640 Class 7 - Class 7 Insurance and Risk Management George...

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Class 7 Insurance and Risk Management George D. Krempley Bus. Fin. 640 Winter 2008
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Agenda Review Types of Life Insurance Life Insurance Contractual Provisions Taxation of Life Insurance Calculation of Life Insurance Premiums Introduction to the Personal Auto Policy
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Exhibit 11.6 Comparison of Major Life Insurance Contracts
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Exhibit 11.4 Two forms of Universal Life Insurance Death Benefits
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Life Insurance Contractual Provisions Ownership Clause Entire Contract Clause Incontestable Clause Suicide Clause Grace Period Reinstatement Clause
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Life Insurance Contractual Provisions (cont.) Misstatement of Age Clause Beneficiary Designation Change of Plan Provision Exclusions and Restrictions Assignment Clause Policy Loan Provision Automatic Premium Loan
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Change of Plan Provision Purpose: Provide flexibility to policyowner to respond to changing needs for insurance Allows exchange of present policy for different contract
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Change of Plan Provision: Rules 1. Change to higher -premium policy: Policyowner pays difference in policy reserve of new policy versus original contract No evidence of insurability required
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Change of Plan Provision: Rules 1. Change to lower -premium policy: Insurer refunds difference in cash values Evidence of insurability is required Reduced cash value increases insurer’s net amount at risk Lower premium policy provides higher pure insurance protection
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Exclusions and Restrictions Suicide clause First two years only (most contracts) Whole Life Policy in Appendix C has one-year suicide clause (See p. 681) War clause Excludes payment if insured dies as a direct result of war Purpose: To reduce adverse selection Not contained in all policies
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Exclusions and Restrictions (cont.) Aviation exclusion – variations: Exclude aviation deaths other than as fare- paying passenger on regularly schedule airline Exclude military aviation or cover at additional premium only Exclude private pilot not meeting certain flight standards, or charge higher premium
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Exclusions and Restrictions (cont.) Hazardous activities may be discovered in initial underwriting: Auto racing Scuba diving Hang-gliding Travel or residence in a dangerous country Underwriter may exclude or cover only with payment of extra premium
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Payment of Premium Payment modes: Annual, semi-annual, quarterly or monthly Carrying charge is relatively expensive Example – p.249 o Annual premium: $1,000 o Semiannual premium: $520 o Apparent charge: 4% = $40/1000 o Effective carrying charge: 16.7% = $40/($1000-520) x 2
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Assignment Clause Life Insurance policy is freely assignable Two types of assignment 1. Absolute assignment 1. Collateral assignment
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Absolute Assignment All ownership rights are transferred to a new owner: Church Charity Educational Institution Insured Beneficiary New owner receives all ownership rights in the policy
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This note was uploaded on 07/17/2008 for the course BUSFIN 640 taught by Professor Krempley during the Winter '08 term at Ohio State.

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640 Class 7 - Class 7 Insurance and Risk Management George...

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