Basic Insurance Principles

Ever wonder how an insurance company can charge a 30 year old person $25 per month for a $200,000 term life insurance policy? That sounds incredible. The insurance company is looking at the odds of anything happening to that 30 year old person and betting that before they have to pay out the death benefit the insured will cancel the policy, convert it to a whole life policy, pay higher premiums as the insured ages, or any number of other options. The insurance company also assumes there will be enough other policyowners that paying the death benefit, in the event the 30 year old dies during the policy period, will make a small dent in the funds the insurance company has reserved for such events.

Insurance is based on two principles: risk transference and the law of large numbers.
Risk transference, sometimes called ‘pooling’, involves the transfer of risk from the individual to a pool of the insurance company’s policyholders. The insurance company charges a fee, the premium (or part thereof), for accepting the risk and ‘pools’ the premiums from a group of policyholders into a general fund to fund the death benefits under contract.
For example, if 10,000 policyowners in the pool pay $1,000 each in annual premiums, the pool would amass $10,000,000 each year to cover claims resulting from losses. Should 500 members of the pool have losses during the year of $10,000 each, the pool would be able to reimburse the members for their losses and still accumulate a large amount of funds for later claims. In this particular case, new members would be brought into the pool and the remaining members would pay their next annual premiums to replenish and grow the pool of funds.
Keep in mind that a 30 year old person would pay a far less premium than a 60 year person for the same amount of insurance and the $1,000 figure above is only for demonstrating how the reserve for claims would grow.
The law of large numbers basically relies on the principle that the larger the pool, the more predictable the amount of losses will be in a given period. Since not all members of the pool are the same age or in the same health condition, we can assume not all of them will be making a claim at the same time.
In fact, by recording and studying the number of claims over a very large population, the number of 62 year old men, for example, who will die in a particular year can be fairly predicted. This is not to say the year a particular person will die can be predicted. It only says that in a given year there is a high probability that X number of men who are 62 will die at that age.
Accordingly, with enough data, a statistician can comfortably predict the number of persons of a given age who will conceive a serious illness in a given year. With enough data, the statisticians can assemble all of this information into tables. For deaths, the tables are called mortality tables and for sicknesses they are called morbidity tables.
All insurance is based on these two principles. A teenager commands a higher auto insurance rate because the statistical history has shown they have more accidents and the accidents are more serious than for a 40 year old driver. Homeowners located on the eastern seaboard of Florida have a higher incidence of losses than a homeowner located in Idaho and, statistically, should pay a higher insurance premium. It would not be fair to charge the Idaho homeowner additional fees to cover the costs of hurricanes in Florida, would it? A 40 year old man with two heart by-passes and who smokes statistically has less of a chance of living to age 70 than a 40 year old man who runs marathons. Again, this is not to say there will not be instances of a 40 year old marathon runner dying from heart problems or other causes but, statistically, those incidences will be less for the marathon runner than for the heart patient who smokes. Should both 40 year old men pay the same premium for the same amount of insurance coverage?
The application submitted by an applicant is extremely important to the insurance company. The application not only becomes essentially a legal document for purposes of recording what the insurance company knew about the applicant when the insurance company assumed the risk it is very important to the underwriter in rating the insurability of the applicant(s). There are generally rules within the policy to address errors, omissions or falsehoods provided on the application.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

Insurance Principles

Main principles of Insurance:

•  Utmost good faith
•  Indemnity
•  Subrogation
•  Contribution
•  Insurable Interest
•  Proximate Cause

Utmost Good Faith (Uberrimae Fides)

As a client it is your duty to disclose all material facts to the risk being covered.  A material fact is a fact which would influence the mind of a prudent underwriter in deciding whether to accept a risk for insurance and on what terms. The duty to disclose operates at the time of inception, at renewal and at any point mid term.

Indemnity

On the happening of an event insured against, the Insured will be placed in the same monetary position that he/she occupied immediately before the event taking place.  In the event of a claim the insured must:

•  Prove that the event occurred
•  Prove that a monetary loss has occurred
•  Transfer any rights which he/she may have for recovery from another source to the Insurer, if he/she has been fully indemnified.

Subrogation

The right of an insurer which has paid a claim under a policy to step into the shoes of the insured so as to exercise in his name all rights he might have with regard to the recovery of the loss which was the subject of the relevant claim paid under the policy up to the amount of that paid claim. The insurer’s subrogation rights may be qualified in the policy.
In the context of insurance subrogation is a feature of the principle of indemnity and therefore only applies to contracts of indemnity so that it does not apply to life assurance or personal accident policies. It is intended to prevent an insured recovering more than the indemnity he receives under his insurance (where that represents the full amount of his loss) and enables his insurer to recover or reduce its loss. 

Contribution

The right of an insurer to call on other insurers similarly, but not necessarily equally, liable to the same insured to share the loss of an indemnity payment i.e. a travel policy may have overlapping cover with the contents section of a household policy.  The principle of contribution allows the insured to make a claim against one insurer who then has the right to call on any other insurers liable for the loss to share the claim payment.

Insurable Interest

If an insured wishes to enforce a contract of insurance before the Courts he must have an insurable interest in the subject matter of the insurance, which is to say that he stands to benefit from its preservation and will suffer from its loss.
In non-marine insurances, the insured must have insurable interest when the policy is taken out and also at the date of loss giving rise to a claim under the policy.

Proximate Cause

An insurer will only be liable to pay a claim under an insurance contract if the loss that gives rise to the claim was proximately caused by an insured peril. This means that the loss must be directly attributed to an insured peril without any break in the chain of causation.

Basic Concepts of Insurance

Basic Concepts of Insurance
 At first, the initial concept of insurance is formed in the UK through a joint responsibility among ship owners to jointly raise funds in a certain amount to replace the losses incurred on the group members.
This concept was later extended to other investors.
In the initial concept, each member collecting a number of funds that will be used to assist members in the affected areas to return to run the business. For that every time a disaster, each member will be asked to put the funds back to restore the association's funds to its original position.

This concept later evolved into the concept of insurance is called the numbers a lot. The concept of numbers many states to provide adequate assurance, insurance companies must have quite a lot of customers who buy a type of insurance coverage.
After all it is met, the insurance companies could sell insurance products and determine the amount of premium to be paid in accordance with high customer low risk to be insured by the client. In setting the amount of premiums, insurance companies should consider the following; reserve funds set up in case of a claim at a later date, operational funds and insurance company profits to shareholders.
In recent years, in line with the high level of competition of insurance companies, some insurance companies determine the amount of premiums by not considering the things mentioned above. Some companies do not reserve sufficient funds to replace in case of claims from customers in the future.
This led to the emergence of a complaint from a customer where the insurance companies do not pay claims in accordance with the agreed payment terms or claims that are inconsistent with previously stated. In addition, these conditions force the government as a regulator (in this case the Insurance Bureau under the Ministry of Finance) to cover the insurance company concerned.
Therefore, be sure to get enough information about the financial condition of an insurance company before deciding to purchase insurance from an insurance company.

BUYING INSURANCE TIPS

BUYING TIPS & MANAGING YOUR LIFE INSURANCE POLICY

Many of you are probably currently in the process offered to buy a life insurance policy or even already have a life insurance policy.

Here are some tips on buying and managing your life insurance policy:

   1. BUY LIFE INSURANCE POLICY BECAUSE YOU NEED.

      Never to purchase a policy because your friends offer, brother, boyfriend, brother, sister, etc. But buy them because you need it.

When do you need insurance?

      If you have dependents such as a husband / wife, children, parents etc who are very dependent on you financially. Imagine if you as a breadwinner just unfortunate like disability or death means the loss of family income. Undoubtedly your family who have been financially dependent on you will have difficulty in meeting the needs of life and can lead to decline in the welfare of your family. By having insurance means that you ensure your family protected from disasters such as mentioned above

      If you have an obligation or a debt or loan repayments. For those of you who do not have dependents but already have obligations such as mortgage payments or debts required to have insurance to protect your debts if at any time you experience misfortune. Do not let your debt burden your family.

   2. VALUE OF ECONOMIC POLICY MUST BE COMPATIBLE WITH YOUR    REQUIREMENTS

      Life insurance policy you buy / have to have economic value that suits your needs.
      The easiest method to calculate the economic value of the policy (sum assured) that you need is based on  the cost of your expenses / liabilities.
      Example:
      Expenditure per month cost of Rp 5 million / month. With the assumption of deposit rate is 6.5% / year, then UP to be taken are:

      5,000,000 x 12 months (spending a year)
      ------------------------------------------ = Rp 92,307,692
      6.5% (Deposit Interest)

      With the UP of Rp 92,307,692 if something happens to you as a breadwinner, then by saving money in a deposit will get Rp 5 jt each month. Where is the money of this magnitude is enough to cover family living expenses if you are unfortunate.
      UP value that you have should always be evaluated at least or at most 5 years. It is useful to ensure that the tone to allow sufficient funds to ensure the welfare of your family.

   3. BUY TYPES OF INSURANCE IN ACCORDANCE WITH THE PRODUCTS YOU NEED.

      Basically there are 4 Types of Life Insurance are:

          * Term Life (Term Insurance)

            Life insurance can benefit from this type of protection in a limited period usually 1, 5, 10 or 20 years. Life insurance does not provide the benefits of cash value (cash value) unless the sum assured. So if you live until the end of the period of coverage there is no benefit gained from this insurance. Usually this is suitable for those who need protection in a short time (eg in travel agencies or tour or to protect the value of debt / credit to you). This type of insurance premium is the cheapest.

          * Whole Life (Life Insurance)

            This insurance provides protection benefit for life or until age 99 years. This type of insurance has a cash value (usually occur in 2nd or 3rd). This cash value you can use as a cash loan or a cash value that can be retrieved when you perform the redemption policy.

          * Endowment (+ Savings Protection)

             This type of insurance combines protection and savings / investment. In this type of insurance you will receive a death benefit in addition you will also receive a cash value that had been planned when life until the end of the coverage. Examples of this insurance is insurance education insurance and pension funds.

          * Universal Link / Investment Links / Link Units

            This type of insurance is life insurance coupled with an investment scheme. This type of insurance     suitable for those of you who enjoyed the element of risk in return for high yields as well. For those of you who want to buy the insurance of this type of investment consider the risk profile that suits you. To determine the appropriate risk profile usually you will be guided to fill out an application the determination of investment risk profile.

INSURANCE

Health Insurance 

Health is one of the valuable things in life. Quite often when someone is sick he will pay a high in the healing process. In fact, sometimes these costs can spend most of the wealth / property owned.
One way to anticipate the high cost is through health insurance programs.  
In general, health insurance programs provide specific benefits to the participant / insured if illness, accident or getting a medical service.
Health insurance programs are most commonly known widely that there are two day-care allowance (income hospital / hospital cash plan) and medical costs (hospital benefits). 

Daily Care Benefit (Hospital Cash Plan / Hospital Income) 

These programs typically provide benefits in the form of a fixed income benefit in a certain amount each day for participants to be hospitalized. For example a person would be given compensation / revenue of Rp 500,000 / day for hospitalized. Who benefit the most common types that exist today are the benefits of hospitalization and surgery. 

Medical Expenses (Hospital Benefit) 

If the above program provides benefits in the form of compensation / income are fixed, the program provides benefits in the form of reimbursement of medical expenses when a person must be hospitalized. Costs are generally covered in this program are: the room, ICU costs, cost of medicines and miscellaneous, surgery cost, cost of care for physician visits and specialist consultations, outpatient costs before and after treatment, ambulance fees, costs of outpatient and teeth due to accidents. 

There are two ways to set boundaries in the reimbursement of expenses is usually applied in the program. First use the boundary in the (inner limit). In this system, masing2 cost components by the insurance is limited to a certain limit. Example: a doctor's visit cost component limit of Rp 125,000 per day. Component surgery cost Rp 10 million per period of hospitalization, etc.. If then the cost of recrudescent higher than the maximum limit which is given then the insurance company will reimburse only for the maximum limit and the rest borne by the participants. In this system usually within a year the total nominal claims are not restricted.
The second limitation is to use the outer boundary. The system is also known as the "as charged" the cost will be reimbursed according to the bill listed in the receipts. Although labeled as charged, does not mean the program has no restrictions / limits. In this system the limit does not apply to masing2 cost components, but applied in a nominal amount of total claims cost component (usually a year). For example in year one participant has a nominal limit of Rp 100 million total claims. So long as the claim does not exceed the total nominal value of Rp 100 jt limit in a year the participants will receive full reimbursement.
In matters of this program claims to use two systems of reimbursement and managed care / cashless. On the reimbursement system participants are required to pay in advance all maintenance costs incurred. Then ask the reimbursement of new participants to the insurers in accordance with the scope and limitations of benefits contained in the policy. Meanwhile, cashless system participants are not required to pay in advance the cost of the hospital. In a cashless system of the hospital which will be billed the cost incurred to the insurers. So participants can come straight home after being treated any tanpamembayar. If then there was the difference between the cost incurred with coverage limits in the policy benefits (excess claims), then usually the insurance to participants will be billed later. But there are also requiring participants to pay the excess costs in the hospital before the participants go home.
Currently this type of health insurance program not only provides benefits expense reimbursement during the hospitalization but can be expanded to replace other biaya2 such as: outpatient costs that are not associated with hospitalization, delivery fees, cost of dental care and eyeglasses. 

Claim Documents 

In the system of reimbursement required supporting documents to make claims, the documents typically are:
Resume · medical / original diagnosis
· Original receipt and the details of the cost.
· Copies Recipes
· A copy of the request supporting diagnostic (X-ray, laboratory, anatomic pathology, etc.) follows a copy of the results
· Operations report including details of the operating costs if carried out surgery. 

Usually for a resume document care benefit programs of medical and does not need the original receipt, simply copy it (legalized).
Besides the documents, the participants must also pay attention to the requirements of the final boundaries of a claim can be filed. Normally a claim must be filed no later than 30 days since the medical services performed.