When you buy a house, you know that after paying the mortgage for 25 or 30 years, you’ve paid it off and you’re done making mortgage payments. Not so with life insurance. As a general rule, you pay the premiums for as long as you live. But there are exceptions to the general rule.

You may be able to buy certain insurance that only requires a limited number of payments. For example, the old government life insurance retirement for veterans that my father bought after World War II was a 20-year paid-up policy; after 20 years, you were finished making payments.

Today, depending on the type of life insurance policy you have, you can arrange to have a paid-up plan. This is also called a vanishing premium. You pay premiums long enough to build up enough cash value in the policy that can be used to continue paying the insurance element for as long as you live. The premium payment depends on the performance of the policy. I have one that projected an 8-year period, but with the low interest rates, it’s more like 12 years before the policy becomes self-sustaining. And even after you’re in a position to stop paying premiums, you may have to ante up again if the policy doesn’t make enough to continue carrying the death benefit.

It’s critical that you not overlook or delay premium payments. If you do, your policy could lapse. Most companies give you a 30-day grace period (if your premium is late by say 10 days, you’re still insured). They will notify you (or someone you designate to receive such notice) that the premium is late. However, once the grace period passes and policy lapses, it’s not a simple matter to reinstate it; you basically have to start from scratch.

Now that you know how to go about getting insurance, let’s see what you need. While you were raising a family, you probably took on life insurance to protect your family by providing a fund to replace the wages you’d never be able to earn if you died early. Many people, maybe you, too, never look at their coverage once they’ve put it in place. They simply pay the premiums forever. At your stage in life, this could be a big mistake. If you’re over insured, you’re missing the chance to earn more on your money. If you’re under insured, you’re exposing your family to potential disaster.

It’s important to look again at why you’re carrying life insurance and whether the kind and amount you have are right.

Replacing income. Proceeds from life insurance (and the income that can be earned on them) can be used to provide income for your family. If you’re still working and dependent on your earnings, your spouse may need the insurance proceeds to replace your lost wages when you die.

Financing estate costs. Whether or not you’re working, you may have sizable assets that will cause your estate to owe taxes-federal and possibly state estate taxes. There’s no federal estate tax if the size of your estate (other than property passing to your spouse or to charity) is under the exemption amount in effect for the year you die.

Of course, even if you’re under the federal limit, your estate may still owe death taxes to your state.

Trusts that are used to own insurance on your life are irrevocable trusts (you can’t change your mind once they’re created). Since the trusts, and not you, own the policy, your estate doesn’t include the policy. Typically, these trusts are used to own second-to-die insurance (explained later in this chapter). Using life insurance trusts in estate planning is discussed more thoroughly later.

There may also be administrative costs (attorney’s fees and selling costs) to settle your estate. Life insurance can be used to provide the necessary cash to meet this contingency.

The preceding articles deal with additional insured interests under policies covering items of real and personal property. There are circumstances, usually limited to commercial policies, in which a policyholder may need to add another person or business as an additional insured under the policies’ liability coverages. Common situations in which this can occur include a wide variety of circumstances.

Construction contractors may be obligated under contracts with property owners for whom the contractors are performing services to add the owner as an additional insured under the contractors’ policy for liability arising out of the contractor’s work for the owner. Similarly, construction subcontractors may be contractually obligated to add the developer or general contractor they are performing services for as an additional insured for liability arising out of the subcontractor’s work.

Persons who lease business premises may be obligated to add the owner of the premises as an additional insured for liability arising out of the use and occupancy of the premises pursuant to the lease.

Churches and charitable organizations may obtain additional insured endorsements extending coverage to officers, trustees, board or vestry members, or volunteers in other roles, while they are acting in their respective capacities for the church’s or organization’s activities.

There is a wide variety of standard form additional insured endorsements, including, in some cases, more than one form that may apply to a particular situation. If an inappropriate version of such an additional auto insured endorsement is obtained, the person or company to whom you owe the obligation to procure additional insured status may not receive the expected coverage. It could result in that person or company turning to you personally for the costs of the defense in the event of lawsuit or for paying a claim in the event of a loss that would have been covered if the correct form of additional insured endorsement had been employed.

It is beyond the scope of this article to detail all the different types of additional insured endorsements available or to detail when a particular form of additional insured endorsement is more appropriate than another in a given circumstance. In order to help ensure that you obtain the correct additional insured coverage for your particular circumstances, it is important that you provide as much information as possible to your agent or broker. This may include copies of your leases or contracts with parties who require additional insured status under your policy. This will help to assure that the correct or most appropriate additional insured endorsement is added to your policy and that the person or other company added as an additional insured is correctly specified. It is also important to specify the activities for which additional insured status is sought so the additional insured is not receiving coverage that is broader than that required by the terms of the lease or contract in question.

Finally, for some persons or entities that are receiving auto liability coverage as additional insureds under the policies of another person or company, it is necessary that they inform their own agent or broker of that fact, so that he or she can take appropriate steps to coordinate the coverages. Specifically, if a person or company is an additional insured under the policy of another, the insured may want that additional insurance to apply to claims or lawsuits as primary insurance. In those situations, it would want the coverage of its own policy to apply only as excess coverage, that is, only after exhaustion of its coverage as an additional insured under the other party’s policy.

Everyone understands that the fundamental concept of buying insurance is to protect one’s own financial interests. What is not well understood is that our legal relationships with others create obligations to protect their financial interests as well. When we assure that those legal obligations are taken care of, we secure our own financial well-being.

Once this abstract discussion is reduced to everyday terms, the concept does not seem so strange. These are relationships of great importance to individuals and businesses in their everyday lives and activities and one’s insurance decisions are interwoven with these relationships. These relationships can include: mortgage lenders on your home; mortgages trust deed, lenders on your auto loan; lenders on other items, whether as lenders or lessors on contracts for business equipment; and, persons with whom you have contracted to sell goods or to provide goods and services, who require that they be named as additional persons insured under your policies.

The lease or auto loan contracts often give the lessor or lender the right to place coverage to protect their interest in the event of loss (but not your interest) and to charge you for the cost of such coverage. This will happen unless you make sure that your auto liability insurance provides evidence of coverage at each policy renewal.

Usually, notifying your insurer is done at the time the lease or loan documents are signed. Many automobile dealers will not release a vehicle to a customer until the dealers have confirmation that your insurer has been informed of your lease or purchase of a new vehicle. It is often a dealership’s finance department that undertakes this notification, based on information supplied by the customer.

However, it is usually a better practice for you to call your insurance agent and personally provide him or her with the new vehicle purchase or lease information. It is better to take the responsibility to handle the notification yourself and to make sure it is done right.

Even if you do not have all the information needed (such as the correct legal name of the lender or its address), you can at least tell your agent the name of the dealership, its telephone number, and the name of the correct person at the dealership to contact in order to obtain the financing and additional insured information necessary. This will guarantee that the auto leasing company or automobile finance company is properly included as an insured party under your automobile policy.

If you are trading in a vehicle as part of the transaction or if you have sold it in a private party transaction, you will need to call your agent to advise him or her of that change to the policy. Also, if you pay off any outstanding loan balance, then you will need to notify your agent that the prior lender should be deleted from your policy.

When in doubt, more notice to your agent (i.e., both from you and from the auto lender) can never hurt you in auto lease finance. It is only a failure to give notice or complete and accurate information to your agent that can lead to trouble.

It is very important for you to make sure that your homeowners insurer:

is always timely and promptly informed of who your home loan lender is, what their appropriate address is, and what your loan number is; shows your home loan lender on your policy as an additional insured to the extent of its interest in your property; and, supplies your home loan lender with evidence that they are an insured every year at the time your homeowners policy and property insurance policy are renewed.

Most homeowners insurers are pretty good about assuring that your home loan lender receives evidence of insurance on renewal each year. That does not, however, mean that you do not need to make sure that they do. It is possible for your insurer to become confused as to who your current mortgage lenders are that need to be shown as additional insured interests on your policy, particularly when many individuals are refinancing their home loans at frequent intervals or are taking out second Mortgages Trust Deed or home equity lines of credit. There can be potential adverse consequences to you if your home loan lender does not receive evidence of insurance each year at your policy’s renewal. These potential adverse consequences to you make your attention to assuring that this detail is attended to each year necessary.

If your lender does not receive timely evidence that its security interest is not insured, your loan documents permit your lender to place insurance— solely to protect its interests at your expense—through its own master insurance program. It can also charge the costs—not just the premiums, but also the administrative costs—to your loan.

This is something you do not want to happen. First, you are only digging yourself in deeper with respect to the amount of your outstanding loan balance. Second, the insurer with which your home loan lender places such forced coverage is often an affiliate or a subsidiary of the lender. Do you think that the premiums charged by such an insurer are going to be competitive with the premiums you could obtain in the marketplace with respect to your own policy? Think again. They have an inherent profit motive and conflict of interest, but one that your contract with your lender—and the law—supports. They have no reason to charge a competitive premium for such force-placed coverage.

Third, the terms of coverage are limited and favor only the lender. You get something only if they have managed to insure for a sum greater than the amount of the outstanding loan balance—something that rarely happens. Your home loan lender does not have an insurable interest in your property in an amount greater than the amount of its outstanding loan balance.

Fourth, these forced placement policies do not cover your personal property (i.e., your contents). In the event of a loss, you are on your own.

Fifth, defaulting on your obligation to insure your property and failure to have your home loan lender named an additional insured on your homeowners policy to the extent of its interest can be reported as a breach of your obligation under your home loan. This can result in a negative (and serious) credit report that can affect your ability to obtain other credit.

If you are a homeowner, and have a first, second, or third home loan, mortgage, home equity line of credit, or any other credit facility that is secured by your house, condominium, or farm, you need to make certain that your lenders’ security interests are protected by appropriate endorsements to your policy. You need to make sure that your insurer knows of the existence of all of these interests, the address of each of the lenders in question, the loan number, and the need to make sure that all secured parties receive annual evidence:

of the fact that you continue to maintain property insurance on the property in which they have an interest; that the amount of the insurance you maintain is sufficient to protect its interests (i.e., the total amount of outstanding loans); and, that each such secured party is an insured under your Mortgages Trust Deed policy.

This is particularly true if you are the owner of a small business. The underwriting of commercial insurance policies is inherently more complex than is the underwriting of personal lines policies. Independent agents are much more likely than captive agents to have a substantial volume of commercial business in addition to their personal lines book of business. Consequently, a good independent agent is likely to be much more attuned to the inquiries necessary to assure that your coverages are as complete as possible and to avoid coverage gaps. This is particularly true with respect to the form of and the amount of business interruption insurance cost, plus additional, optional commercial coverages, that may be appropriate for you.

These are some common examples of situations where a good independent agent’s skills are important. For example, a developer might want its own coverage to apply only as excess coverage over its coverage as an additional insured under the policies of the subcontractors working for it on a construction project. The knowledge of the developer’s loss exposures and the ability to assure that those loss exposures are covered appropriately requires expertise that is often beyond that of an agent for a direct writer.

FAIR plans are alternative market mechanisms for hard-to-place homeowners or other property insurance policy. These are used in areas such as Southern California, urban areas that are underserved by standard lines insurance companies, and other areas that are considered higher than normal risk (such as homes located in and near brush areas). Again, the issuers of policies offered through these types of programs are entitled to charge premiums that reflect the increased risk assumed. However, for most persons, policies procured through such plans are preferable to policies from non-admitted insurers. This is due to the protections afforded by the fact that these policies are covered by each state’s insurance guaranty fund and because of better and more reliable claims service.

Under such plans, all admitted insurers writing automobile or property insurance are required to participate or fund these plans. In the case of most assigned risk auto insurance plans, when a person qualifies (usually by virtue of proof of refusal to issue a policy by a certain minimum number of insurers), he or she is assigned to an insurer that must issue a policy. This is subject to such policy limit and premium limitations as may be established by the plan.

Similarly, a vendor might want the coverage of its own policy to apply only as excess coverage over its coverage as an additional insured under a manufacturer’s policy for product liability suits brought against the vendor by a purchaser of an alleged defective product made by that manufacturer. Again, effecting the insurance needs of such a vendor requires a certain level of knowledge and expertise that may be beyond that of many personal lines oriented agents.

There is a reason why one of an insurance agent’s most essential functions is to place coverages on behalf of their customers with insurers that are financially strong. This is because the amounts typically available in the event of insurer insolvency under the various states’ insurance guaranty funds may be less than the loss exposures of many insureds.

The choice is yours. The important point is for you to realize that you have a choice and that exercising that choice means that you need to better inform yourself so that you obtain the protection best suited to your needs.

The protection offered by the guaranty fund is not perfect protection. But, the protection offered is far better than having none and is a substantial reason to purchase insurance coverage from an admitted insurer as opposed to a non-admitted insurer.

Guaranty funds are funded by you and every other policyholder in your state. You are all providing protection for each other. The initial capitalization (i.e., start-up funds) for guaranty funds comes from assessments of all admitted insurers doing business in that state, in proportion to the respective amount of premiums written by each insurer in that state. Under the guaranty funds statutes of all states, the insurers that have paid these assessments to provide the start-up capital to establish the guaranty fund were, and are, entitled to recover the costs of those assessments. This is recovered by premium surcharges on all of their policyholders. If you were to examine your premium billing notice over a period of time, you will notice such surcharges, typically between $1 and $5. This charge is imposed by your insurer proportionately on all of its policyholders to cover the costs of assessments it has been obligated to pay to fund the guaranty fund in your state.

An insurer that does not pay claims promptly or does not step in and defend an unsured when he or she has been sued has given none of the protections expected by someone who has purchased an insurance policy. It does you little good when you are faced with a lawsuit resulting from an accident claims compensation to find yourself having to fight a two-front war—one against the person suing you and a second against your insurer to obtain the coverage that you paid for.

The guaranty fund in each state operates much like an insurance company. Guaranty funds set reserves, retain defense counsel, and settle and defend claims. They also adjust property claims. The primary difference is in the source of their funding. Insurance companies fund their operations primarily by charging premiums and by realizing investment income on their reserves (premium reserves and loss, loss adjustment expense, and other reserves). Guaranty funds likewise generate income by investments received on reserves. They do not have, however, premium income as a source of income. Nor do guaranty funds have the overhead associated with marketing and selling policies, as do insurance companies.

Unfortunately, the fact is that while certain high-risk insureds may need to consider purchasing insurance from non-admitted insurers, these insureds are usually commercial insureds with higher exposure to risk and loss histories—individually or as an industry classification. This leaves them perceived as high-risk from an underwriting standpoint. The average personal auto or homeowners insured should rarely be in such a position.

When an insurance guaranty fund needs to generate income because the claims it has paid are depleting it imposes assessments on all admitted insurers doing business within the state.

A wholesale broker is a broker involved in the procurement of a policy that does not have a direct relationship with the insured. For example, an applicant for a personal auto policy might not be an acceptable risk to standard carriers due to a variety of underwriting risk factors, such as age or poor loss history (i.e., excessive number of citations or accidents). The problem is, in many states, surplus lines regulations and statutes are not scrupulously observed. And, when they are not, it is usually to the average consumer’s disadvantage. If an independent insurance agent you may have turned to suggests that he or she is going to provide you with a quote or recommends that you purchase a policy through a non-admitted insurer (a surplus lines broker), you should start asking some pointed questions as to why.

A policy issued by a non-admitted insurer in your jurisdiction is not protected by your state’s insurance guaranty fund. In the event that insurer becomes insolvent insurance, your policy is worthless. For the sake of some premium savings, you are completely unprotected in the event of insolvency of a non-admitted insurer.

When you place insurance with an admitted insurer, you are protected up to the limits established by your state’s insurance guaranty fund in the event your insurer becomes insolvent. In general, that means you get a lawyer appointed to defend you if you get sued and a covered judgment or settlement will be paid up to the covered statutory limits of your state’s guaranty fund. It also means that your covered automobile physical damage claim or claim for damage to your house or possessions will be paid, subject to the statutory limits.

For example, in California, under Insurance Code section 1063, the maximum amount of a claim payable by the California Insurance Guaranty Fund is $500,000. That is an amount sufficient to cover most serious liability claims and household insurance claims that the average homeowner is likely to face. It also is an amount sufficient to cover many partial losses to a residence buildings and contents insurance, even though, in the face of escalating construction costs, it may not, in some cases, be sufficient to cover total losses.

State laws exist that require warnings to the insurance purchaser of the risks involved in purchasing insurance from a non-admitted carrier. However, few, if any, brokers involved in the sale of such policies generally warn of or explain these risks and the trade-offs involved to their customers adequately. This is particularly true in the personal auto liability insurance coverage context, where these abuses are most prominent.

A far too common circumstance, particularly in major urban areas, with large numbers of substandard risk insureds, is for high-volume brokers to run mass-marketed commercials, promising to be able to provide auto insurance to anyone, and at great insurance savings. Such mass marketers of insurance often emphasize that coverage can be available for low down payments, and low monthly payments. These representations are often highly deceptive. Such operations often sell ridiculously expensive, low-limits policies, often issued by non-admitted insurers. Rarely do such operations inform their customers of their state’s assigned risk programs, which, if applicable, usually provide better coverage than that from a non-admitted insurer.

Other disadvantages exist using a non-admitted insurer. Non-admitted insurers prey on persons who have been advised that they are substandard risks, particularly in the personal auto context. The claims service offered by non-admitted insurers is generally poor or nonexistent. They offer and sell policies that are often apparently cheap (compared with the premiums that would be charged by an admitted insurer) and they let the insured nominally satisfy their state’s financial responsibility/proof of insurance laws. However, their promises are often functionally smoke and mirrors.

Brokers that routinely place personal lines insurance policies with non-admitted carriers may argue that they are saving their customers money. These claims are usually illusory. In most cases, however, the premium savings do not offset the risks of an uncovered loss in the event of insolvency of the insurer, or in the case of a non-admitted insurer simply failing to observe its policy obligations. Many non-admitted insurers are domiciled outside the United States, making suing them and recovering an uncertain proposition.

There is almost never any need for an individual or a family to turn to a surplus lines/non-admitted insurer for personal auto or homeowners insurance. Many states have what are called alternative market mechanisms. Examples of such alternative market mechanisms are automobile assigned risk plans, and FAIR plans. (FAIR refers to fair access to insurance requirements, under the plan established under the California Insurance Code.)

Nonetheless, the ability to purchase a policy through an assigned risk plan guarantees that an individual is going to be able to obtain coverage from a standard lines admitted carrier. Assigned risk plan policies are more expensive, but the insured has the security of coverage with an admitted insurer. If the policyholder cleans up his or her loss, violation, or infraction history, he or she can eventually purchase coverage in the standard insurance markets and will no longer need to rely on coverage through an assigned risk plan.

The problem with these direct writers marketers is that there is no practical ability for the average insurance buyer to compare the terms and conditions of the policies offered in order to determine whether or not the coverages offered meet the needs of the insurance buyer. And there is no one to provide any counseling with respect to decisions involved in the purchase. You do not have the ability to call on the services of an agent to help you choose the policy limits appropriate to guarantee that you have sufficient coverage to repair or replace your residence and possessions in the event of a major loss.

Many of the 800-number or Internet sellers of insurance (Homeowner Insurance online, Buy Car Insurance Online, Online Car Insurance Rates )
have engaged in widespread television advertising of their policies. These TV commercials frequently emphasize potential premium savings as the inducement to buy that company’s policies. Premium savings does not mean much without advice about variations in optional coverages or how much in limits the average person needs to purchase for adequate consumer protection insurance.

These direct writer sales operations present a potential trap for the unwary by creating a serious risk of uninsured or underinsured loss exposures. A particular disadvantage of many such direct writer marketing insurers is that there is often little or no opportunity to review the policy forms utilized to determine whether they contain unanticipated restrictive terms. Certainly, in order to be licensed to sell policies in any particular state, the policies’ terms necessarily will be in compliance with that state’s minimum requirements. However, that does not ensure that such policies will necessarily provide the best comprehensive coverage for your particular needs.

Compounding this problem is that most insurers charge a penalty if a policy is issued and then cancelled at the insured’s request midterm.

EXAMPLE: You purchased a one-year policy and cancelled it after two weeks because you discovered it contained restrictive terms that did not provide coverage for a particular loss exposure. In this situation, you will receive a refund that is less than fifty-weeks worth of the premium. Unless a direct marketing insurer offers the opportunity to examine the policy in advance or offers a no-charge return policy, you might want to pass. Instead, avail yourself of the services of a local agent you can meet in personal insurance agents and discuss your insurance needs with to obtain the best compromise between cost and extent of coverage provided.

Nonetheless, the captive agent manner of marketing of insurance, particularly personal lines policies, obviously has been successful. State Farm, Allstate, Nationwide, Liberty Mutual, and Farmers control a substantial portion of the United States personal lines insurance market.

However, if you really want to comparison shop for competing quotes involving considerations other than price from several companies, including from one or more captive agent companies, you will have to contact an agent from each company separately and compare the results on your own. The most important thing the consumer needs to do is locate a competent agent. While there is no single yardstick by which to gauge an agent’s competence, things to inquire about include:

• education level (i.e., is the agent in question a college graduate?— sometimes the ability to spot issues is crucial);
• how many years of experience does the person have as a licensed agent?;
• whether the agent is a member of any of the professional insurance associations. While not a perfect measure, such memberships can indicate a level of knowledge and commitment to a business and career; and,
• whether the agent has a chartered property casualty underwriter (CPCU) designation.

NOTE: A CPCU designation is earned by completion of a series of college-level courses in various aspects of the business of insurance and by passing a nationally administered examination for each of the required courses. CPCUdesignations are sought and earned by many insurance industry personnel, such as underwriters and claims representatives, in addition to agents and brokers. Holding a CPCU designation is considered within the business of insurance a mark of commitment to an insurance career and a significant professional achievement within the business.

There are competent and professional agents who are independent insurance agents, and who are captive agents. You just need to understand enough about the various marketing channels to make a decision which form makes the best sense for you.

Independent agents are typically parties to contracts with several insurers by which the agent is authorized to write business (i.e., policies) for that insurer. In most states, each insurer files a notice of appointment of each agent with the department of insurance in that particular state. Independent agents are usually compensated by the insurers they represent through payment of a commission that is a fixed percentage of the premium of each policy sold. This commission percentage may vary with the size of the premium or line of business. For example, insurers often pay higher commissions on commercial lines policies or standard life insurance policy than they do on personal lines policies. This is due in part because the underwriting and production of personal lines policies is often less complex, presenting fewer variables, and typically involves smaller premiums per policy. The administrative costs to the insurer of issuing a commercial policy for a small business and a personal lines policy are roughly the same.

Independent life insurance agents frequently state that one advantage of dealing with an independent agent is that he or she often has the flexibility to obtain competing quotes from several insurers. These competing quotes may offer the insured broader or lesser coverage in response to greater or lower premiums, thus offering the insured a range of choices.

An independent agent will not have a State Farm, Farmers, Allstate, or Nationwide logo in their Yellow Pages ad, or over his or her office. Independent agents are often members of professional/trade organizations, such as the Professional Insurance Agents (PIA) organization or Independent Insurance Agents (IIA) organization. Their advertising in the Yellow Pages and otherwise will usually make clear that they are independent agents, especially the fact that they represent several companies. In some regions, the Yellow Pages will have listings of agents who represent particular insurers that conduct their business even though they are independent agents—so checking by a particular name, such as Hartford or Kemper, may help you identify local independent agents.