adequate
 Initial Premium: The first premium that is paid for an insurance
policy an that is part of the consideration the policy-owner gives for
the policy.
 Renewal premiums: Premiums that are payable after the initial
premium and that are a condition for continuation of the policy and
are not consideration for the policy.
 Lawful Purpose: No contract can be made for a purpose that is illegal
or against the public interest.

The Policy as property

 Property: A bundle of rights a person has with respect to something.
 Real Property: Land and whatever is growing on or affixed to the land.
 Personal Property: All property other than the real property, including
both tangible good and intangible rights.
 Ownership of property: The sum of all of the legal rights that exist in
the property.
 An insurance policy is intangible personal property.
 The legal rights an owner has in the property include the right to use and enjoy the
property and the right to dispose the property.
6 Chapter - VI Pricing Life Insurance
6.1 Method for funding Life Insurance
 Mutual Benefit method (Post death assessment method): A method for
funding life insurance in which money to pay death benefits is collected from
participants in the plan after the death of an insured. This method is developed
by the mutual benefit societies.
 Problem in collecting money from each member
 If membership in society is not growing, funding will become difficult
 As society grows, members become older and death rate becomes higher
 Assessment Method (Pre-death assessment): A method for funding life
insurance in which the estimated annual cost of paying death benefits is shared
equally by participants in the insurance plan.
 Collection Problem was solved by prepayment
 Rest 2 problem remained as it is
 Legal Reserve System: The modern system used to price life insurance in
which the premium for each policy is directly related to the amount of risk the
insurer assumes for that policy. This system is based on following premises
 The death benefit payable under a Life insurance policy should be specified
or calculable in advance of the insured's death.
 Money needed o pay death benefits should be collected in advance so that
the insurer will have funds available to pay claims and expenses as they
occur.
 The premium for each policy is directly related to the amount of risk the
insurer assumes for that policy.

6.2 Premium Rate Calculations

 Actuaries: Insurance company employees who are responsible for performing
the calculations needed to ensure that the company's products are mathematically
sound.
 Premium rates must be
 Adequate: So that company have sufficient money to pay policy benefits
 Equitable: so that each policy owner is charged premiums that reflect the
degree of risk that insurer assumes in providing the coverage
 Factors included while calculating the premium
 Rate of Mortality: Rate at which insured people are expected to die
 Investment earnings: The money that an insurance company earns from its
investment of premium amounts
 Expenses: All the costs involved in issuing insurance policies and operating
an insurance company
 Block of policies: A group of policies issued to insured who are all the same
age, the same sex, and in the same risk classification
Premium rates are often expressed as the rate per thousands
 Mortality Tables
 Expected Mortality: Number of deaths that have been predicted to occur in
a group of people at a given age
 Mortality Experience: The number of deaths that actually occur in a given
group of insured
 Mortality Table: Tables that show how many people in each age group may
be expected to die in a particular year
Currently 1980 CSO (Commissioners Standard Ordinary) mortality table is in use
in US. Based on 1980 CSO we have following assessment for the mortality in US
"As a group females live longer than males, and at any given age mortality rate
for females is lower than that of males. Mortality rate for both male and female
starts high at birth and decrease at the age of 1 and steadily decreases until the
age of 10. After the age of 10 rates for both starts increasing slightly. Mortality
rates for females continue increasing steadily, while those of males begin to climb
sharply during the teenage years, then drop again in the mid-twenties, and begin
to rise again in the early thirties. Finally the mortality rates of both males and
females age 65 or above accelerate sharply with each passing year"
Mortality tables often show mortality rates for 4 class of people
1. Male non smoker
2. Male smoker
3. Female non smoker
4. Female smoker

 Investment Earnings
 Insurance companies can invest premium dollars in many different ways
 Government or corporate bonds
 Mortgages
 Real state
 Stock
 Etc.
 Insurance companies can invest money in any secure investment that
promises good earnings and is not prohibited by government
 Interest: Money that is paid for the use of money
 Simple Interest: Interest paid on the original loan amount
 Compound Interest: Interest paid on the original loan and on accrued
interest
 Investment earnings make insurer to charge less premium for the policies
 Policies that are in-force for longer duration have the substantial effect of
investment earning on their premium rates

 Expenses
 Net Premium: The amount of money an insurer needs in order to provide
benefits for a policy
 Net Premium Rates: Life insurance premium rates that are only based on
Mortality rates and Investment earnings
  Loading: Insurer must also consider its own expenses to run the business
that includes sales and commission costs, taxes, personnel salaries, cost
establishing and maintaining home, sales, and regional offices, record keeping
cost etc. Total amount added to the net premium to cover all of the insurer's
operating costs of doing business is called the LOADING
 Gross Premium: The premium amount that an insurer charges for an
insurance policy, GROSS PREMIUM = NET PREMIUM + LOADING

 Level Premium Pricing System: is a life insurance pricing system that allows
the purchaser to pay the same premium amount each year the policy is in force.
The leveling of premium is possible because premium rates charged for leveling
premium policies are higher than the needed to pay claims and expenses that
occur during the early years. The level premium system allows people to buy long
term insurance policies that protect them at a steady cost even while their risk of
death is increasing over the duration of the policy.
 Policies with Non-guaranteed Elements: Several type of life insurance
policies provide that the policy's price can change after the policy is issued.
Mainly two methods are used
 A portion of the premium is returned in the form of dividend
 Participating Policy: An insurance policy under which the policy owner
shares in the insurance company's divisible surplus. There are also know
as Par-Policy
 Non-Participating Policy: An insurance policy under which the policy
owner does not share in the insurance company's divisible surplus. There
are also know as Non-Par-Policy
 Divisible Surplus: The amount of an insurer's surplus that is available
for distribution to the owners of participating policies
 Policy Dividend: A policy owner's share of an insurer's divisible surplus
 Changing the factors to calculate the premium to be charged next time.
Following factors can change the policy cost
 Favorable mortality experiences
 Favorable investment earnings
 Life Insurance Reserves: Insurance companies maintain several kind of
reserves, some of them are needed by law also
 Conservative mortality table: A mortality table that shows higher mortality
rates than the insurer anticipates for particular block of policies
 Net Amount at Risk: The difference between the face amount of a policy
and the policy reserve at the end of a policy year. Net amount at Risk = Face
Amount - Policy Reserve
 Contingency Reserve: The reserves an insurer maintains to cover unusual
conditions that may occur

7 Chapter - VII Term Life Insurance

Term Life Insurance is one type of insurance product
 Term Life Insurance: Life insurance that provides a death benefit if the insured
dies during a specified period
 Policy Term: The specified period of coverage provided by a term insurance
policy. Policy benefit is payable only if the insured dies during the specified term
and the policy is in force when the insured died
 Policy Anniversary: The anniversary of the date on which an insurance policy
was issued
 Policy Rider: An amendment to an insurance policy that either expands or limits
the benefits payable under the policy. This is also called an endorsement. Riders
are commonly used to provide some type of supplementary benefits or to
increase the amount of death benefit provided by a policy
 Plans of Term Life Insurance Coverage
 Level Term Life Insurance: A term life insurance policy that provides a
death benefit that remains the same over the term of coverage
 Decreasing Term Life Insurance: A term life insurance policy that
provides a death benefit that decreases over the term of coverage
 Mortgage Redemption Insurance: Decreasing term life insurance that
provides a death benefit amount corresponding to the decreasing amount
owed on a mortgage
 Joint mortgage redemption insurance: Mortgage redemption
insurance that insures the lives of two individuals
 Credit Life Insurance: Term life insurance that pays the balance due on
a loan if the borrower dies before the loan in repaid. Money is always
paid to the lender.
 Family Income Coverage: Decreasing term life insurance that provide a
stated monthly income benefit to the insured’s surviving spouse if the
insured dies during the term of coverage
 Increasing Term Life Insurance: A term life insurance policy that provides
a death benefit that increases by some specified amount or percentage at
stated intervals over the term of coverage
 Renewable term insurance: A term life insurance that allows the policy
owner to renew the policy at the end of the policy term
 Renewal Provisions: A term life insurance policy provision that allows
the insurance coverage at the end of specified term with out submitting
evidence of insurability
 Evidence of Insurability: Proof that a person is an insurable risk
 Attained Age: The current age of an insured
 Yearly renewable term insurance: Term life insurance that gives the
policy owner the right to renew the coverage each year, over a specified
period
 Convertible term insurance policy: A term life insurance that gives the
policy owner the right to a permanent plan of insurance
 Conversion Privileges: A policy provision that allows the policy owner
to convert a term insurance policy to a permanent plan of insurance
without providing evidence of insurability of the insured
  Attained Age conversion: The conversion of a term life policy to
permanent life policy at a premium rate that is based on the insured's age
at the time of coverage is converted
 Original Age conversion: The conversion of a term life policy to a
permanent life policy at a premium rate that is based on the insured's age
when the policy was purchased

8 Chapter - VIII Permanent Life Insurance and

Endowment Insurance
Permanent Life and endowment are types of Life Insurance
 Permanent Life Insurance: Insurance that provides coverage through out the
insured's life time and contains a saving potential
 Permanent life insurance products offer lifetime coverage
 Permanent life insurance products provide insurance coverage and contain a
saving element i.e. it builds cash value
 Cash Value: The amount of money, before adjustments for factors such as
policy loans, that the policy owner will receive if a permanent life insurance
policy does not remain in force until the insured's death
 Policy Loan: A loan that is made to a policy owner be an insurer and that is
secured by an insurance policy's cash value
 Paid-up Policy: An insurance policy that requires no further premium
payments
 Traditional Whole Life Insurance: Life insurance that provides lifetime
insurance coverage (constant face amount) at a level premium rate that does
not increase as the insured ages
 Continuous Premium whole life Policy: An insurance policy for which
premiums are payable through out the life of the policy
 Limited Premium whole life Policy: An insurance policy for which
premiums are payable for some stated period that is less than the
insured's lifetime
 Limited by number of years premium is to be paid
 Limited by the maximum age until premium is to be paid
 Single Premium whole life policy: A type of limited payment
policy that requires only one premium payment.
 Modified Whole Life Insurance: Life insurance that provides lifetime insurance
coverage where
1. either premium payment required changes at some time in the life of the
policy
2. or the face amount of coverage changes during the life of the policy
 Modified Premium Whole Life Policy: An insurance policy for which
the policy owner pays a lower than normal premium for a specified initial
period and then pays a higher premium than he would for a similar whole
life policy. The face amount of a modified-premium policy remains level
through out the life of the policy.
  Graded Premium Policy: A whole life insurance policy for which there
are three or more levels of annual premium payment amounts, ultimately
reaching a level premium amount payable for the remaining life of the
policy
 Modified Amount of Coverage: This type of product is based on the
assumption that a policy owner’s need for large amounts of life insurance
is likely to diminish as the insured grows older. A policy with modified
coverage provides that the amount of insurance will decrease by specific
percentage or amounts either when the insured reaches certain ages or at
the end of stated time period.
 Joint Whole Life Insurance: A whole life insurance policy that insures two
lives and that provides for the payment of the proceeds when the first
insured dies
 Last Survivor Life Insurance: (Second to die life insurance) A joint
whole life insurance policy that provides for payments of the proceeds
when both insured have died
 Family policy: A whole life insurance policy that includes and provides term
insurance coverage on the insured's spouse and children
 Monthly Debit Ordinary Insurance: is a whole life insurance that is
marketed under the home service insurance distribution system and paid for
by monthly premiums
 Pre-Need Funeral Insurance: Whole life insurance that provides funds to
pay for the insured's funeral and burial. It is often sold through home service
insurance distribution system

 Universal Life Insurance: A form of permanent life insurance that is

characterized by its flexible premiums, flexible face amounts, and unbundled
pricing factors
 Unbundled pricing factors: Each universal life policy specifies
1. the mortality charges that will be applied periodically
2. the interest rates that will be credited periodically to the policy's cash
value
3. the expense charges that will be applied
 Flexibility Features: A universal life policy gives the policy owner a great
deal of flexibility, both when he purchase the policy and over the life of the
policy.
 Face Amount: At the time of policy purchase owner specifies the face
amount and can choose two option for death benefit
 OPTION A Plan: A universal life policy that provides a level death
benefit, which is always equal to the policy's face amount
 OPTION B Plan: A universal life policy that provides a death
benefit that increases over the life of the policy and that is equal to
the policy's face amount plus the amount of policy's cash value
 After the policy has been in force for a specified minimum period,
policy owner can request an increase or decrease in the policy's face
amount
  Flexible Premium: Owner of the universal life policy is permitted to
determine, within certain limits, how much to pay both for the initial
premium and for each subsequent renewal premium. Certain maximum
limits are imposed on premium by the insurer to ensure that it maintains
the status of the policy as insurance contract and a minimum limit on
initial premium. As long as policy’s cash value is large enough to pay
charges imposed by insurer, policy remains in force
 Policy Operations
1. Insurer receives the premium and it first deduct the amount of any
applicable expense charges
2. Insurer then credits the rest of the amount to policy’s cash value
3. Insurer deducts the mortality charges and credits interest on the
remaining cash value on a periodic basis
4. Policy owner has right to withdraw funds from the policy’s cash value.
Cash value is reduced with applicable withdrawal fee
 Effects of Regulations on Universal life policies
 TEFRA corridor: In order to maintain universal life policy as an
insurance product, in US this specify the difference between a universal
life policy’s face amount and the policy’s cash value. Insurance
companies do not allow a policy owner to pay premium that results in
the cash value’s exceeding the legislatively defined percentage of the face
amount
 Surrender Charges: Expense charges imposed when a policy owner
surrenders a universal life policy
 Adjustable Life Insurance: A form of universal life policy that allows the policy
owner to vary the type of coverage as his insurance needs change
 Indeterminate Premium Life Insurance: A type of non participating whole
life insurance that allows premium rate modifications through out the life of the
policy and guarantees that the premium rates will never exceed a stated
maximum rate.
 Interest Sensitive Whole Life Insurance: A type of indeterminate premium
life insurance that provided that the policy’s cash value may be greater than that
guarantees if changing assumptions warrant an increase
 Variable Life Insurance: A form of whole life insurance under which the death
benefit and the cash value of the policy fluctuate based on the investment
performance of a separate account fund. Variable Life Insurance product are
considered as investment products.
 Separate Account: In US, an investment account maintained separately
from an insurer’s general investment account to help manage the funds
placed in variable life insurance
 Segregated Account: In Canada, an investment account maintained
separately from an insurer’s general investment account to help manage the
funds placed in variable life insurance
 Variable Universal Life Insurance: A type of permanent life insurance that
combines the premium and death benefit flexibility of universal life insurance
with the investment flexibility and risk of variable life insurance
  Endowment Insurance: A type of life insurance that provides a specified
benefit amount whether the insured lives to the end of the term of coverage or
dies during that term
 Maturity Date: The date on which an endowment insurance policy’s face
amount will be paid to the policy owner if the insured is still living
 Endowment policies are not generally considered, for federal income tax
purposes, to be life insurance contracts

9 Chapter - IX Supplementary Benefits

Other than the basic coverage a number of other benefits ca also be added to the various
forms of the life insurance policies. These additional benefits are usually provided by adding
riders to the life insurance policies.
 Supplemental Disability Benefit: Disability benefits are generally classified as a
type of health insurance coverage however some disability benefits can be added
to the coverage provided by the life insurance policy
 Waiver of premium for Disability Benefit: A supplementary life insurance
policy benefit under which the insurer gives up its right to collect renewal
premiums that become due while insured is totally disable
 Normally there is a 3 to 6 months waiting period before the insurer waive
the premium payment after the insured becomes disabled
 Usually this is available during a certain age span only
 Generally once a disability begins, the interval at which premium
payments are due cannot be changed
 Typically disability resulting from following causes are excluded in this
 Intentionally self inflicted injures
 Injuries suffered during the commission of a crime
 Pre-existing conditions and
 Injuries resulting from any act of war while the insured is in military
service
 To receive benefit against this insured needs to claim in writing and must
provide proof
 Waiver of premium for Payor Benefit: A supplementary life insurance
policy benefit under which the insurer gives up its right to collect renewal
premiums if policy owner dies or becomes disable
 Juvenile Insurance Policy: An insurance policy that is issued on the life
of a child but is owned and paid for by an adult
 Disability Income Benefit: A supplementary life insurance policy benefit
that provide a monthly income benefit to a policyowner-insured who
becomes totally disabled
10 Chapter X Annuities and individual retirement
savings plans
Annuity
A contract under which the insurer promises to make a series of periodic payments
in exchange for a premium or a series of premiums.

10.1.1.1.1 Annuity Contract

 Contract holder – person who applied for and purchased an individual contract.
 Insuring party – The Insurance Company
A sum of money(principal) invested for a certain period of time at a stated rate of interest
can be paid out in installments over a stated period of time.

10.1.1.1.2 Classification of Annuities

 How the annuity was purchased

 Single premium annuity which is purchased by payment of a single , lump
sum premium
 Periodic level premium annuity for which the contract-holder pays equal
regular premiums
 Flexible premium annuity which the contract-holder pays periodic payments
that vary between a set of minimum and maximum amount
 How benefits are paid
 Annuity period like annually or semiannually etc
 When benefit payments begin
 Maturity date – the date on which an insurer begins to pay periodic benefits
under an annuity
 Immediate annuities – Under which the benefit payments are scheduled to
begin one annuity period after the annuity is purchased.
 Deferred Annuities – under which benefits are scheduled to begin more than
one annuity period after the date on which the annuity was purchased.
 Accumulation value – The net amount paid for a deferred annuity plus
interest earned minus any withdrawal.
 Withdrawal provision – A provision granting the owner the right to withdraw
part/all of the portion of the annuity’s accumulated value
 Withdrawal charge – charge paid for the withdrawal.
 Cash surrender value – The charge that a contract-holder will receive if the
deferred annuity plan is surrendered.
 Surrender charge – A charge imposed if the contract holder surrenders the
deferred annuity.
 Survivor benefit – Benefit provided by most deferred annuities where the
accumulated value of the policy is given to the beneficiary if the contract
holder dies when the policy is in force.
  Payout option provision – A provision that lists and describes all of the
payment options available to the contract holder.
 When benefit payments end
 Life annuity – One which provides periodic benefit for at least the lifetime of
the holder.
 Annuity certain – AN annuity that is payable for a certain stated period of
time
 Temporary life annuity – One that provides periodic benefit payments until
the end of the contract holder.
 Number of annuitants
 Joint and survivor annuity – one that provides a series of payments to two or
more individuals until all of them die.
 Whether Annuity values are Guaranteed or variable
 Fixed benefit annuities – Under which the insurer guarantees to pay at least a
specified monthly benefit amount for each dollar applied.
 Variable annuities – Under which the policy’s accumulated value and the
monthly annuity benefit payments fluctuate with the performance of a
separate account.
 Accumulation units- ownership shares in a separate investment account
during the accumulation period of a variable deferred annuity.

 Annuity units – Ownership shares in a variable annuity’s separate accounts

during the annuity’s payout period.

10.1.1.1.2.1 Mortality Factor

Annual mortality tables- discussed in pervious chapters

10.1.1.1.3 Types of life annuities

 Straight life annuity – One that provides periodic payments as long as the
annuitant lives
 Life income annuity with period certain –Same as the above but wt a fixed time
frame of payout.
 Life income with refund annuity – Also known as refund annuity. This provides
benefits throughout the annuitant’s lifetime and guarantees total benefit
payments of at least the purchase price of the annuity.
 Cash refund annuity – Under which the refund is paid as a lump sum

10.1.1.1.4 Regulation of Annuities

In the US it falls under the SEC whereas in Canada it falls under the NASD.

10.1.1.1.5 Taxation of Annuities

 Each annuity plan is said to be considered of two parts namely
One portion is for the return of the principal
 The remainder id taxable income.

10.1.1.1.6 Individual retirement plans

In the USA
 Individual retirement plans - One that meets the requirements for
favorable federal tax treatment.
 Keogh plan – A qualified individual retirement plan account available to
self-employed individuals.

IN Canada
 RRSP(Registered Retirement Savings Plan) – In Canada this can be made
by any gainfully employed individual
11 Chapter XI POLICY PROVISIONS

 Regulation of Policy Provision:

 Uniform Life Insurance Act: The Uniform Life insurance Act is a model law adopted by
the Canadian Council of Insurance Regulators (CCIR) to regulate life insurance policies,
including annuity policies

 Standard Policy Provisions: The provision we describe relate to the following aspects of the life
insurance or annuity policy:
 The element that constitute the entire contract between the parties
 The incontestability of a life insurance contract after it has been in force for a stated
period
 The grace period the insurance company provides for the payment of renewal
premium
 The non forfeiture benefits that are available to the owner of a policy that builds a
cash value
 The policy loans and policy withdrawal privileges that may be available to the owner
of a policy that builds a cash value
 The policy owner’s right to reinstate a life insurance policy that has lapsed
 The adjustment methods the insurer will use to correct a misstatement of age or sex
 The manner in which the owner of a participating policy may use policy dividends
 The settlement option or payout options that the insurance company offers for the
payment of the policy proceeds

 Entire Contract:
 Entire contract provision is a provision contained in both life insurance and annuity policies
to define the documents that constitute the entire contract between the insurance company
and the policy owner or contract holder .This provision address two matters:
1. List the documents that constitute the contract
2. It states that only certain insurance company representatives can change
any of the policy’s term and that any such changes must be agreed to in
writing by the policy owner before those changes are effective

 Closed Contract: A policy that includes an entire contract provision is called Open Contract.

 Open Contract: Life Insurance and annuity policies issued by fraternal insurers are called
Open Contract.
 Incontestability Provision:

 Incontestability Provision: It describe the limits placed on the insurer’s right to contest the
contractor’s validity. The nature of this limitation of the insurer’s right to contest the
contractor’s validity depends whether the contract is a Life Insurance or an annuity contract.
 Warranty Statements: A warranty is the statement made by a contracting party that will
invalidate the contract if the statement is not literally true.
 Representation Statements: A representation is the statement made by a contracting party that
will invalidate the contract if the statement is not substantially true.
 Misrepresentation: A false or misleading statement in an application for insurance is known as a
Misrepresentation.
 Material Misrepresentation: A misrepresentation that is relevant to the insurance company’s
evaluation of the proposed insured is called a material misrepresentation
 Fraudulent Misrepresentation: A misrepresentation that was made with the intent to induce
the other party to enter into contract and that did induce the innocent part to enter into the
contract is known as Fraudulent Misrepresentation.

 Annuity Policies:
 In the Annuity, the applicant does not provide the insurance company with information about
insurability. The incontestability provision in an annuity policies states that once the contract
become effective, the insurer may not contest the validity of the contract.
 Grace Period:
 The Grace Period is a specified length of time within which a renewal premium that is due may
be paid without penalty. If the renewal premium is not paid by the end of the grace period, the
policy is said to be lapse.

 Non forfeiture Benefits:

 Non-forfeiture Benefits are the benefits available to the owner of a life insurance policy that
builds the cash value. In permanent life insurance policy insurance protection is provided and
cash value is build so that if policy owner stops paying the renewable premium, the policy
lapses for nonpayment of the premium, but the policy owner has a right to exercise one of the
non forfeiture options contained in the policy.
 Cash Surrender Value: The Cash Surrender Value non-forfeiture option states that policy
owner who discontinues premium payment can elect to surrender the policy and receive the
policy’s cash surrender value.
 Continued Insurance Coverage: Many policies that built cash value provide the insured with
the option of discontinuing premium payments and continuing insurance coverage as either
reduced paid-up insurance or extended term insurance.
 Automatic non-forfeiture: This benefit is a specific non-forfeiture benefit that become
effective automatically when the renewable premium is not paid by the end of the grace period
and the insured have not selected for any other non forfeiture option.

 Automatic premium loan: This provision states that the insurer will automatically pay the
overdue premium for the policy owner by making the loan against the policy cash value as long
as the cash value equals or exceed the amount of premium due.
  Policy Loans And Policy Withdrawal:
 Policy Loan Provision: It grants the owner of a life insurance or annuity policy the right to
take a loan for an amount that does not exceed the policy’s net cash value less one year interest
on the loan.
 Policy Withdrawal Provision: This provision is often called partial surrender provision,
permits the policy owner to reduce the amount in the policy’s cash value by withdrawing up to
that amount in cash.

 Reinstatement:
 Reinstatement is the process by which a life insurance company puts back into
force a life insurance policy that has either
1. Been terminated because of nonpayment of renewable premium.
2. Been continued under an extended term or reduced paid-up insurance option.
The reinstatement provision describe the conditions that the policy owner must
meet in order to reinstate a policy.

 Misstatement of age and sex:

 This provision describe the action the insurer will take to adjust the amount of the policy
benefit in the event that the age or the sex of the insured is misstated and the misstatement
resulted in an incorrect premium amount for the amount of the premium purchased.

 Policy Dividends:
 Participating life insurance and annuity policies include a provision that
describes the payment of the policy dividends. The provision gives the policy owner the right
to choose from among several dividend payout options.
 Settlement Option:
 Settlement Option ( payout option provision ) : Such
provision grant a policy owner or beneficiary the right to decide how the policy benefits will be
paid.

12 Chapter - XII Additional Ownership Rights

12.1
This chapter describes the policy owner’s rights with respect to premium payments, policy
dividends and settlement options.
Premium Payment Mode: A policy’s premium payment mode is the frequency at which
renewal premiums are payable. Most insurers offer to accept renewal premiums for
individual life insurance policies on an annual, semiannual, quarterly, or monthly basis.
12.2
12.3 Method of Premium Payment:
Policy owner do not pay renewal premium to a sales agent of the insurer because these
agents generally authorized to accept only initial premiums. Home service agents generally
are authorized to accept renewal premium payments.
 Payment by Mail: A policy owner who chooses to pay renewal premiums by
mail receives a premium notice from the insurance company before each
 premium due date. In most cases, the policy owner returns a portion of the
notice along with the premium payment.
 Automatic Payment Technique:
 Preauthorized check (PAC) system: The policy owner authorizes the
insurance company to generate checks against the policy owner’s checking or
savings account.
 Electronic Funds Transfer (EFT) method: Policy owners authorize their
banks to pay premiums automatically on premium due dates.
 Payroll deduction Method: The employer deducts insurance premiums directly
from an employee’s paycheck.
12.3.1 Policy Dividend Options:
The owner of a participating life insurance policy may receive policy dividends in a number
of different ways, called dividend options.
 Automatic Dividend Option: Each participating life insurance policy also
specifies this option, this is the dividend option insurer will apply if the policy
owner for some reason does not choose an option. Most policies specify the
paid-up additional insurance option as the automatic dividend option.
 Cash Dividend Option: The insurance company sends s the owner of the
policy a check in the amount of the policy dividend that was declared.
 Premium Reduction Option: The insurer applies policy dividends towards the
payment of renewal premiums.
 Accumulation of Interest Option: Policy dividends are left on deposit with the
insurer to accumulate at interest.
 Paid-Up Additional Insurance Option: The insurer uses any declared policy
dividend as a net single premium to purchase paid-up additional insurance on the
insured’ life; the paid-up additional insurance 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.
 Additional Term Insurance Option: The insurer uses each policy dividend as a
net single premium to purchase one-year term insurance on the insured’s life.
12.4 Settlement Options
In addition to lump-sum settlements of policy proceeds, there are various methods of
receiving the proceeds of a life insurance policy.
 Interest Option: The insurance company invests the policy proceeds and
periodically pays interest on those proceeds to the payee.
 Fixed Period Option: The insurance company agrees to pay policy proceeds in
installments of equal amounts to the payee for a specified period of time.
 Fixed-Amount Option: The insurance company pays equal installments of a stated
amount until the policy proceeds, plus the interest earned, are exhausted.
 Life Income Option: The insurance company agrees to use the policy proceeds as a
net single premium to purchase a life annuity for the beneficiary. A Life Annuity is
an annuity that provides periodic benefits payments for at least the lifetime of a
named individual.
 Straight Life Income Option
 Life Income with period certain
 Refund Life Income Option
  Joint and survivorship Life Income Option
12.5 Settlement Agreement
When the policy owner selects an optional mode of settlement while the policy is in force,
the terms of the settlement usually are incorporated in to a contractual agreement that
governs the rights and obligations of the parties after the insured’s death.
12.6 Supplementary Contract
If the policy owner has not chosen a settlement mode when the policy proceeds become
payable, then the beneficiary has the right to choose a settlement option. This is type of
contract between insurance company and policy beneficiary.
12.7 Payee
The person or party who is to receive the policy proceeds in accordance with the terms of a
settlement agreement is referred to as the payee.
12.8 Contingent payee
The person or party who elects an optional mode of settlement –either the policy owner or
beneficiary-also has the right to designate a successor payee, who will receive any proceeds
still payable at the time of the payee’s death.

12.9 Transfer of Policy Ownership

If the owner of a life insurance policy has contractual capacity, then she has the right to
transfer ownership of some or all of her rights in the policy.
 Transfer of ownership by Assignment: An assignment is an agreement under
which one party transfers some or all of his ownership rights in a particular property
to another party.
 Absolute Assignment: An absolute assignment of life insurance policy is an
assignment under which a policy owner transfers all of his policy ownership
rights to the assignee.
 Collateral Assignment: A collateral assignment of a life insurance policy is a
temporary assignment of the monetary value of a life insurance policy as
collateral –or security- for a loan.
 Transfer of ownership by Endorsement: Policy ownership is completely
transferred without requiring the policy owner to enter in to a separate assignment
agreement. This method is commonly used when a policy is given as a gift.
13 Chapter –XIII Additional Policy Ownership Rights
13.1
In addition to the right to name the beneficiary, policy owner has a number of other
valuable ownership right with respects to premium payments, policy dividends, and
settlement options.
13.2
13.3 Premium Payments

 Mode of Premium Payment: A policy’s premium payment mode is the

frequency at which renewal premiums are payable. The mode of premium
payment affects the total amount of premium that a policy-owner must pay in a
given year. When a policy-owner chooses a premium payment mode that is more
frequent than annual, the insurer usually adds a charge to the policy’s gross
annual premium. This charge compensates the insurer for 1) the investment
income that it will lose if the policy’s annual premium is not paid at the
beginning of the policy year and 2) the expenses it will incur in processing the
additional premium payments.
 Method of Premium Payment: Renewal premiums for policies may be paid in
person, policy-owners, usually pay premiums either by mail, by automatic
payments techniques, or through payroll deduction.
Payment by Mail: A policy owner may pay premium by mail,
Insurance company gives a notice before each premium due date and than policy
owner returns a portion of the notice along with the premium payment.
Automatic Payment Techniques : Under Preauthorized check (PAC) system,
the policy owner authorizes the insurance company to generate checks against
the policy-owner’s checking and savings account.
Some insurance companies allow policy-owners to authorize their banks to pay
premiums automatically on premium due dates using the electronics fund
transfer (EFT) method.
Third automatic payment technique - Payroll deduction method gives the
employer, right to deduct the insurance premium directly from an employee’s
paycheck.

Policy Dividend Options

Owner of a participating life insurance policy may receive policy dividends in a

number of different ways, called dividend options. The applicant for a
participating policy usually selects a dividend option when she completes the
policy application. Over the life of a participating policy, the policy-owner may
change the dividend option at any time through a change to the additional term
insurance option is subject to certain restrictions.
 Cash Dividend Option: insurance company sends the owner of the policy a
check in the amount of the policy dividend that was declared.
  Premium Reduction Option: insurer applies policy dividends towards the
payment of renewal option.
 Accumulation at Interest Option: Policy dividends are left on deposit with the
insurer to accumulate at interest. Policy-owner has the right to withdraw part or
all of these dividends and accumulated interest at any time.
 Paid-up Additional Insurance Option: Insurer uses the any declared policy
dividend as a net single premium to purchase paid up additional insurance on the
insured’s life: the paid up additional insurance 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.
 Additional Term Insurance Rider: the insurer uses policy dividends as a net
single premium to purchase one-year term insurance on the insured’s life. Often
called fifth dividend option.

Settlement Options

Grants a policy-owner or a beneficiary several choices as to how the insurance

company will distribute the proceeds of a life insurance policy.
 Settlement Agreement: When the policy-owner selects an optional mode of
settlement while the policy is in force, the agreement called the settlement
Contract.
 Supplementary contract: When the beneficiary selects a settlement mode, the
insurance company and the beneficiary usually enter into a settlement agreement,
called supplementary contract.
 Interest Option: Insurance company invests the policy proceeds and
periodically pays interest on these proceeds to the payee.
 Fixed Period Option: Insurance company agrees to pay equal installments to
the payee for a specified period of time.
 Fixed Amount Option: Insurance company pays equal installments of a stated
amount until the policy proceeds, plus the interest earned. are exhausted.
 Life Income Option: Insurance company agrees to pay the policy proceeds in
periodic installments over the payee’s lifetime.

13.3.1 Transfer Of Policy Ownership

 Transfer of Ownership by Assignment:
An assignment is an agreement under which one party transfers some or all of
his ownership rights in a particular property to another party. The owner of the
property who makes the assignment is known as the assignor; the party to whom
the property rights are transferred is known as the assignee.
 Assignment Provision
The Assignment provision describes the roles of the insurer and the policy-owner
when the policy is assigned.
An assignment is an agreement between the assignee and the assignor. The
insurance company is not a party to the agreement. Therefore, the policy’s
 assignment provision states that the company is not responsible for the validity of
any assignment.

Types of Assignment

 Absolute Assignment: An absolute assignment of a life insurance or annuity

policy is an assignment under which a policy-owner transfer all of his policy
ownership rights to the assignee. The policy-owner – assignor has no further
rights under the contract and the assignee becomes the policy-owner.
 Collateral Assignment: A collateral assignment of a life insurance or an annuity
policy is a temporary assignment of the monetary value of a life insurance or an
annuity policy as collateral or security for a loan.

Collateral assignment differs from an absolute assignment in three general

respects:
1. The collateral assignee’s rights are limited to those ownership rights that are
directly concern the monetary value of the policy.
2. The collateral assignee has a vested right to the policy’s monetary values, but that
right is limited.
3. The collateral assignee’s rights to the policy values are temporary.

 Transfer of Ownership by Endorsement

Many life insurance and annuity policies issued in United States specify a simple, direct
method of transferring all the policy’s ownership rights. This method is called the
endorsement method and is a complete transfer of ownership.
Chapter - XIV PRINCIPLES OF GROUP INSURANCE

Group Insurance Contracts

 insurance plan to insure a number of people under a single insurance contract called a
master group insurance contract
 the party that enters the insurance contract is referred as Policyholder rather than
Policyowner.
 in US individuals are referred as Group Insured's
 in Canada its referred as Group Life Insured
 if insured group members are not required to contribute in the premium :
Noncontributory Plan
 otherwise if contributing a part or all of premium then : Contributory Plan.

Formation of the Contract

In order to form a valid group insurance contract, the policyholder and the insurer must
meet the following requirements:

 mutually agree to the contract's terms

 both have contractual capability
 exchange legally adequate consideration
 form the contractual for a lawful purpose

Certificate of Insurance:

 the coverage the group insurance provides

 the group insured's rights under the contract

13.3.1.1.1.1.1.1 Group Insurance Underwriting

It determines whether a group of people presents an average risk and whether the group's
loss experience will be predictable and acceptable to the insurer.

Reason for group's existence:

 Single-Employer Groups
 Labor Union Groups
 Multiple-Employer Groups
 Association Groups
 Debtor-Creditor Groups
 Credit Union Groups
 Discretionary Groups

Size
Initially eligibility criteria was at least 50 members in a group but now it can go even up to 10
members in a group.
If members < 15 : each member has to submit satisfactory evidence of insurability

Flow of New Members into the Group

Needed for:
 to replace those who leave the group
 to keep the age distribution of the group stable

Stability of Group and Participation Level

If not stable then the cost of administering the plan would become very high.
100 percent participation is not required in contributory plans (at least 75 %)

Group Insurance Policy Provisions

Eligibility Requirements

An actively-at-work provision requires that in order to be eligible for coverage and

employee must be actively at work.

A Probationary Period is the length of time that a new group member must wait before
becoming eligible to enroll in the group ins. plan.
the eligibility period usually extends for 31 days and is the time during which a new group
member may first enroll for group insurance coverage.

Grace Period Provision

Group life and health insurance policies typically contain a 31-day grace period provision
and if premium is not paid within the grace period the policy is terminated.

Incontestability Provision

It limits the period during which an insurance comp may use statements in the group
insurance application to contest the validity of the master group insurance contract.

Termination Provision

A group members coverage terminates when the master group policy terminates:

Termination of the group Insurance Policy

 it may terminate at any time by notifying the insurer in writing that it has decided to
terminate the policy.
Termination of a group Insured's Coverage
 it may terminate if insured ceases to be a member of a class of persons eligible for
coverage
 or terminates her employment or group membership
 or fails to make a required contribution to the premium

Group Insurance Premiums

Premium Rates : decided on the basis that will be adequate to pay the group's claims and will
be equitable to the policyholder

Manual Rating : is a method insurers use to calculate group insurance premium without
considering the particular group's prior claims and expense experience.

Experience Rating : is a method of setting group insurance premium rates under which the
insurer considers the particular group's prior claims and expense
experience.

Blending Rating : a method that uses a combination of experience rating and manual rating
to set the group's premium rate.

Premium Amounts : are paid monthly in group Insurance plan.

Premium Refunds : These are similar to policy dividends provided for participating
individual life insurance policies.
These are payable to the group policyholder even if the plan is
contributory.

Group Plan Administration

Here number of people can be insured at a cost that is relatively low compared to the cost of
individual insurance. Also the cost of administering one group insurance policy is usually
higher than the cost of administering 50 individual policies.
14 Chapter - XIV Paying Life Insurance Policy
Proceeds
Group Insurance Contracts

 insurance plan to insure a number of people under a single insurance contract called a
master group insurance contract
 the party that enters the insurance contract is referred as Policyholder rather than
Policyowner.
 in US individuals are referred as Group Insured's
 in Canada its referred as Group Life Insured
 if insured group members are not required to contribute in the premium :
Noncontributory Plan
 otherwise if contributing a part or all of premium then : Contributory Plan.

Formation of the Contract

In order to form a valid group insurance contract, the policyholder and the insurer must
meet the following requirements:

 mutually agree to the contract's terms

 both have contractual capability
 exchange legally adequate consideration
 form the contractual for a lawful purpose

Certificate of Insurance:

 the coverage the group insurance provides

 the group insured's rights under the contract

Group Insurance Underwriting

It determines whether a group of people presents an average risk and whether the group's
loss experience will be predictable and acceptable to the insurer.

Reason for group's existence:

 Single-Employer Groups
 Labor Union Groups
 Multiple-Employer Groups
 Association Groups
 Debtor-Creditor Groups
 Credit Union Groups
 Discretionary Groups
Size

Initially eligibility criteria was at least 50 members in a group but now it can go even up to 10
members in a group.
If members < 15 : each member has to submit satisfactory evidence of insurability

Flow of New Members into the Group

Needed for:
 to replace those who leave the group
 to keep the age distribution of the group stable

Stability of Group and Participation Level

If not stable then the cost of administering the plan would become very high.
100 percent participation is not required in contributory plans (at least 75 %)

Group Insurance Policy Provisions

Eligibility Requirements

An actively-at-work provision requires that in order to be eligible for coverage and

employee must be actively at work.

A Probationary Period is the length of time that a new group member must wait before
becoming eligible to enroll in the group ins. plan.
the eligibility period usually extends for 31 days and is the time during which a new group
member may first enroll for group insurance coverage.

Grace Period Provision

Group life and health insurance policies typically contain a 31-day grace period provision
and if premium is not paid within the grace period the policy is terminated.

Incontestability Provision

It limits the period during which an insurance comp may use statements in the group
insurance application to contest the validity of the master group insurance contract.

Termination Provision

A group members coverage terminates when the master group policy terminates:

Termination of the group Insurance Policy

 it may terminate at any time by notifying the insurer in writing that it has decided to
terminate the policy.

Termination of a group Insured's Coverage

 it may terminate if insured ceases to be a member of a class of persons eligible for
coverage
 or terminates her employment or group membership
 or fails to make a required contribution to the premium

Group Insurance Premiums

Premium Rates : decided on the basis that will be adequate to pay the group's claims and will
be equitable to the policyholder

Manual Rating : is a method insurers use to calculate group insurance premium without
considering the particular group's prior claims and expense experience.

Experience Rating : is a method of setting group insurance premium rates under which the
insurer considers the particular group's prior claims and expense
experience.

Blending Rating : a method that uses a combination of experience rating and manual rating
to set the group's premium rate.

Premium Amounts : are paid monthly in group Insurance plan.

Premium Refunds : These are similar to policy dividends provided for participating
individual life insurance policies.
These are payable to the group policyholder even if the plan is
contributory.

Group Plan Administration

Here number of people can be insured at a cost that is relatively low compared to the cost of
individual insurance. Also the cost of administering one group insurance policy is usually
higher than the cost of administering 50 individual policies.
15 Chapter XV Principles of Group Insurance
Employee benefit plan : This is a plan under which an employer provides its employees with
various benefits in addition to their wages.
15.1 Group Insurance Contracts
Master group insurance contract : A group insurance plan that insures a number of people under
a single insurance contract.

Group policyholder : The employer or other party that enters into a group insurance contract
with the insurer.

Group Insureds : The individuals who are covered by a group insurance policy.

Noncontributory Plan : A group insurance plan under which insured group members are not
required to contribute any part of the premium for their coverage.

Contributory Plan : A group insurance plan under which insured group members must
contribute some or all of the premium for their coverage.

15.2 Formation of the contract

In order to form a valid group insurance contract, the policyholder and the insurer
must
a. Mutually agree to the contract’s terms.
b. Both have contractual capacity
c. Exchange legally adequate consideration, and
d. Form the contract for a lawful purpose.

15.3 Certificates of Insurance

A document that describes the coverage provided by a group insurance policy and
that is distributed by the group policyholder to each group insured.

Certificate holder : An insured group member who has received a certificate of

insurance.
15.4 Group Insurance Underwriting
Group Insurance Underwriting focuses on the characteristics of the group and
doesn’t usually require each proposed group insured to provide individual evidence of
insurability. Nevertheless, the goal of group underwriting is the same as the goal of
individual underwriting – to determine whether a group of people presents an average risk
and whether the group’s loss experience will be predictable and acceptable to the insurer.

15.5
15.6
15.7 Group Underwriting Considerations
The group underwriter must consider certain characteristics of a group when
evaluating whether the group is an acceptable risk. These risk characteristics include
 i . The reason for the group’s existence
ii. The size of the group
iii. The flow of new members into the group
iv. The stability of the group
v. The required percentage of eligible group members who must participate in
the plan, how benefit levels will be determined, and
vi. The activities of the group.

15.8 Reasons for the group’s existence

Group underwriting guidelines require that in order for a group to be eligible for
coverage, the group must have been formed for a reason other than to obtain insurance.

Single-employer groups : In this type of insured group, the employer is the group policy holder
and the employees are the insured group members.

Multiple-employer groups : These group consists of the employees of two or more employers
and include negotiated trusteeships(Taft-Hartley groups), Multiple Employer Welfare
Arrangements(MEWAs), and voluntary trade associations.

Labor union groups : These groups consist of the members of a specific labor union;the union
is the policy holder.

Affinity groups : These groups consists of the members of specific organizations. The
organization is the policy holder and usually handles the group’s funds.

Debtor-creditor groups : These groups consist primarily of persons who have borrowed funds
from a lending institution, such as bank. Both life insurance and disability income coverages
are issued to this type of group.

Negotiated trusteeships(Taft-hartley Groups) are formed by one or more employers in the same or
related industries as the result of bargaining agreements with one or more unions. The
employers and unions appoint a trustee, who is the group policyholder.

Multiple Employer Welfare Arrangements(MEWAs) are formed when several small employers
band together and provide group insurance benefits for their employees; in most cases, these
small employers belong to the same or a related industry. The employer appoint a trustee,
who is the group policy holder.

Voluntary trade associations are formed by several employers that are in the same industry and
are members of trade association. The trade association is the group policyholder.
 15.9 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. In general, the larger the group, the more likely that the group will
experience a loss rate that approximates the predicted loss rate.

15.10 Flow of new members into the group

Young, new members are needed (1) to replace those who leave the group and,
consequently, to keep the group size stable and (2) to keep the age distribution of the group
stable.

15.11 Stability of the group

Despite the generally favorable results of changes in group membership, the
insurance company must also be able to expect that the group will remain a group for a
reasonable length of time and that the composition of the group will remain relatively stable.
15.12 Participation levels
Minimum participation requirements are designed to guard against the effects of
antiselection and to avoid discrimination. The specific participation requirement that is
imposed usually depends on whether the group insurance plan is noncontributory or a
contributory plan.
15.13 Determination of benefit levels
The group policyholder typically works with the insurer to establish an equitable and
nondiscriminatory method that will be used to determine the benefit levels provided to the
group insureds. This method of determining benefit levels is then incorporated into the
master group insurance contract.
15.14 Activities of the group
A group is assigned a risk classification - standard, substandard, or declined – based
on the group’s normal activities.
If the group’s activities are not expected to contribute to a greater than the average
loss rate among its members, then the group is classified as a standard risk.
If the group’s activities are expected to lead to a higher than the average loss rate
among its members, then the group is classified as a substandard risk.In this case premium
will be more than the standard risk.
If the group’s normal activities are extremely dangerous, some insurance companies
will decline the group for coverage.

15.15
15.16
15.17 Group Insurance Policy Provisions
Certain provisions are included in every group insurance policy, whether it provides
life or health insurance coverage. These standard policy provisions define which group
members are eligible for group insurance coverage, identify the policy’s grace period,
establish when the policy and a group member’s coverage become incontestable, and govern
when the group insurance policy terminates and when a group insured’s coverage terminates.
 15.18 Eligibility Requirements
Group insurance policies are permitted by law to define eligible employees as those
employees in specified class or those in specified classes. The classes must be defined by
requirements that are related to conditions of employment, such as salary, occupation, or
length of employment .
Provisions in many group insurance policies contain requirements that new group
members must meet in order to be eligible for coverage. They are

Activity at work provision : A group insurance policy provision which requires that an
employee be actively at work on the day his insurance coverage is to take effect in order for
him to be eligible for the coverage.
Probationary period : The length of time that a new group member must wait before
becoming eligible to enroll in the group insurance plan.
Grace period provision : Group life and health insurance policies typically contain a 31-
day grace period provision. The policy remain in force during that period and after that
period it will terminate.
Incontestability: Like individual insurance policies, group insurance policies are required
by state and provincial insurance laws to include an incontestability provision that limits the
period during which an insurance company may use statements in the group insurance
application to contest the validity of the master group insurance contract.

15.19 Termination Provisions

A group members coverage terminates when the master group policy terminates.
However, a group insured’s coverage also may terminate even though the group insurance
policy remains in effect. The following sections describe group insurance policy provisions
that govern (1) when the group insurance policy will terminate and (2) when a group
insured’s coverage will terminate.
Termination of the group insurance policy: According to the term of most insurance
policies, the group policy holder may terminate the policy at any time by notifying the
insurer in writing that it has decided to terminate the policy.
If certain conditions are met, the insurance company also has the right to terminate
the group insurance policy on any premium due date. The terms of the policy state the
conditions that must be met in order for the insurer to terminate the policy.

Termination of a group insured’s coverage : Group insurance policies contain provisions

that describe when a group insured’s coverage terminates. Most group insurance policies
provide that a group insured’s coverage will terminate if the group insured (1) ceases to be
member of a class of persons eligible for coverage, (2) terminates his employment or group
membership, or (3) fails to make a required contribution to the premium.
15.20 Group Insurance Premiums
It describes how the insurance establishes the premium rates to charge for a group’s
coverage, how specific premium amounts are calculated, and how excess premiums can be
refunded.
 Premium Rates : An insurer evaluates each group and establishes a premium rate that
will adequate to pay the group’s claim and will be equitable to the policyholder.
Manual rating: A method of setting group insurance premium rates under which the
insurer uses its own past experience- and sometime the experience of other insurers –to
estimate the group’s expected claims and expense experience.
Experience rating : A method of setting group insurance premium rates under which
the insurer considers the particular group’s past experience.
Blended rating : A method of setting group insurance premium rates under which the
insurer uses a blend of experience rating and manual rating.
15.21 Premium Amounts
Group insurance premiums are typically payable monthly. The insurance company
establishes the premium rate at the beginning of each policy year.
15.22 Premium refunds
At the end of each policy year, a portion of the group insurance premium may be
refunded to the group policy holder. Group policy premium refunds are similar to the policy
dividends provided for participating individual life insurance policy and usually called
dividends.

15.23 Group Plan Administration

The administration of a group insurance plan is primarily a matter of record keeping.
They are of following types:
i. Insurer-administered plan : A group insurance plan for which the insurer
maintains the necessary plan records.
ii. Self-administered plan: A group insurance plan for which the policyholder
maintains the necessary plan records.
16 Chapter - XVI Group Life Insurance
Group Life Insurance: is subject to state and provincial insurance laws and regulations.
Because group life insurance is often provided as an employee benefit in USA & Canada,
group life insurance is also subject to federal, state, and provincial laws that relate to
employer-employee relations.
16.1
16.2 Regulation of Employee Benefits.
State, provincial, and federal legislatures throughout the United States and Canada
have enacted laws designed to ensure that all employees are treated equally in the work place.

In addition to number of U.S federal laws directly regulate group insurance.

 ADEA (Age Discrimination in Employment Act): Protects older workers
from being discriminated against because of their Age. The act prohibits
employers with 20 or more employees from discriminating on the basis of age
individuals who are age 40 and older. Retired workers are not protected by
ADEA.
 ADA (Americans with Disabilities Act): Requires that disabled employees of
certain employers have equal access to the life and health insurance coverage that
are available to other employees.
 ERISA (Employee Retirement Income Security Act): Federal law that
governs welfare benefit plans and employer-sponsored retirement plans.

ERISA requires welfare benefit plans to be established and maintained in

accordance with a plan document. Among other things, this written document
must
- Describe the benefits that are provided by the plan.
- Describe how the plan will be funded.
- Describe the procedure that will be followed to amend the plan.

The written plan document must also name one or more fiduciaries
who are responsible for controlling and managing the operation of the benefit
plans.

 Welfare benefit plan: A Plan or Program that an employer establishes to provide

certain benefits to plan participants and their beneficiaries.
 Fiduciary: A person who holds a person of special trust and confidence.
 Plan administrator: The person who is responsible for ensuring that a welfare
benefit plan complies with ERISA’ s disclosure and reporting requirements.

16.3 State and Provincial Regulation of Insurance:

The states and provinces regulate the contents and operation of group life
insurance polices in much the same way that they regulate individual insurance policies. In
the United States, most states have enacted laws based on the NAIC Group Life Insurance
Model Acct.
 In addition to these provincial insurance laws and regulations, some aspects of group
insurance are governed by the CHILA Group and Group Health insurance guidelines.

Group Life Insurance Policy Provisions:

Many of the provisions are very similar to provisions found-in-individual life

insurance that is typically included in the group life insurance policies. These are
1) Benefit amounts.
2) Beneficiary designation.
3) Conversion.
4) Misstatement of Age.
5) Settlement options.

Benefit Amounts: Every life insurance policy must identify the amount or the method
or the insurer will use to determine amount of each group insured’s life insurance
coverage.
Group life insurance policies typically include a Benefit Schedule that is used to
determine the amount of life insurance provided for each group insured.

 Benefit Schedule: A schedule that is included in group life insurance policy and
that is used to determine the amount of coverage provided for each group
insured.

Beneficiary designation: Each insured group member has the right to name a
beneficiary who will receive the insurance benefit that is payable when that group insurer
dies.
The beneficiary designation rules and restrictions that apply to individual life insurance
beneficiary designations also apply to group life insurance beneficiary designations. The
only other restriction on the insured group member’s right to name the beneficiary is
that he may not name the group policyholder as beneficiary unless the plan is a group
creditor life plan.

Conversion Privilege: A group life insurance policy provision that allows a group
insured whose coverage terminates for specified reasons to convert his group coverage
to an individual policy of insurance with out presenting evidence of his insurability.

Insured’s eligible for group insure terminates: When a group insured’s coverage
terminates because he terminates employment or ceases to be a member of an eligible
class, the NAIC Model Act and CLHIA Group guidelines require that he be given the
right to purchase individual life insurance without providing evidence of insurability. In
order to exercise the conversion privilege, the group insured must complete an
application for an individual life insurance policy and pay the first premium within 31
days after his group coverage terminates.
 Extension of death benefit: The NAIC Model Act requires group life insurance
polices to contain a provision that, in effect, extends coverage on a group insured during
the 31-day conversion privilege. If the group insured dies during 31-day conversion
period and has not been issued an individual policy, then the insurer must pay a death
benefit.

Misstatement of Age: The misstatement of age provision included in individual life

insurance polices specifies that the insurer will adjust the amount of the death benefit
payable to reflect a misstatement of the insured’s age. By contrast, the amount of the benefit
payable following a group insured’s death is specified in the group life insurance policy’s
benefit schedule.

Settlement Options: When a person insured under a group life insurance policy dies, the
beneficiary of the group insured’s coverage usually receives the death benefit in a lump sum.
Some times optional modes of settlement are also available.

Group Life Insurance Plans: Over 99 percent of all group life insurance polices are yearly
renewable term (YRT) insurance plans. Group accidental death and dismemberment plans are
also commonly issued, either as separate plans or in addition to other group life insurance
coverage. Some permanent group life insurance plans are issued, but these plans are rare and
typically provide coverage for group members who have retired.

 The first employer-employee group life insurance plan in the United States was
introduced in 1911.

Group Term Life Insurance: Group YRT insurance is sometimes used to fund other
employee benefit plans that supplement the benefits provided by a group life insurance
plan. For example, a Survivor income plan provides periodic benefit payments to
specified dependents who survive a covered group member; survivor income benefits
are usually funded by group YRT insurance.

 Survivor income plan: A group life insurance plan that provides periodic benefit
payments to specified dependents who survive a covered group member.

Accidental Death Dismemberment plans: Accidental death Dismemberment

(AD&D) benefits may be included as part of a group health policy, or they may be
issued under a separate group insurance policy.
Accidental death and dismemberment policies are often part of the group life
insurance plan purchased by travel groups, automobile clubs, transportation
companies, such as railroads and airlines.
 Group permanent plan: It is less popular than group term insurance plans primarily
because they do not receive the favorable tax treatment that group term life insurance
plans receive.
In most situations, these permanent plans are offered to group members on an
optional basis in addition to the employer’s basic group YRT plan.
Permanent group life insurance coverage is often called a supplementary coverage.

 Supplemental coverage: An optional insurance coverage that may be purchased by

an insured group member.

We describe the primary characteristics of the three most commonly offered group
permanent life insurance plans:
 Group paid-up plans.
 Level premium whole life plans.
 Group universal life plans.

Group paid-up plans: Group life insurance purchased under a group paid-up plan
combines paid-up whole life insurance with decreasing amounts of term insurance.
These plans are contributory plans under which
 The employee’s premium contribution is used as a net single premium to
purchase paid-up whole life insurance, and
 The employer’s premium contribution is used to purchase the amount of group
term insurance required to bring the employee’s total coverage up to a
predetermined amount.

Level premium whole life plans: Some insurance companies make level premium
whole life insurance available on a group basis. Level premium coverage is usually
written on a limited-payment whole life plan, such as whole life paid-up at age 65.
Because these policies build cash values, employers often use them to provide
retirement income benefits for employees.

Group universal life plans: Group universal life plans differ from most other group
life insurance plans in that under a group universal life plan, an individual has portable
coverage, which means that an insured employee who leaves the group can continue his
coverage under the group plan.

 Portable coverage: group insurance coverage that can be continued by an insured

employee who leaves the covered group.

Group creditor life insurance: Group term insurance that is issued to a creditor and covers
the lives of the creditor’s current and future debtors.
17 Chapter-XVII Group Pension and Retirement
Savings Plans
Insurance companies are frequently involved in establishing, funding and
administration of various group retirement plans. Plan Design is focused on
meeting government regulations to receive favorable income tax treatment.

Plan Sponsors: Employers and unions that establish the plan.

Plan Participants: Employees and union members covered.

17.1 REGULATIONS:
17.1.1 Regulations in USA:
Majority of retirement plan legislation is provided by ERISA.
ERISA: Employee Retirement Income Security Act.
Qualified Plan: A plan eligible for favorable income tax treatment in USA.

 Non-Discrimination: Should not be in favor of highly paid employees

 Vesting requirements: Immediate vesting of participant’s own funding and time

limits for full vesting.

 Variety of requirements for safe investments.

 Provision of certain specified information to participants and governmental agencies

is mandatory.

 Plan administers have to abide by the statutory fiduciaries guidelines.

 Employer’s contributions are deductible from his taxable income.

 Employer’s contribution on behalf of employee and the investment earnings are

differed for taxation until the benefits are actually received.

Contributory Vs Non-Contributory
In a contributory plan employees’ contribution is mandatory and taxable.
Hence most plans in US are non-contributory where employees are not required to make
contributions.

17.1.2 Regulations in Canada:

Legislations are in accordance with Pension Benefit Act enacted both federally and at
provincial level.
Registered Plan: A plan eligible for favorable income tax treatment in Canada.
  Most notable difference is that in Canada the plan must be registered with some
specified government agency and that it should be portable i.e. the benefits should
be movable from one registered plan to other.

 Minimum vesting requirements.

 Investments on assets in accordance with standards of Pension Benefits Act.

 Annual information returns to be filed with applicable government agencies and

terms of plan communicated to covered employees.

For favorable income tax treatment the plan must be approved by and registered
with Revenue Canada.
Following tax-benefits are applicable:
 Employer’s contributions are deductible from his taxable income.
 Employer contribution on employees’ behalf and investment earnings are
deffered for taxation until benefits are actually received.
 Unlike USA, the employees also upto a certain limit can deduct their
contributions from their taxable income.

17.2 Types of Retirement Plans:

 Pension Plans: Intend to provide lifetime monthly income to employee which begins
at retirement.
These can be of two types:
 Defined Benefit Pension Plans: The retirement benefit is predefined and
based on actuarial assumptions the employer is obligated to deposit enough
assets into plan to provide promised benefits. Typically contributions on
behalf of all employees are pooled into one fund for investments.
 Defined Contribution Plan: The annual contribution that the employer will
make on behalf of each participant is predefined. Upon retirement this
amount is available to the employee in the form of a monthly annuity or
lump sum.

 Profit sharing Plans: Also called deffered profit sharing plan (DPSP).
These function in the same way as defined contribution plans except that here the
employer contribution is based on employer’s profits and may change form year to
year.
 Qualification rules in United States require that employer contributions must be
1) Substantial and recurring
2) Should not unduly favor highly paid employees.
Rules in Canada for a DPSP:
  If the plan is by “reference to profits” the employer contributions must
be at least one percent of the profits.
 If the plan is “out of profits” the requirements are less stringent.
 In Canada the employees cannot contribute to a DPSP.
 Qualified Retirement Savings Plan: Funded primarily by Employee contributions
these plans are designed to encourage employees to save for their retirement.

 In USA:
 Thrift and Savings Plan: Employee makes a contribution to the plan
and the employer is obligated to match it to a specified maximum
percentage.
However these employee contributions are not deductible from
taxable income.
 401(k) Plan: Same as Thrift and Savings accept that employee
contributions are deductible from taxable income and taxed when
withdrawal from the fund is made.
 SIMPLE Plan (Savings Incentive Match Plan for Employees):
Employee’s compensation is reduced by a certain amount and that
amount is put into his IRA (Individual retirement account or
annuity).The employer also has to make some contributions on
behalf of the employee. Vesting right are immediate.Non
discriminatory requirement is not applicable and reporting
requirements are comparatively less.
However sponsoring employer cannot have more than 100
employees.
 In Canada :
 Group RRSP (Registered Retirement Savings plan) :
 A separate account is set up for each participating employee.
 Employer and employee can both contribute within specified
limits.
 Both the Employer’s and Employee contributions are
deductible from the employee’s taxable income.

 Non-Qualified Retirement Savings Plans :

 In USA :
 SEP (Simplified Pension Plan) :The employee set up his IRA and the
employer contributes in it subject to a legislated maximum.This
contribution is deductible from the employer’s taxable income.

 In Canada :
 EPSP (Employee’s profit sharing plan) : The employer and Employee
both contribute to the plan.The Employer can deduct its
contribution from its taxable income.The employee cannot deduct
his contributions from his taxable income and must also pay taxes on
 employer contributions and investment income of the account.Hence
no taxation is done at the time of receiving benefits.

17.3 Components of a Retirement Plan :

 The Plan : The plan sponsor has to establish a plan document spelling out all the
features, terms and conditions and formulae in the proposed plan.
Most important elements of the plan document are eligibility requirements, method
and time of receiving benefits.

 Plan Administration : A plan administrator is specified who is responsible for plan

administration like keeping participant employee’s records, dealing with external
professionals required to run the plan like attorneys, actuaries etc.

 Funding Vehicle : A funding vehicle is the means for investing the plan’s assets as
they are accumulated.
 Group Deferred Annuity
Each year the insurer uses the contributions made on behalf of each plan-
participant to purchase a single-premium deferred annuity for that plan
participant.

 Deposit Administration Contracts : Plan sponsor keeps plan assets in the

insurance company’s general investment account. An annuity of pre-guaranteed
value is purchased as when an employee retires. The insurance company
guarantees the amount of periodic annuity benefit that will be paid to the plan
participant.

 Immediate Participation Guarantee Contracts(IPG Contracts) : The plan sponsor

keeps the assets in an insurance company’s investment account and shares in the
gains or losses of that account ( i.e no guarantees of the type in Deposit
Administration Contracts are provided). When an employee retires funds may be
withdrawn to purchase an immediate annuity or benefits may be paid directly
from the investment account.

 Separate Account Contracts : Here the plan sponsor can keep his plan assets in
any of the insurance company’s seperate accounts depending on his investment
preferences. No guarantees are given regarding investment performance.

 Guaranteed Investment Contracts (GICs) : The insurance company accepts a

single deposit from the plan sponsor and guarantees a minimum return for a
specified period.
Variations to the basic GIC are :
 Allowing the plan sponsor to make monthly contributions rather than
one single deposit.
  Allowing the principal and interest to be paid out in installments as
benefits to participants.

Government Sponsored Retirement Plans :

 In USA :
 The three common plans offered are 1) The Civil Service Retirement Act 2)
The Railroad Retirement Act 3) The Old Age, Survivors, Disability and
Health insurance (OASDHI) or better known as Social Security.
Majority of people with a few exceptions are covered by Social Security.
 Social Security :
 Funded by mandatory contributions by participants in their earning
years.
 Employer contributes an equal amount as the employee and self-
employed participants have to contribute a slightly higher amount as
their contribution is not matched by employer contributions.
 Benefits are available to covered persons , age 62 or older however if
a participant retires before age 65 he gets lesser amount than what he
would get if he retired at age 65 or older.
 Benefits are also payable to surviving spouses and dependant children
of covered workers who have died as well as to those who have
become disabled.
 The amount of monthly benefit a person receives keeps increasing in
accordance with Consumer Price Index (CPI).
 In Canada :
 Old Age Security Act:
 Virtually all Canadian residents age 65 or older are covered.
 All covered persons receive the same amount.
 Funded by federal government general tax revenues.

 Canada Pension Plan (CPP) and Quebec Pension Plan (QPP):

 Both these plans are closely related in the sense that money contributed
to one plan may be transferred to other.
 The only difference lies in that QPP operates in Quebec and CPP
operates in the rest of Canadian provinces.
 Funded by compulsory contributions by employees and employers and
self employed persons have to contribute higher amount because their
contribution is not matched by employer contributions.
 Benefits payable are pension, survivorship benefits, lump-sum death
benefits, benefits for orphans and long term disability income benefits.

18 Chapter – XVIII Medical Expense Coverage

Medical Expense Coverage: Provide benefits to pay for the treatment of an insured’s
illnesses & injuries.
Disability Income Coverage: Provides income replacement benefits to an insured who is
unable to work because of sickness or injury.
Indemnity Benefits or Reimbursement Benefits: A maximum dollar amount the insurer
will reimburse the insured for each covered expenses the insured incurs.
Managed Care Plans: are medical expense plan that combine the financing and delivery of
health care within a system that manage the cost, accessibility, & quality of care.
Hospital Medical Expense Coverage: consisted of separate benefits for each specific type
of covered medical care cost
 Hospital expense coverage: provides benefits for specified hospital expenses
such
as room and board, medications, laboratory services, and other fees associated
with a hospital stay.
 Surgical expense coverage: provides benefits for the costs of inpatient &
outpatient surgical procedures.
 Physicians’ expense coverage: provides benefits for the charges associated
with physicians’ visits both in & out of the hospital.

First-dollar Coverage: the insurer begins to reimburse the insured for eligible medical
expenses without first requiring the insured for eligible medical expenses without first
requiring an out-of-pocket contribution from the insured.

Major Medical Insurance: provides substantial benefits for hospital expenses, surgical
expenses, & physicians’ fees. However, can provide coverage for expanses that the separate
basic coverage may not have covered.

 Supplement major medical policy: is issued in conjunction with an underlying

basic medical expenses insurance policy, such as a hospital expense plan.

 Comprehensive major medical policy: is a combination into one policy of the

coverage provided by both a supplement major medical policy & an underlying
basic medical expense policy.

Covered Expenses: The benefits provided by major medical coverage include payment for
many different types of medical treatments, supplies, and services.

Usual, Customary, and Reasonable Fees: The maximum amount of a covered expense
that an insurer will reimburse under a major medical policy

Expanse Participation: Major medical policies usually require the insured to share in
paying for his medical expenses. This requirement encourages insured to keep medical
expanses to a minimum, and that, in turn, help reduce the costs of the average. The two
most common expense participation methods are:
 Deductible: is usually a flat dollar amount of eligible medical expanses, such as
$200 or $500, that the insured must incur out of her own pocket before the
insurer will begin making any benefit payments under the policy.
 Calendar deductible: which is deductible that applies to any eligible medical
 expenses an insured incurs during a given calendar year.

Coinsurance provision: states that once the insured has paid the deductible amount, he
then must pay a specified percentage of all the remaining covered medical expenses.

Stop-loss provision: specifies that the policy will cover 100 percent of the insured’s eligible
medical expenses after he has incurred a specified amount of out-of-pocket expenses, such
as $5000, in deductible and coinsurance payment.

Supplement Medical Expense Coverage: Insurance companies provide a range of

supplemental medical expense coverage that provide benefits to reimburse the insured for
the costs of (1) treatment of an illness that is specified in the supplemental policy to (2)
medical supplies or treatments that are specified in the policy.

 Dental Expense Coverage: is a type of medical expense coverage that provides

benefits for routine type of medical expenses coverage that provides benefits for
routine dental examinations, preventive work, and dental procedures needed to
treat tooth decay and diseases of the teeth & jaw.

 Prescription Drug Coverage: provides benefits for the purchase of drugs &
medicine that are prescribed by a physician and are not available over-the counter.

 Vision Care Coverage: provides the insured with benefits for expenses incurred
in obtaining eye examinations and corrective lenses.

 Dread Disease Coverage: provides benefits for medical expenses incurred by

an insured who has contracted a specified disease.

 Critical Illness Coverage: that pays a lump-sum benefit if the insured is

diagnosed with a critical illness while the policy is in force.

 Long-Term Care Coverage: provides medical and other services to insured

who, because of their advanced age or the effects of a serious illness or injury,
need constant care in their own homes or in a qualified nursing facility.

 Medicare Supplement Coverage: reimburse the insured for his out-of-pocket

expenses, such as Medicare’s deductible amount and coinsurance payments.

Medicare: insures a large segment of the population. The following people are eligible for
Medicare benefits:

 Those age 65 or over and eligible for Social Security retirement benefits
 Those entitled for at least two years to receive social Security disability income
benefits.
  Those entitled to receive retirement benefits under the Railroad Retirement Act.
 Those who are afflicted with-or the dependent of a person afflicted with-kidney
disease that requires either dialysis or a transplant.

Medicaid: is a joint federal-state program that provides hospital and medical expense
coverage to people who are poor.

Claim Cost: The Costs the insurer predicts that it will incur to provide the policy benefits
promised.

Loss Ratio: is the ratio of benefits an insurer paid out for a block of policies to the
premiums the insurer received for those policies.
19 Chapter XIX Disability Income coverage
 Disability Income coverage – Health insurance coverage that provides
income replacement benefits to an insured who is unable to work due to
sickness or injury.
 Total Disability – That is defined in a policy and that entitles the insured
to receive disability income benefits

In terms of long term disability, the financial impact to the family is greater than death as the
family ahas to look after the disabled person.

 Income protection Insurance – A type of disability income coverage that

specifies that an insured is totally disabled and, thus, eligible to receive
disability benefits.
 Presumptive disability – A stated condition that if present, causes the
insured to be considered totally disabled and, thus, entitled to full income
benefit amount provided.
 Benefit period – The time during which periodic uncome benefits will be
paid under a disability income policy.
 Elimination Period – A specific time that must pass following the onset
of a covered disability before any benefits will be paid. (Typically 30 days)
 Flat amount – A benefit that is paid periodically to a disabled person.
The max. amount of disability is calculated using
o Usual earned income – taxes
o Unearned income (dividends etc)
o Additional sources of income (disability policies by
the govt. etc)
o Current income tax bracket
19.1.1.1.1
19.1.1.1.2 Supplemental Benefits

 Partial disability – One that prevents an insured from performing certain

duties of his usual occupation of from engaging in that occupation on a
full time basis.
 Future purchase option benefit – A supplemental benefit that allows an
insured to increase the benefit amount payable under a disability policy in
accordance with increases in the insured’s earnings.
 Cost-Of-Living-Adjustments benefits – A supplemental benefit that
provides for periodic increases in the disability income benefit amount
being paid to the insured.
20
21 Chapter XX TRADITIONAL GROUP
HEALTH INSURANCE PLANS
 Group Health Insurance Policies :
 - Group health insurance policy is the contract between the insurer and the group policy
holder (Employer or the other official representative of the group purchasing the group
insurance coverage).

- The insured members of the group are not parties to this contract and are not given
individual policies instead, each insured group member is given a certificate or a benefit
booklet that provides information about his group health insurance coverage .

- Group medical expense insurance policies specify the types of the medical expenses that
are covered ,the benefit maximums ( If any ) , the deductible amount , and the coinsurance
features. Group disability income policies specify the elimination period , the disability
income benefit amount , and the maximum benefit period.

- In addition to provide coverage for eligible group members, most employer – employee
group expense policies provide that an insured employee’s family and dependents are
eligible for group insurance coverage. Dependent coverage is optional , and those who opt
for it have to pay an additional premium amount for that coverage.

 Group Health Insurance Policy Provisions :

- Apart from grace period provision , the incontestability provision , and the termination
provisions that group policies contain some additional provisions that are typically
included in group health insurance policies are :

1. Pre – Existing Conditions Provision.

2. Conversion Provision.
3. Coordination of Benefits Provision.
4. Physical Examination Provision.

 Pre – Existing Conditions Provision :

- Group health insurance policies ( medical expense and disability income policies ) contains
pre - existing condition provision stating that benefits will not be paid for pre – existing
conditions until the insured has been covered under the policy for specified length of time.
Group policies usually define a pre – existing condition as a condition for which an
individual received medical care during the three months immediately prior to the
effective date of her coverage .

 Conversion Provision :

- The conversion provision grants an insured group member who is leaving the group a
limited right to purchase an individual medical expense insurance policy without
presenting evidence of his insurability. The right is limited in that the insurer can refuse to
issue the individual policy if the coverage would result in the insured group member
becoming over insured.
 Most of the states in United States require group medical expense insurance policies to
include a conversion provision.

 Coordination Of Benefits Provision :

- The coordination of benefits (COB) provision is designed to prevent an individual who is

insured under more than one group medical expense insurance policies from receiving
benefit amount that are greater than the amount of medical expenses the insured actually
incurred .

- The COB provision prevents duplicate benefit payments by defining the group health plans that is
the primary provider of the benefits and the plan that is the secondary provider for insured group
member who have duplicate group medical expense coverage.

 Physical Examination Provision :

- The physical examination provision is included in the most group disability income policies
and grants the insurer the right to require an insured who has submitted the disability
income claim to be examined by a doctor of the insurer’s choice , at the insurer’s expense.
This allows the insurer to verify the validity of the insured’s claim.

 Group Health Insurance Underwriting

- When an insurer evaluates a group health insurance coverage, the insurer applies the
group underwriting principles and the group as a whole must meet the insurer’s
underwriting requirements.

- The group’s risk classification – Standard, substandard, or Decline is established on the

basis of the group’s expected morbidity rate. Morbidity rates describe the incidence of the
sickness and accidents that may be expected to occur among a given group of people.

- The expected morbidity rate for a group reflects a number of the factors, including the
following :

1. The nature of the industry in which the group members work.

2. The age distribution of the group.
3. The distribution of the males and females in the group.

 Funding Mechanisms:

- The way in which the group insurance plan‘s claim costs and administrative expenses are
paid is known as the funding mechanism.

- Fully insured plans: The group policyholder makes monthly premium payment to the
insurance company , and the insurance company bears the responsibility for all claims
 payments.

1. Retrospective rating arrangements: Under this the insurer agrees to charge the
group policyholder a lower monthly premium than it would normally charge for
the group health insurance plan based on the group’s prior claims experience.
This arrangement helps employer to increase the amount of the funds and also
usually includes an experience refund features in which if the group‘s claim
experience during the policy year is favorable, the insurer will pay a group
policyholder an experience refund.

2. Premium delay arrangement: This arrangement allows the group policyholder to

postpone paying monthly group insurance premiums for a stated period of time beyond
the expiration of the policy’s grace period. As a result, the group policyholder has the use
of those funds during the premium delay period.

3. Minimum premium plans: Under MPP the group policyholder deposits into a
special account funds that are sufficient to pay a stated amount of expected
claims.

- Fully self – insured plans: In this the employer takes complete responsibility for all claim
payments and related expenses. In the typical fully – insured plan, the group health insurer must set
premium rates that will be adequate to:

1. Pay claims incurred

2. Cover the insurer expenses
3. Provide some profit to the insurer

Advantages :

1. Employer may receive from self – insuring is an improve cash flow because the
employer retains the money it would have paid in premium and can earn
interest on that money.

2. Self – insured plans are exempt from state laws that apply to insurance policies,
employers that self-insured have more freedom in designing their group
insurance plans.

 Funding Vehicle: The account into which the employer deposits the money is
referred to as a Funding Vehicle, and the type of funding vehicle determines
the type of self – insured plan.

 Types of self – insured plans:

1. Asset Plan (nontrusteed plan): The employer usually deposits the money into the
commercial checking account or other similar account .The premium and other
funds set aside for insurance are not consider separate from the employer’s other
 asset Employer pays all claims from out of its current operating funds.

2. Trusteed plan: If the employer deposits the money into the trust, then the plan is
trusted plan. The trustee has the duty to managing the trust property for the
benefits of the employee and their dependents who are insured by the plan.

 Stop – Loss Coverage: Regardless of whether an employer uses a trusteed or

general asset type of self-insured plan, the employer bears the risk of paying claims, no
matter how large those claims may be. If self-insured group experienced several
catastrophic medical claims in one year, the employer might not have the financial
resources to pay the claims. For this reason many insurer that self-insured purchase
stop-loss insurance from an insurance company so that they can place a maximum dollar
limit on their liability for paying health insurance claims.

 Plan Administration: Self – insured plans are administrated by the variety of the methods. When
an employer purchases group insurance from an insurer, the insurer is responsible for most
administrative aspects of the plan. Some employer that self – insure their plans are able to fully
administer their own plans. For other employers, it is more cost effective to have an outside
organization provide some or all administrative services for the plan. These employers usually
purchase an administrative services only (ASO) contract from an insurance company.

22
23
24 Chapter – XXI Traditional Individual Health
Insurance Policies
24.1
This chapter describes the individual health insurance policy and some of the ways in which
individual health insurance coverage and benefits differ from the coverage and benefits
provided by group health insurance policies.
24.2 Individual Health Insurance Policies
An individual health insurance policy is a contract between the insurer and the policy owner.
The policy describes the coverage provided, the benefits payable, and the premium amounts
and their due dates. The policy owner and the insured are usually the same person, and the
insurer typically pays benefits directly to that person or to a medical-care provider on behalf
of that person.
24.3 Individual Health Insurance Policy Provisions
Individual health insurance policies contain many of the same provisions that are included in
group health insurance policies. Some of the provisions unique to Individual Health
Insurance Policy are
 Renewal provision: This describes circumstances under which the insurer has the
right to refuse to renew or the right to cancel the coverage and the insurer’s right to
 increase the policy’s premium rate. Traditional, U.S. and Canadian insurers have used
the following five general classifications of individual health insurance policies
 Cancelable Policy: It grants the insurer the right to terminate the policy
at any time, for any reason, simply by notifying the policy owner that the
policy is cancelled and by refunding any advance premium that has been
paid for the policy.
 Optionally Renewable Policy: The insurer has right to refuse to renew
such type of polices on certain dates specified in the policy.
 Conditionally Renewable Policy: The insurer has limited right to
refuse to renew an individual health policy at the end of premium
payment period.
 Guaranteed Renewable Policy: The insurer must renew this type of
policy as long as premium payments are made at least until the insured
attains the age limit stated in the policy.
 Noncancellable Policy: This is guaranteed to be renewable until the
insured reaches the limiting age stated in the policy.

 Grace Period Provision: This allows the policy owner to pay a renewal premium
wihin a stated grace period following the premium due date.
 Reinstatement Provision: If certain conditions are met, the insurer will reinstate a
policy that has lapsed for nonpayment of premiums.
 Incontestability Provision: This clause states that after the policy has been in force
for a specified period, usually two or three years, the insurer cannot use material
misrepresentations in the application either to void the policy or to deny a claim
unless the misrepresentations are fraudulent.
 Pre-Existing Conditions Provision: A pre-existing condition is usually defined in
individual health policies as an injury that occurred or a sick ness that first appeared
or manifested itself within a specified period-usually two years-before the policy was
issued and that was not disclosed on the application. The provision stating that until
the insured has been covered under the policy for a certain period, the insurer will
not pay benefits for a pre-existing condition.
 Claims Provisions: This define 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.
 Physical Examination Provision: It is included in individual disability income
insurance policies. After an insured submits a claim, the insurer has the right to have
the insured examined by a doctor of the insurer’s choice, at the insurer’s expense.
 Legal Actions Provisions: This 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.
 Change of Occupation Provision: This permits the insurer to adjust the policy’s
premium rate or the amount of benefits payable under the policy if the insured
changes occupation.
 Over insurance Provision: This provision states that the benefits payable under the
policy will be reduced if the insured is over insured. An over insured person is one
who entitled to receive either (1) more in benefits from his medical expense policies
 than the actual costs incurred for treatment or (2) a greater income amount during
disability than he earns while working.
Individual Health Insurance Underwriting
Individual health insurance underwriters evaluate each application to determine the degree of
morbidity risk represented by the proposed insured.
 Morbidity Factors: The primary factors that affect the degree of morbidity risk
presented by proposed insured are
 Age
 Health
 Sex
 Occupation
 Avocations
 Work History
 Habits and Lifestyle

 Risk Classifications: After determining the degree of morbidity risk presented by
the proposed insured, the underwriter will usually place the applicant into one of
three categories of risk.
 Standard Risk
 Substandard Risk
 Declined Risk
25 Chapter – XXII Managed care Plans
25.1
25.2 This chapter describes Blue Cross and Blue Shield plans, government-sponsored
health insurance programs in the United States and Canada and also workers’
compensation programs in the United States and Canada.
25.3
25.4 Blue Cross and Blue Shield Plans

 Blue Cross Plans: Hospital expense insurance plans offered by regional health care
providers that are affiliated with a large national health care organization.
 Blue Shield Plan: Physician’s expense insurance plans offered by regional health
care providers that are affiliated with a large national health care organization.
Each plan is a separate organization with its own governing board, and each plan
operates autonomously in a specific geographic area, typically one state or a portion
of a state.
All these plans in the US belongs to Blue Cross/Blue Shield Association (BCBSA),
which coordinates all these plans and provides a variety of educational, research, and
administrative support services to its members.
In Canada, the Canadian Association of Blue Cross Plans (CABCP) performs many
of the same types of functions for the Canada’s Blue Cross Plans as the BCBSA
performs for the U. S. Blue Cross and Blue Shield plans.

Comparisons with Commercial Health Insurance Plans

Now a days coverage provided by Blues are virtually identical to the coverage
available from the insurance companies and the Blues also operate very similarly to
the way in which traditional commercial health insurance plans operate.
But a few distinctions still remain between Blue Cross and Blue Shield Plans and the
plans offered by the insurance companies.
 Provider Contracts
Unlike insurers, the Blues have traditionally entered into contracts with medical
providers, primarily hospitals and physicians. Under such a provider contract, the
plan agrees that when the provider renders services to a plan subscriber, the plan will
reimburse the provider for those services.
 Service Benefits: Blue Shield and Blue Cross plans offered the benefit known as
service benefit. In contrast commercial health insurance plans offered by insurance
companies provide indemnity benefits.
 Indemnity benefits or reimbursement benefits, are stated as a maximum dollar
amount that is payable for each covered service. Whereas, service benefits are
provided to plan subscribers in exchange of the prepaid fee.
  First-Dollar Coverage: These plans provide the benefit without including
deductible, the first dollar of covered expenses incurred by the insured is paid
by the plan. Whereas, commercial insurance plans includes deductibles and
coinsurance features that require insured to share the costs of medical
expenses.
 Regulation: Blues are regulated differently in the United States than the commercial
insurance companies because the blues are nonprofit organizations. Most states
impose a tax on insurance premium collected within the state, but don’t require the
nonprofit Blues to pay these taxes.

25.4.1.1.1.1 Government –Sponsored Health Insurance Plans

 United States: Health insurance benefits are provided through several government
programs.
Medicare: primarily for the elderly and disabled people. In order to be eligible for
Medicare benefits, a person must be
1) Age 65 or over and eligible for Social security retirement benefit; or
2) Entitled for at least two years to receive Social Security disability income benefits; or
3) Entitled to receive retirement benefit under the Railroad Retirement Act; or
4) Afflicted with, or be the dependent of a person afflicted with, Kidney disease that
require either dialysis or transplant
Medicare is a 2 part program, Medicare part A provides basic hospital insurance
coverage to all eligible individuals. Benefit covered under Part A is 1) hospitalization,
2) confinement in an extended care facility after hospitalization, and 3) home health
care service.
Medicare Part B coverage is voluntary. Individual who are eligible to receive part A
benefits have the option of purchasing coverage under Part B. An individual must
pay a monthly premium for the Medicare Part B.
Provides benefits for physicians’ professional services, ambulance services, medical
supplies, outpatient services, diagnostic tests and other services.
25.4.1.1.1.1.1 Medicaid: Medicaid is a joint federal-state program that provides
hospitals and medical expense coverage to the people who are poor. The state
and federal governments jointly fund the program. Medicaid program
provides certain services, including physicians’ and hospital services,
laboratory tests and home and health visits.
25.4.1.1.2 Social Security Disability Income: 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)
benefit payments if they become disabled.
Benefit Payments Continue until 1) two months after the disability ends 2) the
insured worker dies 3) the insured worker reaches age 65 when regular Social
Security retirement income benefit become payable.
 Canada
Both medical expense coverage and disability income coverage are provided by the
government programs in Canada.
 Medical Expense Coverage: Canada’s provincial hospital and medical expense plans
are funded by the provinces with assistance from the federal government. The
provinces have taken various approaches to funding their plans. Some provinces rely
 on general tax revenues; some impose premium on the participating residents; and
some impose a payroll tax on employers.
 Disability Income Coverage: Short Term disability income benefits are available
under the federal Unemployment Insurance Act for all employees who have worked
a stated minimum number of weeks during the preceding 52-week period. These
benefits are available for up to 15 weeks after a short waiting period and amount is a
percentage of the worker’s average weekly earnings, up to a stated maximum
amount.
Long Term disability income benefits are provided through the Canada Pension Plan
(CPP) and the Quebec Pension Plan (QPP). To qualify for disability income benefit
under one of these plans, a worker must 1) must have made contributions to the
plan for a stated minimum number of years, 2) be under the age of 65, and
3) be afflicted with a severe and prolonged disability. These taxable benefit payments
begin four months after the onset of the disability and continue until the person 1) is
no longer disabled, 2) dies, or 3) reaches age 65, when normal retirement benefits
provided through the CPP or QPP become payable.

25.4.1.1.3 Workers’ Compensation

Workers’ compensation coverage provide a variety of benefits – including medical
expense benefits, disability income benefits, and death benefits – to workers who are
injured on the job or who contract certain occupational illnesses.
 United States: Most employers purchase workers’ compensation insurance from
private insurers. In some states, employer purchase coverage from a competitive
state fund that has been established to provide workers’ compensation insurance. In
order to e eligible to receive workers’ compensation benefits, an employee must
work in a covered occupation and must suffer an illness or injury that arose out of
and in the course of employment.
 Canada: The benefits provided by the workers’ compensation program in Canada are
similar to the benefit mandated in the United States be state workers; compensation
laws. Most employees in Canada are covered by a provincial Workers’ Compensation
Act that provides benefits to workers and certain of their dependents if the worker is
injured, suffers an illness, or dies from a cause arising out of employment.
26 Chapter – XXIII Traditional Alternative Health
Insurance Providers
26.1
This chapter describes Blue Cross and Blue Shield plans, government-sponsored health
insurance programs in the United States and Canada and also workers’ compensation
programs in the United States and Canada.
26.2
26.3 Blue Cross and Blue Shield Plans

 Blue Cross Plans: Hospital expense insurance plans offered by regional health care
providers that are affiliated with a large national health care organization.
 Blue Shield Plan: Physician’s expense insurance plans offered by regional health
care providers that are affiliated with a large national health care organization.
Each plan is a separate organization with its own governing board, and each plan
operates autonomously in a specific geographic area, typically one state or a portion
of a state.
All these plans in the US belongs to Blue Cross/Blue Shield Association (BCBSA),
which coordinates all these plans and provides a variety of educational, research, and
administrative support services to its members.
In Canada, the Canadian Association of Blue Cross Plans (CABCP) performs many
of the same types of functions for the Canada’s Blue Cross Plans as the BCBSA
performs for the U. S. Blue Cross and Blue Shield plans.

Comparisons with Commercial Health Insurance Plans

Now a days coverage provided by Blues are virtually identical to the coverage
available from the insurance companies and the Blues also operate very similarly to
the way in which traditional commercial health insurance plans operate.
But a few distinctions still remain between Blue Cross and Blue Shield Plans and the
plans offered by the insurance companies.
 Provider Contracts
Unlike insurers, the Blues have traditionally entered into contracts with medical
providers, primarily hospitals and physicians. Under such a provider contract, the
plan agrees that when the provider renders services to a plan subscriber, the plan will
reimburse the provider for those services.
 Service Benefits: Blue Shield and Blue Cross plans offered the benefit known as
service benefit. In contrast commercial health insurance plans offered by insurance
companies provide indemnity benefits.
 Indemnity benefits or reimbursement benefits, are stated as a maximum dollar
amount that is payable for each covered service. Whereas, service benefits are
provided to plan subscribers in exchange of the prepaid fee.
 First-Dollar Coverage: These plans provide the benefit without including
deductible, the first dollar of covered expenses incurred by the insured is paid by the
plan. Whereas, commercial insurance plans includes deductibles and coinsurance
features that require insured to share the costs of medical expenses.
  Regulation: Blues are regulated differently in the United States than the commercial
insurance companies because the blues are nonprofit organizations. Most states
impose a tax on insurance premium collected within the state, but don’t require the
nonprofit Blues to pay these taxes.

26.3.1.1.1.1 Government –Sponsored Health Insurance Plans

 United States: Health insurance benefits are provided through several government
programs.
Medicare: primarily for the elderly and disabled people. In order to be eligible for
Medicare benefits, a person must be
1) Age 65 or over and eligible for Social security retirement benefit; or
5) Entitled for at least two years to receive Social Security disability income benefits; or
6) Entitled to receive retirement benefit under the Railroad Retirement Act; or
7) Afflicted with, or be the dependent of a person afflicted with, Kidney disease that
require either dialysis or transplant
Medicare is a 2 part program, Medicare part A provides basic hospital insurance
coverage to all eligible individuals. Benefit covered under Part A is 1) hospitalization,
2) confinement in an extended care facility after hospitalization, and 3) home health
care service.
Medicare Part B coverage is voluntary. Individual who are eligible to receive part A
benefits have the option of purchasing coverage under Part B. An individual must
pay a monthly premium for the Medicare Part B.
Provides benefits for physicians’ professional services, ambulance services, medical
supplies, outpatient services, diagnostic tests and other services.
Medicaid: Medicaid is a joint federal-state program that provides hospitals and
medical expense coverage to the people who are poor. The state and federal
governments jointly fund the program. Medicaid program provides certain services,
including physicians’ and hospital services, laboratory tests and home and health
visits.
Social Security Disability Income: 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) benefit
payments if they become disabled.
Benefit Payments Continue until 1) two months after the disability ends 2) the
insured worker dies 3) the insured worker reaches age 65 when regular Social
Security retirement income benefit become payable.
26.3.1.1.1.1.1.1.1 Canada
Both medical expense coverage and disability income coverage are provided by the
government programs in Canada.
Medical Expense Coverage: Canada’s provincial hospital and medical expense
plans are funded by the provinces with assistance from the federal government. The
provinces have taken various approaches to funding their plans. Some provinces rely
on general tax revenues; some impose premium on the participating residents; and
some impose a payroll tax on employers.
Disability Income Coverage: Short Term disability income benefits are available
under the federal Unemployment Insurance Act for all employees who have worked
 a stated minimum number of weeks during the preceding 52-week period. These
benefits are available for up to 15 weeks after a short waiting period and amount is a
percentage of the worker’s average weekly earnings, up to a stated maximum
amount.
Long Term disability income benefits are provided through the Canada Pension Plan
(CPP) and the Quebec Pension Plan (QPP). To qualify for disability income benefit
under one of these plans, a worker must 1) must have made contributions to the
plan for a stated minimum number of years, 2) be under the age of 65, and
3) be afflicted with a severe and prolonged disability. These taxable benefit payments
begin four months after the onset of the disability and continue until the person 1) is
no longer disabled, 2) dies, or 3) reaches age 65, when normal retirement benefits
provided through the CPP or QPP become payable.

26.3.1.1.2 Workers’ Compensation

Workers’ compensation coverage provide a variety of benefits – including medical
expense benefits, disability income benefits, and death benefits – to workers who are
injured on the job or who contract certain occupational illnesses.
United States: Most employers purchase workers’ compensation insurance from
private insurers. In some states, employer purchase coverage from a competitive state
fund that has been established to provide workers’ compensation insurance. In order
to e eligible to receive workers’ compensation benefits, an employee must work in a
covered occupation and must suffer an illness or injury that arose out of and in the
course of employment.
Canada: The benefits provided by the workers’ compensation program in Canada are
similar to the benefit mandated in the United States be state workers; compensation
laws. Most employees in Canada are covered by a provincial Workers’ Compensation
Act that provides benefits to workers and certain of their dependents if the worker is
injured, suffers an illness, or dies from a cause arising out of employment.
Chapter- XXIV REGULATION OF HEALTH INSURANCE

Regulation in the US

The National Association of Insurance Commissioners (NAIC) has adopted a number of

model laws designed to regulate individual and group health insurance.

State Regulation of Health Insurance

NAIC Model Laws Designed to regulate Health Insurance are:

 Uniform individual Accident and Sickness Policy Provision Law
 Group Health Insurance Definition and Group Health Insurance standard Provisions
 Model Newborn Children Bill
 Group Health Insurance Mandatory Conversion Model Act
 Group Coordination of Benefits Regulations and Guidelines

Federal Regulation of Health Insurance

Age Discrimination in Employment Act (ADEA) : protects workers who are age 40 and older
from being discriminated against because of their age and can be complied by those
employers who have 20 or more employees.

Civil Rights Act : Valid for all employees and employers that have 15 or more employees and
that are engaged in interstate commerce.

Family and Medical Leave Act : Employers that have 50 or more employees must comply.
Employees, upon the birth or adoption of a child, or who need to provide care for a
seriously ill family member, or who are ill themselves are the protected class.

Employee Retirement Income Security Act (ERISA) : Employers that sponsor welfare benefit plans
to provide benefits listed in the act (medical, surgical, hospital, disability, death,
unemployment benefits, etc.)

Consolidated Omnibus Budget Reconciliation Act (CORBA) : Employers that have 20 or more
employees must comply and employees and certain dependents whose health care
coverage is lost due to a qualifying event.

Health Maintenance Organization Act (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.

Health Insurance Portability and Acceptability Act(HIPAA) : Employer-sponsored group medical

expense insurance plans and insurers that issue individual medical expense insurance
coverage must comply.
Regulation in Canada

Federal Regulation of Health Insurance

In order to qualify for federal financial assistance, the federal Canada Health Act establishes
the following criteria that provincial hospital and medical expense plans must meet:
 the plan must be administered on a nonprofit basis by the province or a provincial
agency.
 the plan must be comprehensive, covering specified health services provided by
hospitals, medical practitioners, and dentists.
 the plan must provide universal coverage
 plan benefits must be portable
 the plan must provide insured services on a nondiscriminatory basis and must operate on
a basis that does not preclude reasonable access to services.

Provincial Regulations of Health Insurance

The insurance industry in Canada in effect regulates itself by agreeing to abide by a variety of
guidelines issued by Canadian Council of Insurance Association (CCIR) and the Canadian
Life and Health Insurance Association (CLHIA).

Provincial Insurance Laws

It requires an insurer to include certain information in each health insurance policy. The
provincial insurance laws contain requirements relating to several provisions that are
typically included in health insurance policies.
 With certain exception, insurers may not avoid individual health insurance policies on
the ground of misrepresentation in the application after the policy has been in force for
two years.
 With a few exceptions, group and individual health insurance policies may not exclude a
pre-existing condition from coverage after the insured person's coverage under the
policy has been in force for two years
 Most jurisdictions have enacted statutory requirements relating to the continuation of
coverage when a group health insurance policy terminates
 Provincial insurance laws throughout Canada contain requirements concerning how
disability income benefits must be paid when an insured person is overinsured.

Taxation

 Medical expense insurance benefits in Canada are not taxable. Premiums that a taxpayer
pays for an for an individual medical expense policy are deductible by the taxpayer as a
medical expense.
 Whether benefits that an individual receives under a disability income insurance policy
are considered to be taxable income depends on whether the individual paid the policy's
premiums.

Premiums that a taxpayer pays for disability income insurance are not deductible by the
taxpayer. In contrast, premiums paid by an employer for group disability income insurance
are deductible by the employer as a business expense; such premiums are not considered to
be taxable income to the covered employees.