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
Coverage in property insurance for an employee's lost income if a peril such as fire damages or destroys the place of employment, causing the worker to become unemployed. For example, a ...
Table used by the Internal Revenue Service (IRS) in evaluating split dollar life insurance plans as to the extent of the economic benefit that is considered taxable ordinary income to the ...
Complete coverage for hospital and physician charges subject to deductibles and coinsurance. This coverage combines basic medical expense policy and major medical policy. ...
Risk management tool to determine risk exposure and to help spread the risk. A risk manager considers a business firm's individual exposures separately. As the number of exposures ...
System for calculating the relationship between a pension plan's present cost and its present future benefits. This relationship shows the extent to which a pension plan's benefits are ...
Method of accident prevention whose objective is to detect system-component deficiencies that have the potential for causing accidents. ...
Rule that stipulates how to calculate the actual cash value of property that has been damaged, destroyed, or stolen. The thesis of this rule is that whatever evidence that can be produced ...
in health insurance, reimbursement for an insured's medically related expenses, including room and board, surgery, medicines,anesthetics, ambulance service to and from a hospital, ...
Policy purchased by an insured from an insurer in another state. This insurer is not licensed in the state where the insured's risk is located. ...
Have a question or comment?
We're here to help.