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
Written agreement that puts insurance coverage into effect. ...
Same as term: Free Examination "free Look" Period: right, in most states, of an insured to have 10 days in which to examine an insurance policy, and if not satisfied, to return it to the ...
Trust in which a home is transferred directly to the children while the parent (s) remain in the home for a fixed period of time, resulting in a substantially reduced estate tax cost. These ...
Injury covered under workers compensation insurance. For every part of the body that may be injured, there is a listed financial sum that will be paid. For example, a right severed index ...
Term that describes commercial insurance with no administrative services attached, or alternatively, administrative services from an insurer without insurance coverage. Years ago, insureds ...
Total earned premiums minus total expenses and losses paid of the insurance company. ...
Legislation designed to provide the structural reform necessary to strengthen the thrift industry after the bailout of the insolvent Federal Savings and Loan Insurance Corporation (FSLIC) ...
Life insurance that pays the balance of a mortgage if the mortgagor (insured) dies. Coverage is usually in the form of decreasing term insurance, with the amount of coverage decreasing as ...
Method whereby an insurer pays the amount of each claim for each risk up to a limit determined in advance and the reinsurer pays the amount of the claim above that limit up to a specific ...
Have a question or comment?
We're here to help.