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MTHEL 131 (111)
David Kohler (106)

Lesson 10

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Mathematics Electives
David Kohler

Lecture 10 “Utmost of good faith” - both parties rely on accuracy of information The contract Offer - an offer must be made by 1 party - comes in the form of an application Acceptance - the offer must be accepted by the other party - comes in the form of a policy Consideration - payment must be made - comes in the form of premiums - The person must be ‘capable’—have the mental capacity to make a decision - The person must be old enough to take part in a contract (In Ontario, you have to be 16 to enter a life insurance contract) - The contract must be for a lawful purpose (contracts about illegal things are null) - Financial stability/soundness of the insurer ensures their ability to keep promises - A flawed underwriting process can cause the company to go bankrupt Principles of underwriting: 1. Ensure financial soundness 2. Be fair 3. Prevent economic Business Insurance Elimination period: - With disability insurance, it’s 30/60/90 days - With business insurance, the waiting period is 1-7 days, because the business needs the cash flow to stay open Benefit period: - shorter for business insurance - it should be enough time for them to decide whether they want to sell, or keep the business open Benefit amount: - should be equal to expenses - when paid to the business, it is taxable When a person dies, their claim form is the death certificate—it is readily available The insurance company requests an A.P.S. (Attending physician’s report), which details cause of patient’s death Money may be subtracted from the full death benefit in the amount of: - outstanding premiums - loans - interest on loans * unpaid dividends may be added Risk - Insurance is about managing risk - In life insurance, people want to manage the financial risk associated with death - Risk is measured by frequency and severity (lowhigh)  Ex. the frequency of losing pencils is very high, but the severity is very low, so insurance is unnecessary - Three most financially valuable things:  house  car  their ability to earn a living Cash surrender value - Whole life policy CSV takes time to accumulate because the insurer has to make up for the expenses incurred (ex. commission, underwriting, etc.) - If the policyholder decides to cancel the policy, they get their agreed upon cash surrender value Tax 1. income tax (federal and provincial) 2. consumption tax: H
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