Individuals and businesses establish plans to protect their personal and financial interests against events that threaten to undermine their security. This concept is risk management. The most common method of risk management is the transfer of risk from an individual or a business to an insurance company. As with other areas of law, the area of insurance has its own special concepts and terminology. It is also pointed out that when a broker deals with an applicant for insurance, the broker is, in effect, the applicant’s agent, but that an insurance agent is an agent of the insurer, not an agent of the applicant.
Insurance Terminology — Insurable Interest
A person can insure anything in which he or she has an insurable interest. One must have a reasonable expectation of benefit from the continued life of another to have an insurable interest in that person’s life. This interest must exist when the policy is obtained. In the case of property, an insurable interest exists when one would sustain a pecuniary loss from its destruction. This interest must exist when the loss occurs.
The Insurance Contract
Insurance policies generally are in standard form; and in some states, standardization of forms is required.
Application
The application is part of the insurance contract. Because an insurance company evaluates the risk based on the information in the application, misstatements or misrepresentations can void a policy.
Effective Date
An insurance applicant may be protected between the time an application is received and the time the insurance company either accepts or rejects it, or an applicant may not be protected until a formal written policy is issued.
Provisions and Clauses
The words used in an insurance contract have their ordinary meaning and are interpreted in light of the nature of the coverage. Ambiguity and uncertainty are interpreted against the insurance company. In some cases, the unambiguous language of a clause in an insurance policy would appear to provide so little coverage that courts have held that it would be unconscionable to allow the insurer to enforce it. Insurance policies are typically long and detailed, in language drafted by an insurance group. Consumers often do not read the policies and, even when they do, often do not understand the provisions. In those cases, the courts may determine that if the insured had read and understood the clause, he or she would have considered the coverage unacceptable.
Defenses against Payment
An insured can cancel a policy at any time; an insurer can cancel only on written notice. The reasons for cancellation depend somewhat on the type of insurance, but generally policies are canceled for nonpayment of premiums or anything that materially affects the risk insured against — fraud, misrepresentation, gross negligence, crimes by the insured, etc. Not all defenses are available to an insurer, however.
Coinsurance Clauses — These provide that if a property owner insures the property up to a specified percentage of its value, the owner will recover any loss up to the face amount of the policy. If the insurance is for less, the owner suffers a proportionate share of the loss.
Good Faith Obligations — Essentially, the parties to an insurance contract are responsible for the obligations the contract imposes. These include basic contract duties (act in good faith, disclose all material facts). An insurer must investigate and attempt to settle claims, and the insured must cooperate.
Bad Faith Actions — If an insurer’s denial of a claim or refusal to settle a claim for a reasonable amount within a policy’s limits is in bad faith, the insured may recover damages, including punitive damages, in tort.
Title insurance — Title insurance companies issue title insurance policies to insure title to real property against defects that might otherwise render title unmarketable. The amount of the policy is usually equal to the purchase price of the property being purchased. Typically, title insurance companies issue title insurance policies after a title search of the property has been conducted but before closing has occurred. A title insurance policy does not affect the quality of the title being purchased but simply provides a guarantee of accuracy regarding the quality of title to the land itself. A property owner could file an action against the title insurance company if some defect that was not disclosed in the title insurance policy rendered title unmarketable, but that very same property owner would have no right to proceed against the title insurance company simply because its investigation revealed that there are defects in the title.
Title policies exclude a number of items from coverage, such as defects in title, that are not evidenced by a recording in the public records but which are known to the purchaser of the property. Title policies may also exclude items that can only be ascertained by a physical inspection of the property such as the accuracy of the survey and the presence of any adverse possessors. Other common exceptions to title include government zoning regulations, tax assessment schemes affecting the property, and easements. In the event that a defect renders title to the property unmarketable, the title policy will usually provide the title insurance company with the option of paying the claim (up to the full amount of the policy — which is generally the purchase price of the property) or litigating the claim. The policy itself remains in force only for as long as the insured continues to own the particular property. Subsequent purchasers of the land must purchase their own policies.
Business Insurance — A business may be vulnerable to all sorts of risks. A key employee may die or become disabled; a customer may be injured when using a manufacturer’s product; the patron of an establishment selling liquor may leave the premises and injure a third party in an automobile accident; or a professional may overlook some important detail, causing liability for malpractice. Should the first situation arise (for instance, if the company president dies), the business may have some protection under a key-person insurance policy. In the other circumstances, other types of insurance may apply.
- General Liability. Comprehensive general liability insurance can cover virtually as many risks as the insurer agrees to cover. Among the types of coverage that a business might wish to acquire, for example, is protection from liability for injuries arising from on-premises events not otherwise insured against, such as company social functions. Some specialized establishments may be subject to liability in individualized circumstances, and policies can be drafted to meet their needs. In many jurisdictions, for example, statutes impose liability on a seller of intoxicating liquor when a buyer of the liquor, intoxicated as a result of the sale, injures a third party. Legal protection may extend not only to immediately consequent injuries, such as quadriplegia in an automobile accident, but also to the loss of support suffered by a family because of the injuries. Insurance can provide coverage for these injuries and losses.
- Product Liability. Manufacturers may be subject to liability for injuries that their products cause, and product liability insurance can be written to match specific products’ risks. Coverage can be procured under a comprehensive general liability policy or under a separate policy. The coverage may include expenses involved in recalling and replacing a product that has proved to be defective.
- Professional Malpractice. Attorneys, physicians, architects, and engineers, for example have increasingly become the targets of negligence suits. Professionals may purchase malpractice insurance to protect themselves against such claims. The large judgments in some malpractice suits have received considerable publicity and are sometimes cited in what has been termed “the insurance crisis,” because they have contributed to a considerable increase in malpractice insurance premiums in recent years.
- Workers’ Compensation. Workers’ compensation insurance covers payments to employees who are injured in accidents arising out of and in the course of employment (that is, on the job). Workers’ compensation is governed by state statutes which provide for fixed awards to employees or their dependents without considering issues of proof or negligence. Such statutes make the employer strictly liable for the injuries of his employees but workers’ compensation is an exclusive remedy that bars any common-law remedies that might have otherwise been asserted by the employees.
Auto Insurance
The cheapest form of auto insurance is liability auto insurance. This is because it only covers any damage you cause to a person, another vehicle or property in the process of an accident. It also only covers you when you are at fault for the accident and not when someone else is at fault. Anyone driving a car should carry at least a minimum level of liability auto insurance. Most, if not all, states requires drivers to have liability insurance and usually set forth a minimum amount of coverage that each driver is required to have. Many insurance agents will tell individuals that they should get additional coverage rather than just the minimum coverage required by the state because you can become open to lawsuits if the medical bills of the individual become higher than your coverage amount.
Collision auto insurance will help cover your car for any damage that happens after an accident. Whether the accident is your fault or not, collision coverage will allow you to get the money needed to fix your car after an accident. This type of auto insurance generally covers all types of accidents whether it is from another car or an object. You can save money on collision auto insurance coverage by choosing a high deductible so that your premiums will be lower. Although since this form of auto insurance coverage is limited to the value of your car it may not be worth it to purchase this form of auto insurance if you have an older vehicle.
Comprehensive auto insurance will help cover your car against any damage or loss that results from fire, theft, vandalism, wind, hail, explosion or other natural events. This type of insurance can cover your vehicle against all natural events as well as losses from the theft of your vehicle. The insurance company will pay to fix your vehicle from any of these events less the amount of deductible that you choose when signing the insurance policy. However, you should always carefully read your policy since the type of coverage and conditions can vary depending on the policy you are signing.
Life Insurance
There are two basic types of life policies: cash-value policies, which cover you for your entire life and include an investment component; and term policies, which cover you for a specific period of time and provide a death benefit only.
Term life insurance covers you for a specified period of time (usually from 5 to 30 years) and usually has the lowest premium in the early years, making it the most affordable life insurance initially. Term life insurance does not build cash value. If you are still living at the end of the term, your insurance coverage ends unless you can renew the policy. When you renew (assuming your policy has that feature) it will renew at a higher price reflecting your now older age. Term insurance has no buildup of cash as with whole life (e.g., cash-value insurance).
Listed below are various types of term insurance.
- Level Term – a fixed amount of coverage with premiums that are fixed over a certain period of time, usually in 10-year increments.
- Increasing/Decreasing Term – amount of coverage increases or decreases throughout the term, premiums typically remain level.
- Renewable Term – includes a renewal provision that gives the policy owner the right to renew the insurance coverage at the end of the specified term without submitting evidence of insurability.
- Convertible Term – gives the policyholder the right to convert the term policy to a permanent policy.
- Group Term – insurance purchased typically by an employer or professional association that is intended to cover several people, usually resulting in reduced premiums.
Whole life is a type of permanent life insurance. It’s called permanent because a whole life policy provides life-long protection and is guaranteed to do so by the insurance company. With whole life, you pay a fixed premium for life, instead of the increasing premiums found on term life insurance policies.
The most important reason to own life insurance is to provide support for your dependents should you or your spouse die prematurely. The idea is to allow surviving family members to maintain something close to the standard of living they enjoyed prior to you or your spouse’s death. The amount of insurance necessary to manage this depends, in part, on how much income you and your spouse currently earn. Generally, the lower your income, the less you have to replace and the less life insurance you need.
Guaranteed level term life insurance
Many insurance companies now also offer level term life insurance. This type of life insurance policy has premiums that are designed to remain level for a period of 5, 10, 15, 20, 25 or even 30 years. Level term life insurance policies have become extremely popular because they are very inexpensive and can provide relatively long term coverage. Most level term life insurance policies contain a guarantee of level premiums. However some policies do not provide such guarantees. Without a guarantee, the life insurance company can surprise you by raising your life insurance rate, even during the time in which you expected your premiums to remain level. Needless to say, it is important to make sure that you understand the terms of any life insurance policy you are considering.
With a term policy, you get “pure” life insurance coverage. Term insurance provides a death benefit for only a specific period of time. If you die during the coverage period, your beneficiary (the person you named to collect the insurance proceeds) receives the death benefit (the face amount of the policy). If you live past the term period, your coverage ends, and you get nothing back.
Permanent Life Insurance Policies
How permanent insurance works. With a permanent policy, your premium payments for the first few (or more than a few) years cover more than the insurance company’s cost of your risk of death. The excess money goes into a reserve account, which is invested by the insurance company. Unless the company is disastrously managed, these investments yield returns in the form of interest or dividends. A proportion of these are passed along to you. You can add these returns to your policy reserves or borrow against them, after a set time. And if you decide to end the policy, you can cash it in for the “surrender value.”
Traditional Whole Life Insurance
Whole life insurance is a type of permanent insurance or cash value insurance. Unlike term insurance, which provides coverage for a particular period of time, permanent insurance provides coverage for your entire life. When you make premium payments, you pay more than is needed to pay for the current costs of insurance coverage and expenses. The excess payment is credited to a cash value account. This cash value account allows the insurance company to charge a level, guaranteed premium and to provide a death benefit and cash value throughout the life of the policy.
As you make payments, the cash value account grows. With traditional whole life insurance, the cash value account is guaranteed and held in the insurance company’s general portfolio — you don’t get to choose how the cash value account is invested. However, the cash value can potentially grow beyond its guaranteed amount through the payment of dividends (profits earned by a “mutual” insurer). The cash value grows tax deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. It is important to note, however, that a policy loan or partial surrender will reduce the policy’s death benefit, and a complete surrender will terminate coverage altogether.
Universal life insurance
Universal life insurance differs from whole life insurance in that this type of life insurance policy distinguishes and itemizes the protection element (death benefit), the expense element, and the cash value element. By separating the three elements, the insurance company can build more flexibility into the life insurance policy. This flexibility allows (within certain guidelines) the life insurance policy owner to modify the face amount or the premium in response to changing needs and circumstances.
Universal Life insurance is a variation of Whole Life insurance. The difference is that with Universal Life, the term life portion of the policy is separate from the investment or cash portion of the policy. Also, with Universal Life policies, the investment portion of the policy is invested in money market funds as opposed to stocks, bonds and mutual funds. The cash value portion of the policy is an accumulation fund that investment interest is credited to and death benefits are paid from. With Universal Life insurance, the insured can vary the amount of his/her annual death benefit and annual premium payments. Insured people may also make partial surrenders of the policy and/or take policy loans against the cash value of the policy. A partial surrender is when an insured withdraws some of the funds that have accumulated in the investment or cash portion of the policy.
There are basically two types of Universal Life insurance. Under Option A, there is a set death benefit for the insured regardless of premiums paid to keep the policy in force. Under Option B, the death benefit for insured is equal to a set amount plus the current cash value of the policy at the time of the insured’s death. Option B usually pays out more than Option A following the death of an insured.
A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. Reducing or increasing premiums will impact the growth of the cash value component and possibly the death benefit. You are also free to change the policy’s death benefit directly (again, within the limits set out by the policy) as your financial circumstances change. Be aware, however, that if you want to raise the amount of coverage, you’ll need to go through the insurability process again, probably including a new medical exam,
Variable Life insurance
Variable life insurance provides permanent protection for you and is the type of life insurance with account flexibility for the more risk-oriented policy holder. Variable Life insurance is also a form of Whole Life insurance. As with Whole Life and Universal Life insurance, part of the premium payment goes toward the term life portion of the policy, part to administrative expenses and part to the investment or cash value portion of the policy. There is a major difference between the investment portion of Variable Life and that of other forms of life insurance. With Variable Life, the insured person (you) is able to choose how to invest the funds in the investment portion of the policy.
The insured may select from an array of investments such as stocks, bonds and mutual funds as long as they are within the insurance companies portfolio. Usually, there are a few times during the year that the insured person may modify his/her investment selections. Variable Life insurance is generally more expensive than other forms of Life insurance. Death benefits may fluctuate up or down depending on investment performance however, there is usually a minimum level for benefits so they will not drop below a certain level.
Like other types of permanent life insurance, variable life insurance has a cash value account. A variable life insurance policy, however, allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, known as subaccounts, which are professionally managed to pursue a stated investment objective. Choices can range from a fixed interest subaccount to a highly volatile international growth subaccount. Variable life insurance policies require a fixed annual premium for the life of the policy and may provide a minimum guaranteed death benefit. If the cash value account exceeds a certain amount, the death benefit will increase.
Variable universal life combines all of the options and flexibility of universal life with the investment choices of a variable policy. It is a true hybrid product, and you make most of the policy decisions. You decide how often and how much your premium payments are to be, within guidelines. With most variable universal life policies, you get no guaranteed minimum cash value or death benefit. Your premium payments in excess of administrative costs and the cost of insurance are invested in the variable subaccounts that you choose.
With both variable and universal life insurance, your policy may lapse if the cash value account falls below a certain level. Low-interest loans can be taken against your cash value account, and cash withdrawals are available. However, keep in mind that your policy’s face amount is reduced by the amount of a policy withdrawal, and withdrawals may be taxable. You have the option of choosing a fixed or enhanced death benefit. Today, most variable universal life policies offer a rider that guarantees the death benefit at a certain level regardless of the performance of the subaccounts, provided that a stated minimum premium is paid for a predetermined number of years.
