Term Life Insurance

A term life insurance policy is the simplest form of life insurance. In return for premium payments, the insurance company promises to pay a benefit if the insured dies during a specified period of coverage. They can be issued for a specific number of years or to a specific age of the insured. A term life policy does not accumulate cash value and the insurance company owes nothing at the end of the term specified in the contract.

As in all insurance products, there are different plans which are designed to benefit the specific needs of the insured. Term life insurance has three basic plans:

• Level term – In the Level Term plan, the amount of insurance protection remains level for the duration of the contract. The premiums will increase at periodic intervals as the policyowner ages but the coverage will remain the same until the policy is terminated or expires. At the end of the contract period, the contract expires and no money changes hands. If the policy is for a specific number of years, the contract will expire at the end of that period. If the insured dies during the term of the contract, his/her beneficiary will be paid the face amount of the contract. Similarly, if the policy is to be in force until the policyowner reaches a certain age, the contract will expire when the insured reaches that age. Again, if the insured dies before reaching that age, the beneficiary will receive the face amount of the contract.
• Decreasing term – In the Decreasing Term plan, the amount of insurance (death benefit protection) will decrease over the term of the contract. A thirty year decreasing term life insurance policy, for example, would have very little value in the 29th year. This type of insurance is often used as “credit life” insurance plan where an insured would like to cover a debt, such as a home mortgage. With a 30 year mortgage, a 30-year decreasing term life insurance policy could be purchased which would assure that if the insured dies during the 30 year mortgage period, the insurance death benefit would be sufficient to pay-off the mortgage.
• Increasing term – In the Increasing Term plan, the amount of insurance will increase at periodic intervals over the term of the contract in accordance with some established indices or some prescribed amount. This type of policy can be used where a young person, for example, cannot presently afford the amount of insurance coverage he/she anticipates will be needed in future years. You might wonder why a person would do this since he/she could simply go out and purchase a new policy when they get the funds. There is at least one very good reason for doing this. The face value is increased without the policyholder having to obtain evidence of insurability. Should the policyowner become disabled, the insurance would still be increased as long as the premium payments are made as scheduled.

Many term life insurance policies contain a couple of options (called “riders”) which can be added to the contract in return for some small increase in the annual premium. These are:

• Renewal Option Rider – if the term of the policy is for a specific period of time or to a specific age, the renewal option allows the policyowner to renew the policy at expiration without having to provide new evidence of insurability. This is a strong advantage to the insured because he/she can continue the insurance coverage even if they have become uninsurable.
  
• Conversion Option Rider – in this option the insured is allowed to convert the term life insurance contract to a whole life contract at any time during the contract term. Again, the primary advantage of doing this is that the insured can convert without providing evidence of insurability even if he/she has become uninsurable.
  

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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 for Buy-Sell Agreements

Own a business? Have a will for your business? Sole proprietorships, partnerships and small closed corporations all need to consider what happens if the owner or one of the partners or shareholders dies or becomes disabled. Who will purchase the company or the deceased partner’s or shareholder’s interest? What is a fair price? When will the sale be made? Will the deceased owner’s/partner’s/shareholder’s families be given a fair shake and taken care of? These are real questions every small business should deal with before the event occurs.

The business itself may also suffer form a supplier’s or creditor’s perception of the value of the deceased person to the success of the business. Key employees may consider the deceased’s death as a reason to move elsewhere. There needs to be continuity and a smooth transition in the business when tragic events such as deaths or disabilities occur. The buy-sell agreement is important to resolve a lot of problems dealing with employees, creditors, suppliers and the deceased person’s family.


Importantly, where will the funds come from to provide continuity and a smooth transition?
Everyone is going to die and sometimes it happens totally unexpectedly and at a much younger age when expected. There are no dying rules specific to owners, partners and shareholders. Stuff happens!
A buy-out sell agreement is, essentially, the will for the business and it eliminates a lot of difficulties and heartaches when a key person dies. A plan needs to be in place and a method of funding that plan must also be available.
There are several options for business owners to fund a buy-sell agreement:

• they can wait and see – “I’ll worry about that if and when it happens.” A sole proprietor can say, “I’ll be dead, so no reason for me to worry about it.” Sure! If it is a partnership, the partnership dissolves automatically and, “My partner will do the right thing.” Is that what you want? You can use your personal funds to buy-out your partner’s stock. But what if it comes at a bad time? Your personal stock portfolio is down, you’ve got two children in college, and you’ve had to take less income form the business lately because business has been in a slump. Maybe, after a lengthy probate the corporation can buy the stock and place it into treasury stock, if funds are available.
  But where does this leave the family of the deceased? Would you leave it up to your partners to do the right thing for your family no matter what the personal cost would be to the partner?
  
• they can borrow funds – obviously, borrowing funds is not an option to a dead sole proprietor. Could a key employee put together the money to purchase the company? Can the surviving partner(s) borrow enough to purchase the assets of the deceased partner? Maybe they can take out a second mortgage on the house? Maybe the lost one is the one depended upon by bankers and suppliers. Maybe the repayment and interest is simply too burdensome.
  
• they can set-up a savings account within the company in anticipation of an event like this happening but, again, if you are a corporation there may be accumulated earnings tax problems and if you are not a corporation, it may be difficult to maintain a savings account or the death may occur prematurely before enough funds are available.
  
• they can buy life insurance.
  

Let’s look at this from a sole proprietor’s, a partnership’s and a corporation’s perspective.

Sole Proprietor

Unless a sole proprietor (let’s call the person and “owner”) has a family member or a close relative to turn the business over to and feels comfortable the owner’s desires for his/her family members will be served, the options are limited. The business can be closed, it can be sold to an outsider, although small businesses are sometimes difficult to sell, or, if the owner wants his ‘baby’ to continue, it can be sold to one or more competent and faithful employees. The buy-sell agreement to a trusted employee becomes a two-step plan:

• an agreement is prepared which sets forth the employee’s obligation to buy, the price the employee(s) will pay for the business and the method of payment
  
• the employee takes out a life insurance policy on the owner. The employee is the owner of the policy, the person who pays the premiums and the beneficiary.
  

If the owner dies, the death benefits of the insurance policy would be used to buy the business from the owner’s estate.

Partnership

Partnerships are automatically dissolved with the death of one partner; therefore, a buy-sell agreement is very important. In this case, a buy-sell agreement would sell the deceased’s interest in the company to the surviving partner(s) at an agreed to price. For partnerships there are two different plans:

• Cross-Purchase Plan – in this plan each partner buys a life insurance policy on each of the other partners. The partnership itself is not a participant in the agreement. Each partner owns, pays the premium payments and is the beneficiary of the insurance policies on the other partners in an amount equal to his share of the purchase price set forth in the buy-sell agreement. The proceeds are used to purchase the partner’s business interest from the heir’s of the deceased.
  The number of policies required for a partnership with multiple partners would be the number of partners X (number of partners-1). For example, a plan for a partnership with three partners would require six separate insurance policies. Each partner would need a policy on each of the other parties.
  Let’s say a business worth $600,000 is owned by three partners in equal shares. Each partnership would be worth $200,000 and if one of the partners died, the other two partners would have to provide $100,000 each to equally purchase the deceased person’s share. Therefore, each partner, in this case, would take out a policy on each of the other two partners in the amount of $100,000 each.
  
• Entity Plan – in this plan partners enter into an agreement with the partnership who owns, pays the premium payments and is the beneficiary of the policies. When a partner dies, his/her interest is purchased from his/her estate by the partnership at the buy-sell agreement price and the interest is then divided among the surviving partners in proportion to their own interest.
  In this case, the $600,000 business discussed above would purchase a $200,000 policy for each of the three partners. If one of the partners dies, the business pays the deceased partner’s share from the death benefit of the policy and distributes those shares equally to the two remaining partners. The remaining partners, in this case, would then each own 50% of the business.
  

Because of origination funding, buy-ins, etc., not all partnerships are owned equally by the partners. In those cases, both the insurance policy’s amounts and the benefits distributions would be made on the basis of each partner’s proportionate share in the business.
Additionally, none of the premium payments in the above plans are tax deductible; however, the benefits are tax-free.

Closed Corporation

Unlike a partnership, a closed corporation (i.e. a small number of shareholders who run the business) does not cease to exist with the death of one of its shareholders. For closed corporations, there are also two different plans:

• Cross-purchase plan – each stockholder owns, pays for and is the beneficiary of life insurance on the other stockholders in amounts equivalent to his or her share of the purchase price. The corporation is not a party to the agreement. The surviving stockholders purchase the interest of the deceased stockholder as individuals from the estate of the deceased stockholder. This plan is like the cross-purchase plan described in the partnership section above. Obviously, the more shareholders the more difficult this plan becomes.
  
• Stock redemption plan – the corporation, rather than the stockholders, purchases the insurance policy, pays the insurance premiums and is the beneficiary on the lives of each shareholder. The amount of insurance on each stockholder is equal to the proportionate share of the purchase price. Upon the death of one of the stockholders, the death benefits are paid to the corporation who then buys the deceased’s stock from the deceased’s estate. Premiums are not taxed deductible but the proceeds are received income tax free.
  

Any agreements and insurance polices within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.

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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.

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.