Chapter 2- Life Insurance Basics

Needs Approach

based on the predicted needs of a family after the premature death of the insured.

Key Person Insurance

businesses use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured. The most common use of life insurance by businesses is an employee benefit. A business can suffer a financial loss of the premature death of a key employee. The business is both the applicant, policyowner, premium payer and beneficiary. The business cannot take a tax reduction for the expense of the premium.

Variable Life Insurance

contracts in which the cash values accumulate based on a specific portfolio of stocks without guarantees of performance.

Fixed Life Insurance

contracts that offer guaranteed minimum or fixed benefits that are stated in the contract

Nonparticipating Life Insurance

does not pay out dividends

Human Life Value Approach

gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured.

Backdating (antedating)

if the applicant chooses to do this, the policy may be backdated for no more than 6 months before the date of application or the medical examination, whichever is later. The only allowable reason that am application may be backdated is to effect a lower premium.

Effective Date of Coverage

if the premium is not paid with the application, the agent must obtain the premium and a statement of continued good health at the time of policy delivery. if he full premium was submitted with the application, and the polciy was issued as requested, the policy coverage would generally coincide with the date of application if no medical exam is required.

Attending Physician Statement (APS)

if the underwriter sees answers to certain questions that could indicate greater risk, and the underwriter wants to obtain specific medical details, the underwriter will request a statement from the applicant's physician.

Net Single Premium

includes the mortality and interest components necessary to keep the policy in force until maturity

Buyer's Guide

provides basic information about life insurance policies. The buyer's guide bust be provided prior to or at the time of application

Agent's Report

provides the agent's personal observations concerning the proposed insured.

Participating (mutual) Life Insurance

refers to any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance.

Permanent Life Insurance

refers to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid. it provides a lifetime of protection, and includes a savings element (or cash value)

Blackout Period

social security blackout period id the time during which the surviving spouse and/or children do not receive any social security survivor benefits.

Types of Risk

standard, substandard, and preferred. the higher the risk, the higher the premium

Term Life Insurance

temporary life insurance provided for a specific period of time. also known as pure life insurance.

Field Underwriter

the agent id the company's front line and is referred to this because the agent is usually the one who has solicited the potential insured

Mode

the frequency the policyowner pays the premium. can be paid annually, semi-annually, quarterly, or monthly.

Gross Annual Premium

the one year cost for mortality, plus the cost of operating the company

Liquidity

the policy's cash values can be borrowed against at any time and used for immediate needs.

Insurable Interst

the policyowner must face the possibility of losing money or something of value in the event of a loss. This must exist between the policy owner and the insured at the time of application. Once a life insurance policy has been issued, the insurer must pay the policy benefit.

Replacement

the practice of terminating an existing policy or letting it lapse, and obtaining a new one.

Estate

the purchase of life insurance creates an immediate estate. There is no other legal method by which an immediate estate can be created at such a small cost.

Underwriting

the risk selection and classification process

Survivor Protection

Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death

Premium Determination

Mortality Tables- indicate the number of individuals within a specified group of individuals starting at a certain age, who are expected to be alive at a succeeding age. Interest- since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds Expense (Loading Charge)- insurers have various operating expenses, so each premium must carry a proportionate share of these operating costs. The insurer's largest expense is the commissions paid to its agents.

Buy-Sell Agreement

a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. (business continuation agreement) Cross Purchase- used in partnerships when each partner buys a policy on the other Entity Purchase- used when the partnership buys the policy on other partners Stock Purchase- used by privately owned corporations when each stockholder buys a policy on each of the others Stock Redemption- used wen the corporation buys one policy on each shareholder

Medical Information Bureau (MIB)

a membership corporation owned by member insurance companies.

Illustration

a presentation or depiction that includes nonguaranteed elements of a life insurance policy over a period of years

Policy SUmmary

a written statement describing the features and elements of the policy being issued.

Business Continuation Plan

an arrangement between business owners that provides for shares owned by any one of them who dies or becomes disabled to be sold to, and purchased, by the other co-owners or the business.

Application

the starting point and basic source of information used by the company int he risk selection process Part 1 (General Information)- includes general questions about the applicant, such as name, age, address, birth date, gender, income, marital status and occupation. identifies the type of policy applied for and the amount of coverage, and usually contains information about the beneficiary Part 2 (Medical Information)- includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. BOTH THE AGENT AND THE APPLICANT MUST SIGN THIS

Conditional Receipt

used only when the applicant submits a prepaid application. the conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam.

Premium Receipt

whenever the agent collects premiums, the agent must issue this

Group Life Insurance

written as a master policy covering the lives of more than one individual covered under the single policy. individuals covered do not receive a policy but instead receive certificates of insurance

Individual Life Insurance

written on a single life. the rate and coverage are based upon the underwriting of that individual.