Cheat sheet - What is insurance Individuals are exposed to...

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What is insurance? Individuals are exposed to risks. Insurance is a mechanism for transferring risk from the individual to the insurer. Insurer agrees to pay “benefit” if contingent event occurs while the contract is in force. Social insurance: Provided or mandated by government. Focus on Social Equity and redistribution of income. Private Insurance: Focuses on individual equity. Individuals pay in proportion to their expected loss Objectives of Insurance Pricing: Rates must be Adequate. Insurance is a promise that will be fulfilled in the future. If rates are not adequate, company’s ability to fulfill promise is imperiled. Rates must be Equitable No Unfair subsidization of one class. Rates must not be excessive. The part of the total rate charged to provide just for the benefits is called the NET RATE. It provides for the first three of the four components. In other words it does not provide for the loading component. When you add the loading to the net rate you get the gross rate and that is what is paid by the insured. The insured typically do not see the two components individually. Flexible Premium Universal Life Policies: Policyholder pays a premium which may vary within limits Insurer deducts(usually monthly) expense and mortality charges and adds interest on the fund At the end of the prior calculation the amount is called the Fund value. If the Policyowner wishes to surrender the policy, the insurer will deduct a surrender charge and pay the Policyholder the resulting Surrender Value. Flexibility in Premium and death benefitsTransparency Traditional Cash value Policies: Traditional Cash Value Life insurance is also called Guaranteed cost, Non Participating Insurance. Not term portion and savings portion. It is an indivisible whole It is critical that the insurer be able to know or estimate the benefit amount to be paid. Mortality table – shows probability of death. Morbidity table – probability of a morbid condition or event Participating insurance PO may get dividends, refunds, if actual experience is better than assumed. Mortality, Interest or Expense Simulation of operating experience, using best estimate assumptions, sometimes called Model Office Calculation Relationship with Reserves and Cash values : Cash Value always less than reserves :Asset share may start negative but must always grow to a larger amount than the reserve. History!! Friendly Societies: Operated on an assessment basis. Members were assessed as needed to provide benefits. Assessment Spirals led to failure. But they were the germs of formal insurance industry “The Equitable” is said to be the first company to operate on basic insurance and mathematical principles. Benefits to Individual: Assists and complements savings plan. Safe and Profitable Investment(tax savings) Special protection for beneficiaries Reduces worry and increases efficiency. Assured Income. Estate Planning Benefits to Society: Substitute for Gov’t Programs. Financial Intermediary Role. Reduce Transaction Costs. Create Liquidity Economies of Scale. Investment Function foster a more efficient Capital Allocation
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