This course is designed to provide accurate credit hours for your state. It is not intended to be used as selling material or to give any type of professional or legal advice to either the agent or the client. Since this material is gathered from many sources, there may be differences of opinion expressed or implied within the course. The material enclosed is subject to change at any time since laws or customs may change.

It is understood by those who read this credit course that this material is not to be copied or used in any manner without prior written authorization. All courses are the sole property of United Insurance Educators, Inc.

It is further understood that the agent requesting the credit hours must have personally read the text and personally taken the test. No certificate of completion may be given under any other circumstances.

Thank you for ordering your credit hours from United Insurance Educators, Inc. We welcome any suggestions you may have.

INSURANCE PRINCIPLES

A state approved educational course.

The fundamental objective of buying any type of insurance is to provide a means of covering financial losses that may occur.

Nearly everyone is familiar with the concept of insurance. Pascal (1623 to 1662) has been credited with proposing the modern theory of probability. Insurance affects everyone. Few people could own homes, drive cars, attain adequate medical attention or provide financial security for their families without insurance. While insurance provides these services when properly applied, millions of dollars are also wasted on improperly applied insurance. When it comes to insurance, what one doesn't know certainly CAN hurt both the policyholder and the agent. Few people know or understand their insurance policies. Many of the mistakes made could be avoided if buyers could rely on the expertise of their insurance agents. Unfortunately, just as in many other businesses, many salespeople and their backup personnel are not always qualified to serve the policyholder, nor are they motivated to do so. Therefore, when it comes to insurance, the old saying " Ignorance is bliss" does not apply.

Consumers face common problems and seem to make the same mistakes when buying insurance. Usually, gaps and overlaps occur unless the buyer is well informed. For instance, a policyholder might buy a policy to protect their home from fire and theft, but overlook the loss that occurs while their homes are repaired or reconstructed. This forces the policyholder to pay the mounting costs of living in a motel while their home is being repaired.

From the policyholders point of view, our society seems to be forcing them into an "insurance poor" situation. If one were to insure every possible loss, the possibilities might be endless. The idea is, therefore, to calculate "the modern theory of probability." The difficulty with insurance is that the layman needs to know everything at once. Which hazards of life are most likely to strike?

When Russia's first spaceship, the Sputnik, began its tumble to earth, a man in Arizona, fearing damage to his luxurious home, bought a policy to protect himself and his possessions against loss in the event that the spaceship smashed into his property. The likelihood of this was extremely small, but to him it was a real and frightening threat. Therefore, the policy eased his mind against what he perceived as a real life hazard. He felt relief from a possible financial burden of life. That is the basis of all insurance policies.

The burden of financial loss is transferred from an individual to an insurance company through an insurance policy. Usually, in the absence of legal remedies or contractual obligations, these losses are allowed to remain where they fall. Without an insurance policy, losses must be covered by those people affected by a loss, whether it is a house fire, a car accident, a heart by-pass operation or any other financially draining situation.

Losses caused by negligence of another may allow the costs to be shifted to society or the person directly responsible. If a house burns down due to a careless neighbor, the loss might be shifted to that person. If a car accident occurs due to a drunken driver, the loss might be shifted to that driver. We use the phrase "might be shifted" for two reasons:

1) fault must be proven, and

2) if fault is proven, the guilty party must have the financial ability to pay the damages or costs incurred.

In some situations, laws redistribute the loss. For example, worker's compensation laws charge losses from industrial accidents to employers, without regard to fault. The law requires employers to guarantee the availability of funds for these losses.

Social Security laws redistribute income losses resulting from unemployment, disability, old age and death. In some jurisdictions no-fault laws governing auto accidents have shifted financial loss from the responsible party to the injured party. In these states, injured persons collect from their own insurers avoiding lengthy and costly court litigation.

Whether a financial loss remains where it falls or is shifted by law, the loss must land somewhere causing someone financial problems. A family whose home burns down, a family whose breadwinner dies, the wife of a man who needs major surgery, will all suffer a financial burden.

Families and businesses exposed to serious property, income and liability losses want methods to protect them from these potential losses. One effective solution is a private contractual arrangement shifting the financial loss to members of a selected group who are also exposed to similar losses. These loss-sharing arrangements are called Insurance Policies. We, as agents, are, of course, expected to know this. People tend to forget the actual definition, however. That definition is the basis of our profession. That principle of insurance is so very simple, yet its application can be most complicated!

Insurers (organizations who administer insurance plans) may be corporations, partnerships or syndicates of individual underwriters. We agents supply the policyholders for those insurance carriers. Agents, usually called the "field force," can be either employees (captive agents) or independent agents representing multiple companies.

The insured can be any person or company protected by the policy from financial loss. Under this particular definition, in a life insurance policy, the insured is actually the beneficiary. The policyholder would be the person who dies leaving the beneficiary a sum of money. In a fire insurance policy, the insured is often the homeowner and the mortgage lender if the lender is named in the policy. On a liability policy, the insured can be either the policy owner or the person to whom the damages are paid or both.

In earlier liability insurance policies, the insurer promised to "reimburse" policy owners for damages due to a negligent act. Now, under most current liability insurance policies, the insurer agrees to pay "on behalf of the policy owner." So, if a person is required to pay for a negligent act, his insurer will do so on his behalf. There are two "insureds" here:

1) the person who owns the policy is protected from financial loss, and

2) the person who was the victim of the negligent act is protected from financial loss.

Since the term "insured" causes so much confusion, most policies use more precise terms such as "policyowner", "subject", "beneficiary", "claimant", etc.

Developing a legal insurance contract is no simple matter. These contracts must define exact circumstances under which the insurer will pay and the amounts to be paid. Obviously, attorneys are involved in preparing the contracts and handling disputes, should they arise over the interpretation of those contracts.

An extensive analysis of economics and technical consideration is needed to determine several things:

1) kinds of insurance,

2) insurance rates, and

3) restrictions on coverage issued.

These underwriting decisions are made by industry-educated specialists such as engineers, statisticians, doctors, meteorologists, and economists. Different types of insurance require different types of industry underwriters. Understanding insurance coverage can best be done with an analysis of insuring agreements, limitations, exclusions, conditions, and definitions within the policy itself.

Insurance requires an equitable distribution of costs among the policyholders. Underwriters classify and rate each loss exposure to maintain this semblance of equity. The premium will vary with the likelihood of loss and its probable severity. Obviously, some chances of loss will be too great and, therefore, the insurance company will refuse to take the risk. Since the nature of insurance requires handling and investing large sums of money by skilled investment professionals, insurance, as a major financial institution, has a significant effect on our economy.

The insurance industry is subject to a greater degree of public control than most other businesses. Nearly all aspects of insurance are regulated, starting with the formulation of insurers (insurance companies) and ending with their liquidation. This is due to the nature of insurance. Insurance is a business affected with a public interest; that is, it affects the community at large.

Insurance requires public confidence. Incompetency and/or dishonesty caused many company failures in early American history, peaking during a period of expansions following the civil war. At that time, insurance companies were not trusted and were viewed with suspicion. It is understandable that insurance companies need to be regulated to prevent insolvency. Insurance buyers rely on the company's promise to pay claims. If an insurer is unable to honor that promise the customer looses not only the purchase price, but also the resources to cover a financial loss. Furthermore, persons winning judgments against insureds may be unable to collect damages, creating a social injustice.

Insurance has been regulated for along time, but not until 1914 was it held by the US Supreme Court to be a business "affected with a public interest." The court ruled that insurance was affected with a public interest because it plays such an important role in other businesses, and therefore, regulation is in the publics' best interest.

Individual states establish the criteria and standards for policy provisions, rate expense limitations, valuation of assets and liabilities, investment of funds and the qualifications of sales agents. Some forms of insurance may sometimes be more regulated than others. The extent and quality of regulations will vary from state to state.

There was a time when private insurance as a business was separated into three branches:

1) life,

2) fire and marine, and

3) casualty and surety.

Most states chartered companies to write coverage only in one of these branches. Many insurance experts doubted the wisdom of this approach and insisted that only life insurance should be a separated division. Auto insurance, for instance, was split between fire insurance for physical damage and casualty insurance for liability. Collision could be written by either branch.

Finally, in the late 1940's and early 1950's, legislation was passed by the states providing full multiple-line underwriting powers for fire and casualty insurers. Multiple-line underwriting powers do not extend to life insurance except in a few states that had never divided insurance types to start with.

Life insurers write three types of coverage:

1) life insurance,

2) annuities, and

3) health insurance.

Life insurance, of course, provides money upon the insureds death. Annuities are the reverse of life insurance. They are a form of putting money aside to be annuitized to provide lifetime income. There are many types of health insurance, all designed to offset medical costs. Health coverage includes disability insurance to provide an income when a disability results due to illness or injury.

GOVERNMENT INSURANCE:

Government insurance is written by both federal and state agencies. It may be voluntary or compulsory depending upon the type being considered.

Voluntary plans written by the federal government include crop insurance, military personnel life insurance, bank deposit insurance, savings and loan insurance, securities investor protection insurance (covers cash and security balances held with participating brokers), crime insurance, mortgage and property improvement loan insurance, Social Security, Medicare, insurance against foreign expropriation of a limited class of American owned companies (those in new countries) and backup programs written in cooperation with private companies for coverage against loss from floods and riots in qualified areas and also for writing surety bonds for small minority contractors. Voluntary insurance plans written by one or more state governments include hail, life in Wisconsin, title auto in Maryland, medical malpractice and worker's compensation.

Social insurance is the term put on government insurance coverage required of the masses. Social insurance is written by both the federal and state governments. This type of insurance is generally compulsory. Social Security is one such compulsory insurance program. Social security offers income coverage for qualified survivors of deceased workers and their dependents and medical care upon reaching age 65. Pension termination insurance is another form of compulsory federal coverage.

New federal insurance plans are continually being proposed. For instance, national health insurance has been a constant topic for several years.

State governments also administer social insurance plans, one of which is unemployment benefits. Compulsory non-occupational health insurance is required in five states and in Puerto Rico. Six states operate monopolistic state funds (no private insurance allowed) for workers' compensation. Twelve states operate workers' compensation funds that compete with private insurance. Private insurance can be written by private insurance companies. Workers' compensation is required in most states.

Although the contributions of insurance are significant to society, it is not without its costs. It was not a coincidence that the rise of England as a great trading nation occurred at the same time it emerged as a nation with exceptional insurance facilities. A trader who sent a ship load of finished goods to colonial America in exchange for raw materials might have stayed with domestic local trade if marine insurance had not been available.

No one quite knows just when life insurance was first written. It is known that retirement insurance, of a sort, was available in Babylonian. Under Babylonian law, a person could adopt a son, rear him and then depend on him for support during retirement.

In early Greece, several religious groups had certain devotees whose function was the care and custody of a temple belonging to the group. These temple societies collected monthly subscriptions from other devotees. In return, each member was assured a decent burial according to the rites of each particular group, as well as providing cash to the immediate survivors. If a member fell behind on their monthly installments, fines were levied. If a person died while in default, no burial was provided. Some of the societies allowed members to borrow money under certain circumstances, which is an early example of policy loan provisions.

The Romans liked many of Greece's ways including the idea of religious societies furnishing burial insurance and funds for the most important post-burial needs of the deceased's family. The Romans, however, began to place less emphasis on the religious aspect and opened up the societies to the general public. The Romans developed a special society for soldiers for death benefits and pensions for disability and old age.

Insurance was not greatly developed, however, until the 14th century. In 1310 in Flanders, an insurance company was chartered and the industry and the forms began to take on a modern element.

During the Middle Ages the guilds continued to cover lives much like the Roman burial societies. The guilds were grouped for persons associated in trade or industry. Religion did not play a part in them. In addition, the guilds accumulated insurance funds that were used to pay other losses. The dangers of fire, robbery and livestock mortality were among those things commonly covered. Loss payments were restricted. For example, a person who burned down their own house could not collect benefits. One guild refused to pay fire losses for persons guilty of "lust, dice-playing and gluttony." The middle ages provide at least one instance of non-mutual, all risk property insurance.

Insurance has a definite social value since it plays an important role in encouraging business. The effect is the same as that attempted through legislation designed to restrict monopolies. Insurance eliminates one barrier to establishing a business. For instance, if a person wishing to invest in a grocery business found that fire insurance was not available to grocery stores, he might be reluctant to invest in that business. If others felt the same way, the result would be higher prices through higher sales margins for the few willing to take the risk.

One influence that interfered with the smooth function of competition was the lack of knowledge. To the extent that insurance eliminates the uncertainty of financial losses resulting from a given set of causes, it provided or increased knowledge, therefore decreasing one of the obstacles to competition.

Insurers, through loss-prevention activities, also contribute to the economy by decreasing the chance of financial loss. Insurance companies maintain large engineering staffs to determine why accidents happen and how to prevent them. They also support safety research, medical research, and health education.

Insurance is greatly important to our credit system. When one buys a car on credit, one signs a contract promising to pay for it, assuming the person will continue to live and work. However, if the person buying the care dies or becomes disabled, life and disability insurance protects the creditor. The same idea applies to home and fire insurance. If a home burns to the ground, the mortgage holder knows they will be protected by the insurance policy.

Often insurance is important in what is commonly called "peace of mind." Parents, who realize their death could come prematurely, worry about the welfare of their children. Annuities for the elderly provide comfort by providing financial security. There are many ways of providing the peace of mind that today's society seeks.

Insurance is often used to solve complex social problems. Worker's compensation and Social Security are two examples of this.

Insurers play an active role in finance influencing the investment and financial markets around the world. Insurance companies provide funds for industries and engage in financing government projects. Many insurers are also in the "financial planning" business. Some have become part of conglomerates or have created conglomerates themselves. They have organized or bought mutual funds, real estate investment trusts, financial consulting services and investment brokerage firms.

In 1967, nearly 175 life insurance companies pledged one billion dollars for investment in urban ghetto areas that previously did not, and probably could not, qualify for conventional loans. This program was known as "I-CAP" for "Inner-city Capital Investment Program." The insurers retained control over the distribution of these funds, but the loans were subject to the following guidelines:

1) Projects not ordinarily financed by life insurers because of the risk or location involved were eligible.

2) Housing and residential projects providing improved living space for low and moderate-income families presently living in blighted urban areas were eligible.

3) Businesses offering new job opportunities or medical community services for people living in the inner city were eligible.

After investing most of the first billion in 1969, the life insurers then pledged another billion dollars. One insurer pledging about 35 percent of the total commitment reported a default rate of about 15 percent by the end of 1974. This default rate is about double the average rate in areas able to obtain loans from regular sources.

One of the early problems life insurers faced in investing these funds was their inability to find property insurers willing to write coverage on the business and residential property against physical damage-fire, theft, etc. This problem was partially solved by an industry-government-sponsored facility known as the "fair" plan (fair access to insurance requirements).

There are social costs of insurance and these costs cannot be ignored. Not all premiums paid are used to pay losses. During the 1970s, capital-stock property insurers incurred annual losses ranging from 66 percent to 79 percent of the annual premiums "earned." About 78 percent of the annual income of life insurers is used to pay current or future claims of policyholders. Expenses of capital-stock property insurers for the same decade ranged from 27 percent to 30 percent of annual premiums "written." There is a distinction between premiums "written" and premiums "earned." Losses are related to earned premiums and expenses are related to written premiums. The life insurer's operating expenses have ranged from around 16 percent to 18 percent of annual income according to data quoted in the Life Insurance Fact Bill which is published by the American Council on Life Insurance. The appearance of greater efficiency of life insurers is misleading. Life insurers experience a lower percentage of operating expenses to income because of their higher investment income. Life insurers are more than just insurance institutions. They are also savings intermediaries.

The difference between premiums earned and losses paid is used to compensate those who either work in insurance or provide it with operating capital, supplies and space. Some funds are used in building surpluses for future use in expanding operations or strengthening the company. Nearly two billion people are utilized to operate the insurance industry. The business also uses land and capital resources. Tying up these resources are part of the social cost of insurance. Of course, with today's job market, the people involved are probably glad to have a job and would not consider that to be a social cost of insurance. The companies must maintain large reserves, which they do by investing in other businesses. This does reduce the net social cost of capital used.

Insurance companies are the victims of many fraudulent losses. Insurers receive claims for arson, theft, and even murder. Willful destruction of lives and property, to collect on insurance policies, ends up costing society and adding another social cost of insurance. Unfortunately, the availability of insurance also may reduce the incentive to protect property against loss. This lack of incentive may be responsible for losses that otherwise would have been prevented. In addition, since payment is generally made by a third party in many types of claims, the insurer interferes with normal cost control mechanisms between consumers and providers. For example, the increases in the cost of medical care have been caused, in part, because the consumer does not have to pay directly for much of the fees charged. They simply pass the cost on to their insurance companies.

Many people believe that insurance companies should be regulated in the same way as railroads and public utilities. Others favor increased competition in the marketplace. The objectives of the insurance industry conform with many of our social goals - loss predictability by reducing social unrest, minimizing the chance of unexpected loss, lessening damage from catastrophes and encouraging loss prevention. These goals provide useful social functions, as well as stabilizing insurers profitability.

Because the insurer is obligated to pay the policyholder only under a defined set of circumstances within the policy, the policyholder must understand fundamental items:

1) which events are covered,

2) how one gets paid, and

3) the amount that the policy will pay.

All these answers are in the policy. Even so, owners seldom actually read their policies. They generally rely on their agent or agents to protect them reasonably well. Insurance policies are likely to be the nation's number one "UNREAD" best seller considering the quantity of policies written. It's not unusual for a policyholder to first realize that his insurance contract does not cover everything when a claim comes back denied. It's often said "The big print gives, the little print takes away." Actually, that is a false statement. All policies pay exactly as they say they will. It is just that few policyholder's take the time to read exactly what a policy does or does not pay. Even the insureds' agent sometimes does not fully disclose this information. However, if the disappointed policyowner had been forewarned to read the policy, both the policyowner and the insurance company would benefit with fewer dissatisfied claimants and better reputations for all insurance companies.

Insurance policies all have the same components: declarations, insuring agreements, exclusions and conditions. Policies may also have endorsements and riders.

DECLARATIONS are descriptive material relating to subjects covered, persons insured, premiums charged, periods of coverage, policy limitations and warranties or promises made by the insured relating to the nature and control of the hazard that is covered.

INSURING AGREEMENTS broadly define coverage on insurance policies. Definitions of important policy terms may also be found in insuring agreements. When used in the policy these terms will appear in boldface type in most cases.

EXCLUSIONS reduce the broad coverage listed on the insuring agreements. Looking at the old saying, "The big print giveth; the little print taketh away," in this case, it would state "The insuring agreements giveth, the exclusions taketh away." There are several ways that exclusions "take away." Insurers modify insuring agreements to:

1) facilitate management of hazards both physical and moral,

2) eliminate duplicate coverage due to multiple policies or such things as Medicare benefits,

3) eliminate coverage not needed by the typical policyowner,

4) eliminate uninsurable exposures, and

5) eliminate specialized coverage that the insurer is not qualified to offer or that requires special underwriting.

Exclusions often lower premiums because particular risks are eliminated for the insurer. Covering high risks would of course, require higher premiums.

CONDITIONS control the insurance company's liability for covered losses by putting obligations on both the policyowner and the insurer. One might say that "conditions" are the ground rules. The usual conditions are those relating to the policyowner's duties and obligations after a loss, other insurance, cancellation and optional settlements. The types and variations of conditions could nearly be a chapter in itself since there can often be a great deal involved in them.

ENDORSEMENTS AND RIDERS are used when standard or preprinted policies do not fit a particular need. To correct this situation, a policy can be modified by adding special provisions. In life insurance, these provisions are usually called "riders." In property and liability policies, they usually are called "endorsements." Both are used to complete a contract, alter coverage to meet particular needs and to change policies which are in effect.

For most people, understanding an insurance policy is a major obstacle. A systematic approach is best. Take each section and read it several times. Underline or highlight confusing phrases or sections. The selling agent should then be contacted for explanations. The policyholder needs to do this during the "Free Look" period. Once that period has passed on health and life coverage, a refund cannot be obtained in most cases. The "Free Look" is the period of time the policyowner has to examine the policy. It begins on the day the insured has the actual policy in hand. The time period will be between 10 and 31 days.

CASH VALUE life insurance policies have a "cash value." The face amount is the amount of loss. No attempt is made to place an actual value on the life of the deceased person. The beneficiary collects the full face value regardless of personal considerations. The insured carries the responsibility of determining the amount of coverage held.

In health insurance, the "cash value" is determined by several factors depending on the type of policy purchased. The policy might be a "hospital indemnity" paying a set amount per day of confinement (say, for example, $150 per day for a maximum of 180 days) or the policy might cover the cost of 180 days hospital room and board in a semiprivate room without being specific as to an actual dollar amount. Medical policies vary too widely to be able to state a specific rule on their "cash value."

Disability policies are specific on "cash value." They will state both a dollar amount and time limitation. The time limitation can be a short term or until the age of 65.

Some types of policies may allow the insured to collect more than the actual cash value of a loss:

1) valued policies,

2) duplicate coverage (more than one policy), and

3) replacement-cost insurance.

VALUED POLICIES: many states have valued policy laws requiring insurers to pay the face amount of the policy "for a total loss of real property." In these states, the insurer would have to have appraised all covered real property before buying the insurance to avoid the possibility of excess insurance. However, since few real property losses are total losses, insurers often find it less expensive to pay an occasional excessive claim than to appraise all insured property. Valued policies violate the principle of indemnity and increase moral hazard.

DUPLICATE COVERAGE: this often occurs in health insurance. For instance, a policyowner can collect on his or her disability policy, according to the terms of that policy, even if their employer continues to pay their wages while they are disabled. Such a situation would allow duplicate coverage.

If a person is on Medicare, that person may collect on a health claim from Medicare, their Medicare supplement (as many supplements as they happen to carry), plus any indemnity or medical-surgical policies which they may have.

REPLACEMENT-COST INSURANCE: replacement-cost insurance covers the cost of repairing or replacing damaged property without deduction for depreciation. This coverage protects policyowners for the difference between the "actual cost value" and the restoration cost, which eliminates an otherwise uncovered exposure.

An insurer will not pay more than the policy face amount of the policy limits. In liability insurance, the cost of defense, premium on bonds, cost of investigations and so on, generally are not included in the policy limits. Usually, the limits apply only to judgments awarded by the court. Also, indemnities under the sue-and-labor clause in marine policies may be in addition to the face amount of the policy.

When a loss occurs, face amounts of policies can change. Life insurance is irreplaceable, of course, so there is no question of restoration. After all, a person can only be one of two things: either dead or alive. Other types of insurance, however, can be restored after a loss. Some types of health insurance do not reduce coverage due to a loss. Other types of health insurance do. For example, many major medical policies have a million dollar life time limit. Therefore, every time a claim is paid, the remaining benefits decline. Many types of dread disease policies, such as cancer policies, set limits on benefits. As these services are used, the policy benefits are reduced. A current example of restoration policies is nursing home plans with a "benefit period" and a "lifetime benefit period." Generally, these policies have a set time "per benefit period." For example, one company has a 3 year benefit period. Then the policy also provides a maximum lifetime benefit period of five years.

This means that if the patient comes home after a nursing home confinement, up to two years will renew itself (restoring two years of benefits) if all conditions of the policy are met.

In most liability policies, the payment of claims does not reduce the face amount of the insurance. The insurer will pay up to the limits of the policy for each loss and all losses that occur during the policy period. The policyholder is not required to pay additional premiums after each accident to restore benefit amounts. Aggregate limits, by definition, are the exceptions to the rule.

As a rule of consumerism, in most cases, multiple or double coverage is not advised. However, it may arise for many reasons. If both husband and wife are employed where group coverage is provided, duplication may occur. Often we see policies purchased that duplicate benefits in one area, but provide separate benefits in other areas. An example of this may occur in Medicare supplements where a plan provided through retirement pays full hospital benefits, but only limited part B medical benefits. Often, those policyholders will purchase mail-order policies, such as AARP's plan, in an attempt to better cover themselves on Part B benefits.

Many policies, especially those for people under the age of 65, have specific policy clauses limiting payment when more than one policy is involved in payment of losses. It is considered a moral hazard when a policyholder gains from a loss which results in making insurance a gambling transaction, thus violating public policy.

CONTRIBUTING INSURANCE:

Two methods of apportioning losses when two or more policies cover the same loss and interest are PRO RATA and LIMIT OF LIABILITY.

The PRO RATA liability clause divides payment equally between insurers respecting any policy amounts that may be in the coverage. For example, one insurer (A) writes $40,000 on a building; another (B) writes $160,000 on the same building. On a loss, the first insurer (A) would pay 1/5 of the loss and the other (B) would pay 4/5 of the loss, even if the loss were a smaller amount, such as $60.000. Computed by the following formula, it works like this:

Insurer A or B

Insurer A's or B's liability = X Amount of loss

Insurer A and B

Therefore, the insurers pay an amount of the loss in respect to the other policies in force. Insurer A would pay $12,000 on the $60,000 loss and insurer B would pay $48,000. If both policies had been equal in the amount of coverage then they would have each paid half using the same formula.

Some policies provide that the "limit of liability," rather than "Pro Rate" liability, shall be the basis for payment of a loss. Therefore, rather than apportioning the loss over the total face amounts, the limit of liability apportions it over each insurer's liability as if there had been no other policy in effect.

The following is used:

Liability of A OR B

As if each wrote only policy A or B's liability =

Liability of A AND B

As if each wrote only policy = X amount of loss

Both top and bottom figures must be used in the formula to get the correct amount. It is not as simple as both policies paying independently of each other.

Nursing home policies (commonly referred to as long-term care policies or LTC policies) may be an indemnity policy in which case they pay a set amount of benefits per day (regardless of other policies in force and even regardless of the actual charge made) or they may pay "up to" a set amount per day. Refer to the policy language for clarification. "Indemnity" is the key word.

Some policies may stipulate that they pay nothing until all other policies have paid, at which point the policy usually pays only remaining balances. This is often true in group plans when both spouses are covered by group medical plans which cover all eligible family members. These types of policies are termed "excess coverage." If the husband incurs medical expenses, the insurance provided by his employer pays all covered benefits up to that policy's limits. Costs exceeding those limits will be covered by his wife's coverage. In group medical expense policies, this arrangement is called "Coordination of Benefits." This usually occurs between group policies only; not between one group policy and one individual policy, although the insured should always read the policy limitations to be sure.

The husband's group policy would also be called the primary insurer. His wife's policy would be called the secondary insurer.

Where Medicare is involved, Medicare may be either the primary or the secondary insurer depending on how the employer's group plan is designed. Most group plans would prefer Medicare be the primary since it is a big savings to the insurer. If an individual Medicare supplement policy and Medicare are the only two plans in effect, Medicare is then always the primary insurer and the supplement policy is always the secondary insurer. When Medicare and more than one individual Medicare supplement plans are involved, Medicare is still always the primary insurer. Each Medicare supplement policy in force is a secondary insurer. Each Medicare supplement policy will pay according to its policy terms without regard to any other supplement policy in force. Even so, only one Medigap policy should be purchased.

Some policy contracts contain coinsurance clauses, which restrict recovery for partial losses if the policyowner does not cover the property for a given percentage of its actual cash value at the time of loss. Coinsurance is optional in some policies and required in others. The policyholder is charged a reduced rate when a policy contains a coinsurance clause. Larger deductibles also lower premium rates. The purpose of coinsurance is to help achieve equitable and adequate rates. Fire insurance is the best illustration of this. Most fire losses are partial. Less than 2 percent result in total loss and more than 80 percent produce total property value. Therefore, property owners can cover most losses with only 10 percent of insurance to value. Since the property may be the security of a mortgage loan, however, generally full coverage is required by the lien-holder.

Deductibles play a major role in insurance. In some types of policies they are optional; in others they are mandatory. The size of the deductible is often a choice made by the policyholder with premiums decreasing as deductible amounts increase. The insurance premium is lower when larger deductibles are chosen because small claims are eliminated. Deductibles also decrease moral hazards. Insureds who are forced to pay part of each loss may be encouraged to reduce their losses.

Major medical policies over the past few years continued to reduce deductible amounts. The quick rise in premium rates clearly demonstrated the result. The amount of claims rose at a much higher rate than normal due to the policyholders desire to get as much as possible out of their policies. There was simply no encouragement for policyholders to keep their claims down. Agents interested in their clients welfare understand and appreciate the value of deductibles and urge their clients to buy them if:

1) the client can absorb the deductible loss, and

2) the rate deduction is fair.

There are several types of deductibles:

1) STRAIGHT DEDUCTIBLE is the most common type. With this type, the insured pays a set amount before the policy pays anything. Some straight deductibles are a percentage of a value rather than a fixed dollar figure. Earthquake insurance is often written as a percentage.

2) FRANCHISE DEDUCTIBLE is found in ocean marine insurance. If the loss exceeds the franchise, the insurer pays the full loss, not just the excess. Assume a shipment valued at $3,000 is covered subject to a 3% franchise. If a loss amounts to less than $90 the insurer is free of liability, but if the loss exceeds $90 the insurer is liable for the full amount. Marine insurance can be written with a straight deductible, but the franchise type is more common. Straight deductibles are most common in medical insurance.

3) ELIMINATION PERIODS are deductibles expressed in terms of time not covered. This is common in disability and nursing home policies. In this type of deductible, no benefits are paid until a set period of time has passed. Waiting periods are more common in sickness plans than in accident plans.

People face four basic contingencies to their economic productivity: death, disability, compulsory retirement and unemployment. Life insurance is a financial instrument in several ways:

a. providing financial support for survivors,

b. paying estate costs at death,

c. helping business offset losses caused by the death of key personnel, and

d. accumulating funds for retirement, emergencies, or business uses.

Annuities offer insureds lifetime post-retirement income. There are other types of insurance that also play a role in these areas, such as disability income insurance.

In the United States, well over $3.2 trillion of life insurance is in force. About 44 percent is group life insurance. Obviously, life insurance plays an important role in personal financial planning. THE FEDERAL EMPLOYEE RETIREMENT INCOME SECURITY ACT of 1974 spurred the amount of life and annuity sales because it provided tax incentives for individuals not covered by employee benefit retirement plans. The federal ECONOMIC RECOVERY TAX ACT OF 1981 further liberalized tax incentives by increasing the allowable amount of tax-sheltered contributions to individual retirement accounts. It also extended the privilege to workers covered by other retirement plans.

Life insurance is classified into four groups:

1) participating and nonparticipating,

2) cash values,

3) specific type of policy written (term, endowment, whole life, or some combinations of the three), and

4) the kind of coverage written (ordinary, industrial or group).

Life insurance is issued either as participating (PAR) or nonparticipating (NON-PAR). PAR life insurance provides for policy dividends. These policy dividends reflect part of the insurers gains when:

1) investment income is higher, or

2) death claims and/or operating expenses are lower than projected.

Higher investment income has been the major source of dividends generally. Inflation has either reduced or eliminated operating expenses as a dividend source. Non-par policies do not provide for policy dividends.

There are differing views on whether a PAR or NON-PAR policy is most advantageous. To be competitive, insurers generally must charge lower guaranteed premiums for NON-PAR than for PAR policies of the same type issued at the same age. However, the "net premium" (premiums paid less dividends received) for PAR policies in force for several years is expected to be less than for NON-PAR policies. NON-PAR advocates argue that NON-PAR premiums are guaranteed and point out that PAR policy dividends are not guaranteed. PAR advocates answer with the argument that dividends, although not guaranteed, generally have been higher than those projected when the policy was sold.

CASH VALUES:

Life insurance has often been used as a savings medium. Part of the premium paid in accumulates plus the interest earned on it. If a policy owner purchases a series of one year policies (that is, each year buys a new one-year policy) and pays a yearly premium just sufficient to cover his or her share of death claims and company expenses for the year, then no cash value would accumulate. However, if a policyowner buys a policy that is kept in force more than one year and pays for it with a series (pays each year on the SAME policy) of level annual premiums, cash will accumulate.

It works like this:

1) Assume 100,000 people of the same age (say 25 years old) each have $1000 of life insurance issued at the same time.

2) Each pays an annual premium of $10.25 figured mathematically based on interest and mortality tables (for this example, expense assumption is ignored to keep this illustration simple). The total paid by all policyowners amounts to $1,025,000 or $10.25 x 100,000 people.

3) The premiums are invested for a year and earned an assumed interest rate of 4.5% - the minimum guaranteed amount. The interest earned on the initial premium paid in is $46,126 or $1,025,000 x .045. When $46,126 is added to the initial premium of $1,025,000 the policyholders now have a fund which equals:

$1,071,126 or: $1,025,000.00

+ 46,000.00

$1,071,126.00

4) Based on mortality rates, 193 of the original people die during the first year. On behalf of each person dying, $1,000 death benefit is paid at the end of the first year for a total of $193,000 or 193 people x $1,000 = $193,000. Understand that death benefits are paid as they occur, but to keep the math simple, we are saying that all 193 people died precisely at the end of the first year.

5) Death claims ($193,000) are subtracted from the total amount accumulated ($1,071,126) now leaving the fund with:

$878,126 or: $1,071,126

-193,000

$ 878,126

6) The $878,126 remaining is allocated to the accounts of the survivors or 100,000 people less the 193 who died which equals 99,807 people. The amount for each survivor is $8.80 or $878,125 - 99,807 people. Therefore the $8.80 is the savings accumulation, which is called the policy's cash value.

a) premium paid: $10.25

b) plus interest of 4.5 percent: + .46

c) less death claims

193 deaths x $1000 - 100,000 people - 1.93

d) plus survivorship benefits: + .02

$ 8.80

(d), the survivorship benefit, can be an elusive concept. It takes into account that the remaining fund of $878,126 is composed of the premiums (or contributions) of those who died as well as those who lived. The fund not only pays the death claims, but also is used to increase the fund of those who lived. That is why it is called a "survivorship benefit."

It is figured like this:

a. $878,126 1000.000 = $8.78

b. $8.78 x 193 = $1,694.54

c. $1.694.54 99,807 = $0.02

Refer to the computation of the first set of figures to understand where these numbers come from.

It becomes more detailed when figuring the second year on in relation to accumulating policy cash values.

a) Fund on hand at the end of the first year = $878,126

b) Number of people living at the beginning of the second year = 99,807

c) Premiums paid at the beginning of the second year = $1,023,021.80 (0.25 x 99.807)

d) Total fund on hand at the beginning of second year = $1,901,146.80 ($878,126 PLUS $ 1,023,021.80)

e) Interest earned on the total fund on hand at the beginning of the second year at the assumed rate of interest of 4.5% = $46,035.98 (#1,901,146.80 x .045)

f) Total amount at end of second year before claims = $1,947,182.80 ($1,901,146.80 PLUS $46,035.98)

g) Number dying during the second year = 196

h) Total death claims paid - $196,000 ($1,000 x 196 people)

i) Net fund accumulated at the end of the second year =

j) $1,751,182.80 ($1,947,182.80 less $196,000 paid out in claims).

k) Number of people living at the end of the second year = 99,611 (99,807 - 196)

l) Savings accumulation or cash value = $17.58

The method continues on. Only the figures become different as more people die and the interest accumulates. The result of this is that the savings per policy continue to grow. The $10.25 premium continues to be paid in each year and the survivorship benefit and interest earnings grow larger and larger. The survivorship benefit increases year by year because more funds are available for the dwindling numbers of survivors. The interest earnings increase each year because more funds are available for investment.

There are four types of life insurance:

1) Term

2) Endowment

3) Whole life

4) Universal life

TERM INSURANCE obligates the insurer to pay the policies' face amount if the insured dies within a specified time. When that specified time expires, the contract (policy) also expires without cash value. There are two important features of term insurance:

1) The policy contracts are for a fixed period of time, and

2) there is no cash value in the policy.

There are different forms of insurance. Straight term insurance is written for a year or a specified number of years and ends when that period of time is reached. The policy may designate 5, 10 or 20 year terms or may even be written to specific ages such as 65 or 70 years old.

Renewable term allows a policyholder to renew the policy before its expiration date without (and this is important) proving insurability. Over a period of time, health conditions often appear. Renewable term protects against this possibility.

A 10 year renewable term permits renewal for another 10 years. The renewable premium will be higher than the first 10 year term, in most cases. This reflects the mortality tables that show that the likelihood of death increases with age.

The purest form of term insurance is yearly renewable term, called "YRT." At the option of the owner, and without proof of insurability, the policy may be renewed each year. The renewal option is, however, generally limited to a specific number of years or a specific age of the policy owner. Most companies limit the renewal age to 65 or 70. An increasing number of companies are offering YRT to age 100.

Convertible term insurance permits policies to be converted into whole life or other types of policies (as specified in the convertible term policy) within a specified time period and without proof of insurability. Some policies take away the conversion decision by offering "automatically convertible term" as an option. The automatic conversion occurs on a date specified in the policy.

The renewable and convertible term policy is a policy where these features have been combined. For example, a five year renewable and convertible policy might be renewable until age 70 and convertible at any time before age 65.

The usual form of term insurance is level term, where the face amount payable remains the same throughout the policy, but premiums do increase yearly. Under decreasing term, the face amount of the policy reduces periodically. This type of policy has many uses: as mortgage insurance providing the payoff of a home should the breadwinner die, for example.

The negative side of term insurance is the rise in premiums as the insured gets older. This, of course, is due to the increased probability of death. Term insurance rates are highly competitive and should be carefully shopped for.

Term insurance accounts for more than 60 percent of new policies although universal life is currently rising in popularity. Much of term is written for mortgage protection which is often required under mortgage agreements. Many young people also use term because their family needs protection when they are least able to afford high premiums. Term is very affordable at younger ages!

ENDOWMENT INSURANCE:

Endowment insurance obligates the insurer to pay the beneficiary a sum if the insured dies during the policy term or the owner if the insured lives past the endowment period (the stated time of the policy term). In other words, on a $10,000 endowment policy, either the beneficiary will get $10,000 if the insured dies or the owner will get $10,000 if he or she lives. The owner and the insured may be the same person or different people.

Premiums for endowment policies are high and generally do not tend to be written much anymore.

The endowment policy can be viewed as a savings program protected by the life insurance. The policyowner can be secure in knowing that the policies' face value will be paid at a specified time. The insurance company must charge premiums high enough to pay the face amount when due. The high premium means less death benefit can be bought with the life insurance budget.

Endowment insurance has been questioned as a wise buy. It tends to overlook the basic purpose of life insurance: to provide an efficient protection against financial hardship in the event of death.

WHOLE LIFE INSURANCE:

Whole life insurance is often known as permanent or cash value life insurance, because it offers lifetime coverage. It can be viewed as either term or endowment to age 100. Whole life relies heavily on mortality tables to set their premium rates. Those people reaching age 100 are paid the face amount of the policy because they survived the maximum period of time set by the actuaries. It is for this reason that whole life policies are viewed as an endowment policy maturing at age 100. It needs to be noted that whole life policy actuaries do not expect the insured to be alive at age 100. Therefore, when an insured DOES happen to reach age 100 and are paid the face value of the policy, these payments, in effect, are "mortality" and not "survivorship" payments. Consequently, it is reasonable to also view whole life policies as term insurance to age 100 with "death" payments made to those who reach that age. Functionally, whole life policies are more readily called endowment policies even with the similarity to term because of the endowment effect at age 100 which will pay the insured at a set time (age 100) or pay a death benefit if the insured dies. This does bring out the point that actuarially and conceptually, only two basic policy types exist:

a. TERM

b. ENDOWMENT.

Premiums on whole life must be large enough so that, when combined with investment earnings, the insurer will have enough funds to pay expenses and honor all claims under the contract. Whole life is most commonly written on a "payments for life" arrangement. That is, at some point, they commonly are set up to pay the insured a set monthly or yearly life time payment (income).

Whole life provides resources after death and are also used as a savings plan for financial emergencies or funding retirement. Of course, the amount of income a whole life policy provides is determined by the amount of premium paid in over the years. If one could be sure they would die young, term would still be the best buy. For most of us, however, life will continue into retirement years. Therefore, whole life becomes a better buy than term. It is increasingly popular to utilize more than one type of life insurance starting out with term and ending up in whole or universal life. Term is used for a temporary life insurance to provide adequate death protection when budgets are limited and when death protection is the primary goal. Other cash value types of life insurance becomes the choice when a person has more spendable income and when the accumulating cash value for retirement becomes the primary goal with death protection being the secondary goal.

There has, over the past years, emerged a theory of "Buy term and invest the difference." If the theory were carried through without fail, a person could start at an early age, say 25, and accomplish both death protection and retirement savings. Unfortunately, people seldom stick to such plans. The amount of the budget which needs to be regularly invested in savings just doesn't seem to get there. Three problems regularly arise:

1) Many people simply do not possess the willpower to save unless compelled to do so. Life premiums are generally viewed as a bill rather than a savings, so the premiums are paid regularly. Adding to a savings account, mutual funds, or whatever, are seldom viewed as a bill, so may not be regularly carried out.

2) Withdrawing from a savings account is not only easy to do, but is also not viewed as seriously as surrendering life insurance or borrowing against it would be.

3) Most people have little or no experience in investing money. Often people are tempted, for the sake of high yields, to invest in high-risk adventures, which exposes their principle to loss. Many savers may also simply save in a passbook savings account that makes the relatively small earnings even smaller after taxes and inflation.

There are advantages to the "Buy term and invest the difference" theory. This, of course, must assume that the investing part of the theory is followed through! Those who do have the personal discipline to stick to a savings plan have the opportunity to invest in equities such as common stocks and real estate which many experts consider a better inflation fighter than other types of investments. Another advantage is the ability to truly diversify in multiple types of investments. It is true that using life insurance policies can be restrictive in regards to the growth of retirement accounts.

UNIVERSAL LIFE INSURANCE:

This is the newest type of life insurance policy. The availability in past years of increased yields on money market funds, corporate and government bonds, certificates of deposit, tax-free municipal bonds, etc. has lessened the appeal of traditional cash-value life insurance policies. As a result, the idea of buying term and investing the difference certainly has gained popularity. To reverse this trend, life insurers have developed policies designed to combine the advantages of cash value policies (primarily forced savings and tax-deferred accumulation) with the higher returns possible through more varied types of investments. This type of policy, when first developed, was named "universal life." Because universal life is a trade name, insurers offering similar policies may use various names for it. Regardless of the name used, many similarities and differences exist among all these policies.

Basically, universal life divides death protection and cash-value accumulations into separate sections. This division distinguishes it from the traditional cash-value policy which is an indivisible contract with unified death protection and cash value accumulations. The distinction is not one without a difference. With universal life, more competitive rates can be guaranteed from year to year and greater flexibility can be obtained by adjusting the amounts of savings and protection to the needs of the policyowner.

Universal life offers minimum interest guarantees comparable to the traditional cash-value policies - usually around 4.5 percent interest guarantees for one year or less are also made which are governed by money-market conditions at the time. They may be based on the insurers' appraisal of the financial markets for each period or on some interest rate index. The guarantee may be based on long-term or short-term rates or the higher of the two. Therefore, during times of high interest rates, the guarantees may be quite high. During the periods of low interest rates, the guarantees decline, but never below the minimum guaranteed rate. The short term interest guarantees usually do not apply to the first $1000 of cash value or to cash values restricted by a policy loan.

The great flexibility of universal life is especially useful as the policyowner passes through the life cycle. When more death benefit is needed, it can be supplied; or as more retirement savings becomes the objective, the policy can supply that as the primary goal. Unemployment may require that a premium payment be skipped (cash values will be used to keep the policy in force). Many things can affect the balance needed between death benefits and cash-value accumulation.

An important question often arising regarding universal life policies is its' tax sheltered status. In private letter rulings, which apply only to the particular parties involved and do not have the stability of a revenue ruling, the IRS has said that universal life is tax-sheltered. Only the excesses over the premiums are taxable and then only when withdrawn. Death benefits are generally income-tax free.

In 1982, the IRS ruled that interest beyond the minimum guaranteed interest rate credited to the policyowner of universal life policies and annuities are treated as taxable income at the time of withdrawal.

SPECIAL-PURPOSE POLICIES:

Besides the basic types of life insurance policies, insurers offer several special policy forms. Often, they combine basic types into packages to meet special needs. Many simply reflect sales gimmicks not actually related to the needs of the buyer. Often, it appears they are designed to simply confuse buyers seeking to compare prices and products. These plans make buying life insurance even more confusing than it already is for the consumer.

ANNUITIES:

One of the most popular types of saving methods, annuities provide regular periodic income for the annuitants' life or for a specified time period. An annuity providing lifetime income is called a LIFE ANNUITY. A life annuity is a true life insurance plan because it insures against outliving financial resources.

Often, a life annuity is explained as the liquidation of capital over the annuitants' lifetime. Each payment has two components:

1) Interest

and

2) Principle.

The interest earned declines each year as the principle gradually gets paid out. As the years go by, more and more of the payment comes from the principle and less and less comes from the interest earnings.

Annuities are classified according to:

1) The number of lives covered

2) How premiums are paid

3) When benefit payments begin

4) Use of life contingencies

5) How long (if at all) benefit payments continue after a life annuitants death

6) How benefit payments are measured

Usually the annuitant is one person, but not always. A JOINT-AND-LAST-SURVIVOR ANNUITY covers two or more people. It is often used by husband and wife to provide an income for both as long as either one of them are still alive. Some Joint-and-Last-Survivor annuities are written to reduce the monthly income to 2/3 or 3/4 of its initial amount upon the death of the first annuitant. It is assumed that less people require less income to live.

Annuities can be bought by paying in a monthly premium, an annual premium or one single premium. Many life insurance cash values and death proceeds are converted into annuities through settlement options. Through both regular periodic and single payment premiums, many employee retirement plans are funded through annuities. Even many state lotteries use annuities to pay the winners over a period of time, such as 20 years.

An annuity may be either Immediate or Deferred. Immediate annuities begin to pay immediately after being purchased. A Deferred annuity pays benefits after a given period of time has passed. Generally, Deferred annuities are set up to pay benefits at retirement. An Immediate annuity is usually purchased with funds from another investment that has matured, such as Certificates of Deposit. This may especially be true if the CDs are yielding unusually low rates or if tax deferment is desired.

Single-premium deferred annuities are also bought for tax shelters. The interest that grows in the single-premium annuities are tax sheltered until withdrawn. If the annuity is surrendered, the purchase price is subtracted from the total amount in the annuity. It is that remaining amount on which taxes are paid.

Annuities are often combined with term life insurance. This is called Split-Life Insurance. An annual premium is paid into both the annuity and yearly renewable term life insurance. The term is low in premium, but the annuity payment is high creating a package priced about the same as a whole life insurance policy. The reverse may be true for universal life. The charge for the term life insurance may be high leaving less of the divided premium for cash values. These low cash values appear to accumulate at an interest rate more competitive than it actually is. If a more realistic death protection charge (for the term) were made, then more funds would be available for the savings annuity. These higher annuity premiums could be earning a lower interest rate and still do better than the one sporting the higher interest rate. That is one way split-life policies can cause confusion for the buyers. The annuity and the term policy do not necessarily have to be bought at the same time or even on the same life. The term insurance can be written for several lives. Split life is not approved for sale in all states because of legal and tax questions. There is also concern about its value to consumers.

Since all experts agree on which products are best, there is no clear-cut guide to follow. Consumers generally must do some homework themselves before shopping for life insurance. As more states pass consumer legislation regarding policy "readability," perhaps insurance shopping will become easier. Then again, perhaps not. Some observers claim that policy readability laws are passed so that ATTORNEYS can better read them - not consumers. Realize that lawyers are paid to put agreements into legalese and then paid again to interpret what the contract means. Therefore, many experts feel that the consumer legislation will actually accomplish little for the average person.

HEALTH INSURANCE:

Health insurance is intended to pay the cost of hospital and medical expenses and offsets income losses arising from accidental injury or sickness. The majority of Americans carry private health insurance. In fact, about 35 percent of the premiums paid to life insurers is actually for health coverage. Unfortunately, much of what is offered is inadequate.

The cost of health care is rising so dramatically, that it is becoming difficult for the health insurance industry, employers, and direct consumers to cover these rising costs at an affordable premium. Many health insurers have instituted programs in an attempt to decrease the cost to health care. For example:

(1) Health care facilities that are less expensive than hospitals, such as nursing homes, are being encouraged.

(2) Care provided in outpatient wards, pre-admission testing, and preventative care programs are being encouraged.

(3) Discouragement of elective surgery and encouraging or even requiring second opinions before surgery is becoming routine.

In one study, it was found that second opinions resulted in 18 percent fewer surgeries. Many advertising campaigns encourage people to take better care of their health. Some insurers review and trim excessive health care claims using strict claim payment practices.

There are many types of health policies. Some are very specific in what is covered and in how high the benefits will be. Others are more generalized.

DISABILITY INCOME COVERAGE is designed to provide a stated amount of income to the policy owner when he or she is disabled. The term "disabled" varies from policy to policy. Some disability policies pay a specified lump sum payment rather than weekly or monthly income payments. Disability income protection can be purchased for varying periods of time - one year, five years or until age 65. Only 1/5 of disability policies in force are long term. Disability policies may be written as individual or as group policies.

ACCIDENT POLICIES provide for a capital sum payment to be paid to the beneficiary if the insured dies accidentally. Natural death is not covered. The insured may also be covered if he or she is injured due to an accident. Again, the policies tend to set specific amounts that are paid. This is usually on a "schedule" within the policy. Most accident policies also pay a set sum for the loss of limb or sight. This type of policy is not only one of the cheapest to buy - it is also one of the least important since a good major medical policy will cover accidents as well as sickness.

HEALTH EXPENSE COVERAGE is one of the most important policies that a person can own because it covers hospitalization and medical expenses. What is actually covered may range from simple hospital indemnity plans (which pay a "set" amount of money per day) to catastrophic benefits, including most costs of medical care. Health expense coverage may be, therefore, either scheduled or blanket. On scheduled policies, maximum amounts per procedure will be shown in the policy. Realize there may be some conditions imposed in the policy before even those set benefits are considered payable by the insurance company. A good example of this are nursing home policies. While they set a specified amount payable per day, the insured may have to meet certain requirements first:

Perhaps:

(1) Prior hospitalization,

(2) Being admitted to the nursing home within 14 to 30 days from hospital discharge,

(3) Being admitted into the nursing home under "skilled" care first (one of three levels of care), or

(4) Being admitted into the nursing home by a doctor for the same reason they were in the hospital.

These are only some examples. Many more restrictions may exist within the policy.

With blanket policies, a maximum amount is specified for necessary and reasonable medical procedures. That maximum amount may be stated in several ways within the same policy. For example, a major medical policy may pay 80 percent until $5,000 in total "approved" bills are reached at which point the company will pay 100 percent of "approved" charges. However, the policy often specifies a million dollar lifetime maximum pay out. That is a limit within the policy.

One must also read the policy's definition of "approved" charges. Generally, all procedures ordered by a doctor, which are approved by the American Medical Association, will be considered with "customary and reasonable" dollar amounts covered. Those "customary and reasonable" dollar amounts are also something, which can vary from policy to policy. Read the definition within the policy. For individuals who came into their policy with existing medical conditions, there may also be limitations applied. The policy may be limited in the coverage offered or particular conditions may be excluded from care entirely.

Most health expense coverage is written independently of disability income protection. Hospital expense (or indemnity) plans tend to be the most widely written, often taken out through the mail by individuals who do not fully understand the limitations of the policy they have bought. The next most popular type of health coverage is medical-surgical policies, which pay on a set schedule for physicians' expense and some types of major medical costs. Again, it is common for the policyholder to lack understanding of what they have purchased. All too often, these products are bought on the basis of cost, not coverage. The third most likely form of health expense policy bought is major medical, which actually should be the first type of coverage bought since this type of policy is more likely to cover adequately. These can be written on an individual, family, or group basis.

BASIS OF LOSS PAYMENTS vary in health insurance. Because health insurance need not be indemnity plans, loss payments are not restricted to actual costs incurred. There are 3 basis' on which health insurance may be written.

(1) Valued forms,

(2) Reimbursement forms, or

(3) Service forms.

VALUED FORMS are what disability income protection is written on. They pay a specified amount per week or month for a designated benefit period. Accidental death plans are also generally valued forms establishing specific benefit schedules within the policy. Some hospital expense policies provide a flat amount per day for a set number of days, which would also make them a valued policy form.

REIMBURSEMENT FORMS are more common in health expense coverage. They are a maximum allowance, with the insurer paying the patient only the charges actually incurred up to the allowable limits (such as a million dollar lifetime maximum). If the charges are more than the policy limits then the insured pays the excess costs. This is most commonly seen in Medicare supplement policies where the Part B (medical) benefits are subject to limitations of the amount "approved" by Medicare. The amount that Medicare approves is seldom the amount actually charged under normal billing conditions (Although there is a 115 percent ceiling imposed on most Part B charges). In fact, the amount approved by Medicare isn't even the amount considered reasonable. Therefore, those who carry Medicare supplemental insurance that pay based on what is approved by Medicare (called 20 percent allowable plans) generally find themselves paying part of many Part B bills out of their own pockets.

SERVICE FORMS perform based on the "service incurred" plan payments. Payments are made directly to the hospital and doctors for services rendered and not to the patient. This payment arrangement is common to Health Maintenance Organizations (HMO) and plans such as Blue Cross (hospital) and Blue Shield (Physicians and surgeons), and also in some independent plans.

There are not any health plans that are free of limitations but some forms do have more than others. Any policy containing unusual exclusions, limitations, reductions or restrictive conditions is called a limited policy. They provide coverage only if the insured has a claim which EXACTLY meets the policies' requirements. They are generally poor buys. One underwriter was once quoted as saying: "They pay benefits only if the insured is kicked to death by a goose in an Amtrak car." These types of policies are often thrown in as a bonus to encourage a policyholder to either keep an existing policy or to buy a new one. The type of limited policy often used in this so-called giveaway is the accidental death policy. Here, benefits are paid only if the insured dies due to an accident and then they usually must die within a certain time frame following the accident. Junk mail peddles these types of policies in quantity

Dread Disease policies are also limited policies. They pay benefits only for certain illnesses and even then, often only under certain conditions. Luckily, the broad coverage in the major medical policies of today has eliminated the need for dread disease policies, but that was not always the case. At one time, many major medical policies excluded coverage for specific diseases such as cancer.

The biggest problem with limited policies is that they create misunderstandings and a bad feeling towards the insurance industry as a whole. Often the lump-sum benefits for rare accidents, like those on a common carrier, are emphasized in the sales pitch while the small benefits payable for more common accidents are mentioned only casually (if at all). Because the public is always looking for bargains, many people buy these cheap (and often worthless) policies with the idea that they are protected. Perhaps they are if a goose attacks them in their Amtrak car!!

In recent years, the states have recognized the misunderstandings that have occurred. Now you will normally see at the top of the policy:

"THIS IS A LIMITED POLICY.

READ ITS PROVISIONS CAREFULLY."

This is good advice for ANY policy, but certainly a limited policy in particular. Limited accident forms available include those covering occupational accidents only, vacation accidents, accidents while participating in specified sports activity, injuries incurred while serving with a volunteer fire department, home accidents and school accidents. In certain cases, it may make sense to carry a limited policy, but most limited policies are best left unsold.

Definitions of an accident can vary. Strictly worded, accident policies promise payments only if the injury is caused by "accidental means," which is not the same as "accidental bodily injury," and can mean the difference as to whether or not benefits are paid. The difference is so widely misunderstood that courts frequently ignore it. An accidental-means clause supposedly requires the injury to result from causes that were accidental. That means that if the insured ruptures a blood vessel while carrying heavy objects (such as books) an accidental-means policy would NOT pay any benefits because its CAUSE was not accidental. The cause was carrying books and that was an intentional act. If, however, a toe was broken because the insured DROPPED one of the books on his or her toe, then the policy would pay benefits. The insured did not intend to drop the book, so that was an accidental-means. Suicide while insane has been construed to be death by accidental means. For this reason, most accidental policies providing death benefits exclude suicide specifically.

Under policies using the term "accidental bodily injury," payment is made if the injury was unexpected and unintended, even though the act causing the injury was not unusual, unexpected or unforeseen. That means, if the policy uses the term "accidental bodily injury," the insurance company would pay benefits for the ruptured blood vessel, which resulted from carrying the books. Under "accidental bodily injury," the insured does not have to be involved in an unintentional act. Even an intentional act causing an unintentional injury is covered.

Most accident policies contain the wording "directly and independently of all other causes." This clause protects the insurance company from paying claims resulting from preexisting health conditions combined with a minor or imagined accident. If a person has a history of fainting, does faint and falls down a flight of stairs, the insurance company is not liable for benefits since the history of fainting played a part in the claim.

EXCLUSIONS: The fewer exclusions in a policy, the better the policy is. Intentional self-inflicted injuries and war-connected disabilities/injuries are nearly always excluded. More restrictive policies add other exclusions, as well. Those restrictions vary with the type of policy, but may include injuries outside the United States and Canada, and injuries occurring during illegal activities (except for minor traffic violations).

The dimensions of disability coverage can be for total or partial disability. The definition will determine what type is covered, the amount of the periodic payments, the maximum duration of payments and the length of the waiting period. TOTAL DISABILITY is not uniformly defined, but its definition is extremely important to the policyholder as it is stated in his or her policy. One insurer defines total disability liberally to mean the complete inability of the occupation for 60 months. After that first 60 months, total disability means the insured's complete inability to perform the duties of ANY occupation for which he or she is reasonably qualified by training or experience. Some insurance companies define total disability in a similar fashion, but add "and does not engage in any occupation for wages and/or profit" after the words "regular occupation." This addition excludes benefit payments to insureds who accept positions when unable to work at their regular occupation. For instance, a construction worker who takes a job washing dishes in a restaurant would loose his disability benefits since he was engaging in an occupation for wages and/or profit.

Some policies contain even more restricted definitions of total disability. For instance, the policy might require that the person be under the constant care of a doctor. This requirement has been ignored to some degree by court decisions holding that if competent medical testimony shows the disabling condition cannot be treated or improved by regular medical care, then the requirement is meaningless. Other policies require the insured to be house confined (which means continuously indoors - not necessarily within their own home) in order to receive benefits beyond the first two years. Going to the doctor for brief periods is acceptable in this type of policy, but most other outings would violate the policy. Luckily for our consumers, this type of policy is seldom written, but those that are written this way should be avoided.

Partial disability coverage may be written as a policy provision or as a separate rider. As with total disability, the definitions of PARTIAL DISABILITY can also vary widely from policy to policy. Generally, the definition is linked to the policy definition for total disability. A policy with a house-confining clause usually offers a fractional benefit for partial disability (commonly one-half) for a no confining disability. When total disability is defined as the inability to perform any occupation, the partial disability definition is usually the ability to perform some, but not all, of the routine duties of the insured's occupation. If the definition is the inability to perform the duties of one's own occupation, then the partial disability definition is the inability to perform one or more of the major duties.

Most policies restrict payment for partial disability in some way. They may be restricted to payment only following a period of total disability, for instance. In some policies, partial disability is paid only for accidents, not illnesses. Partial disability policies were first written to allow insurers to shorten periods of total disability. In theory, if partial disability benefits are offered, the insured may qualify for the lower benefits as recovery progresses allowing the insurance company to lessen benefits paid under total disability. This, of course, reduces premiums for income disability policies.

RESIDUAL DISABILITY BENEFITS are often a substitute for the original purpose of partial disability income. It is used in policies with a regular occupation disability definition and benefits both the insurance company and the insured. Residual Disability coverage permits disabled persons to work in ANY occupation if they are unable to earn as much as 75% or 80% of the amount earned immediately prior to becoming disabled. It works like this:

Assume policy owner "Annie" is a grocery checker earning $3,000 per month. She becomes disabled. After three months, she takes a job in an office that pays only $1,600 per month. Her disability policy has benefits providing $2,400 per month. Annie's policy will provide a residual benefit: $3,000 minus the $1,600 divided by $3,000 multiplied by $2,400. That means she collects only $1,120 instead of the $2,400 from her insurance company on the disability policy. However, this amount ($1,120) plus the $1,600 from her new job gives her a total income of $2,720 per month, so she actually ends up earning more than she would have with only her disability policy. She comes out $320 ahead financially and her insurance company pays out less in benefits. Both parties benefit.

Income protection policies vary in how they pay (weekly, monthly), the duration of payment (one year, five years, etc.), and on the length of time following the disability before payment begins (7, 14 or 30 days, etc.). Regarding the periodic payments, a more desirable policy is one where disability income payments are flexible to offer some help against inflation. The ideal benefit period extends to the age of 65 since many types of injuries permanently affect one's earning ability. A waiver of premium is also a good idea to have on this type of policy. Once disabled, money is generally tight and it helps to not need to pay the premiums any longer. The longer the waiting period, the less expensive the policy. The waiting period refers to the time after the disabling occurs until the policy begins to pay. One thing to bear in mind: waiting periods longer than 180 days actually save the insured very little. Therefore, generally waiting periods should be no longer than 180 days.

Some disability income policies provide that in the case of dismemberment or other specified losses, the insurer pays a lump-sum benefit instead of periodic income payments. In some policies, the insured may elect either a lump sum or periodic disability income payments. Lump-sum benefits usually are limited to the amount of disability income payable for four years. Therefore, the insured may make an unfortunate choice. More liberal policies make lump-sum benefits the minimum to be paid. In even more liberal policies, some dismemberment's are considered permanent disability. In these cases, the periodic disability income payment is continued for the maximum income period. In choosing a policy, the most liberal provision should be selected. The cost difference is very small as far as premiums are concerned.

Provisions regarding renewal and cancellation vary policy to policy. This is important to consider in any type of health policy. Health insurance contracts may contain one of a variety of clauses specifying the rights to retain the policy in force. The best is the noncancelable policy. As long as premiums are paid, the insurance company cannot cancel the policy. There is no change in premium until the insured reaches a specified age. This is, of course, also the most expensive type of health policy. The least favorable is the cancelable policy under which the insurance company may terminate the insurance by giving written notice to the insured. In between these two extremes are several variations:

NONCANCELABLE: Guaranteed that the policy will be renewed up to a specified age with no change in premium amounts.

GUARANTEED RENEWABLE: The insured is guaranteed renewal up to an age specified in the policy. Premium rates are not guaranteed.

CONDITIONALLY RENEWABLE: The insured is guaranteed that renewal will not be denied solely on the basis of deterioration in health.

OPTIONALLY RENEWABLE: The insured has no rights concerning renewal or premium levels.

Many things can affect the premiums of health coverage even after the policy has been issued. Many types of health policies change as the insured becomes older. Obviously, the premiums would go up as the person becomes older. In some types of policies, such as income disability, changes in occupation can also cause changes in the premium level.

With all the different types of health insurance, it is necessary to determine the most valuable types of policy for individual needs and give those policies priority. Protection against large losses should be acquired first. The amount of the deductible should be low enough to be absorbed in any one year, but high enough to offer sufficient premium savings to offset the cost of increased maximum limits. A family deductible, under which a yearly amount is applied and spread over all family medical expenses, appears logical even though an extended illness results in the application of the deductible each year.

Social insurance is so broad a topic that it will be impossible to fully discuss it here. It is intended to cover social risks, which are whatever a particular society considers them be at any given time. Whether the burden of medical care (such as Medicare) is the social topic or protecting ocean vessels, as was the case in early trading days, social insurance can have wide effects on the society as a whole.

In the middle and late 1930's, the risks of loss of income from unemployment, old age and death of a working spouse (or parent) became the social risk of concern. Even during the 1920's, loss of income and medical expenses of workers were considered social risks. Replacement of some liability exposures with PURE no-fault laws could expand the number of social risks covered. Thus, social risks do change over time.

Social risk has been defined by The Committee On Social Insurance Of The Commission On Insurance Terminology Of The American Risk And Insurance Association as "a device for pooling risks by transfer to a governmental service organization." According to that committee, the characteristics of social insurance are:

(1) Coverage is compulsory by law in nearly all cases,

(2) Benefit eligibility arise from contributions made to the program by or for the claimant,

(3) The method to determine the benefits is prescribed by law,

(4) Benefits are not usually related directly to contributions, but generally redistribute income to groups with low wages or many dependents,

(5) The benefits financing plan must be designed for long-range adequacy,

(6) The cost is borne primarily by contributions from covered persons, their employers, or both, and,

(7) The plan is administered or supervised by the government (either state or federal or both).

Our Social Security system violates the conditions in several ways, but because of the inevitable compromises, it is not surprising that the definitions given and what actually happens are sometimes different.

Our federal Social Security system is a social insurance program (one which does not meet all the criteria laid down by the committee). It includes old-age survivors, disability and health care coverage, and state unemployment compensation, workers' compensation and temporary disability plans. Other forms of insurance are available under government auspices. These include crop, war damage, flood, auto accident (in Puerto Rico), life (in Wisconsin) and crime insurance. Various government reinsurance plans are also written, but they are not considered to be social insurance.

Social insurance is questioned from time to time. Why did our government (the people) feel it to be so important? Demographic, economic and social changes explain the reasons. In earlier cultures, society saw no need for social insurance. Most people worked at some trade which made them self-employed. Families hunted, gathered or grew their own food. Among many primitive peoples, the economic problem of old age presented no problems. Their lifestyle as well as disease, resulted in a very low rate of longevity. People just simply did not live into old age as a general rule. In the earliest cultures, the individual would starve to death upon reaching an age beyond self-sufficiency unless some kind friend or relative was willing to assume the burden of care. Some groups are said to have simply killed their elderly citizens. However, with the factory system, the industrial revolution and the end of the family as the principal economic unit, the problem of unemployment became serious. The family no longer produced enough goods to keep itself self-sufficient. Workers traded money (wages) for goods and services to meet their families' economic needs. This new system of living made workers "wage slaves" and the victims of the business cycle.

Along with the end of the family as a self-supporting economic unit has come the additional problem of increased numbers of persons reaching old age. At one time, the United States had a young population, but by the year 1980, the proportion of people over 65 years old reached 11 percent. Much of the increase is due to a long-term declining birthrate. The number of births per thousand of population at the turn of the century was about 55. Currently that figure is more than 15 per thousand. Economic pressures requiring two-career families, women's desires (and need financially) for careers and overpopulation problems continue to depress the birthrate even more. Scientific advances in medicine have increased the number of old people, as well. Although the maximum life span has not lengthened significantly, more people are living to become old. Actuaries expect these trends to continue.

With the increase in the number of the elderly, changes have occurred that make old-age problems more severe. The social unity of the family has changed. Often older family members are not required for child-rearing and other types of family back-up. Today they often have few ways to contribute economically to the family and have, therefore, become burdens to their family. We often tend to believe, however, that this is a new condition. Not so. Even in the earlier days when the west was being settled, it was reported that older family members were often unwelcome and even subject to abuse.

The smaller families also put a harder burden on the children. In past times, it was common for a family to contain ten or more children. Now it is more common to have only one or two children to care for their elderly parents. Even a willing child often finds it difficult to cope with their own family's needs and their parent's needs at the same time.

A final and important reason for social insurance is to provide protection against losses from perils that are uninsurable privately. Unemployment is an example of this. One large New York life insurance company once developed rate tables for unemployment insurance and sought permission from that state to write the coverage. Nothing more has been heard from that aborted effort. It is not likely that the private insurance sector will ever cover these perils.

Not all prospective policy owners meet the underwriting requirements of insurance policies. Usually, potential policy owners are classified as one of the following:

a) Older age,

b) Substandard (or extra risk),

c) Special risk, or

d) Business overhead expense.

OLDER AGE POLICIES are generally referring to applicants between the ages of 60 and 65. Once age 65 is reached, the applicant will be insured under Medicare in most cases. Persons falling in the older age category will generally find themselves paying higher premiums and facing stricter underwriting procedures.

SUBSTANDARD POLICIES (OR EXTRA RISK) for physically impaired persons usually are written for those with an arrested serious illness such as cancer or heart trouble. Probably the condition will be rated or even excluded from coverage.

SPECIAL-RISK POLICIES cover hazards included in normal health policies. These hazards include such things as war, accidents pertaining to occupations or dangerous scientific experiments, travel to the moon, and most other hazards within the realm of imagination. Often, Lloyd's of London writes these special policies to cover unique talents or personal characteristics. Usually these talents or characteristics contribute to that person's income earnings. For example, a magician's hands may be specially insured against dismemberment or permanent damage.

BUSINESS OVERHEAD EXPENSE POLICIES are a special form of disability income coverage written for a business or professional person to provide resources to pay business expenses (rent, utilities, phones, payroll, etc.) while the insured is disabled. The insurer reimburses the insured only for expenses actually incurred. Premiums paid are tax deductible and the proceeds are reportable as income. This is different from individual disability policies where premiums do not tend to be deductible and the benefits received are not taxed as income.

Health insurance policies are subject to the Uniform Individual Accident And Sickness Policy Provisions Act. It is a model drafted by the National Association Of Insurance Commissioners and passed by the states individually. This act contains 12 mandatory provisions that must be included in individual health insurance policies and also 11 contract clauses, grace periods, time limits for defenses, notice of claims, claim forms, proof of loss on claims, reinstatement, time of claim payment, physical examinations, autopsy, legal actions, and change of beneficiaries.

The 11 optional provisions include conditions relating to change of occupation, misstatement of age, other insurance with the same insurer, income insurance with other insurers, relations of earnings to insurance, unpaid premiums, cancellations, conformity with state statute, illegal occupation and intoxicants and narcotics. The most commonly used provisions are occupation change, age misstatement and statute conformity. Many insurers use provisions more beneficial to the policy owners than the law demands.

Employee Benefit Plans are generally defined as employer-sponsored plans that provide:

a) Income maintenance during periods when regular earnings are cut off due to death, accident, sickness, retirement, or unemployment.

b) Benefits to meet expenses associated with illness or injury.

Employee benefit plans are growing at a rapid rate. Between 1970 and 1980 various types of employee benefit plans increased from about 30 cents to 39 cents of each payroll dollar. Between 1980 and 1990, it has risen to 55 cents. Most of this increase will be found in expanded health and retirement benefits. Unfortunately, this rising trend will also bring increased company operating costs. It is difficult to judge where that will lead company cost-cutting measures. One thing that has become widespread is dropping existing coverage in search of a more economical coverage for employees. This generally leads to loss of some existing benefits and much larger deductibles.

Changes in legislation have imposed new and specific criteria for standards of employee benefit plans. The legal and tax environment is also expected to undergo additional modifications to reflect these changes.

Workers today often rely on employee benefits without realizing what the cost actually is to their companies. If more of our population bore the cost themselves, there might be a greater effort to cut down on unnecessary expenses. Employers use the plans to:

(1) Improve employee relations,

(2) Meet union demands, and

(3) Provide insurance benefits at lower costs since group coverage is less expensive than individual coverage, in most cases.

Now, when a company lacks employee benefit packages, it often adversely affects employee relations. Few employees realize what goes into benefit packages financially.

Since 1948 when the National Labor Relations Board ruled insurance and pensions were subject to collective bargaining, employee benefits have been the subject of union demands. Gaining more benefits each year has been the results of those demands. With increased benefits comes increased costs passed on to consumers.

Group insurance is often written without underwriting restrictions. This allows employees with existing health conditions to be fully covered right away. In group policies, the underwriting unit is the group and not the individuals. The members are neither contracting parties, nor policyowners. The members are issued participation certificates and booklets describing the master policy issued to the employer.

Most health coverage for individuals has been acquired through group plans. Whether measured by premium dollars or by face amounts of insurance, group coverage has had amazing growth in the United States. About 80 percent of all health premiums paid for people under the age of 65 has been paid to group plans.

There are several distinguishing features of group insurance:

(1) Payment of premium: group members do not usually pay the full cost. Employers are generally required by statutes or the insurer underwriting rules to pay a portion of the premium. Without this employer contribution, premiums would likely be prohibitive. Some aspects of the coverage, such as dental benefits, might even be unobtainable to the individual person.

(2) Benefit levels: employees do not generally have the freedom to choose their benefit levels. Group members receive amounts determined by benefit formulas to eliminate adverse selection that could easily occur on an individual basis due to poor health conditions. Because large groups are partly self-rated (that is, the experience of the group will affect the ultimate amount charged the group) adverse selection may result in higher costs for the group over a period of time. The degree of self-rating depends upon the size of the group.

(3) Cost: group insurance is less expensive than individual insurance for the individual enrollee. This happens for several reasons:

(A) Individual underwriting is eliminated which also eliminates the cost of such underwriting.

(B) Commission rates paid to salespeople are much lower and decrease with the premium size

(C) Employers administer much of the program.

(D) An income tax advantage reduces the cost of group term life insurance. Employers normally can deduct premiums paid for employee group term life insurance. An exception to this is when the insurance is covering an employee whose compensation is considered excessive. Group health insurance is also usually a business tax deduction. Employees are not required to report the coverage as income.

Several principles apply in underwriting group insurance because:

(1) State statutes require them, and

(2) Insurers consider them consistent with good under writing standards.

To run a group insurance plan effectively, several plan design features must be considered:

(1) First of all, the group insured must have some common purpose other than obtaining insurance. If a group were organized simply to buy insurance, there surely would be large numbers of people in poor health, engaged in hazardous activities or possessing some type of risk for the insurance company. This would cause the premiums to be high, so that members with desirable insurance characteristics would withdraw leaving even higher rates of claims. The premiums would soon become cost prohibitive.

(2) The group size needs to be large enough to reduce adverse selection and obtain savings in administrative costs. The larger the group, the easier it is to insure persons that might otherwise be uninsurable. The minimum number of persons needed for a group has decreased over the years which indicates that the insurance companies are giving less attention to this principle.

(3) Mandatory participation rates depend upon the type of plan used. When the employer pays the cost, participation of all eligible employees are required. When employees pay part or all of the premium, 75 percent participation is usually required. The mandatory participation rates are designed to control adverse selection.

(4) The insurance must be apportioned. Disproportionate insurance amounts should not be allocated to a few members, because it would interfere with the group underwriting. Participants insurance amounts (such as life insurance) should be related to amounts written for a typical employee, the size of the group and the amount written for the group. Application of this principle helps to control adverse selection (once again!) and is also consistent with the application of the law of large numbers.

Generally, insurance companies decide for or against insuring a group as a whole, not due to the individuals participating, but due to the type of group as a whole. They emphasize a sound group plan in accepting the group for coverage. For life insurance, the ideal group is FLUID. That means that younger members enter as older members leave. Otherwise, the cost could become quite high. This is actually true for many lines of group insurance, not just life insurance.

The model group law requires several provisions in the master contract:

(1) a grace period for late premium payments,

(2) incontestability of the validity of the master policy after it has been in force for 2 years (Delaying a claim until the two years has passed would not bypass this provision. If the claim occurred during those first two years, the contestability would still apply),

(3) the application, if applicable, shall be attached to the policy,

(4) the member's statements shall be representations,

(5) the conditions regarding evidence of insurability (Generally, this applies if the employee does not join the plan within a designated time period, often 31 days after becoming eligible),

(6) a clause explaining how a misstatement of age will be handled (since members usually pay the same premium per $1,000 of coverage, what is affected is the amount of benefits they would receive),

(7) a facility-of-payment clause indicating that if there is no living named beneficiary at the time of the member's death, the insurer may pay the policy proceeds to a close relative or to the insured member's executors,

(8) a clause requiring certificates be issued to employers stating the insurance benefits, the beneficiary and the participant's rights when employment or the group contract is terminated,

(9) a clause allowing withdrawing participants the right to convert coverage to individual insurance (other than term) without evidence of insurability. Normally the conversion must be made within 31 days. The premium will be the prevailing rate for their age and sex. If the person happens to die during this 31 day conversion period without having converted, the original insurer would still pay the full death benefit. This is known as the 31-day extended death benefit.

(10) conversion rights when the master policy terminates. Upon termination, every person that had been covered under the master policy for five years or more can, within 31 days, convert up to $2000 of the insurance without evidence of insurability. The 31 day extended death benefit also applies.

(11) Master policies written for group permanent insurance must contain the appropriate no forfeiture provisions.

There are some optional provisions that may or may not apply to the group's policy:

(1) Interruptions in employment may happen due to many reasons. Typically, the master policy provides that group life insurance coverage continues during authentic layoffs and leaves of absence. Generally, master policies also contain protection for the members from clerical errors.

(2) Waiver of premium for members who are totally disabled before the age of 60. In that case, the insurance will continue as long as the employee is wholly prevented from engaging in any occupation for pay or profit. Some contracts may provide for payment for the policy's face amount if the employee becomes totally disabled. A third type of disability clause, called an Extended Death Benefit, provides the member with a year of coverage when terminating employment, if the employee has been continuously and totally disabled since leaving employment. This benefit ceases at age 65. Therefore, if the disability began at 64 1/2, it would end upon turning 65 even though only six months benefits had been received.

(3) Settlement options are generally in most policies. Although group policies are paid in a lump sum, group participants or their beneficiaries can elect to take policy proceeds on an installment basis. The types of installment options vary.

(4) Limiting the employee's insurance amounts is common to most group policies. There are several ways this is done:

(A) A flat fixed amount,

(B) A fixed amount for each wage bracket,

(C) A fixed amount for each job classification

(D) A variable amount based on years of service which is subject to an upper limit, or

(E) Some combination of these methods.

(5) The employer need not cover all workers, but may select who in the group is covered. This is generally done by selecting specific employee classes (types of occupations).

(6) The employee is nearly always the one who selects their beneficiary. Statutes do prohibit naming the employer as beneficiary in most cases.

(7) Group members may or may not be able to assign their rights in their participation life insurance certificates. Some master policies do prohibit assignments; others allow assignments only with the employer's permission. Many master policies have no specified restrictions at all. In this case, the participant can exclude insurance proceeds from their taxable estates. If their estate was large enough, the member could assign their proceeds to their children to reduce the taxable estate when the surviving spouse dies.

(8) The employer must maintain a list of members including the coverage date, any coverage changes and the coverage amount.

(9) Premiums may be paid monthly, quarterly, semiannually or annually. The amount of premium is determined by the participants' ages, occupations, and the size of the group. The rating plan may provide for a rate adjustment based on the group's past experience. In other words, it will be based on past overall claims experience for all master policies.

There are different types of group permanent plans: level-premium group permanent plans, unit purchase plans, and group ordinary plans.

GROUP ORDINARY plans appear to be a contradiction of terms. In general, group and ordinary insurance are separate classes of life insurance. Still, the term group ordinary persists. Group ordinary, a hybrid of group term and of group permanent, permits eligible participants individually to substitute a minimum amount of permanent ordinary for an offsetting amount of group term. Generally, this substitution is elected by a participant initially or at any subsequent premium due date. Because group permanent is substituted for group term, the total death benefit is not affected. It generally remains the same.

There are regulations applicable to group ordinary insurance.

Revision of the 1950 adverse tax ruling applicable to employer-paid premiums for permanent life insurance has spurred a renewed, but limited, interest in group ordinary. These are often called Section 79 Plans, because the governing tax regulations are applicable to that section of the Internal Revenue Code (IRC). The essential features of these complicated regulations require:

(1) Freedom of participants to elect and to cancel the permanent coverage

(2) The level group term insurance for section 79 plans to be unaffected by the participant's decision regarding the permanent coverage

(3) A specific allocation of death benefits for each employee between that provided by group term and that attributable to group permanent insurance

(4) The minimum group term benefit to be that amount by which the total death benefit payable exceeds the paid-up death benefit provided by the nonforfeiture value of the permanent insurance

(5) The plan to specify that part of the premium are allocable to term insurance. In making this allocation, each portion of the total coverage (term and permanent) must stand on its own. This is not only quite difficult, but also often causes lots of confusion.

(6) The employer's contribution to the plan to be limited to the premiums legally allocated to term coverage.

A formula is included in the regulations for determining the cost of the permanent insurance. Under Section 79 of the IRC, the employer pays and deducts the cost of the term insurance and the employee need not report this amount as income. The exception to this is when the insurance amount is in excess of $50,000. The employee pays the cost of permanent insurance with after-tax dollars.

There are different types of group life insurance coverage. Typically, group life is written as one-year renewable term with rates subject to change at the beginning of each policy year. Generally, it is provided that, from time to time, coverage can be added for all new eligible employees and other eligible members such as the employees family. Most group life, of course, is intended for employees only. However, coverage can be written on the master policy to include dependents. Usually, the employee pays the cost of the premium, which covers their dependents. Although most group life insurance plans are term, some are written on a permanent basis.

SURVIVOR INCOME BENEFIT INSURANCE (SIBI) is sometimes written to supplement group term, pension plan death benefits and Social Security survivor benefits. SIBI provides monthly survivorship benefits to the deceased employee's spouse and children. Normally, these benefits are paid to the age of 62 or 65 or until the spouse remarries. The amount of benefit for the spouse is commonly from 20 to 40 percent of the employee's pre-death earnings or a fixed amount - less for the children. While no lump sum payment is generally made, some plans do offer an additional one-time only payment upon the remarriage of the spouse.

Bear in mind that SIBI plans do vary widely and there is no "set" rule regarding their setup. Some limit payments to five or ten years, while others pay benefits for life. Some plans allow the insured to designate any beneficiary to receive the payments (although this is usually for a restricted time period if the payments are not going to a spouse).

The purpose of SIBI is to offset what is termed the "social inequalities" of typical group term life. In these plans those that need the insurance most (people with young families and/or high debt) are allocated the smallest amount of insurance while those that need the insurance the least (generally older people whose children are grown and whose debt level is low) are usually given the most insurance because of higher pay and longer service with their companies. Under SIBI, however, those that need the protection the most are likely to receive the most insurance.

SIBI is certainly not new; yet only in recent years has it become increasingly popular. SIBI is now being recognized as a very important part of employee benefit programs. In 1912 the first large (2,912 employees) group life insurance plan was written for Montgomery Ward & Company. They included in this benefit program, a $100 burial benefit and one year's salary, up to a maximum of $3,000, payable to a named beneficiary or to the estate of any employee, who had no family. For employees with dependents, the dependent spouse was given a lifetime annuity, four years certain, for an amount equal to 25% of the employee's salary. The payment ceased if the spouse remarried. Except for the benefits payable on behalf of employee without dependents, this benefit package, created nearly 80 years ago, was identical to current SIBI plans. Montgomery Ward & Co. discontinued this prototype in 1921 in favor of a less expensive traditional plan.

Because single employees receive no benefits from SIBI and childless employees along with older employees whose spouses are also older, receive low SIBI benefits in relation to their salaries, SIBI plans are in keeping with the minority view that employee obligation philosophy has been one of the deterrents to the further development of these types of benefits. The higher paid executives who generally put together employee benefit plans often find it to their advantage to accept the wage concept of employee benefits rather than the theory that employee benefits are a social obligation of their industry. There is little incentive to give more insurance to newer workers with low pay who have dependents with long life expectancy. There is more incentive to give benefits to valuable highly paid workers with a longer history of company service. It is this aspect that prevents SIBI from becoming the principle method of the future for providing death benefits in employee benefit plans.

GROUP HEALTH INSURANCE

Group health insurance has many factors common to group life insurance. Differences between the two are the perils covered and the broader definition of groups eligible for coverage.

Group health insurance policies developed without special legislation. Insurers had to only comply with general statutes relating to insurance until 1937 when Illinois enacted a state group health insurance law. The model bills of the Health Insurance Association of America (HIAA) and the National Association Of Insurance Commissioners (NAIC) have influenced state group health legislation, but neither has been adopted in its entirety. The laws define group health insurance and standard policy provisions.

The HIAA definition designates no minimum for the group. The NAIC bill requires 25 covered lives. Several states require a smaller minimum; others require no minimum leaving the decision to the insurers. The HIAA bill has no minimum participation. In contrast, the NAIC bill includes a 75% participation requirement for contributory and 100% for noncontributory plans. Eligibility requirements for group health insurance plans are more liberal than for group life insurance plans. The HIAA bill provides eligibility for group health insurance to:

(1) Any organization eligible for group life plans,

(2) Any other substantially similar group not organized solely for the purchase of insurance,

(3) Dependents or family members of persons enrolled in an eligible group.

When group health insurance was first introduced into the marketplace, the individual market for health insurance was not developed enough so insurance agents had little to gain by lobbying for restrictions on group health coverage. In addition, health insurance companies felt it was a necessary step in order that they might compete with organizations like Blue Cross/Blue Shield and other prepayment medical groups such as the Health Maintenance Organizations (HMO'S). As a result, adequate competition in products and rates made further regulation unnecessary.

The HIAA bill contains only three standard provisions:

(1) Oral statements cannot be used to avoid the insurance and written statements shall be interpreted as representations,

(2) Each group member must receive a summary statement of coverage, and

(3) Eligible new members or dependents may be added to the group according to policy terms.

A majority of the states require standard provisions. Some states, for instance, require a provision stating conditions under which the insurer may decline to renew a policy. As in group life insurance, an employer cannot be named the beneficiary of the insurance.

There are often some differences between group health coverage and individually issued health coverage:

(1) Group health covers OFF-THE-JOB accidents only; not on-the-job accidents which is supposed to be covered. Occupational sickness is seldom covered by group health if covered by worker's compensation. Some employers integrate coverage with on-the-job accidents and occupational illnesses so that disabled employees will receive equal amounts regardless of whether the injury or illness is job related.

(2) State law requires uniform provisions in individual but not group health policies.

(3) Group policies omit clauses that prorate benefits when participants own other insurance. Instead, a coordination-of-benefits clause restricts the amount a covered person may collect from other group policies. In many families, both husband and wife may have a group medical policy where they work. Often these plans also cover the other spouse as a dependent. When claims occur in this situation, the person's own work plan becomes the primary, with their spouse's plan coming in as the secondary coverage. When the claim occurs on a dependent child, the policies generally consider the primary coverage to be the policy which has been in effect the longest time. This can vary, however, and the policies should be checked for any provision made regarding this.

Group health policies can vary widely as to the type of coverage they contain. Group policies may be written to include disability income, accidental death and dismemberment, hospital expense, surgical expense, nursing home care, vision care and prescription drugs. Measured by the number of persons covered, group insurance accounts for nearly 85 percent of major medical, 99.6 percent of dental and vision care covered.

Disability income benefits have expanded to include pregnancy as a temporary disability. Insurers (and often employers who pay the bill) argued without success that pregnancy differs from illness because it occurs by voluntary means and often, on purpose. The courts have ruled that excluding pregnancy from disability income coverage unfairly discriminates against women in spite of the fact that the act was voluntary. Guidelines designed by the Equal Employment Opportunity Commission (EEOC) require employers to offer benefits for pregnancies equal to those benefits offered for other health-related conditions. An exception is nonmedical abortions. The EEOC also requires employers to cover pregnancy expenses for dependents when the plan includes dependents' coverage.

Something that is often confused with group insurance is called BLANKET HEALTH POLICIES. They differ from group insurance because no insured is named and no certificates are issued. Examples of groups underwritten by blanket health policies are students at college, spectators at a sports event and members of a football squad. In general, group membership changes constantly and the policy covers the changing membership.

FRANCHISE (WHOLESALE) HEALTH INSURANCE is designed for an employee group that is too small to qualify for true group health insurance plans. The insurance company underwrites the individual people, not the group, as a whole. The only reason for taking this type of policy is to save on cost. The plan is less expensive than the premium for a true group policy.

To generalize about the cost of group health insurance is difficult as each plan is different in coverage and optional benefits. Competition is great and each insurer determines its own rates. To simply quote premium rates is misleading because the true cost of insurance is the net cost after dividends or credits. Group premium rates vary with the age distribution, occupations covered, proportion of females in the group (women lose twice as much working time as men because of sickness), and variations in medical care costs throughout the United States. In major medical an additional rating factor is the earnings level of the members because high-income people demand higher-priced medical services and may be charged more for the same service than low-income people.

When establishing employee benefit plans, there are always many decisions to be made. One of the major decisions is whether the cost should be paid entirely by the employer or shared by the employees. This determines whether it is a CONTRIBUTORY or NONCONTRIBUTORY plan.

The Noncontributory Plan has the advantage of administrative ease. If the plan is Contributory, most plans require a 75 percent participation of employees. The Noncontributory plan automatically covers everyone. Therefore, employers do not need to try to pressure their workers into joining it. A Noncontributory Plan also eliminates the paperwork involved when part of the premium must be withheld from an employees paycheck on a monthly basis. This, of course, also eliminates the clerical errors that can always happen. It should not be a surprise to anyone that employees also prefer that the employer pay the full cost.

The Cost Factor, however, definitely favors the Contributory method of group medical insurance. When the employees offset the cost by paying their portion, often more benefits can be obtained. The additional benefits are often better than the employee could obtain as an individual and generally at a lower cost overall. Dental coverage is a good example of this.

The policyholder seldom understands true cost until a claim occurs. An easy rule to go by on cost is a comparison of annual premium PLUS any deductibles in the policy.

Several group plans, other than life and health insurance, are offered to a limited extent to complete an employees' benefit package. The two that appear to have the most promise for further development are group property and group liability insurance and also prepaid legal plans. Eventually, there may be many more types of group plans offered as a incentive to get the very best in employees.

As a final statement to all agents, always bear in mind that this is an ever-changing field. Any statement here or elsewhere is subject to change. It is up to you to stay on top of current legislation and products in order to give the very best service to your clients.

UNITED INSURANCE EDUCATORS, INC.

PO Box 1030

Eatonville, WA 98328

(253) 846-1155

(800) 735-1155