General Insurance
General Insurance
General Insurance
an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the benefits. Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot and civil commotion. Life-based contracts tend to fall into two major categories: Protection policies designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance. Investment policies where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US) are whole life, universal life and variable lifepolicies.
Contents
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1 Overview
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1.1 Parties to contract 1.2 Contract terms 1.3 Costs, insurability and underwriting 1.4 Death proceeds 1.5 Insurance vs assurance
2 Types
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2.2.1 Whole life coverage 2.2.2 Universal life coverage 2.2.3 Limited-pay 2.2.4 Endowments 2.2.5 Accidental death
3 Related products
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4 Investment policies
6 Investment bonds
6.1 Pensions
7 Annuities 8 Taxation
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8.1 Australia 8.2 India 8.3 United States 8.4 United Kingdom
9 History
14 External links
Overview [edit]
Parties to contract [edit]
There is a difference between the insured and the policy owner, although the owner and the insured are often the same person. For example, if Joe buys a policy on his own life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured. The
policy owner is the guarantor and he will be the person to pay for the policy. The insured is a participant in the contract, but not necessarily a party to it. Also, most companies allow the payer and owner to be different, e. g. a grandparent paying premiums for a policy on a child, owned by a grandchild. The beneficiary receives policy proceeds upon the insured person's death. The owner designates the beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrevocable beneficiary designation. If a policy has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowing would require the agreement of the original beneficiary. In cases where the policy owner is not the insured (also referred to as the celui qui vit or CQV), insurance companies have sought to limit policy purchases to those with an insurable interest in the CQV. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The insurable interest requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company which sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).
by each company using pooled industry experience studies as a starting point. In the 1980s and 1990s, the SOA 197580 Basic Select & Ultimate tables were the typical reference points, while the 2001 VBT and 2001 CSO tables were published more recently. The newer tables include separate mortality tables [4] for smokers and non-smokers, and the CSO tables include separate tables for preferred classes. Recent US mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will die during [5] the first year of coverage after underwriting. Mortality approximately doubles for every extra ten years of age, so the mortality rate in the first year for underwritten non-smoking men is about 2.5 in 1,000 people [6] at age 65. Compare this with the US population male mortality rates of 1.3 per 1,000 at age 25 and 19.3 [7] at age 65 (without regard to health or smoking status). The mortality of underwritten persons rises much more quickly than the general population. At the end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year. Consequently, in a group of one thousand 25-year-old males with a $100,000 policy, all of average health, a life insurance company would have to collect approximately $50 a year from each participant to cover the relatively few expected claims. (0.35 to 0.66 expected deaths in each year x $100,000 payout per death = $35 per policy). Other costs, such as administrative and sales expenses, also need to be considered when setting the premiums. A 10 year policy for a 25-year-old non-smoking male with preferred medical history may get offers as low as $90 per year for a $100,000 policy in the competitive US life insurance market. Most of the revenue received by insurance companies consists of premiums paid by policy holders, with some additional money being made through the investment of some of the cash raised from premiums. Rates charged for life insurance increase with the insurer's age because, statistically, people are more likely to die as they get older. The insurance company will investigate the health of an applicant for a policy to assess the likelihood of incurring a claim, in the same way that a bank would investigate an applicant for a loan to assess the likelihood of a default. Group Insurance policies are an exception to this. This investigation and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are asked, with certain responses or revelations possibly meriting further investigation. Life [8] insurance companies in the United States support the Medical Information Bureau (MIB), which is a clearing house of information on persons who have applied for life insurance with participating companies in the last seven years. As part of the application, the insurer often requires the applicant's permission to [9] obtain information from their physicians. Underwriters will determine the purpose of insurance; the most common being to protect the owner's family or financial interests in the event of the insured's death. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank loans or buy-sell provisions of business agreements are another acceptable purpose. Life insurance companies are never legally required to underwrite or to provide coverage to anyone, with the exception of Civil Rights Act compliance requirements. Insurance companies alone determine insurability, and some people, for their own health or lifestyle reasons, are deemed uninsurable. The policy can be declined or rated (increasing the premium amount to compensate for a greater probability of [citation needed] a claim). Many companies separate applicants into four general categories. These categories are preferred [citation needed] best, preferred, standard, and tobacco. Preferred best is reserved only for the healthiest individuals in the general population. This may mean, that the proposed insured has no adverse medical history, is not under medication for any condition, and his family (immediate and extended) have no
history of early-onset cancer, diabetes, or other conditions. Preferred means that the proposed insured [citation is currently under medication for a medical condition and has a family history of particular illnesses. needed] [citation needed] Most people are in the standard category. Profession, travel history, and lifestyle factor into whether the proposed insured will be granted a policy, and which category the insured falls. For example, a person who would otherwise be classified as preferred best may be denied a policy if he or [citation needed] she travels to a high risk country. Underwriting practices can vary from insurer to insurer, encouraging competition.
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Types [edit]
Life insurance may be divided into two basic classes: temporary and permanent; or the following subclasses: term, universal, whole life and endowment life insurance.
Another common type of term insurance is mortgage life insurance, which usually involves a levelpremium, declining face value policy. The face amount is intended to equal the amount of the mortgage on the policy owner's property, such that any outstanding amount on the applicant's mortgage will be paid should the applicant die.
Limited-pay [edit]
Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to the policy in force. Common limited pay periods include 10-year, 20-year, and are paid out at the age of 65.
Endowments [edit]
Main article: Endowment policy Endowments are policies in which the cumulative cash value of the policy equals the death benefit at a certain age. The age at which this condition is reached is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier. In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters (creating modified endowments). These follow tax rules in the same manner as annuities and IRAs. Endowment insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age (e.g. 65).
resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurance policies. It is also very commonly offered as accidental death and dismemberment insurance (AD&D) policy. In an AD&D policy, benefits are available not only for accidental death, but also for the loss of limbs or bodily functions, such as sight and hearing. Accidental death and AD&D policies very rarely pay a benefit, either because the cause of death is not covered by the policy, or the coverage is not maintained after the accident until death occurs. To be aware of what coverage they have, an insured should always review their policy for what it covers and what it excludes. Often, it does not cover an insured who puts themselves at risk in activities such as parachuting, flying, professional sports or involvement in a war (military or not). Accidental death benefits can also be added to a standard life insurance policy as a rider. If this rider is purchased, the policy will generally pay double the face amount if the insured dies due to an accident. This used to be commonly referred to as a double indemnity policy. In some cases, insurers may even offer triple indemnity cover.
tailored to the needs of senior applicants. These are often low to moderate face value whole life insurance policies, to allow a senior citizen purchasing insurance at an older issue age an opportunity to buy affordable insurance. This may also be marketed as final expense insurance, and an agent or company may suggest that the policy proceeds could be used for end-of-life expenses. Preneed life insurance policies are limited premium payment whole life policies that, although available at almost any age, are usually purchased by older applicants. This type of insurance is designed to cover specific funeral expenses when the insured person dies, which the applicant has designated in a preneed funeral goods & services contract with a funeral home. The policy's death benefit is initially based on the total funeral cost at the time of prearrangement, and it then typically grows as interest is credited. In exchange for the policy owner's designation of the funeral home as the primary beneficiary, the funeral home will typically guarantee that the death benefit proceeds will cover the future cost of the selected goods & services no matter when death occurs. Excess proceeds may go to either the insured's estate, a designated beneficiary, or to the funeral home, as set forth in the prearrangement funeral contract. Purchasers of these polcies usually make a single premium payment equal to the funeral amount at the time of prearrangement, but companies offering these products also allow premiums to be paid over as much as ten years.
Pensions [edit]
Pensions are a form of life assurance. However, whilst basic life assurance, permanent health insurance and non-pensions annuity business all include an amount of mortality or morbidity risk for the insurer, pensions pose a longevity risk. A pension fund will be built up throughout a person's working life. When the person retires, the pension will become in payment, and at some stage the pensioner will buy an annuity contract, which will guarantee a certain pay-out each month until death.
Annuities [edit]
Main article: Life annuity An annuity is a contract with an insurance company whereby the insured pays an initial premium or premiums into a tax-deferred account, which pays out a sum at pre-determined intervals. There are two periods: the accumulation (when payments are paid into the account) and the annuitization (when the insurance company pays out). IRS rules restrict how money can be withdrawn from an annuity. Distributions may be taxable and/or penalized.
Taxation [edit]
Australia [edit]
Where the life insurance is provided through a superannuation fund, contributions made to fund insurance premiums are tax deductible for self-employed persons and substantially self-employed persons and employers. However where life insurance is held outside of the superannuation environment, the premiums are generally not tax deductible. For insurance through a superannuation fund, the annual deductible contributions to the superannuation funds are subject to age limits. These limits apply to employers making deductible contributions. They also apply to self-employed persons and substantially self-employed persons. Included in these overall limits are insurance premiums. This means that no additional deductible contributions can be made for the funding of insurance premiums. Insurance premiums can, however, be funded by undeducted contributions. For further information on deductible contributions see "under what conditions can an employer claim a deduction for contributions made on behalf of their employees?" and "what is the definition of substantially self-employed?". The insurance
premium paid by the superannuation fund can be claimed by the fund as a deduction to reduce the 15% [citation needed] tax on contributions and earnings. (Ref: ITAA 1936, Section 279)
India [edit]
Premiums paid by the policy owner are deductible from the taxable income of the policy owner under section 80 (C) up to a maximum limit of Rs.1,00,000. Any proceeds from an Insurance Plan in form of maturity proceeds, claims, partial withdrawal is exempt from taxation under section 10 (10) D of Income Tax law of India.
bonds is the '5% cumulative allowance' the ability to draw 5% of the original investment amount each policy year without being subject to any taxation on the amount withdrawn. If not used in one year, the 5% allowance can roll over into future years, subject to a maximum tax-deferred withdrawal of 100% of the premiums payable. The withdrawal is deemed by the HMRC (Her Majesty's Revenue and Customs) to be a payment of capital and therefore the tax liability is deferred until maturity or surrender of the policy. This is an especially useful tax planning tool for higher rate taxpayers who expect to become basic rate taxpayers at some predictable point in the future (e.g. retirement), as at this point the deferred tax liability will not result in tax being due. The proceeds of a life policy will be included in the estate for death duty (in the UK, inheritance tax) purposes. Policies written in trust may fall outside the estate. Trust law and taxation of trusts can be complicated, so any individual intending to use trusts for tax planning would usually seek professional advice from an Independent Financial Adviser and/or a solicitor.
History [edit]
Main article: History of insurance Insurance began as a way of reducing the risk to traders, as early as 2000 BC in China and 1750 BC in Babylon. Life insurance dates to ancient Rome; "burial clubs" covered the cost of members' funeral expenses and assisted survivors financially. Modern life insurance originated in 17th century England, [12] originally as insurance for traders. Merchants, ship owners and underwriters met to discuss deals at Lloyd's Coffee House, predecessor to the famous Lloyd's of London. The first society to sell life insurance was the Amicable Society for a Perpetual Assurance Office. The first insurance company in the United States was formed in Charleston, South Carolina in 1732, but it provided only fire insurance. The sale of life insurance in the U.S. began in the late 1760s. The Presbyterian Synods in Philadelphia and New York created the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalianpriests organized a similar fund in 1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but fewer than half a dozen survived. Prior to the American Civil War, many insurance companies in the United States insured the lives of slaves for their owners. In response to bills passed in California in 2001 and in Illinois in 2003, the companies have been required to search their records for such policies. New York Life, for example, reported that Nautilus sold 485 slaveholder life insurance policies during a two-year period in the 1840s; they added that their trustees voted to end the sale of such policies 15 years before the Emancipation Proclamation.
According to a study by Swiss Re, the EU was the largest market for life insurance premiums in 2005, followed by the USA and Japan.
Criticism [edit]
This section needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (October 2011) Although some aspects of the application process (such as underwriting and insurable interest provisions) make it difficult, life insurance policies have been used to facilitate exploitation and fraud. In the case of life insurance, there is a possible motive to purchase a life insurance policy, particularly if the face value is substantial, and then murder the insured. Usually, the larger the claim, and the more serious the incident, the larger and more intense the ensuing investigation, [13] consisting of police and insurer investigators. The television series Forensic Files has included episodes that feature this scenario. There was also a documented case in 2006, where two elderly women were accused of taking in homeless men and assisting them. As part of their assistance, they took out life insurance for the men. After the contestability period ended on the policies, the women are alleged to have had the men killed via hit-and-run car [14] crashes. Recently, viatical settlements have created problems for life insurance providers. A viatical settlement involves the purchase of a life insurance policy from an elderly or terminally ill policy holder. The policy holder sells the policy (including the right to name the beneficiary) to a purchaser for a price discounted from the policy value. The seller has cash in hand, and the purchaser will realize a profit when the seller dies and the proceeds are delivered to the purchaser. In the meantime, the purchaser continues to pay
the premiums. Although both parties have reached an agreeable settlement, insurers are troubled by this trend. Insurers calculate their rates with the assumption that a certain portion of policy holders will seek to redeem the cash value of their insurance policies before death. They also expect that a certain portion will stop paying premiums and forfeit their policies. However, viatical settlements ensure that such policies will with absolute certainty be paid out. Some purchasers, in order to take advantage of the potentially large profits, have even actively sought to collude with uninsured elderly and terminally ill patients, and created policies that would have not otherwise been purchased. These policies ar