Life Insurance Basics

Estate

A person's net worth

Cash value

Equity accumulated in permanent life insurance

Expense factor in Premium Determination

- The expense factor, also known as the LOADING CHARGE, also affects premium rates. - 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. o Other ongoing expenses include payroll, rent, and taxes.

The State Life and Health Guaranty Association's plan of operation must establish 3 accounts for:

1. Health insurance 2. Life insurance 3. Annuities

What are two types of Life Insurance Policy Cost Comparison Methods

1. Interest-Adjusted Net Cost Method 2. Comparative Interest Rate Method

EXISTING INSURER

o Is the company whose policy is being replaced

Stock Purchase

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

The agent is the company's front line, and is referred to as

a Field Underwriter

what is meant by 'liquidity' in personal uses of life insurance?

a. As a result of the cash accumulation feature, some life insurance policies provide LIQUIDITY to the policyowner. b. That means the policy's cash values can be borrowed against at any time and used for immediate needs.

Producer Report

i. The producer's (agent's) report allows the producer to communicate with the underwriter and provide information on the applicant that may assist in the underwriting process. ii. It becomes part of the application

Net Single Premium

- The net single premium includes the mortality and interest components necessary to keep the policy in force until maturity. o Net Premium + Expense (loading) = Gross Premium

Preferred risks

- Preferred risks are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. - These applicants have a superior physical condition, lifestyle, and habits.

Who is not considered a Life Settlement Broker?

o A licensed life settlement provider or its representative o An attorney o An accountant; or A financial planner

REPLACING INSURER

o Is the company that issues the new policy

Signatures Required

- Both the agent and the proposed insured (usually the applicant) must sign the application. o If the proposed insured and the policyowner are not the same person, such as a business purchasing insurance on an employee, then the policyowner must also sign the application. § An exception to the proposed insured singing the application would be in the case of an adult, such as a parent or guardian, applying for insurance on a minor child

What are the 3 Classification of Risks

a. A prospective insured may be rated as one of the three classifications: standard, substandard, or preferred.

Executive Bonuses

- Executive bonus is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. - The employee owns the policy and therefore has all control. - Since the employer treated the premium payment as a bonus, that amount is TAX DEDUCTIBLE TO THE EMPLOYER and INCOME TAXABLE TO THE EMPLOYEE. o It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit.

Solicitation and Sales Presentations

- Solicitation and sales presentations --> Underwriting: Field and Company --> Premium Determination --> policy issue and delivery

Human Life Value Approach

- The 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. - It calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money.

Beneficiary

o A person who receives the benefits of an insurance policy

Individual Underwriting by the Insurer

- In order to properly select and classify insurance risks, the insurer needs to obtain the applicants' background information and medical history. - There are several sources of underwriting information that are available to the underwriters.

Premium Receipt

Receipt given to the applicant by the producer or insurer, as proof of a premium payment.

Business of Life Settlement

Refers to ANY activity relating to the solicitation and sale of a life settlement contract to a third party who has no insurable interest in the insured

Stock Redemption

Used when the corporation buys one policy on each shareholder

Permanent Life Insurance

Permanent Life insurance is a general term used to refer to various forms of whole life insurance policies that remain i effect to age 100, as long as the premium is paid. Permanent insurance provides lifetime protection, and includes a savings element (or cash value)

Death benefit

o The amount paid upon the death of the insured in a life insurance policy

Life and Health Insurance Guaranty Association

- State Life and Health Guaranty Associations o Are nonprofit legal entities created to protect policyowners, insured, and beneficiaries against insolvent insurers within certain limitations. o All licensed insurers are members of the Guaranty Association and must remain members as a condition of their authority to do business in this state. o When a company goes bankrupt, all other members of the Association contribute to help financially the policyowners of the insolvent company.

Needs Approach

- The needs approach is based on the predicted needs of a family after the premature death of the insured. - Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses.

Life Insurance Solicitation rules require for each insurer and producer to maintain a complete file of each form authorized by the insurer for a period of?

3 years

The Application is the starting point and basic source of information used by the company in the risk selection process. What are the two basic concepts of an application?

Part 1 - General Information Part 2 - Medical Information

Illustrations

Presentation or depiction of non-guaranteed elements of a life insurance policy

Non-participating life insurance policy

a non-participating policy does not pay dividends to the policyowners

What is meant by 'Security' in personal uses of life insurance?

a. The purchase of life insurance provides the policyowner a sense of security in case uncontrollable circumstances make it impossible for a wage earner to continue in such capacity. b. Life insurance can guarantee future financial certainty for the surviving family of the insured.

Failure to comply with the INSURANCE SOLICITATION REGULATION will be considered

misrepresentation of the policy benefits, which, in turn, is a violation of the Unfair Trade Practices statute

- Each producer who initiates the application must submit the following to the insurance company with or as part of each application:

o A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction; and o A signed statement as to whether the producer knows replacement is or may be involved in the transaction.

Variable life insurance or annuities

o Are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. o Variable annuities keep pace with inflation, and are determined by the value of securities backing it.

Cross Purchase

used in partnerships when each partner buys a policy on the other;

Qualified Institutional buyer

§ Is one that owns and invests at least $100 million in securities and is allowed by the SEC to trade in unregistered securities. A life settlement provider may sell, or in some other manner approved by the Department of Insurance, transfer ownership of a settled policy to a qualified institutional buyer or other approved investment entity

Stranger-Originated Life Insurance (STOLI)

Is a type of insurance that is initiated on behalf of a 3rd party that has no insurable interest in the life of the insured, for the primary purpose of affecting a life settlement contract. In most states STOLIs are ILLEGAL

conditional receipt

o A conditional receipt is used only when the applicant submits a prepaid application o The conditional receipt says that coverage will be EFFECTIVE EITHER ON THE DATE OF THE APPLICATION or the DATE OF THE MEDICAL EXAM, whichever occurs LAST, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for. § This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages.

Group life insurance

o Is written as master policy covering the lives of more than one individual covered under the single policy. o Individuals covered do not receive a policy but instead receive certificates of insurance The rate and coverage are based upon group underwriting, with all individual covered for the same amount and rate

What are some examples of what WOULD NOT constitute a life settlement contract?

· A policy loan issued by a life insurance company; · A loan made by a bank or a lender; · A collateral assignment of a life insurance policy by the owner; · An agreement between closely related parties (be blood or by law); · A bone fide business succession arrangement; · Employer-owned life insurance on key employees; · An agreement between a service recipient and a service provider; Any other form specified by the state Department of insurance

Life Settlement Provider

Is a person (other than the owner) who enters into a life settlement contract with the owner

the term Insured

Is the person covered under the policy that is considered for sale in a life settlement contract

Liquidation

Selling assets in order to raise capital

Entity Purchase

Used when the partnership buys the policies on the partners

Suitability

- An insurance producer may not recommend the purchase, sale or exchange of an insurance policy or annuity contract without the reasonable belief that the transaction is in the best interest of the insured.

Term Life Insurance

is a temporary life insurance provided for a specific period of time. (it is also known as Pure Life insurance)

Fixed life insurance or annuities

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

In simplest terms, solicitation of insurance means

o an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing. § This includes providing information about available products, describing the policy benefits, making recommendations about a specific type of policy, and trying to secure a contract between the applicant and the insurance company

the State Life and Health Guaranty Association's LIABILITY is generally limited to those of the impaired insurance company. the Liability of the Association may not exceed the lesser of the contractual obligations for which the insurance company is liable, or the following amount with respect to any one life, regardless of the number of policies or contracts:

§ $300,000 in life insurance death benefits, but not more than $100,000 in net cash surrender and net cash withdrawal values for life insurance § $100,000 in health insurance benefits, including any net cash surrender and net cash withdrawal values § $100,000 in the present value of annuity benefits, including net cash surrender and net cash withdrawal values.

Premium Payment Mode

- In regard to insurance premiums, MODE refers to: o The FREQUENCY the policyowner pays the premium. § an insurance policy's rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest for a full year before paying any claims. § If the policyowner chooses to pay the premium more frequently than annually, there will be an additional charge because the company will have additional expenses in billing the premium. § However, the premium may be paid annually, semi-annually, quarterly, or monthly. o Higher Frequency = Higher Premium o Monthly > Quarterly > Semi-Annual > Annual

Mortality factor in premium determination

- Mortality is the ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population. - MORTALITY TABLES o Which are used by insurers, indicate the number of individuals within a specified group of individuals (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age, § In other words, these table help the insurers predict the expectation of life and the probability of death for a given group.

Policy Issue and Delivery

- Once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured. - Although personal delivery of the insurance policy is the best method of finalizing the insurance transaction, mailing the policy directly to the policyowner is acceptable. - When the insurer relinquishes control of the policy by mailing it to the policyowner, policy is considered legally delivered. o However, it is advisable to obtain a signed DELIVERY RECEIPT.

Delivery Receipt

- Personal delivery of the policy allows the agent an opportunity to make sure that the insured understands all aspects of the contract. - Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and explaining what effect they have on the contract. - In addition, the agent should explain the rating procedure to the client, especially if the policy is RATED DIFFERENTLY than applied for, or has been modified or amended in any other way - The agent should also explain any other choices and provisions available to the policyowner that may become active at this time.

Standard risks

- Standard risks are persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. - Standard risks are representative of the majority of people at their age and with similar lifestyles. - They are the average risk

Factors in Premium Determination

- There are three primary factors that are used in premium determination: risk (mortality - rate or death within a specific group), interest and expense

a. Investigative Consumer Reports

i. To supplement the information on the application, the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. 1. They are general reports of the applicant's finances, character, work, hobbies, and habits. ii. Companies that use inspection reports are subject to the rules and regulations outlined in the Fair Credit Reporting Act. iii. No insurer, representative or support organization may request an investigative consumer report in connection with an insurance application, policy renewal, reinstatement or a change in benefits, unless the affected individual is informed: 1. That each individual may request to be interviewed in connection with the report; and 2. That, upon request, this individual is entitled to receive a copy of the report. iv. If an investigative consumer report is prepared by a support organization, the responsible entity must inform the organization of any request for a personal interview. v. No investigative consumer report is permitted to contain any information related to the affected individual's sexual orientation, furthermore, these reports cannot divulge information related to counseling for AIDS.

Individual life insurance

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

Life Insurance Solicitation rules DO NOT APPLY TO

§ Annuity contracts; § Credit life insurance § Group life insurance § Variable life insurance; or ERISA pension plan life insurance

Life Settlement Contract

§ Establishes the terms under which the life settlement provider will pay compensation to the policyowner, in return for the assignment, transfer, sale, or release of any portion of any of the following: · The death benefit; · Policy ownership · Any beneficial interest; or · Interest in a trust or any other entity that owns the policy § A life settlement contract also includes a premium finance loan that is made on or before the date of issuance of the policy if the loan proceeds are not used solely to pay premiums for the policy, and/or if the owner receives a guarantee of the future life settlement value of the policy.

Key Person Insurance

- A business can suffer a financial loss because of the PREMATURE DEATH OF A KEY EMPLOYEE - someone who has specialized knowledge, skills or business contacts. - A business can lessen the risk of such loss by the use of KEY PERSON INSURANCE. - With this coverage, the key employee is the insured, and the business is all of the following: o Applicant; o Policyowner; o Premium payer; and o Beneficiary - In the event of death of a key employee, the business would use the money for the additional costs of running the business and replacing the employee. o The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. o No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage.

Life Settlement Act refers to:

- The term LIFE SETTLEMENT refers to: o Any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash. o A life settlement would require an absolute assignment of all rights to the policy from the original policyowner to the new policyowner

What are the 6 information Sources and Regulations

1. Application 2. Producer Report 3. Attending Physician Statement 4. Investigative consumer reports 5. Medical Information Bureau (MIB) 6. Medical Examinations and Lab Tests Including HIV

Participating (mutual) life insurance policy

o 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.

Declined Risks

- Applicants who are rejected are considered DECLINED RISKS. - Risks that the underwriter assess as not insurable are declined. - For example, a risk may be declined for one of the following reasons: o There is no insurable interest; o The applicant is medically unacceptable; o The potential for loss is so great it does not meet the definition of insurance; or Insurance is prohibited by public policy or is illegal

substandard risks

- Substandard (High Exposure) risk applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. - These policies are also referred to as "rated" because they could be issued with the PREMIUM RATED-UP, resulting in a higher premium

Medical Examinations and Lab Tests Including HIV

i. Medical examinations, when required by the insurance company, are conducted by physicians or paramedics at the insurance company's expense. ii. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent in recording medical information on the application iii. The medical exam requirement is more common with life insurance underwriting. 1. If an insurer requests a medical examination, the insurer is responsible for the costs of the exam. iv. It is common among insurers to require and HIV test when an applicant is applying for a large amount of coverage, or for any increased and additional benefits. 1. To ensure proper obtaining and handling of results, and to protect the insureds' privacy, states have enacted the following laws and regulations for insurers requiring an applicant to submit to an HIV test: a. The insurer must disclose the use of testing to the applicant, and obtain written consent form the applicant on the approved form; b. The insurer must establish written policies and procedures for the internal dissemination of test results among its producers and employees to ensure confidentiality; c. The test must be administered in a manner that meets the protocol of the U.S. Department of Health and Human Services. d. The insurer must disclose the test results as authorized by the applicant in writing; e. If the applicant has not identified a physician to receive test results, the positive test results and the identity of the applicant must be sent to the state Department of Health; and f. The reporting of test results must include the name and address of the reporting company. 2. Requiring an HIV test is not considered unfair discrimination as long as the following conditions are met: a. The testing is required for all individuals in the same class b. Proposed insured is not denied coverage on the basis of such testing alone (if no other conditions specified in the Insurance Code apply); and c. The tests and testing procedures have been approved by the United States Food and Drug Administration (FDA) and otherwise comply with applicable state and federal laws. 3. Insurers are permitted to ask a proposed insured whether he or she has tested positive on an AIDS - related test. v. Use and disclosure of insurance information 1. When insurers plan to seek and use information from investigators, they must first provide the applicant of insured with a WRITTEN DISCLOSURE AUTHORIZATION NOTICE. a. The notice must state the insurer's practice regarding collection and use of personal information. b. The disclosure authorization form must be written in plain language, and must be approved by the head of the Department of Insurance.

Policy Summary

- A policy summary is a written statement describing the FEATURES AND ELEMENTS of the policy being issued. o It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. - a policy summary will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. - The policy summary must be provided when the policy is delivered.

Agent's Report

- As a field underwriter, the agent can be considered the most important source of information available to the company underwriters. - The AGENT'S REPORT provides the agent's personal observations concerning the proposed insured. o The agent's report does not become a part of the entire contract, although it is a part of the application process

Insurable interest

- In life insurance: o Insurable interest must exist between the policyowner and the insured AT THE TIME OF APPLICATION; § However, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

the term Owner:

Refers to the owner of the life insurance policy who seeks to enter into a life settlement contract. The term DOES NOT INCLUDE an insurance provider, a qualified institutional buyer, a financing entity, a special purpose entity, or a related provider trust.

what is meant by 'cash accumulation' in personal uses of life insurance?

a. Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. i. For example: some life policies (those that provide permanent protection, such as whole life) accumulate cash value that is available to the policyowner during the policy term.

what is meant by 'estate conservation' in personal uses of life insurance ?

a. Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell of the assets.

what's an example of a cross-purchase buy-sell agreement?

o Here is an example of a cross-purchase buy-sell agreement: § Partnership AB has two partners, A and B. the value of the business is $1 million. § The partners each have an equal interest ($500,000 each). § Partner A buys a life policy on partner B for $500,000, and partner B buys a life policy on partner A for $500,000. § If partner A dies, partner B gets 100% ownership of the business and As heirs receive $500,000

Planning for Income Needs - Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns:

o Replacing Insured's Salary or Lost Services § The surviving spouse who was the caregiver of the children may have to train to enter the job market. § If the spouse works outside the home, a new expense for day care must be considered. o Social Security Income "Blackout" Period § Social Security blackout period is the time during which the surviving spouse and/or children do not receive any social security survivor benefits § Blackout period begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. § (unmarried children under the age of 18 or up to 19 if they are attending secondary school full time can also receive benefits. · Technically, the social security check will be made payable to the surviving spouse until the youngest child is 16, and directly to the child between the ages of 16 and 18.) o Liquidation versus Retention of Capital § Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset (such as a home)

What are 10 basic definitions and characteristics of different classes of life insurance policies?

1. Permanent 2. Term 3. Participating 4. Non-participating 5. Ordinary 6. Industrial (Home Service) 7. Group 8. Individual 9. Fixed 10. Variable

Duties of the replacing producer

o Present to the applicant a NOTICE REGARDING REPLACEMENT that is signed by both the applicant and the producer. § a copy must be left with the applicant o obtain a list of all existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all companies being replaced. o Leave the applicant with the original or a copy of written or printed communications used for presentation to the applicant. o Submit to the replacing insurance company a copy of the replacement notice with the application.

Example of the Human Life Value Approach:

o Let's assume that a 40-year-old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. o Out of his annual income, $40,000 is spent on family needs, and the remaining $10,000 goes to the insured's personal expenses. o This means that the human life value of this insured to his family is $1,000,000 ($40,000 a year spent on family needs times 25 years to retirement). o Based on this assumption, and taking interest and inflation into consideration, the insurance company will determine the right amount of insurance to produce the same annual amount of income for the family if the insured were to die.

Corporate-Owned Life Insurance

- A CORPORATE-OWNED LIFE INSURANCE POLICY (COLI) is owned by the corporation and payable to the corporation. - These policies are purchased on the lives of employees for whom postretirement benefits will be provided by the corporation. o The corporation receives the death benefits tax-free and uses them to cover most or all of the promised postretirement benefits. o Cash values will ordinarily accrue income tax free. o Benefit payments made by employer to the employee are tax deductible, but premium payments are not.

Notice of Information Practices

- Agents are required to disclose to a prospect the facts about information collection practices, as well as the products they are proposing to sell.

Attending Physician Statement

i. When smaller amounts of insurance are requested and there is no prior medical history of concern, the home office underwriter may make an underwriting decision solely on the basis of the application. 1. If however, 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. 2. This is called an ATTENDING PHYSICIAN STATEMENT (APS) a. The insurance company must pay for this information, but it is often less expensive than ordering an examination. ii. The next step would be a paramedical exam (which often includes blood work and a urine sample). 1. A paramedical exam is conducted by a registered nurse or a paramedic. iii. Under certain circumstances the underwriter may require a full medical examination by a licensed physician for additional information. 1. All these are at the insurer's expense. iv. A full medical exam occurs routinely for applicants requesting higher amounts of coverage, or if the application raised additional questions concerning the health of the prospective insured or for applicants beyond a certain age. 1. Each company establishes standard requirements, based on age and amount of coverage, and reserves the right to request additional information and testing, at their own expense.

Industrial (Home Service) insurance

is life insurance written on an individual basis - The following are its distinguishing features: o Written in small amounts (usually with a face amount of less than $1,000); o Premiums are payable on a weekly or monthly basis; o Premiums are collected by a representative of the insurance company at the home of the insured; and Policies are written as nonmedical (no medical exam is required; however, medical history information is still collected

Determining Lump-sum Needs - Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:

o Cost Associated with Death (postmortem) § Taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance; o Debt Cancellation (as an alternative to Estate Liquidation) § Paying off debts of the insured such as home mortgage, or auto loans. (most lenders require a collateral assignment of life insurance as a condition for a loan) o Emergency Reserve Funds § Paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members o Education Funds § Paying for children's education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market o Retirement Fund § As a source of retirement income o Bequests § Leaving funds to the insured's church, school, or charity

insurance companies have developed 2 basic approaches to help producers and buyers to determine the needed amount of protection:

o HUMAN LIFE VALUE APPROACH and NEEDS APPROACH

- When an applicant for pre-need insurance is taken (e.g. pre-need funeral contract), and before any premiums are collected from the applicant, all of the following information must be fully disclosed to the applicant:

o The fact that a life insurance policy is being used to fund this arrangement; o The relationship of the producer, the funeral provider, the administrator, and any other persons involved in the arrangement; o The impact of § Failure to pay premiums § Cancellation, lapse, or surrender of the policy; § The difference between the proceeds of the life insurance policy and the amount actually needed to fund the funeral; and § Any geographical limitations in the contract; and All sales commissions or any other compensation being paid

The term Life Expectancy

§ is an important concept in life settlement contracts. § It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean)

Explain the General information section of an Application

- General information of the application includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. - It will also inquire about the existing policies and if the proposed insurance will replace them. - Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary.

explain the Medical Information section of the Application

- Medical information of the application 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. - If the amount of insurance is relatively small, the agent and the proposed insured will complete all of the medical information o That would be considered a NONMEDICAL APPLICATION. o For larger amounts, the insurer will usually require some sort of medical examination by a professional. - It is the agent's responsibility to make certain that the application is filled out completely, correctly, and to the best of the applicant's knowledge. o The agent must probe beyond the stated questions in the application if he or she has any reason to believe the applicant is misrepresenting or concealing information, or does not understand the specific questions asked. o Any information that is misleading, misrepresentation, he/she must inform the insurance company. - Some insurers require that the applicant complete the application under the agent's watchful eye, while other insurers require that the agent complete the application in order to help avoid mistakes and unanswered questions.

Replacement

- Replacement is a practice of terminating an existing policy or letting it lapse, and obtaining a new one. - To make sure that replacement is appropriate and in the best interests of the policyowner, insurance producers and companies must take special underwriting measures to help policyowners make informed decisions. - REPLACEMENT means: o Any transaction in which new life insurance or a new annuity is purchased and, as a result, the existing life insurance or annuity has been or will be any of the following: § Lapsed, forfeited, surrendered, or otherwise terminated; § Reissued with any reduction in cash value; § Converted to reduced paid-up insurance, continued as extended term insurance or otherwise reduced in value by the use of nonforfeiture benefits or other policy values; § Amended so as to affect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid; or § Used in a financed purchase.

Effective date of coverage

- If the initial premium is not paid with the application: o The agent will be required to collect the premium at the time of policy delivery. - In this case, the policy does not go into effect until the premium has been collected. - The agent may also be required to get a STATEMENT OF GOOD HEALTH from the insured. o This statement must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date. - If the full premium was submitted with the application: o And the policy was issued as requested, the policy coverage would generally coincide with the date of application if no medical exam is required. o If a medical exam is required, the date of the coverage will coincide with the date of the exam. - Sometime is it possible to lower the premium rate by BACKDATING ( or antedating) an application for insurance o If the applicant chooses to do this, the policy may be backdated for no more than 6 MONTHS before the date of the application or the medical examination, whichever is later. o All premiums must be paid from the effective date of the policy. § The only allowable reason that an application may be backdated is to EFFECT A LOWER PREMIUM

Interest factor in premium determination

- Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds (invested in bonds, stocks, mortgages, etc.). This interest is a primary factor in lowering the premium rate.

Interest-Adjusted Net Cost Method

- Interest-adjusted net cost method considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. o This means that each year premiums and dividends are figured, interest is taken into consideration. - Two versions of the interest-adjusted method are the surrender cost index and the net payment cost index.

what is the purpose of Life Insurance Policy Cost Comparison Methods

- To help consumers make educated decisions on purchasing life insurance, the industry developed specific methods and indexes that measure and compare the actual policy costs. - These comparisons are usually included in policy illustrations. o Traditional methods of comparing costs are interest-adjusted net cost method and comparative interest rate method.

A valid insurable interest may exist between the POLICYOWNER and the INSURED when the policy is insuring any of the following

o Policyowner's own life; o The life of a family member (a spouse or a close blood relative; or o The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as debtor to a creditor)

Fraudulent Acts - In connection with life settlement contracts, the following acts or omissions are considered FRAUDULENT LIFE SETTLEMENTS ACTS if committed by any person knowingly or with intent to defraud:

o Providing false material information or concealing information pertaining to any of the following: § An application for a life settlement contract; § Underwriting § A claim for payment or benefit pursuant to a life settlement contract or insurance policy; § Premiums paid on an insurance policy; § Payments and changes in ownership or beneficiary made in accordance with the terms of a life settlement contract § The reinstatement or conversion of an insurance policy; § The solicitation, offer, effectuation or sale of a life settlement contract or insurance policy § The issuance of written evidence of life settlement contracts; or § Engaging in stranger-originated life insurance o Failing to disclose to the insurer that the prospective insured has undergone a life expectancy evaluation by an entity other than the insurer, in connection with the issuance of a policy; o Employing any device, scheme or artifice to defraud in the business of life settlements.

- Duties of the replacing insurance company:

o Require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant; and o Send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the application is received in the replacing insurance company's home or regional office. § A policy summary or ledger statement containing policy data on the proposed life insurance or annuity must be included.

what is the primary criteria an underwriter will use in assessing the desirability of a particular candidate for life insurance

the applicant's HEALTH (current and past), OCCUPATION, LIFESTYLE, and HOBBIES OR HABITS.

It is illegal for any person to do any of the following:

o Remove, conceal, alter, or destroy the assets or records of anyone engaged in the business of life settlements; o Misrepresent or conceal the financial condition of a licensee, financing entity, insurer, or other person; o Transact the business of life settlements in violation of laws requiring a license, certificate of authority, or other legal authority for the transaction; o File a document containing false information or otherwise conceal information about a material fact; o Engage in embezzlement, theft, misappropriation or conversion of moneys, funds, premiums, credits, or other property of a life settlement provider, insurer, insured, owner, insurance policyowner, or any other person engaged in the business of life settlements or insurance; o Recklessly entering into, brokering, or otherwise dealing in a life settlement contract, the subject of which is a life insurance policy that was obtained by presenting false information concerning any fact material to the policy; or by concealing, for the purpose of misleading another, information concerning any fact material to the policy, where the owner or the owner's agent intended to defraud the policy's issuer; or o Attempting to commit, assisting, aiding or abetting in the commission of, or conspiracy to commit the acts or omissions specified in this regulation.

a. Medical Information Bureau (MIB)

i. In addition to an attending physician's report, the underwriter will usually request a Medical Information Bureau (MBI) report ii. The MIB is a membership corporation owned by member insurance companies. 1. It is a NONPROFIT TRADE ORGANIZATION which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. 2. It is a systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered. 3. The MIB can be used only as an aid in heling insurers know what areas of impairment they might need to investigate further. iii. An applicant cannot be refused simply because of some adverse information discovered through the MIB

Life Settlement Broker

§ Is a person who, for compensation, solicits, negotiates, or offers to negotiated a life settlement contract. § Life settlement brokers represent only the policyowners, and have a fiduciary duty to the owners to act according to their instructions and in their best interest.

Buy-sell Funding

- A buy-sell agreement o Is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

Buyer's Guide

- A buyer's guide provides basic, GENERIC information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. - This document explains how a buyer should go about choosing the amount and type of insurance to buy, and how a buyer can save money by comparing the costs of similar policies. - Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium. - If the policy contains an unconditional refund provision of at least 10 days (free-look period), a buyer's guide can be delivered with the policy,

Business uses of life insurance

- Businesses use life insurance for the same reason individuals use life insurance: o It creates an immediate payment upon the death of the insured - The most common use of life insurance by businesses is as an employee benefit, which serves as a protection for employees and their beneficiaries. - There are also other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. o These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees.

Ordinary Life insurance

- Is also written on an individual basis; however, it differs from Industrial Life in the following areas: o Large face amounts (at least$1,000); o Premiums can be paid annually, semiannually, quarterly or monthly; o Premiums are paid by the insured directly to the insurance company; and o A physical examination may be required to prove the applicant's insurability

What are some examples of when a Life Settlement Act is appropriate?

- Policyowners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy. - In many cases, however, life settlement transactions are offered to senior citizens who may have a life-threatening illness and a short life expectancy. o In these situations, the owner may elect to sell the policy to a life settlement provider for an amount greater than what they would receive if they surrendered the policy for cash value.

Life Settlement Broker Authority and Licensing

- Prior to acting as a life settlement broker, a person must obtain a license from the Commissioner of Insurance. - Upon the filing of an application for initial licensure and payment of the application fee, the Commissioner will examine each applicant to determine that the applicant is competent and trustworthy, and has the experience, training and education required to operate as a life settlement broker. - A LIFE INSURANCE PRODUCER who has been licensed in the commonwealth to transact a life line of authority for AT LEAST ONE YEAR is qualified to operate as a life settlement broker. o The producer must notify the Commissioner within 30 days from the first day of operating as a life settlement broker and pay the required fee. o Life settlement brokers are required to complete 15 HOURS OF TRAINING related to the business of life settlements EVERY 2 YEARS. - Licensed attorneys, certified public accountants or accredited financial planners may negotiated life settlement contracts on behalf of the owner without obtaining a license as a life settlement broker if they represent the owner in their professional capacity and do not receive compensation directly or indirectly by the life settlement provider or purchaser. - Regardless of the manner in which the life settlement broker is compensated, the broker is deemed to REPRESENT ONLY THE OWNER, and owes a fiduciary duty to the owner to act according to the owner's instructions and in the owner's best interest.

Comparative Interest Rate Method

- The comparative interest rate (CIR) is the rate of return that must be earned on a hypothetical "side fund" in a buy-term-invest-the-difference plan, so that the value of the side fund will equal the illustrated cash surrender value of the higher-premium policy at a designated point in time. o The higher the CIR, the less expensive the higher-premium policy (e.g., whole life) relative to the alternative plan (e.g., term plus side fund).

The Unconditional (Binding) Receipt

- The unconditional (binding) receipt is used most often with property and casualty insurance. - With the binding receipt, coverage begins immediately for a specific length of time, until the policy is issued. o Biding receipts usually stipulate that coverage is effective from the date of the application for only a specified period of time, such as 30 or 60 days, or until the company either issues or declines coverage, whichever occurs first.

Changes in the Application and Amendments

- When an answer to a question on the application needs to be corrected, agents have the option, depending on which insurer they represent, of correcting the information and having the applicant initial the change, or completing a new application. o An agent should never erase or white out any information on an application for insurance

What are the 6 personal uses of life insurance?

1. security 2. survivor protection 3. estate creation 4. cash accumulation 5. liquidity 6. estate conservation

what is meant by 'estate creation' in personal uses of life insurance?

a. A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and significant period of time. b. The purchase of life insurance CREATES AN IMMEDIATE ESTATE. i. Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets ii. When an insured purchases a life insurance policy, he will have an estate of at least that amount the moment the first premium is paid. iii. There is no other legal method by which an immediate estate can be created at such a small cost.

what is meant by 'survivor protection' in personal uses of life insurance?

a. The death of the primary wage-earner will usually stop the flow of income to a family. b. The death of a non-earning spouse who cares for minor children can also cause great financial hardship for the survivors. c. 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. i. This is known as SURVIVOR PROTECTION. ii. Planning for survivor protection requires careful examination of current assets and liabilities as well as determining what survivors' needs may be.

Disclosure to Customers - According to the disclosure regulations for life settlement brokers and providers, NO LATER THAN THE DATE OF APPLICATION for a life settlement contract, a life settlement provider is REQUIRED to give the owner a separate document which CLEARLY LISTS all the following information:

o An explanation of possible alternatives, including accelerated benefits offered by the insurer; o That some or all of the proceeds of a life settlement contract may be taxable; o The proceeds of a life settlement contract may be subject to the claims of creditors; o Receipt of the proceeds may adversely affect the recipient's eligibility for public assistance; o The owner has the right to terminate a life settlement contract within 15 days after the date it is executed by all parties; o That the owner has received the disclosures required by the state regulations; o That the proceeds will be sent to the owner within 3 business days after the life settlement provider has received acknowledgement that ownership of the policy has been transferred and the beneficiary has been designated according to the terms of the life settlement contract; o That entering into a life settlement contract may cause other benefits under the policy, such as conversion or waiver of premium, to be forfeited by the owner. o That a change of ownership may limit the insured's ability to purchase life insurance in the future (due to a limit to how much coverage insurers will issue on one life); o The total amount paid by the life settlement provider, as well as the net amount to be paid to the owner; o The date by which the funds will be available; o That the life settlement provider is required to furnish to the owner a consumer information booklet The life settlement provider's name, business and email address, and phone number

example of a conditional receipt

o If an agent collects the initial premium from an applicant and gives the applicant a conditional receipt, and the applicant dies the next day, the underwriting process will proceed as though the applicant were still alive. o If the insurer ends up approving the coverage, then the applicant's beneficiary will receive the death benefit of the policy. o If, on the other hand, the insurer determines that the applicant was not an acceptable risk and declines the coverage, the premium will be refunded to the beneficiary, and the insurer is not required to pay the death benefit.

As a field underwriter, the agent has many important responsibilities during the underwriting process and beyond, including the following

o Proper solicitation of applicants; o Helping prevent adverse selection; o Completing the application; o Obtaining the required signatures; o Collecting the initial premium and issuing the receipt, if applicable; and o Delivering the policy

- Duties of the existing insurer:

o Retain all replacement notifications for at least 5 years or until the next regular examination by the insurance department - whichever is later; o Send a letter notifying the policyowner of his or her right to receive information regarding the existing policy values. § The information then must be provided within 5 business days of receipt of the request from the policyowner; o Upon receipt of a request to borrow, surrender or withdraw any policy values, send a notice advising the policyowner that the release of policy values may affect the guaranteed and nonguaranteed elements, face amount or surrender value.