Page 13 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes
Example: Flood damage may not be covered if your house is in a floodplain.

At some point, you will probably consider the purchase of life insurance to provide your family
with additional economic security should you die unexpectedly. Generally, life insurance provides
for a fixed benefit at death. However, the benefit may vary over time. In addition, the length of
the premium payment period and the period during which a death is eligible for a benefit may
each vary. Many combinations and variations exist.
When it is time to retire, you may wish to purchase an annuity that will provide regular income
to meet your expenses. A basic form of an annuity is called a life annuity, which pays a regular
amount for as long as you live. Annuities are the complement of life insurance. Since payments
are made until death, the peril is survival and the risk you have shifted to the insurer is the risk
of living longer than your savings would last. There are also annuities that combine the basic
life annuity with a benefit payable upon death. There are many different forms of death benefits
that can be combined with annuities.
Disability income insurance replaces all or a portion of your income should you become disabled.
Health insurance pays benefits to help offset the costs of medical care, hospitalization, dental
care, and so on. Employers may provide many of the insurance covers listed above to their
employees.
Self Assessment

Fill in the blanks:
5. The insurance company operates by collecting small contributions from many people
who are exposed to ……………………….

6. The insurance policy is the ……………………………. of the insurance company.
7. Life insurance provides for a fixed benefit at ……………………….
8. A basic form of an annuity is called a ……………………… annuity, which pays a regular
amount for as long as you live.
1.4 How Insurance Works?

You need to know that insurance is an agreement where, for a stipulated payment called the
premium, one party (the insurer) agrees to pay to the other (the policyholder or his designated
beneficiary) a defined amount (the claim payment or benefit) upon the occurrence of a specific
loss. This defined claim payment amount can be a fixed amount or can reimburse all or a part of
the loss that occurred.
The insurer considers the losses expected for the insurance pool and the potential for variation
in order to charge premiums that, in total, will be sufficient to cover all of the projected claim
payments for the insurance pool. The premium charged to each of the pool participants is that
participant’s share of the total premium for the pool. Each premium may be adjusted to reflect
any special characteristics of the particular policy.
Normally, only a small percentage of policyholders suffer losses. Their losses are paid out of the
premiums collected from the pool of policyholders. Thus, the entire pool compensates the
unfortunate few. Each policyholder exchanges an unknown loss for the payment of a known
premium.
Under the formal arrangement, the party agreeing to make the claim payments is the insurance
company or the insurer. The pool participant is the policyholder. The payments that the

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