Modified Reserve Methods
Definition of "Modified reserve methods"
Accounting procedures that defer the full funding of a life insurance net level premium reserve to accommodate the policy acquisition cost in the early years of a policy. First-year policy expenses, such as agent commission, medical examination, and premium tax, often result in little of the premium remaining for the premium reserve required under full valuation reserve standards. In such cases, the difference comes out of the insurer's surplus account. To avoid this, two types of modified reserve methods are used: (1) the full preliminary term reserve valuation method, and (2) the modified preliminary term reserve valuation method, better known as the commissioners' reserve valuation method. The full preliminary term method does not require any terminal reserve at the end of the first year and in effect accounts for reserves like term insurance during this period. This leaves more of the premium available to cover acquisition cost and first-year claims. In subsequent years, for reserve accounting purposes, the policy is considered to have been issued one year later than its actual date on an insured who was one year older than his actual age. This results in stepping up additions to the premium reserve, eventually making up for the first year's shortfall.
The commissioners' reserve valuation method limits first-year expenses and thus the amount of deferred funding of policy reserves. Policies whose premiums fall below a certain level can be accounted for under the full preliminary term method. For policies with premiums above that level, the full preliminary term method is modified by a limitation on the amount of expenses that can be used in figuring the schedule of deferred reserve funding.
Popular Insurance Terms
Attachment to a commercial package policy to cover counterfeit currency, depositor's forgery, employee dishonesty, and the loss of money, money orders, and securities by the insured ...
In some life insurance policies, provision that permits the beneficiary, upon the death of the insured, to receive not only the death benefit payable under the policy but also all premiums ...
number of people born as a percentage of the total population in any given period of time. ...
Same as term Burglary Insurance: coverage against loss as the result of a burglary. Found as part of the commercial package policy that has generally replaced the special multiperil ...
Early life insurance that provided benefits only to survivors who lived to the end of a certain period of time. In the mid-17th century, Lorenzo Tonti, an Italian, devised a scheme to raise ...
Insurance policy in force only after the insurance company approves the application. Today, most companies use the insurability conditional premium receipt. ...
Extremely aggressive behavior by an insurance agent to convince a prospect to purchase the insurance product without due regard for the prospect's ability to pay the premiums and/or needs ...
Plan established by the employer that permits the employee to defer pretax earnings into a specifically designated account. From this account, the employee may withdraw funds to pay ...
Clause in an insurance policy that describes the administration and submission of claims procedure. ...
Have a question or comment?
We're here to help.