Life Insurance Basics

Agents or producers are also known as

"field underwriters."

Replacement

any transaction in which new life insurance or a new annuity is purchased & existing life insurance or annuity has been or will be lapsed or forfeited

which is the primary source of info used for insurance underwriting?

application

Insurable interest may be

based on economics or family relationships.

A policy that provides for business continuation in the event that a business partner dies is

based upon a "cross-purchase buy/sell" agreement.

Surcharges or Rate-Ups, may be accomplished by

basing rates on an older age, a different gender, a flat fee, or as percentage adjustment to the Manual Rate.

A Rate-Up or Surcharge may

be charged every year for a dangerous hobby or health problem.

Life settlement contracts are

between the life insurance policy owner and a third party.

A "life settlement" contract is

between the policy owner and a third party.

Replacing insurer

company that issues the new policy

Interest-adjusted net cost method

considers the time value of money by applying an interest adjustment to yearly premiums & dividends *each year premiums & dividends are figured, interest is taken into consideration

Binders may start

coverage. Binding authority is in the producer's contract.

Applicants who are rejected are considered

declined risks

Under an executive bonus, the premium paid to the employee as a bonus is

deductible by the business and the amount paid to or for the employee is reportable as taxable income to the employee.

The human life value approach was created to

establish what a family would lose in income upon the death of the sole or chief income provider.

When life insurance is used to pay estate taxes it is known as

estate conservation.

Individual life and annuity policies sold in this state must have a

free look of 10 days.

The "needs approach" to life insurance does not consider

future earnings.

A brother and sister have an insurable interest in each other based upon

genetics.

A "preferred risk" need not have a

high income.

higher frequency=

higher premium * if paid yearly, lower premium, * if paid monthly, higher premium

Acquisition costs of life insurance companies are

highest the first policy year.

can the company discriminate?

in favor of good risks & against poor risks, if done FAIRLY

executive bonus

the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy -employee owns the policy and has all control

A "conditional receipt" is not given to an applicant unless

the initial premium has been paid.

The less frequent the Mode of payment,

the lower the total annual premium will be, and vice versa. There is no service charge or fee if you elect the Annual Mode of payment.

Insurable Interest

the policy owner must face the possibility of losing money or something of value in the event of loss

Coverage can NEVER begin unless

the premium has been paid.

The company underwriter determines the final rating classification, not

the producer.

The HIV consent form states that

the results of an HIV test will only be shared with certain individuals, such as the underwriter.

A corporation may buy a policy on a shareholder to provide for "stock redemption" in the event of

the shareholder's death.

Insurable Interest must exist at

the time of application, but not necessarily at the time of a claim.

"Insurable interest" must exist at

the time of policy issue.

An increase in an insurer's investment income will allow

them to lower premiums.

Applicants may backdate a life insurance application for

up to six months in order to obtain a lower premium.

Conditional receipt

used ONLY when the applicant submits a prepaid application - states whether coverage will e effective on the date of the application or the date of the medical exam , whichever occurs last

Stock Purchase

used by privately owned corporations when each stockholder buys a policy on each of the others

Cross Purchase

used in partnerships -each partner buys a policy o the other

Stock Redemption

used when the corporation buys one policy on each shareholder

Entity Purchase

used when the partnership buys the policies on the partners

An incomplete application is

usually returned. However, should the underwriter approve it, coverage begins and the company has waived its ability to contest a claim.

Key Person Insurance

when a business gets insurance on a key employee - Key employee is insured -Business is the applicant, policy owner, premium payer& beneficiary

Liquidity

when the policies cash value can be borrowed against at any time & used for immediate needs

Must the person being insured be present?

yes & of competent legal capacity EXCEPT 1. a spouse may get insurance upon the other spouse 2. a person with insurable interest in a minor or anyone a minor is dependent upon * minors of 15 y.o may get life insurance on their own life

You have an insurable interest in another person if

you would benefit if they continue to live.

When life insurance is purchased as an "executive bonus" for a corporate employee, the policy belongs to

the employee.

Examples of third-party policy ownership include

Key Person and Partnership insurance, as well as a policy written on the life of a spouse or minor child.

Conditional or "binding" receipts are used in

L&H. Binders are used in P&C.

Human Life Value Approach is calculated by looking at

- Insureds Wages -Inflation -The # of years to retirement - Time Value of Money

Policy Summaries

-premium -cash value -dividend -surrender value -death benefit

Life & Disability Insurance Guaranty Fund

-the purpose is to protect the interests of insureds & policyholders when insurers become insolvent (unable to pay debts owed)

CLASSES OF LIFE INSURANCE POLICIES

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PERSONAL USES OF LIFE INSURANCE

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The 3 primary factors used in premium determination

1. mortality 2. interest 3. expense

Valid insurable interest may exist between

1. policy owners own life 2. the life of a family member(spouse of close relative) 3. the life of a business partner, key employee, or someone who has a financial obligation to the policy owner

what is true about buy-sell agreements?

Buy-sell agreements are normally funded with a life insurance policy

Insurers must provide to all prospective life insurance purchasers both a

Buyer's Guide and a Policy Summary.

The Securities and Exchange Commission, SEC, enforces

Federal securities laws.

Fixed VS Variable

Fixed: offer guaranteed minimum or fixed benefits that are stated in the contract Variable: cash values accumulate based upon a specific portfolio of stocks w/o guarantees of performance

Group VS Individual

Group: Written as a master policy covering the lives of more than one individual * individuals re dive certificates of insurance * rate & coverage is based upon group underwriting, w/ ALL individuals covered for the same amount & rate Individual: written on a single life

Net single premium

Mortality-Interest= Net Premium

Ordinal VS Industrial (Home Service)

Ordinal: larger face amounts ( minimum $1000) - premiums can be paid annually, semiannually, quarterly or monthly -premiums are paid by the insured directly to the insurance company -a physical exam may be required Industrial (home service): small amounts (less than $1000) -premiums are payable on a weekly or monthly basis -premiums are collected by a representative of the insurance company at the insureds home -policies are written as non medial- no medical exam required but medical history info is still collected

Participating vs Nonparticipating

Participating refers to any policy that distributes its dividends to policy owners by cash payments, reduced premiums, units of paid up insurance , a savings program, or by the purchase of term insurance Non-participating does NOT pay dividends

Permanent VS Term

Permanent Life Insurance i used to refer to various forms of WHOLE life insurance policies that remain in effect to age 100, as long as the premium is paid -provides lifetime protection & includes a savings elect (cash value) Term life insurance is temporary life insurance provided for a specific period of time - AKA Pure Life Insurance

An individual applied for an insurance policy & paid the initial premium. The insurer issued a conditional receipt, 5 days later, the applicant had to submit to a medical exam, what would be the polices effective date?

The date of the medical exam, *policy is in effect on the date of the application or the date of the medical exam (whichever is later )

Life Settlement

any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a 3rd party for some form of compensation

what must happen when an individual policy or annuity has been personally delivered to the policy owner?

The policy owner must sign a delivery receipt * When an individual policy or annuity is delivered by hand to the policy owner, a delivery receipt must be signed & state the date the contract was received.

A 60-year-old male has a higher mortality rate than

a 60-year-old female.

The SEC, Securities Exchange Commission, is

a Federal agency that regulates securities.

Buy-Sell Funding AKA business continuation agreement

a legal contract that determines what will be done w a business in the event that an owner dies or becomes disables * ANY form of life insurance may be used to fund a buy-sell agreement

Under the life insurance free look,

a policy owner who returns their policy within 5 days of delivery will receive a full refund.

The Agent's or Producer's Report is

a section of the application where the producer lists their opinion of the applicant.

Premiums

agent must issue the premium receipt, type of receipt issued will determine when coverage will be effective

changes on the application/amendments

an agent should never erase of white out on an application make change & initial it

A "viatical settlement" is

an agreement where a terminally ill insured, a "viator", sells their life insurance policy to an investor for less than its face amount, but for more than its cash value.

A "stock redemption" plan is

an agreement whereby a corporation agrees to buy back the stock of a deceased shareholder.

Stranger-Originated Life Insurance (STOLI)

an arrangement in which a person with no relationship to the insured purchases a life policy with the intent of selling it to an investor & profiting -violate the principle of insurable interest -ins urers take an aggressive legal stance against policies they suspect are involved in STOLI transactions

FINRA, Financial Industry Regulatory Authority, is

an association that regulates its own members.

A Surcharge is

an example of a Counteroffer. There is no coverage until the client accepts the policy at the higher rate and pays the increased premium.

Buying a life insurance policy creates

an immediate estate.

Life Insurance surrender cost index

index that determines the polices guaranteed cash surrender value available to the policyower at the end of the 10th and 20th policy years, accounting for the annual cash dividends at 5% interest

A preferred risk is

individuals who meet certain requirements & qualify for lower premiums than the standard risk

Stockholders in small, privately held closed corporations often enter

into Buy/Sell agreements with the corporation that are funded by Life policies.

Client funds used to purchase Whole Life and Fixed Annuities are

kept in the insurance company's General Account, which is invested more conservatively.

Client funds invested in a Variable Life contract or Variable Annuity must be

kept in the insurance company's Separate Account, which is similar to a mutual fund.

A person who seeks to sell their life insurance policy in a viatical settlement is

known as a "viator."

Survivor Protection

life insurance provides the funds necessary for the survivors of the insured to be able to maintain their lifestyle

Life insurance premiums are based on

mortality, death, plus company expenses minus interest earned on company investments.

Gross Annual Premium

net premium + expense (loading9= Gross Premium

If a producer gives an applicant a conditional receipt and the underwriter rejects the application, there is

no coverage.

Substandard (High Exposure) Risk

not acceptable at standard rates because of physical condition diseases, occupations , or dangerous habits -these policies are referred to as "rated"

A "rated" policy is

one issued to a sub-standard risk with dangerous hobbies or health problems.

A "standard risk" is

one with an average life span. Most clients' are "standard."

The earliest that coverage COULD start would be the day of application, assuming the client has

paid the first premium, had no conditions to fulfill, and had not lied on the application.

Life insurance mortality tables are based upon

people and time.

Life insurers may discriminate based upon

physical hazards, including the age and health, of the client.

A parent does not need their minor child's consent in order to

purchase life insurance on them.

Estate Creation

purchasing a life insurance policy creates an immediate estate

Variable Life producers do NOT have to be

registered with the New York Stock Exchange, NYSE.

Life insurance covers death due to either

sickness or accident.

Cash Accumulation

some life policies (such as whole life-provide permanent protection) accumulate cash value that is available to the policy owner during the policy term

Application

starting point & basic source of information used by the companion the risk selection process part 1- general information such as name, age, address, dob, gender, income, marital status, occupation part 2- --medical information

Binders are

temporary insurance containing all the terms of the policy to be issued.

The total cost of premiums that the insured pays over a 12-month period is known as

the "gross annual premium."

Variable Life producers DO have to be registered with

the Financial Industry Regulatory Authority, FINRA.

a corporation is the owner & beneficiary of the key person life policy, if the corporation collects the policy benefit then

the benefit is received tax free because the benefit is treated as a reimbursement to the business for loss of services from that key person

Existing insurer

the company whose policy is being replaced