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Basic Principles of Insurance

As you progress through this chapter, it is important you understand the following key terms:

A Reserve is funds held by the company to help fulfill future claims. Minimum reserves are usually set
by the state Department of Insurance.

A Multi-line insurer is an insurance company or independent agent that provides a one-stop shop for
businesses or individuals seeking coverage for all their insurance needs. For example, many large
insurers offer individual policies for automobile, homeowner, long-term care, life and health insurance
needs.

For the purpose of insurance, Stock Companies are insurance companies owned and controlled by a
group of stockholders whose investment in the company provides the safety margin necessary in
issuance of guaranteed, fixed premium, nonparticipating policies.

A Nonparticipating plan is Insurance under which the insured is not entitled to share in the divisible
surplus of the company.

For the purpose of insurance, Mutual Companies are insurance companies characterized by having
no capital stock; it is owned by its policy owners and usually issues participating insurance.

A Participating Plan of insurance is a plan under which the policy owner receives shares (commonly
called dividends) of the divisible surplus of the company.

A reinsurer is a company that provides financial protection to insurance companies. Reinsurers handle
risks that are too large for insurance companies to handle on their own and make it possible for
insurers to obtain more business than they would otherwise be able to.

Fraternal Benefit Societiesare nonprofit benevolent organization that provide insurance to its
members. Producers or agents who only sell within their society, do not receive commission, and stay
under a specific premium threshold often have less stringent licensing requirements.
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The Fair Credit Reporting Act is a federal law requiring an individual to be informed if she is being
investigated by an inspection company. The law also outlines the sharing and impact of such
information and requires individuals to be notified prior to being investigated.

A Buyer's Guide is an informational consumer guide books that explain insurance policies and
insurance concepts; in many states, they are required to be given to applicants when certain types of
coverages are being considered. Buyer's Guides are often used with life insurance, long-term care
insurance, and annuities.

A Policy Summary is a summary of the terms of an insurance policy, including the conditions,
coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term
care insurance, and annuities.

The National Association of Insurance Commissioners (NAIC) is an association of all of the state
insurance commissioners active in insurance regulatory problems and in forming and recommending
model legislation and requirements. The NAIC does not directly MAKE laws, as laws are made at the
state level. They do work on suggesting standards for states to adopt with the goal of a standardizing
the insurance industry throughout the United States of America.

The State Guaranty Association is established by each state to support insurers and protect
consumers in the case of insurer insolvency, guaranty associations are funded by insurersthrough
assessments. All authorized insurers are legally required to participate in the State Guaranty
Association for any state they are authorized to do business in regardless of where their corporate
office is.

Life Insurance is insurance against loss due to the death of a particular person (the insured) upon
whose death the insurance company agrees to pay a stated sum or income to the beneficiary. In its
purist form, life insurance states, "we will pay this amount when this person dies."

Term Life Insurance is protection for a set number of years; expiring without value if the insured
survives the stated period, which may be one or more years. Term life is designed to provide
temporary protection in case a person dies during a set period of time.

Whole Life is permanent level insurance protection for a person's "whole of life," from policy issue to
the death of the insured. Characterized by level premiums, level benefits, and cash values.

Group Life is a type of life insurance in which a single contract covers an entire group of people. Most
often, the group is an employer-employee group. Those covered under a group life policy may or may
not pay a portion of the premium and can usually choose their beneficiary. However, the insured
typically does NOT own the policy, the group (employer) owns and controls the policy.

Consideration is the part of an insurance contract setting forth the amount of initial and renewal
premiums and frequency of future payments. Consideration is often said to include the initial
premium and completed application for insurance. In other words, the applicant is saying, "please
CONSIDER me for insurance, here is my initial premium, my completed application, and how
much\how often I agree to pay in the future. Please CONSIDER me."

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The Insuring Agreement (Insuring Clause, Insurance Provision) is the portion of the insurance
policy in which the insurer promises to make payment to or on behalf of the insured. It states the
scope and limits of coverage. The insuring agreement is usually contained in a coverage form from
which a policy is constructed. In other words, it is the insurance company saying, "We ensure to
INSURE you under these conditions for this amount."

Health Insurance is a general way of describing insurance against loss through sickness or accidental
bodily injury. It is also called accident and health, accident and sickness, sickness and accident, or
disability insurance. It is important to remember the general term "health insurance" applies to many
different types of insurance, not just the medical insurance that pays for doctor and hospital visits.

Disability (income) Insurance is a form of insurance that insures the beneficiary's earned income
against the risk that a disability creates a barrier for a worker to complete the core functions of their
work. Although disability insurance is designed to protect one's income, there are typically rules and
regulations in place limiting the benefits of a disability policy to one's income level, and typically only
allowing protection for a portion of their income.

Medical expense insurance pays benefits for nonsurgical doctors' fees commonly rendered in a
hospital; sometimes pays for home and office calls.

Entire Contract is an insurance policy provision stating that the application and policy contain all
provisions and constitute the entire contract.

Notice of Claim is a policy provision that describes the policy owner's obligation to provide
notification of loss to the insurer within a reasonable period of time. Notice of claim only requires the
insurance company be NOTIFIED of a loss, it does not require that proof of the loss is provided.

Reinstatement is the act of putting a lapsed policy back in force by producing satisfactory evidence
of insurability and paying any past-due premiums required. Most states have reinstatement laws
requiring an insurer to allow for a policy to be reinstated upon request of the policy owner within a
specified period of time.

Property Insurance is an insurance policy that provides financial reimbursement to the owner or
renter of a structure and its contents, in the event of damage or theft. Simply put Property insurance
protects the things you own and rent.

Casualty (Liability) Insurance is insurance which broadly encompasses insurance not directly
concerned with life insurance, health insurance, or property insurance. Casualty insurance includes
vehicle insurance, liability insurance, theft insurance, workers' compensation insurance, and elevator
insurance. Casualty insurance protects you financially in the event that someone sues you.

Property and Casualty Insurance are often referred to collectively as property and casualty insurance
because the things you own have the potential to harm people in ways that could cause them to sue
you. The main kinds of property and casualty insurance include auto insurance, home-owner's
insurance, renter's insurance and umbrella insurance.

Proof of loss is a mandatory health insurance provision stating that the insured must provide a
completed claim form to the insurer within days of the date of loss. If the insured wants paid, they

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must PROVE the loss occurred.

A Deductible is the amount of expense or loss to be paid by the insured before an insurance policy
starts paying benefits. Deductibles typically apply to property, casualty, and health insurance.

An insurance Declaration page is a piece of paper which provides basic information about an
insurance policy. Typically, the first page (face) of an insurance policy is a declaration page. The
declarations page normally specifies the named insured, address, policy period, location of property,
policy limits, and other key information.

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