The major types of life insurance contracts are tern, whole life, and universal life. But innumerable combinations of these basic types are sold. Term insurance contracts, issued for specified periods of years, are the simplest. Protection under these contracts expires at the end of the stated period, with no cash value remaining whole life contracts, on the other hand, run for the whole of the insured’s life and gradually accumulate a cash value. The cash value, which is less than the face value of the policy, is paid to the policyholder when the contract matures or is surrendered. Universal life contracts, a relatively new form of coverage introduced in the United States in 1979, have become a major class of life insurance. They allow the owner to decide the timing and size of the premium and amount of death benefits of the policy. In this contract, the insurer makes a charge each month for general expenses and mortality costs and credits the amount of interest earned to the policy holder.

There are two general types of universal life contracts, type A and type B. in type A policies the death benefits is a set amount while in type B policies the death benefit is a set amount plus whatever cash value has been built up in the policy. Life insurance may also be classified, according to type of customer as ordinary, group, industrial, and credit. The ordinary insurance market includes customers of whole life, term, and universal life contracts and is made up primarily of individual purchasers of annual-premium insurance.

The group insurance market consists mainly of employers who arrange group contracts to cover their employees. The industrial insurance market consists of individual contracts sold in small amounts with premiums collected weekly or monthly at the policyholder’s home. Credit life insurance is sold to individual, usually as part of an installment purchase contracts, if the insured dies before the installment payments are completed, the seller is protected for the balance of the unpaid debt. Insurance may be issued with a premium that remains the same throughout the premium-paying period, or it may be issued with a premium that increases periodically according to the age of the insured. Practically all ordinary life insurance policies are issued on a level-premium basis, which makes it necessary to charge more then the true cost of the insurance in the earlier years of the contract in order to make up for much higher costs in the later years, the so-called overcharges in the earlier years are not really overcharges but are a necessary part of the total insurance plan, reflecting the fact that mortality rates increase with age.

The insured is not overpaying for protection, because of the claim on the cash value that accumulate in the early years. The policyholder may borrow on this value or may recapture it completely by lapsing the policy. The insured does not, however, have a claim on all the earnings that accrue to the insurance company from investing the funds of its policyholders. By combining term and whole life insurance, an insurer can provide many different kinds of policies.

Two examples of such “package” contracts are the family income policy and the mortgage protection policy. In each of these, a base policy, usually whole life insurance is combined with term insurance calculated so that the amount or protection declines as the policy runs its course. In the case of the mortgage protection contract, for example, the amount of the decreasing term insurance is designed roughly to approximate the amount of the mortgage on a property. As the mortgage is paid off, the amount of insurance declines correspondingly. At the end of the mortgage period the decreasing term insurance expires, leaving the base policy still in force. Similarly, in a family income policy, the decreasing term insurance is arranged to provide a given income to the beneficiary over a period of years roughly corresponding to the period during which the children are young and dependent. Some whole life policies permit the insured to limit the period during which premiums are to be paid. Common examples of these are 20-year life, 30-year life, and life paid up at age 65.

On these contracts, the insured pays a higher premium to compensate for the limited premium-paying period. At the end of the stated period, the policy is said to be” paid up”, but it remains effective until death or surrender. Term insurance is most appropriate when the need for protection runs for only a limited period; whole life insurance is most appropriate when the protection need is permanent. The universal life plan, which earns interest at a rate roughly equal to that earned by the insurer (approximately the rate available in long-term bonds and mortgages), may be used as a convenient vehicle by which to save money. The owner can vary the amount of death protection as the need for changes in the course of life. The policy offers flexibility and saves the owner commission expense by eliminating the need for dropping one policy and taking out another as protection requirements change.

Life insurance policies contain various clauses that protect the rights of beneficiaries and the insured. Perhaps the best-known is the incontestable clause, which provides that if a policy has been in force for two years the insurer may not afterward refuse to pay the proceeds or cancel the contract for any reason except nonpayment of premiums. Thus, if the insured made a material misrepresentation when the policy was originally obtained and this misrepresentation is not discovered until after the contestable period, beneficiaries may still receive the value of the policy so long as the premiums are maintained.

Another protected clause is the suicide clause, which states that after a given period, usually two years, the insurer may not deny liability for subsequent suicide of the insured. If suicide occurs within the period, the insurer tenders to the beneficiary only the premiums that have been paid. If the age of the insured was misstated when the policy was taken out, the misstatement-of-age clause provides that the amount payable is the amount of insurance that would have been purchased for the premium had the correct age been stated. Many life insurance policies, Known as participating policies, return dividends to the insured. The dividends, which may amount to 20 percent of the premiums, may be accumulated in cash left with the insurer at interest, used to buy additional life insurance, used to reduce payments, or used to pay up the contract sooner than would otherwise have been possible.

The major types of health insurance coverage are hospitalization, surgical, regular medical, major medical, disability income, dental and long term care. Health insurance contracts are not highly standardized. The policy provisions discussed below should be considered as typical, not universal or invariant.

Hospitalization insurance indemnities for room and board in the hospital, laboratory fees, use of special facilities, nursing care, and certain medicines and supplies. The contract contains specific limitations on coverage, such as maximum number of days in the hospital and maximum allowances for room and board. Surgical expense insurance covers the surgeon’s charge for given operations or medical procedures, usually up to a maximum for each type of operation. Regular medical insurance contracts indemnity the insured for expenses such as physicians’ home or office visits, medicines, and other medical expenses. Major medical contracts are distinguished from other health insurance policies by offering coverage without many specific limitations; usually there is only a maximum per person, a deductible amount, and a percentage deductible, called coinsurance, under which the insured usually pays 20 percent of each medical bill above the deductible amount. Disability income coverage provides periodic payments when the insured is unable to work as a result of accident or illness. There is normally a waiting period before then payments begin. Definitions of disability vary considerably.

 

A strict definition of disability requires that one be unable to perform each and every duty of one’s regular occupation for a given period, say two years, and thereafter be unable to perform the duties of any occupation for which one is reasonably titled by training or experience. More liberal definitions of disability require only the inability to perform the duties of one’s usual occupation. Dental insurance, usually sold on a group plan and sponsored by an employer, covers such dental services as fillings, crowns, extractions, bridgework, and dentures. Most policies contain relatively low annual limits of coverage, such as $2500, as well as deductible and coinsurance provisions. Some policies limit benefits to a percentage of the cost of services, long-term care insurance (LTC) has been developed to cover expenses associated with old age, such as care in nursing homes care visits. LTC insurance, though relatively new, is already attracting strong interest because of the rapid growth of the elderly population in the United States. Policies specify a maximum of four or five years in a nursing home.

 

A common provision is a 20-day waiting period before benefits begin. Some policies exclude certain conditions such as Alzheimer’s disease and do not cover custodial care. For an additional premium, some LTC policies offer an inflation provision, which increases the daily benefit by some percentage, such as 5 percent a year.

Under group life insurance an employer sign a master contract with the insurance company outlining the provisions of the plan.

Each employee receives a certificate that gives evidence of participation in the plan. The amount of insurance depends on the employee’s salary or job classification; usually the employer pays a portion of the premium and the employee pays the rest, but sometimes the employer pays the entire cost of the plan.

A major advantage of group life insurance to an employee is that usually coverage may be obtained regardless of health. An employee who leaves the group may, without a medical examination, convert the group coverage to an individual policy. The premiums on group life insurance are considerably less than on comparable individual policies; mainly the selling and administrative costs are minimal.

Major types of health insurance on a group basis include insurance against the losses occasioned by hospitalization, surgical expense, and disability. Hospitalization insurance is designed to cover daily room and board and other expenses. Surgical expense insurance usually provides specified allowances for physicians’ charges for various operations. Regular medical expense coverage is generally aimed at covering part of the costs of medicines and doctor calls. Major medical insurance offers the insured a large monetary coverage, designed to meet catastrophic costs of illness or accident with few restrictions as to the type of medical expense for which reimbursement is allowed. The insured must bear a percentage of any loss, usually 20percent. Temporary disability offers the insured a weekly indemnity for a period of up to six months if the insured is temporary disabled and unable to work. Long-term disability extends the income for periods longer than six months. Accidental death and dismemberment insurance offers an insured or a beneficiary a lump sum, it is used widely as a form of travel accident insurance.

 

Under the typical group health insurance contract, the insured person enjoys several elements of protection not obtainable in individual contracts. Cancellation of coverage is not permitted unless coverage for the entire group is canceled. The insured enjoys protection against rate increases unless the rate for all members of the class is increased. Typically the group protection may be converted to some kind of individual policy, or the insured may transfer to another group plan. The insurer tends to be liberal on claims settlement because the typical premium under a group plan is large enough for the insurer to be unwilling to jeopardize the good will of the clientele through miserly claims treatment.

Most group insurance plans require that certain conditions be met. Sometimes there must be a minimum number of persons covered, such as 10 or 25. The group must also have some reason for existence other than to obtain insurance. The most usual types of groups are employees of a common employer, members of a labor organization, debtors of a common creditor.