Life and Health Insurance Basics

Introduction

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Types of Insurance Companies

Commercial Insurers (Private Insurance Companies)

• Operate for profit.
• Sell one or many lines of insurance (multi-line insurers).
• Focus in this series: Life and Health Insurance.
• Groups:
  • Stock Companies: For stockholders, known as non-participating (non-par).
    • Policyholders do not participate in profits, stockholders get dividends.
    • Dividends are taxed.
  • Mutual Companies: For policyholders, known as participating (par).
    • Policyholders participate in profits and get untaxed dividends as return of premium.
  • Mixed Insurers: Both par and non-par.

Special Types of Mutual Companies

• Assessment Mutual Companies:
  • Pure Assessment: No upfront premiums; charges based on company's losses.
  • Advanced Premium Assessment: Premium paid upfront; balanced at year-end based on profit/loss.
• Fraternal Benefit Societies: Nonprofits like Knights of Columbus, provide insurance to members.
• Risk Retention Groups: For professionals (e.g., doctors, lawyers) pooling risk.
• Service Providers: Include HMOs and PPOs for healthcare subscribers.
• Reciprocal Insurers: Group of people insuring each other; use an 'attorney-in-fact' for indemnity agreements.
• Reinsurers: Insurers that insure other insurance companies (seeding companies).
• Captive Insurance Companies: Created by a parent company to insure its own risks.
• Home Service or Industrial Insurance: Often sold door-to-door; small amounts, paid weekly.
• Government Insurance: Includes Social Security, Medicare, Medicaid, TRICARE.
• Self-Insurers: Companies using their own funds to cover risks; typically large companies.

How Insurance Is Sold

• Agents and Brokers:
  • Captive Agents: Work for one carrier.
  • Independent Agents: Offer products from multiple carriers.
• Distribution Systems:
  • Career Agencies: Set up by insurance companies, hire captive agents.
  • General Agencies: Not created by insurance companies; agents represent multiple companies.
  • Independent Agencies: Agents who own their client accounts.
  • Managerial System: Branch manager-run offices set up by insurance companies.
  • Mass Marketing: No agents; direct sales through ads and online representatives.

Industry Regulation

Key Regulatory Acts

• Armstrong Investigation Act: States have authority for insurance regulation.
• McCarran-Ferguson Act: Federal authority but states primarily regulate.
• Fair Credit Reporting Act: Ensures fair handling of credit information.
• Graham-Leach-Bliley Act: Allows financial companies to enter each other's business lines.
• Patriot Act: Prevents terrorism via money laundering related to insurance.

Regulatory Bodies and Guidelines

• National Association of Insurance Commissioners (NAIC): Governing body for the insurance industry in the US:
  • Encourage uniform laws/regulations.
  • Assist in law administration.
  • Protect consumers.
  • Preserve state regulation.
• Advertising Code: Bans misleading terms; promotes fair representation.
• Unfair Trade Practices Act: Prevents misleading, false information, and unfair discrimination.
• NAIFA and NAHU Code of Ethics: Emphasizes suitability, full disclosure, and ethical selling practices.
• Buyer’s Guide and Policy Summary: Informational documents required for consumers.
• Reserves: Funds set aside for future claims.
• Liquidity: Availability of funds for unexpected claims.
• Guarantee Associations: Protect insured in case of insurer insolvency.