Life Insurance Basics
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
Solvency
Ability to meet financial obligations
Unfair discrimination between individuals of same class
Age or gender, physical or mental impairment, blindness, genetic characteristerics Investigation as part of the underwriting procress a proposed insured sexual orientation
Field Underwriting
Agent the one who solicited potential insured. Agent has many important responsabililities such as proper solicitation of applicants, helping prevent adverse selection, completing application, obtaining required signatures, collecting initial premium, delivering policy
Purchase of life insurance creates
An immediate estate
Declined Risk
Applicant who are rejected, may be declined for reasons: - no insurable interest - applicant is medically unacceptable - potential for loss is so great it does not meet the definition of insurance or insurance is prohibited by public policy or is illegal
When key employee is the insured, business is
Applicant, policy owner, premium payer, and beneficiary
Business continuation plan
Arrangements between the business owners that provide that the shares owned by any one of them who dies or becomes disabled shall be sold to and purchased by the other co-owners or by the business.
Solicitation of insurance
Attempt to persuade a person to buy an insurance policy and can be done orally or in writing. Providing information about available products, describing policy benefits, making recommendations about specific type of policy.
Needs approach
Based on predicted needs of family after premature death of insured, some factors considered by the needs are income. Amount of debt (including mortgage) investment, other ongoing expenses
Signatures requiredq
Both agent and proposed insured (applicant) must sign the application.
Liquidity
Cash accumulation feature, some life insurance policies provide liquidity to policy owner. Policy's cash value can be borrowed against anytime or immediate need
Replacing insurer
Company that issues new policy
Existing insurer
Company whose policy is being replaced
Cash value
Equity amount accumulated in permanent life insurance q
Which of the following would NOT fall into category of costs associated with death
Final medical expenses of the insured
What rule applies to all advertisements, public announcements, signs pamphlets, circulars and cards
Full name of insurer and name of city
What can insurers ask the proposed insured
If he she tested positive on AIDS
Why cant insurance agents, brokers, or other persons cannot use an advertisement or public announcement in this state
If it calls attention to unauthorized insured, publicizes the financial condition of any insurer
Attending physician statement APS
If underwriter see answers to certain questions, it could indicate greater risk and obtain more medical details. Must pay for this information but often less expensive than ordering exam
General Rules
Illustration used in sale of life insurance policy which must contain: - name of insurer, name + business address of producer or insurer authorized rep, name age sex of proposed insured, - Underwriting or rating classification upon which illustration is based - Generic name of policy, company product name and form number - initial death benefit, dividend option election or application of no guaranteed elements, Illustration date, prom label stating Life Insurance Illustration
When are premiums paid
In advance
Survivor protection
Life insurance providing funds necessary for survivors of insured to be able to maintain their lifestyle in event of insured's death.
Expense Factor
Loading charge, Affects premium rates. Insurers largest expense is commissions paid to its agents.
Cash accumulation
May be used to accumulate specific amounts of monies for specific needs with guarantees that money will be available when needed. Some life policies accumulate cash value that is available to policy owner during policy terms
Estate conservation
May be used to pay inheritance taxes and federal estate taxes so that it not necessary for beneficiaries to sell off the assets
Estate creation
May create an estate through earnings, savings, and investments, but all these methods require disciplined action and significant period of time.
Advertisements
Must be accurate and not misrepresent the facts
Duties of replacing producer
Notice regarding replacement that is signed by both applicant and producer. Copy must be left with applicant. Obtain list of existing life insurance to be replaced and leave applicant with original or copy of written printed communications Submit replacing insurance company a copy of replacement notice with applicaiton
Gross annual premium
One year cost of mortality, plus cost of operating company. Loading includes commissions, taxes, advertising, and while not an expense includes amount added to a pure or basic rate.
Illustrations
Presentation or depiction of non guaranteed elements of a life insurance policy
Medical exam
Require hiv testing: prior to testing, insurer must disclose use of testing to the applicant. Obtain written consent, insurer establish written policies and procedures for internal dissemination, must be administered in manner that meets protocol of us health
Liquidation
Selling assets in order to raise capital
Adverse Selection
Tendency of individuals with higher probability of loss to purchase Insurance more often than those who present a lower risk
What does liquidity refer to in a life insurance poliy
The death benefit replaces assets that would have accumulated if the insured has not died
Preferred Risk
Those individuals who meet certain requirements and qualify for lower premiums than standard risk.
Social Security Income Blackout Period
Time during which surviving spouse or children do not receive any social security survivor benefits. Blackout begin when child reaches 16 and end when surviving spouse qualifies for retirement benefits; as early as age 60.
What are changes in applicatio
When answer need correction, agent can correct information and have applicant initial change.
Key person
When business suffer financial loss of premature death, someone who has knowledge skills or business ...key person insurance maybe issued as term or per men at life, with whole life and universal life policies used most often.
When is the earliest a policy may go into effevt
When the first premium is paid and policy has been delivered
Policy Summary
Written statement describing features and elements of policy being issued. Must include name and address of the agent, full name amd home administrative office address. Also include cash value, premium, dividend, surrender value, death benefit
Agents report
allows the agent to communicate with the underwriter and provide information about the applicant known by the agent that may assist in the underwriting process
Medical Information Bureau (MIB)
non-profit central information agency that was established by a number of insurance companies to aid in underwriting. Speeds up underwriting and helps prevent fraud.
Stock Purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Cross purchase
used in partnerships when each partner buys a policy on 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
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.
Death benefit
Amount paid upon death of insured in life insurance policy
Investment Return
In an effort to earn interest on the funds before claims incurred, interest is primary factor in lowering premium rate
Medical information
Include information on prospective insured medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. If amount of insurance is small, agent would be considered a non medical application. Any information that is misleading, inaccurate or illegible may delay issuance.
General Information
Includes general questions about applicant such as name age address birthdate, gender income, marital status, occupation
net single premium
Includes mortality, interest components necessary to keep policy in force until maturity
When producers or insurers recommend annuity replacement, must make sure the replacement is suitable for consumer
Incur surrender charge, lose existing contractual benefit, have tax penalties, increased fees, investment advisory, have replaced another annuity in preceding 36 months
Determining amount of personal life insurance
Individuals seeking to buy life insurance may need assistance trying to establish how much coverage is appropriate, based on ability to pay premium, serve need and protect survivor.
Suitability in life insurance and annuities
Insurance producer may not recommend purchase, sale, or exchange of insurance policy or annuity contract without reasonable belief that transaction is best interest of insured. Producers must make reasonable effort to obtain relevant information from consumer and evaluate Age, annual income, tax, financial needs and timeline, investment objectives, liquidity needs and liquid net worth, existing assets, intended use of annuity, risk tolerance
Human life Value Approach
Insured an estimate of what would be lost to family in event of premature death of insured calculate an individual life value by looking at insureds wages, inflation, number of years to retirement and time value of money
Who is responsibility for all the advertisements?
Insurer whose policies are advertised
insurance application
Key source underwriters use for information about the applicant
Bequests
Leaving funds to insured's church, school or a charity
Illustrations
Means presentation or depiction that includes no guaranteed elements of a life insurance policy
Conditional reciept
Most common, only when applicant submit prepaid application. Coverage will be effective either on date of application or date of medical exam.
Insurable interest
Must exist at time of application and policy owner must have insurable interest in life of the insured.
Insurable interest
Must exist between policy owner and insured at the time of application; once a life insurance policy has been issued insurer must pay the policy benefit.
Mortality - Interest
Net premium
Substandard (high exposure) risk
Not acceptable at standard rates because of physical condition, personal, family history of disease, occupation, or dangerous habits. Referred to rated because they could be issued with premium rated up
Education Funds
Pay for children education expenses so they can remain in school, or for surviving spouse who may need additional education or training in order to re-enter job market.
Emergency Reserve Funds
Pay for unexpected expenses following the death of the insured such as travel expenses and lodging for family members
Debt Cancellation (as an alternative to estate liquiditation)
Pay off debt of the insured such as home mortgage or auto loans. Most lenders require collateral assignment of life insurance as condition for a loan.
Lump sumq
Payment of entire benefit in one sum
Minot
Person under legal age
Beneficiary
Person who receives benefits of an insurance policy
Estateq
Persons net worth
Standard risk
Persons who according to company's underwriting standard share entitled to insurance protection without extra rating or special restriction.
Valid insurable interest may exist between policy owner and insured
Policyowner's own life, life of family member (a spouse or close blood relatives), life of business partner, key employee or someone who has a financial obligation to policy owner
Replacement
Practice of terminating an existing policy or letting it lapse and obtaining new one, make sure replacement is appropriate and best interest of policy owner, insurance and companies take special underwriting measures to help policy owners make informed decisions
How must a replacing producer respond to an applicant wishing to replace existing life insurance
Producer must collect existing policies and turn them over to the replacing insurer
Which of the following would describe a legal document which would dictate who can buy a deceased partner's share of business and for what amount
Profit and loss agreement
Agent's report
Provide agents personal observations concerning proposed insured. The insurer may inquire whether the agent knows of any adverse information about applicant, or ask agent to express opinion about applicant's character.
Buyers guide
Provide basic information about life insurance policies. Explaining how a buyer should go about choosing the amount and type of insurance and provide cost comparison for similar policies. Must be prior to time of application
Mortality
Ratio of number of earths in specific population over certain amount of time versus the number of living people in that population
Duties of the replacing insurance company
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 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.
Underwriting
Risk selection and classification process. It involves careful analysis of many different factors to determine acceptability of applicants for insurance. Assessing desirability of particular canidate if life insurance, occupation, lifestyle, hobbies or habits
Retirement FUnd
Source of retirement income;
Application
Starting point and basic source of information used by the company in risk selection process. All have general information and medical information
Disclosure Authorization Notice
State insurers practice regarding collection n use of personal information
Replacing Insured's Salary or Lost Services
Surviving spouse who was caregiver of children may have to train to enter job market, if spouse works outside of home, new expense for day care must be considered
Postmortem costs associated with death
Taking into account the final medical expenses of the insured, funeral expenses, and day to day expenses family maintenance.
For what reason may a life insurance producer backdate a life insurance policy
To meet sales quotas established by the insurer
Liquidation vs Retention of Capitali
Under retention- enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing insured's principal assets
Classifying Risks
Underwriting dept will look at applicant past medical history, present physical condition, occupations, habits, morals, acceptable, underwriter must then determine the risk or rating classification to be used in deciding whether or not applicant should pay higher or lower premium. Higher risk Higher Premium
Mortality tables
Used by insurers, indicate number of individuals within a specific group of individuals starting at certain age, who are expected to be alive at succeeding age.
Unconditional binding receipt
Used most often with property and casualty insurance. With binding receipt, coverage begins immediately for specific length of time, until policy is issued.
Prohibited Practices
When using illustration in sale of life insurance policy, insurer or its producers may not do any of the following: - represent policy as anything other than life insurance policy, describe nonguaranteed elements in manner that could be misleading, use illustration that depicts policy's performance s being more favorable, provid incomplete illustration, and claim premium payment will not be required for each year of policy in order to maintain illustrated death benefit - vanish or vanishing premium implies policy become paid up or not self supporting
Premium receipt
determines when coverage will be effective