Business Law (part 51)

More law, less justice.

Marcus Tullius Cicero

Types of Insurance (part A)

 by

 Charles Lamson

Insurance companies provide many types of policies to help people protect against financial loss. Three types of policies that most people purchase include:

1. Life insurance
2. Property insurance
3. Automobile insurance

Life Insurance

Life insurance is a contract by which the insurer agrees to pay a specified sum or sums of money to a beneficiary upon the death of the insured. An insured generally obtains life insurance to protect the beneficiary from financial hardship resulting from the death of the insured.

Types of Life Insurance Contracts

The most important types of life insurance policies include:

1. Term insurance
2. Endowment insurance
3. Whole life insurance
4. Combinations

Term Insurance

Term insurance contracts are those where by the company assumes for a specified period of time the risk of the death of the insured. The term may be for only one year or it may be for 5, 10, or even 50 years. The term must be stated in the policy.

Many variations of term policies exist. In short term policies, such as 5 years, the insured might have the option of renewing it for another equal term without a physical examination. This is called renewable term insurance. The cost is higher for each renewal period. In nonrenewable term insurance the insured does not have the right to renew unless the company consents.

Term policies also may be either level term or decreasing term. In level term contracts, the face of the policy is written in units of $1,000. The face amount remains the same during the entire term of the policy. In decreasing term contracts, the length of time the proceeds are collected or the face amount decreases over the life of the policy. The policy may be written in multiples of an amount of monthly income. For example, a person age 20 could purchase a decreasing term policy of 50 units, or $500 a month, covering a period of 600 months, or 50 years. If the insured dies the first month after purchasing the policy, the beneficiary would draw $500 a month for 600 months or $300,000 ultimately. If the insured dies at the end of 25 years, the beneficiary would draw $500 a month for 300 months or $150,000 ultimately. Some decreasing term insurance is paid in a lump sum rather than periodically.

All term policies have one thing in common they are pure life insurance. They shift the specific risk of loss as a result of death and nothing more.

Endowment Insurance

An endowment insurance policy is decreasing term insurance plus a savings account. Part of the premium pays for the insurance, and the remainder earns interest so that at the end of the term the savings will equal the face amount of the policy. If the insured dies during the term of the policy, the beneficiary will collect the face. If the insured is still living at the end of the term, the insurance company pays the face to the insurer or a designated beneficiary.

Whole Life Insurance

All life insurance contracts are either term insurance or endowment insurance. A whole life insurance policy is one that continues, assuming the premium is paid, until age 100 or death, whichever occurs first. If the insured is still living at age 100, the face of the policy is collected as an endowment. A whole life policy might correctly be defined as endowment insurance at age 100. 

Combinations

The three basic life insurance contracts term, endowment, and whole life can be combined in an almost endless variety of combinations to create slightly different contracts. In the case of universal life insurance, any premiums paid that exceed the current cost of term insurance are put into a fund and earn interest. The fund can be withdrawn by the owner or paid to the beneficiary at the death of the insured. The family income policy, for example, is merely a straight life policy with a 20-year decreasing term policy attached as a rider.

Insurers frequently add several other riders to life insurance policies for an added premium. The disability income rider may be attached to any policy and pays an income to an insured who becomes disabled. A rider requiring the insurer to make a greater payment, customarily twice the ordinary amount when death is caused by accidental means, is called a double indemnity rider.

Limitation on Risks in Life Insurance Contracts

Two common limitations upon the risk covered by life insurance include: (1) suicide and (2) death for more activity.

Suicide

Life insurance policies commonly refuse payment when death occurs from suicide. Other suicide clauses stipulate that the company will not pay if the suicide occurs within two years from the date of the policy. 

Death from War Activity

A so-called war clause provides that if the insured dies as a consequence of war activity the company will not pay. If a member of the armed forces dies a natural death, the company must pay. In order to refuse payment, the insurance company has the burden of proving war activity caused the death.

Payment of Premiums

If the premiums are not paid when due, and the policy still provides, it either will lapse automatically or may be declared forfeited at the option of the insurer. The policy or a statute of the state may provide that after a certain number of premiums have been paid, an unpaid premium results in the issuance of a smaller, paid-up policy for the same term. By the payment of an additional premium the insured may generally obtain a policy containing a waiver of premiums that becomes effective if the insured becomes disabled. When disability occurs, the insured does not have to pay premiums for the period of time during which the disability exists. 

Grace Period

The law requires life insurance companies to provide a grace period of 30 or 31 days in every life insurance policy. This grace period gives the insured 30 or 31 days from the due date of the premium in which to pay it without the policy lapsing. Without this provision, if the insured paid the premium one day late, the policy either might lapse or be forfeited by the insured. The insured might be able to obtain a restatement of the policy but might be required to pass a new physical examination. To buy a new policy, the insured might have to pass a physical examination and would have to pay a higher rate for the current age.

Incontestability

Life insurance policies are incontestable after a certain period of time, usually one or two years. After that time, the insurance company usually cannot contest the validity of a claim on any ground except nonpayment of premiums.

Change of Beneficiary

Life insurance policies ordinarily reserve to the insured the right to change the beneficiary at will. Policies also permit the insured to name successor beneficiaries so that if the first beneficiary should die before the insured, the proceeds would pass to the second named or contingent beneficiary.

Courts uphold divorce decrees or separation agreements fixing beneficiaries of insurance policies. Later attempts by the insurer to change a beneficiary required by a court order do not succeed. 

Assignment of the Policy

The policy of insurance may be assigned (or the rights in the policy may be transferred to another) by the insured. The assignment may be either absolute or as collateral security for a loan that the insured obtains from the assignee, such as a bank.

A beneficiary may also make an assignment; however, the assignee of the beneficiary is subject to the disadvantage that the insured may change beneficiaries. If the assignment is made after the insured has died, the assignment is an ordinary assignment of an existing money claim.

Annuity Insurance

An annuity insurance contract pays the insured a monthly income from a specified age, generally age 65, until death. It is a risk entirely unrelated to the risk assumed in a life insurance contract, even though life insurance companies sell both contracts. Someone has defined life insurance as shifting the risk of dying too soon and annuity insurance as shifting the risk of living too long, or outliving one's savings. An individual age 65 who has $50,000 and a life expectancy of 72 years could use up the $50,000 over the expected seven additional years of life by using approximately $600 a month for living expenses. However, if the individual lives for more than seven years, there would be no money left. An annuity insurance policy could be purchased for $50,000, and the monthly income would be guaranteed no matter how long we insure the lives. If the annuity contract calls for the the monthly payments to continue until the second of two insureds dies, it is called a joint and survivor annuity. Couples who wish to extend their savings as long as either one is still living frequently use this type of annuity. 

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 456-460*

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