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Define Insurance
Protection, through the payment of money as compensation or reimbursement for financial loss, provided by written contract, against the occurrence of specified chance or unexpected events.
Define Insurance Agent
An individual provincially licensed to solicit and sell insurance, deliver policies, or collect premiums on behalf of an insurance company.
Define Life insurance
Provides coverage where the risk insured against is the death of a particular person (the life insured). Upon the death of the life insured, while the policy is in force, the insurance company (the insurer) will pay the death benefit to the beneficiary named in the insurance policy.
What is Distribution
A transfer of a mutual fund's income and/or capital gains to its unitholders in whose hands it is taxed. As trusts, most mutual funds are required to transfer all net income and net realized capital gains to unitholders.
Define Insurer
The company that issues the insurance policy and assumes the risks associated with the insured.
Define Insured
The individual or group covered by the contract of insurance.
What is isurance?
Insurance is a way to protect against catastrophic financial loss. One party, the insurer, agrees to pay another party, the insured, an amount of money as a result of a specified event that results in a financial loss to the insured.
Define Life insured
The person upon whose death the benefit of the life insurance becomes payable.
Define Policy
The written agreement between insurer and policyowner containing the schedule of benefits, contract specifications, a premium schedule, provisions describing benefits and procedures in various circumstances, limitations and exclusions, and amendments or riders.
Define Policyowner
The person who enters into a contract with the insurer and who may exercise all rights in the insurance policy. In a life insurance contract, he or she may or may not be the life insured. Also known as the policyholder.
Define Beneficiary
The beneficiary is the person who is entitled to receive the death benefit upon death of the life insured. A person in this context can be a natural person, a corporation, a charity, or a trust including the deceased's estate, except in the case of the life insured who must be a natural person. Upon the death of the life insured, the beneficiary immediately becomes the policyowner.
How many people can be the: life insured, policyowner, and beneficiary?
The life insured, policyowner, and beneficiary can be the same person, two people or three people.

David owns a policy on his life payable to his estate upon his death. In this case, David is both the policyowner and the life insured. His estate is the beneficiary.

Ingrid owns a policy on David's life payable to their son, Sven, upon David's death. In this case, Ingrid is the policyowner, David is the life insured and Sven is the beneficiary.
Define Face value
The policy has a face value that is the amount of the death benefit the insurer will pay the beneficiaries should the life insured die during the period of coverage named in the policy.
define Death benefit
The sum payable to the beneficiary as the result of the death of the life insured.
Define Trust
A formal arrangement in which one party, the trustee, holds legal title to property on behalf of another party, the beneficiary, subject to terms set out in the agreement.
What is the principle behind insurance?
The principle behind insurance is spreading or sharing the risk among individuals within a risk class.
Define Risk Class
A risk class can be defined as a group in which all members share common characteristics for purposes of insurance. For example, non-smoking males aged 35 would form one risk class, while 50-year-old females in good health would form another risk class.
What do actuaries do?
Insurance company actuaries analyze the size and frequency of insurance claims within each risk class. (Actuaries are experts in statistics, probability, and risk theory, who perform calculations related to insurance.) The actuaries then set premium levels for each class. (The premiums are the amount that the policyowner pays for the insurance.) The premiums are calculated to cover the anticipated claims for the year and the company's expenses, as well as to provide a margin of profit for the insurance company.
What terms do policies stipulate?
When an application for insurance is accepted, the company issues a policy to the policyowner. The policy is a contract that spells out the following terms:

1. the risks being insured
2. the premium required
3. the maximum amount at risk
4. the responsibilities and undertakings of each of the two parties
What type of insurances are mandatory?
Auto and Home
Define Claim
A request or demand on an insurer for payment of benefits according to the provisions of a policy. Subject to statutory provisions in A&S situations.
Define Premium
The periodic payment that is required to keep an insurance policy in force. The cost of an insurance policy to a policyowner is the sum of these amounts over the years.
Type the correct term in the spaces provided.

Ramona owns an insurance policy on the life of her husband, James.
That means that Ramona is the ________________ and James is the _________________.
Every month, she makes a payment f
Ramona is the Policy Holder
James is the Insured
The payment is called the Premium
Timothy and Patricia are the Beneficiaries
Describe the first known life insurance policy.
The first known life insurance policy was written in England in 1583 during the reign of Queen Elizabeth I. The policy was taken out by Richard Martin, citizen and alderman of London, on the life of William Gybbons for a period of one year. Gybbons died within that calendar year and the insurance company was required to pay the death benefit stated on the policy.

The policy on William Gybbons' life was for one year only.
Describe how insurance practices came about.
Early insurance practices were developed in response to the risks of trade, such as the threat of being robbed by bandits or losing goods at sea due to storms. Merchants who sent their goods in a number of caravans rather than a single caravan, in effect, spread their risks. In the Middle Ages, merchants in various seafaring countries developed marine insurance by forming associations to which they contributed funds. Merchants who lost ships would be compensated from this fund.
Outline the history of life insurance in Canada.
Little is known about the life insurance industry in Canada until the Canada Life Assurance Company was founded in 1847. Canada Life's first policy was for 500 pounds sterling on the life of its president, Hugh C. Baker. The new federal Government of Canada passed the first Insurance Act to regulate activities in the insurance industry in 1868. In 1870, The Ontario Mutual Life Assurance Company, now known as Mutual Life of Canada, was established. Other insurance companies established during the 1870s include Sun Life of Canada, Confederation Life, and London Life. In 1881, North American Life commenced business with Alexander Mackenzie, the second Prime Minister of the Dominion of Canada, as its president. Manufacturers Life was established six years later headed by Sir John A. MacDonald, the first Prime Minister of the Dominion of Canada.

By 1910, there were 43 companies licensed by the federal government to transact life insurance business in Canada.
What are the most important risks that face most people?
disability and illness,
inadequate income during retirement
Describe Risk of Death
The risk of death poses significant financial risks. While death is inevitable, when it will actually occur is unpredictable. It is dependent on factors such as an individual's age, gender, health, and lifestyle. Actuaries have developed tables that show expected death rates for different age groups. For example, the likelihood of a male who is 35 years old dying before he reaches age 45 is about one in 50. In contrast, the likelihood of this 35-year-old male dying before he reaches age 65 is about one in five. The expected death rate of individuals in a given class is called mortality.
Define mortality
The expected death rate of individuals in a given class
Describe Risk of disability and illness
Total disability is an individual's inability to do any work due to injury or a medical condition. Actuarial tables for disabilities indicate that the probability of a male aged 35 becoming disabled for a period of three months or more before age 65 is one in three. The expected illness or disability rate of individuals in a given class is called morbidity.
Describe Morbidity
The expected illness or disability rate of individuals in a given class
Define Total disability
The level of physical or mental impairment caused by an accident or illness, as defined in a disability insurance policy, that must exist before benefits are paid. Elements include loss of income and inability to perform the important duties of one's own occupation, any occupation, or an occupation to which one is reasonably suited by education, training, or experience.
Discuss Risk of inadequate income during retirement
An often overlooked risk when discussing insurance is the risk of an individual not having a sufficient source of income during retirement to support their desired standard of living or even to meet basic lifestyle expenses. As a result, an individual will be forced to curtail spending or to seek support from their family or the government to meet their needs.
List 6 common situations for which insurance can be used
1. To protect a family financially.
2. To fund a trust fund.
3. To pay off debt.
4. To pay income taxes.
5. To pay capital gains tax.
6. To fund bequests.
Describe how life insurance can be used to protect a family financially.
Life insurance on the life of an income earner can provide funds to replace his or her income in the event of death. The death benefit provides financial support for his or her survivors, alleviating the financial hardships they may otherwise encounter.
Describe how life insurance can be used to fund a trust fund.
Anyone who is supporting a financially dependent child or adult can purchase life insurance on his or her own life. In the event that the caregiver dies, the guaranteed death benefit can be used to create a trust fund to provide continued support for the dependent child or adult.
Describe how life insurance can be used to pay off debt.
Mortgages, bank loans, and certain investment strategies can create sizeable debt. Life insurance can guarantee that if the borrower dies, there will be sufficient funds available to pay off these liabilities.
Describe how life insurance can be used to pay income taxes.
Many self-employed individuals and professionals pay their income taxes quarterly. Life insurance can provide funds to pay outstanding taxes if the individual dies.
Describe how life insurance can be used to pay capital gains tax.
When an individual dies, taxes must be paid on the difference between the cost price and the market value of their capital property, such as a cottage, investment portfolio, or rental property. The individual's heirs may not have the funds available to pay these taxes, and as a result may be forced to sell the assets. Life insurance can provide funds that can be used to pay these taxes.
Describe how life insurance can be used to fund bequests.
It is the wish of many people to leave a cash bequest to a charity, family members, or friends. Life insurance can provide funds for these bequests in a tax efficient manner.
How does life insurance address specific personal needs?
Life insurance can address specific personal needs by paying a guaranteed, tax-free cash death benefit when the insured dies.
What are the three major factors that insurance companies consider when calculating the premium?
mortality, administration costs, and expenses.
Define Mortality cost
The actual cost to the insurance company of the risk that the life insured might die during a given policy year. The cost of life insurance net of administration costs.
Define Underwriting
The process, by which an insurance company examines an application, decides whether to accept the risk according to insurability criteria and if so, what premium to charge under the policy.
What are some factors that affect mortality costs?
The key elements in mortality cost are age and gender. For example, the risk of death over the subsequent 10 years for a 35-year-old male is less than the risk of death for a 45-year-old male. Consequently, the 45-year-old would be required to pay a higher premium than the 35-year-old pays if they were to obtain identical coverage.

Actuarial studies show that women have a longer life expectancy than men do. This fact is reflected in the lower premiums that a female would pay compared to a male for the identical insurance coverage.

Mortality costs also take into account the lifestyle of individuals. Smokers pay more than non-smokers. Similarly, people who participate in hazardous sports pay higher premiums than people who do not participate in hazardous sports.
What are the types of insurance companies?
Stock Life Insurance Companies,
Mutual Life Insurance Companies,
Fraternal Benefit Societies
Describe a Stock Life Insurance Company
A stock life insurance company is a corporation that has share capital. This type of company can issue shares as a means of raising capital to fund expansion. A stock life insurance company is managed by a board of directors which is elected by the shareholders. In Canada, a stock life insurance company is governed by the insurance laws of the federal government and must have two classes of directors. The first class of directors is elected by the shareholders. The second class, which must number at least one-third of the total number of directors, is elected by the policyowners of participating policies.

Participating policies are policies that entitle the owner to receive a dividend from the insurance company. The payment of dividends is not guaranteed. Dividends are effectively reductions in premiums based upon the financial results of the insurance company. (Participating policies and dividends are dealt with in more detail in later units.)

The vast majority of Canadian companies are stock companies.
Describe a Fraternal Benefit Society
A fraternal benefit society is an organization that is operated for fraternal, charitable, or religious purposes. As part of their member services, fraternal benefit societies may offer life, health, and disability insurance to members and their families. For instance, professions such as teachers or firefighters and their dependents may be insured by a fraternal benefit society.
Describe a Mutual Life Insurance Company
A mutual life insurance company is owned by its policyowners. Mutual insurers are organized for the purpose of providing insurance for their members. Unlike a stock life insurance company, a mutual insurer does not have capital stock. Since there are no shareholders, there is only one class of directors elected by the policyowners. Another distinguishing characteristic of a mutual insurer deals with the distribution of earnings. Any surplus after operating costs is repaid to the policyowners in the form of dividends or a reduction in premiums.

All directors of mutual and stock life insurance companies must be Canadian citizens and resident in Canada. Life insurance agents may not be directors.
Define Participating policies
Participating policies are policies that entitle the owner to receive a dividend from the insurance company. The payment of dividends is not guaranteed. Dividends are effectively reductions in premiums based upon the financial results of the insurance company. (Participating policies and dividends are dealt with in more detail in later units.)
Define Demutualization
The process of converting a mutual life insurance company to a stock insurance company is called demutualization. Each policyowner was converted to a shareholder by issuing the policyowner common shares. The value of shares each policyowner received approximated the relative contribution made for each policy owned. Some policyowners received thousands of dollars worth of stock.

In practice there is not much difference between a mutual company and a stock company from the point of view of the insurance agent or the client. Demutualization does not affect insurance coverage, policy values, premiums, or policy dividends.
Define insurance broker
A broker is an independent businessperson who may sell life insurance contracts issued by any number of insurance companies.
How do life insurance companies distribute their financial products?
Most life insurance companies distribute their products through other distributors, including banks, securities and mutual fund dealers, property and casualty brokerages, and independent life insurance agents. A few companies have maintained their own network of agents but some of those have now converted their branch office into franchises.
What are some of the financial products that life insurance companies offer?
Today, life insurance companies are manufacturers of financial products, which include life and disability insurance, investment products, retirement income products, and group life and health benefits.
Describe the size of the life insurance marketplace in Canada
Today, Canada's life and health insurance industry is highly competitive. According to Canadian Life and Health Insurance Facts, 2001, there are currently 120 life and health insurers operating in Canada. At the end of 2000, roughly 17 million Canadians owned some form of life insurance, for a total value of nearly $2.1 trillion. This is almost double the amount owned 10 years ago. In fact, life insurance ownership has grown at an average annual rate of six per cent over the past ten years. In 2000, the average amount of life insurance owned by insured individuals was $121,400.

In 2000, premiums paid for life insurance totalled $11.1 billion and life insurance benefit payments totaled $5.0 billion.

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