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No premium is payable in advance. Instead, each member is assessed an individual portion of losses that actually occur. An advance premium assessment mutual charges a premium at the beginning of the policy period. If the original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as dividends. However, if total premiums are not enough to meet losses, additional assessments are levied against the members.
However, with reciprocals, it is the policyholders themselves who insure the risks of the other policyholders. Each policyholder assumes a share of the risk brought to the company by others. Reciprocals are managed by an attorney-in-fact. Reinsurance is an arrangement by which an insurance company transfers a portion of a risk it has assumed to another insurer. Usually, reinsurance takes place to limit the loss any one insurer would face should a very large claim become payable.
Another reason for reinsurance is to enable a company to meet certain objectives, such as favorable underwriting or mortality results. The company transferring the risk is called the ceding company; the company assuming the risk is the reinsurer. A common reinsurance contract between two insurance companies is called treaty reinsurance, which involves an automatic sharing of the risks assumed.
Fraternal societies, noted primarily for their social, charitable, and benevolent activities, have memberships based on religious, national, or ethnic lines.
Fraternals first began offering insurance to meet the needs of their poorer members, funding the benefits on a pure assessment basis. Today, few fraternals rely on an assessment system, most having adopted the same advanced funding approach other insurers use.
To be characterized as a fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work, and maintain a representative form of government with elected officers. Fraternals must be formed for reasons other than obtaining insurance.
Most fraternals today issue group and annuities with many of the same provisions found in policies issued by commercial insurers. Benefits are in the form of services provided by the hospitals and physicians participating in the plan. They sell medical and hospital care services, not insurance. These services are packaged into various plans, and those who purchase these plans are known as subscribers. Another type of service provider is the health maintenance organization HMO. HMOs offer a wide range of health care services to member subscribers.
For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to the services of certain physicians and hospitals contracted to work with the HMO. Unlike commercial insurers, HMOs provide financing for health care plus the health care itself. HMOs are known for stressing preventive health care and early treatment programs. A third type of service provider is the preferred provider organization PPO. Under the usual PPO arrangement, a group desiring health care services e.
PPOs can be organized by employers or by the health care providers themselves.
The contract between the employer and the health care professional, whether physician or a hospital, spells out the kind of services to be provided. Insurance companies can also contract with PPOs to offer services to insureds.
Ranging from crop insurance to bank and savings and loan deposit insurance, these programs have far-reaching effects. Millions of people rely on these plans. Rather than transfer risk to an insurance company, a self-insurer establishes its own self-funded plan to cover potential losses.
Self-insurance is often used by large companies for funding pension plans and some health insurance plans. Many times, a self-insurer will look to an insurance company to provide insurance above a certain maximum level of loss. The self-insurer will bear the amount of loss below that maximum amount. In a sales transaction, agents represent the insurer and brokers represent the buyer. Agents are also classified as captive or career agents and independent agents.
An independent agent works for himself and sells the insurance products of many companies. In most states, however, the agent may represent as many insurers as will appoint him. There are three systems that support the sale of insurance through agents and brokers. These are the career agency system, personal producing general agency system, and independent agency system.
GAs may operate strictly as managers, or they may devote a portion of their time to sales. The career agency system focuses on building sales staffs.
However, PPGAs do not recruit, train, or supervise career agents. They primarily sell insurance, although they may build a small sales force to assist them.
PPGAs are generally responsible for maintaining their own offices and administrative staff. Instead, independent agents represent any number of insurance companies through contractual agreements.
They are compensated on a commission or fee-basis for the business they produce. This system is also known as the American agency system. Independent agent represent any number of insurance companies through contractual agreements. With the direct selling method, the insurer deals directly with consumers by selling its policies through vending machines, advertisements, or salaried sales representatives.
No agent or broker is involved. A large volume of insurance is also sold through mass marketing techniques, such as over the Internet, newspaper, magazine, radio, and television ads.
Mass marketing methods provide exposure to large groups of consumers, often using direct selling methods with occasional follow-up by agents. The primary purpose of this regulation is to promote public welfare by maintaining the solvency of insurance companies. Other purposes are to provide consumer protection and ensure fair trade practices as well as fair contracts at fair prices.
It is very important insurance agents understand and obey the insurance laws and regulations. Though a balance between these two bodies has been reached and maintained for many years, arguments favoring control by one governing authority over another are still being waged. This case, which was decided by the U. The Supreme Court sided against the insurance company, ruling that the sale and issuance of insurance is not interstate commerce, thus upholding the right of states to regulate insurance.
The decision of Paul v. Virginia held for 75 years before the Supreme Court again addressed the issue of state versus federal regulation of the insurance industry. In the SEUA case, the Supreme Court ruled that the business of insurance is subject to a series of federal laws, many of which were in conflict with existing state laws, and that insurance is a form of interstate commerce to be regulated by the federal government.
This decision did not affect the power of states to regulate insurance, but it did nullify state laws that were in conflict with federal legislation. The result of the SEUA case was to shift the balance of regulatory control to the federal government.
Today, the insurance industry is considered to be state-regulated. In the mids the Federal Trade Commission FTC sought to control the advertising and sales literature used by the health insurance industry.
These riders change the basic policy to provide some feature desired by the policy owner. A common rider is accidental death see above. Another common rider is a premium waiver, which waives future premiums if the insured becomes disabled.
Joint life insurance is either term or permanent life insurance that insures two or more persons, with proceeds payable on the death of either. Unit Linked Insurance Plans[ edit ] Main article: Unit-linked insurance plan These are unique insurance plans which are basically a mutual fund and term insurance plan rolled into one.
The investor doesn't participate in the profits of the plan per se, but gets returns based on the returns on the funds he or she had chosen. See the main article for a full explanation of the various features and variations.
Main article: With-profits policy Some policies afford the policyholder a share of the profits of the insurance company—these are termed with-profits policies.
Other policies provide no rights to a share of the profits of the company—these are non-profit policies. With-profits policies are used as a form of collective investment scheme to achieve capital growth. Other policies offer a guaranteed return not dependent on the company's underlying investment performance; these are often referred to as without-profit policies, which may be construed as a misnomer.
India[ edit ] According to the section 80C of the Income Tax Act, of Indian penal code premiums paid towards a valid life insurance policy can be exempted from the taxable income.
The total amount that can be exempted from the taxable income for section 80C is capped at a maximum of INR , Australia[ edit ] Where the life insurance is provided through a superannuation fund, contributions made to fund insurance premiums are tax deductible for self-employed persons and substantially self-employed persons and employers.
However where life insurance is held outside of the superannuation environment, the premiums are generally not tax deductible. For insurance through a superannuation fund, the annual deductible contributions to the superannuation funds are subject to age limits.
These limits apply to employers making deductible contributions. They also apply to self-employed persons and substantially self-employed persons. Included in these overall limits are insurance premiums. This means that no additional deductible contributions can be made for the funding of insurance premiums. Insurance premiums can, however, be funded by undeducted contributions. The benefits arising from life assurance policies are generally not taxable as income to beneficiaries again in the case of approved benefits, these fall under retirement or withdrawal taxation rules from SARS.
Investment return within the policy will be taxed within the life policy and paid by the life assurer depending on the nature of the policyholder whether natural person, company-owned, untaxed or a retirement fund. United States[ edit ] Premiums paid by the policy owner are normally not deductible for federal and state income tax purposes, and proceeds paid by the insurer upon the death of the insured are not included in gross income for federal and state income tax purposes.
Cash value increases within the policy are not subject to income taxes unless certain events occur. For this reason, insurance policies can be a legal and legitimate tax shelter wherein savings can increase without taxation until the owner withdraws the money from the policy.
In flexible-premium policies, large deposits of premium could cause the contract to be considered a modified endowment contract by the Internal Revenue Service IRS , which negates many of the tax advantages associated with life insurance. The insurance company, in most cases, will inform the policy owner of this danger before deciding their premium.
The tax ramifications of life insurance are complex.
The policy owner would be well advised to carefully consider them. As always, both the United States Congress and state legislatures can change the tax laws at any time. Non-investment life policies do not normally attract either income tax or capital gains tax on a claim.
If the policy has as investment element such as an endowment policy, whole of life policy or an investment bond then the tax treatment is determined by the qualifying status of the policy. Qualifying status is determined at the outset of the policy if the contract meets certain criteria. Single premium contracts and those running for a short term are subject to income tax depending upon the marginal rate in the year a gain is made.
This gain is reduced by applying a calculation called top-slicing based on the number of years the policy has been held. Although this is complicated, the taxation of life assurance-based investment contracts may be beneficial compared to alternative equity-based collective investment schemes unit trusts , investment trusts and OEICs. The withdrawal is deemed by the HMRC Her Majesty's Revenue and Customs to be a payment of capital and therefore, the tax liability is deferred until maturity or surrender of the policy.
This is an especially useful tax planning tool for higher rate taxpayers who expect to become basic rate taxpayers at some predictable point in the future, as at this point the deferred tax liability will not result in tax being due. The proceeds of a life policy will be included in the estate for death duty in the UK, inheritance tax purposes. Policies written in trust may fall outside the estate.
Pension term assurance[ edit ] Although available before April , from this date pension term assurance became widely available in the UK. Most UK insurers adopted the name "life insurance with tax relief" for the product.