2. Learning Objectives
1. Define risk management and explain the purpose of
insurance.
2. Identify the contractual elements of an insurance
agreement.
3. Make clear the importance of insurable interest.
4. Differentiate among the different types of life insurance.
5. Explain how insurable interest differs with life insurance
and property insurance.
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3. Learning Objectives (cont.)
6. Explain the coinsurance clause in most property insurance
policies.
7. Describe coverage given by
fire, marine, homeowner’s, renter’s, and flood insurance.
8. Differentiate among the principal kinds of automobile
insurance.
9. Describe the benefits included in health insurance policies.
10. List the steps in applying for, obtaining, and maintaining an
insurance policy.
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4. Risk Management
• Insurance
– a transfer of the risk of economic loss from the insured
to the insurance company.
• Purpose of insurance is to spread the losses
among a greater number of people
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6. Parties to an Insurance Contract
• Insurer
– accepts the risk of loss in return for a premium (the
consideration paid for a policy) and agrees to
indemnify, or compensate, the insured against the
loss specified in the contract
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7. Parties to an Insurance Contract
• Insured
– the party (or parties) protected by the insurance
contract.
• Policy
– The contract of insurance
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8. Parties to an Insurance Contract
• Life of the Policy
– The period of time during which the insurer assumes
the risk of loss
• Beneficiary
– A third party, to whom payment of compensation is
sometimes provided by the contract
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9. Contractual Elements
• Insurance policies, like other contracts, require:
– an offer,
– an acceptance,
– mutual assent,
– capable parties,
– consideration,
– a legally valid subject matter
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10. Insurable Interest
• The financial interest that a policyholder has in
the person or property that is insured
• Example: Life insurance - who has an insurable interest
in me?
–
–
–
–
Myself
My spouse (or other close family member)
My employer
My business partner
Can someone secretly take out a policy on me?
Wager on life is void
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11. Subrogation
• Substitution of one person in place of another,
relative to a lawful claim
• If another person causes you a loss, and your
insurance company pays you for it, your insurance
company can sue the person who caused the loss
What is subrogation?
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13. Life Insurance
• An insurance contract that provides monetary
compensation for losses suffered by another’s
death.
• Premiums based on age, health, amount of
coverage, type of policy, etc.
• The person taking out the policy must have an
insurable interest in the insured’s life (at the time
of the policy’s creation), but the beneficiary
doesn’t necessarily
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14. Straight life insurance (ordinary, whole life)
• Requires the payment of premiums throughout the life of
the insured and pays the beneficiary the face value of the
policy upon the insured’s death
• Cash Surrender Value - an investment feature
– usually builds up slowly at first but in later years approaches the
face amount of the policy
– at some stated point (usually at the age of 95 or 100 years), it
equals the face value of the policy.
– insured can cancel a straight life policy at any time and receive
its cash surrender value
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15. Straight life insurance (ordinary, whole life)
• Loan Value - an amount of money that may be
borrowed against the cash surrender value of
the policy
– usually at a relatively favorable rate of interest.
– when bank interest rates are high, insurance
policies are often excellent sources of loans at
low interest rates
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16. Life Insurance
• Universal life
– a form of straight life insurance
– allows the policy owner flexibility in choosing and
changing terms of the policy
• increase/decrease premiums within policy limits
• increase/decrease amount of insurance
• borrow up to max. loan value at prearranged interest rate
– Policy loans reduce cash surrender value and death benefit
• make withdrawals from cash surrender value
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17. Limited-Payment Life Insurance
• Limited-payment life insurance
– provides that the payment of premiums will stop after
a stated length of time—usually 10, 20, or 30 years
– amount of the policy will be paid to the beneficiary
upon the death of the insured, whether the death
occurs during the payment period or after
– premiums usually higher than for straight life, but cash
surrender value grows faster
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18. Term Insurance
• Issued for a particular period, usually 10-20 years
• Least expensive kind of life insurance because
term policies have no cash or loan value
• Convertible term insurance
– Can be converted to a straight life policy
• Decreasing term insurance
– Premiums stay constant, but death benefit decreases
over the years (ex: mortgage life insurance)
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19. Annuity
• Guaranteed retirement income purchased by
paying either a lump-sum premium or making
periodic payments to an insurer.
• Insured can usually choose to receive payments:
– For a fixed # of years, with a beneficiary receiving
remainder after insured’s death
or
– For as long as insured lives, losing any remainder upon
death
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20. Exemptions from Risk
• Policies can include clauses that exempt the
insurance company from liability in certain
situations. For instance, if death happens from:
– Breaking the law
– Flying
– Dangerous occupations
– Suicide
– Military service
• There could be more or less exemptions
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21. Optional Provisions
• May be purchased for an additional premium
• Some popular options:
– Double indemnity (accidental death benefit)
• Insurer pays double the amount of the policy if the insured
dies from accidental causes
– Waiver of Premium
• Excuses insured from paying premiums if he/she becomes
disabled
– Guaranteed Insurability
• Option to buy additional insurance at specified times
later, no questions asked (even if insured develops serious
illness)
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22. Property Insurance
• To protect real and personal property
• Insurable interest exists if insured can
demonstrate a monetary loss if property is
damaged/destroyed
– At the time the loss occurs (unlike life insurance)
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23. Property Insurance
• Deductible
– an amount of any loss that is to be paid by the insured
– can be a $ amt., a % of claim amt., or amt. of time that
must elapse before benefits are paid
• The bigger the deductible, the lower the premium
charged for the same coverage
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24. Property Insurance
• Coinsurance
– A provision under which the insurer and the insured
share costs, after the deductible is met, according to a
specific formula
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25. Fire Insurance
• Covers fire damage
• Also usually covers losses related to fire damage,
such as:
– Water used to fight the fire
– Smoke damage
– Deliberate destruction of property in an effort to
control the fire
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26. Marine Insurance
• Ocean marine insurance
– Covers ships at sea
• Inland marine insurance
– Covers goods that are moved by land carriers such as
rail, truck, and airplane
– Also covers such items as:
• Jewelry, fine arts, musical instruments, wedding presents
• Customer goods in the possession of a bailee (fur storage
houses, dry cleaners, etc.)
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27. Marine Insurance
• Floater Policy
– Insures property that cannot be covered by specific
insurance because the property is constantly changing
in either value or location.
– A personal property floater, for example, covers
personal property in general, wherever it is located.
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28. Homeowner’s and Renter’s Insurance
• Homeowner’s policy
– Gives protection for many types of losses and liabilities
related to home ownership.
• Fire, windstorms, burglary, vandalism
• Injuries suffered by other persons while on the property
• Usually excludes things like floods and earthquakes
• Renter’s insurance
– protects tenants against the loss of personal property,
liability for a visitor’s personal injury, and liability for
negligent destruction of the rented premises.
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29. Flood Insurance
• Usually not included in homeowner’s and renter’s
insurance and must be purchased additionally
• Most flood insurance backed by National Flood
Insurance Program (NFIP)
• Lenders might require it if you own property in a
Special Flood Hazard Area (SFHA)
Insurance problems after Hurricane Katrina
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30. Automobile Insurance
The most common types of automobile insurance:
• Bodily injury liability insurance.
• Uninsured-motorist insurance.
• Medical payments insurance.
• Property damage liability insurance.
• Collision insurance.
• Comprehensive coverage.
• Substitute transportation insurance.
• Towing and labor insurance.
Consumer information – Auto insurance in NC
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31. Health Insurance
Health insurance policies often include:
• Physician care
• Prescription drugs
• Inpatient and outpatient hospital care
• Surgery
• Dental and vision care
• Long-term care for the elderly
Consumer Information – Health Insurance in NC
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33. Medicare and Medicaid
• Medicare
– a federally funded health insurance program for
people 65 years of age and older who are covered by
Social Security
• Medicaid
– a health care plan for low-income people
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34. The Insurance Policy
• Application
– an offer made by the applicant to the insurance
company
• Binder
– will provide temporary insurance coverage until the
policy is formally accepted
– Also called binding slip
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35. The Insurance Policy
• Premiums
– Payment determined by the nature and character of
the risk and by how likely the risk is to occur
• Lapse
– When the insured stops paying premiums insurance
contract terminates
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37. Estoppel
• Estoppel
– An insurer may not deny acts, statements, or promises
that are relevant and material to the validity of an
insurance contract
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38. Question?
What provides temporary insurance
coverage until a policy is formally accepted?
A. Application
B. Claim
C. Binder
D. Surrogate policy
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39. Question?
Which type of insurance covers ships at
sea?
A. Aqua-marine insurance
B. Ocean marine insurance
C. Inland marine insurance
D. Open ocean insurance
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40. Question?
What is an amount of any loss that is to be
paid by the insured?
A. Co-pay
B. Deductible
C. Abstract
D. Escrow
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41. Question?
What is the substitution of one person in
place of another relative to a lawful claim?
A. Legal replacement
B. Subrogation
C. Legal proxy
D. Legal surrogate
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42. Question?
Which party is protected by the insurance
contract?
A. Insured
B. Beneficiary
C. Underwriter
D. Insurer
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43. Question?
Who accepts the risk of loss in return for a
premium?
A. Insured
B. Applicant
C. Underwriter
D. Insurer
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