Here's a clear, step-by-step overview of the insurance concepts in your material, tailored for a 19-year-old student.
1) Substandard Risk
A substandard risk is an applicant who falls below normal underwriting guidelines, usually due to health or other factors. This doesn’t always mean no coverage—insurers may still issue policies with exclusions or higher rates.
2) Pre-Selection vs Post-Selection
- Pre-Selection: Field underwriters (often agents) target prospects who are most likely to be low risk.
- Post-Selection: Company underwriters in the home office review and rate the applicant after pre-selection.
Goal: rate the risk before the policy is issued, not after a claim is filed.
3) Post-Claim Underwriting
Post-claim underwriting is the rescission, cancellation, or limitation of a policy because underwriting wasn’t completed before writing a policy. It is illegal for insurers to engage in post-claim underwriting, especially for senior products like Medicare supplement or long-term care insurance.
4) Benefits & Costs of Insurance
Insurance helps protect you from financial devastation if a loss occurs. As costs rise, insurance becomes more essential. Insurance is a way to limit exposure to loss, even though premiums can be expensive.
5) Deductibles
A deductible is the amount of money (dollar deductible) that must be paid, or a period of time (elimination period), before benefits begin. Typically, higher deductibles mean lower premiums.
- Money deductible: a fixed dollar amount.
- Elimination period: a waiting period before benefits start.
6) Reinsurance
Retention limit is how much risk an insurer normally accepts for a contract. Reinsurance is when the insurer (ceding company) shares excess risk with another insurer (reinsurer).
- Treaty reinsurance: the ceding company transfers all excess risk up to treaty limits to a reinsurer.
- Facultative reinsurance: used when no treaties exist or all treaties have been used; the reinsurer covers the excess risk on a policy.
In both cases, the ceding company still remains responsible for paying losses to the insured. The reinsurer is generally invisible to the client.
7) Classes of Insurance
The California Insurance Code lists about 20 classes of insurance. Major groups include:
- Life (includes annuities) and Property & Casualty (P&C), with many sub-classes such as Fire, Inland Marine, Ocean Marine, Title, Surety, and Disability (covering health, accidental death and dismemberment, disability income, long-term care, and Medicare supplement).
- Other P&C classes include Plate Glass, Liability, Workers’ Compensation, Boiler & Machinery, Burglary, Credit, and more.
Note: Annuities are not themselves a separate class of insurance.
Conclusion: Understanding these terms helps you compare policies, estimate costs, and choose coverage that fits your needs now and in the future.