Life Insurance
7 Dividend Options- CRAPO
1) Cash - Mail me my check. 2) Reduce/Prepay - Deduct from what I owe you now. 3) Accumulate at Interest - Create a savings account. Interest would be taxable. 4) Paid Up Additions - Use dividend as a single premium to purchase a mini paid up policy of the same type which is permanently attached to the original policy. Creates a snowball effect. Can surrender the PUA for cash 5) Term - aka the 5th option. Use the dividend as a single premium to purchase a policy of a different type (one year term) which increases the death benefit for just that year. 6) Paid Up Option - Shortens premium paying period. 7) Accelerated Endowment - Causes policy to mature faster. Dividend added to the guaranteed cash.
Agent Duties
Sign a statement as to whether or not a replacement is or may take place. Where a replacement is taking place the agent must present to the applicant a "Notice of Replacement" to be signed prior to taking an application. A copy is to be given to the applicant and to the insurer. Both the Agent replacing and the agent/insurer trying to conserve the business must leave all printed materials used in their presentations with the insured/consumer.
Calculation Assumptions
-All premiums are paid at the beginning of the year, in advance. -All premiums are invested and earn interest -All claims are paid at the end of the year.
Per Capita
-means by head. Used when children are to share equally
Annuities- Funding Methods?
1)Single 2)Periodic **Fixed **Flexible - Single lump-sum payment or periodic payments over time
Underwriting Sources
1. The Application 2. Medical exams and medical history 3. Inspection Reports 4. Medical Information Bureau (MIB) 5. The Agent
Medical Information Bureau (MIB)
A non-profit trade organization supported by the member insurance companies that exchanges medical impairment information in its files. Includes risky behavior such as hobbies.
Per Stripes
- means by stock or blood line. Under per stirpes each child, grandchild,or great grandchild moves up in a representative place of a deceased beneficiary
Life Insurance
-"Life Insurance creates an immediate estate" -(By paying a lump sum of money upon the insured's death to a beneficiary)
Modified Life
-(one premium increase) -Death Benefit (Face) remains level to age 100
Single Pay
-(paid one lump sum)- -Death Benefit (Face) remains level to 100
Underwriting Parties
-Applicant - The person who applies for the insurance -Insured - The individual whose life is covered or insured by the policy -Policy-owner - The person who has all the rights in the contract Applicant, insured, and policy-owner can be all the same person or as many as three - Beneficiary - The person who is to receive the proceeds when the insured dies. The beneficiary is not a party to the contract until the death of the insured.
Common Beneficiary Designations
-Individuals - Each beneficiary is named (share equally unless stated otherwise) - Business entities -Trusts - used when beneficiary is not to have direct access to the funds Disadvantages: Trustee charges a management fee - Minors - Though a minor can be named an insurer will not pay proceeds to a minor. Will pay the proceeds once they turn 18 -Estate - Can name the Estate of the Insured as beneficiary. If there is no living beneficiary then proceeds would be paid to Insured's estate Not a good choice. Proceeds would have to be probated. -Charity - Attractive way to benefit a charity such as a school or religious institution. Tax benefits; avoids legal challenge since life policy not part of the estate - Creditor - to cover indebtedness. -Class - used when beneficiary is not directly identified by name but are identified by grouping, such as children or brothers and sisters. It would include both natural born and adopted children. In addition to the class designation, the per capita and per stirpes designations are used to benefit children.
Actuary
-a mathematician who works with the data and helps the insurer establish their rates. test purposes keep in mind the following. SIDENOTE: -Insurers - set the rates. Actuaries help them do so -Commissioner - Approves or disapproves the rates. Doesn't set
Optional Policy Riders
-add coverage - attached to and made part of the contract. They are pure protection. - They increase premium but do no increase the cash value in the contract. -Since riders are pure protection they end when the policy goes into nonforfeiture. 2 MOST COMMON RIDERS? - Accidental Death - Waiver of Premium
Personal Uses of Life Insurance
-survivor protection -estate creation -estate conservation -retirement -cash accumulation -liquidity. CREATES AN ESTATE
Annuities- Underlying Investments
1) Fixed 2) Variable 3)Equity Index Investment configuration (type of investment backing annuity) • A fixed (guaranteed) rate of return, an index (minimum guarantee return with opportunity for gain) or a variable (non-guaranteed) rate of return.
Payout or Annuity
1)Straight Life 2)Life Income 3)Refund -Cash -Installment 4)Period Certain or Temporary 5)Joint and Survivor - A specified term of years of for life, or a combination of both.
Settlement Options- Joint and Survivor
1. Life Income Joint and Survivor: Guarantees payment throughout lifetime of two or more recipients however all payments stop when the LAST PERSON DIES. 2. Joint Life Guarantees payment throughout the lifetime of two or more recipients however all payments cease when the FIRST PERSON DIES.
Annuities- Purpose
Annuities are purchased to protect against the possibility of outliving one's income. They provide a life income or an income for a stated period of time by systemically liquidating or distributing accumulated funds. They are sold by life insurance companies and require a Life Agent license to sell.
Annual Renewable Term
Can renew for to a specified age or # of times -Level face amount -Annual increases Only level term can be renewable Reentry term - Both renewable and convertible
Policy Summary
Computer generated spread sheet identifying the agent, product, riders, values, loan rates, and indexes of the policy purchased.
Criteria for Assessing Annuity Suitability with Seniors
Criteria 1. The senior's financial status. Criteria 2. The senior's tax status. Criteria 3. The senior's investment objectives. Criteria 4. Other information which may be a consideration regarding the purchase.
Buyers Guide
Generic brochure describing various forms of life insurance, how to compare, as well as a method to determine overall insurance need.
Waiver of Premium
If insured becomes totally and permanently disabled as defined by the policy. Premiums waived for the duration of the disability. Rider becomes inoperative at a 65. Waiting period -six months and retroactive if premiums current. - Cash and dividends are still paid when policy is on waiver.
Annuities vs Life Insurance
Life insurance= CREATES ESTATES Annuities= LIQUIDATE OR DISTRIBUTE ESTATES Life insurance is purchased to protect against premature death while annuities are purchased to protect against outliving your financial resources.
Major Advantage of Renewable and Convertible
No new suicide, incontestability periods, and no proof of insurability.
Premium Factors (M - I - E)
Once a risk has been classified, the three main premium factors used to determine the life insurance premium are mortality, interest, and expenses. M-I-E Dividends and reserves are not a factor
Flexible (aka Nontraditional)
Policyowner has some or all control over: Death Benefit (face) to raise or lower (adjustable), type (permanent, term), and premiums paid (flexible) -Policyowner gives up some or all guarantees for this control such as guarantees policy will endow. -Types of flexible/nontraditional policies are: Universal Life, Variable Life, and Variable Universal Life
Interest
Premiums are invested to earn interest. This interest is used to offset mortality. Premiums must be invested very conservatively and assumed to earn a very low interest rate. Insurance premiums provide a source of investment funds investments like corporate bonds. Reflects investment return
Sprendthrift Clause
Prevents the creditors of the beneficiary from attached the policy proceeds held by an insurance company. It protects the beneficiary from commuting, alienating, or assigning benefits.
Endowments
Primary purpose -Accumulate cash. Secondary - Death Benefit • Endows/matures BEFORE age 100 Pays a predetermined amount whether you live or die -MOST EXPENSIVE FOR OF LIFE INSURANCE -Face amount is paid if death occurs before endowment date -Emphasis is on savings not insurance protection -Purpose was to guarantee or accumulate an amount of money by specified date
Needs Analysis Approach
This approach assumes death to be immediate. By calculating all financial needs and objectives, then subtracting any assets will determine if there is any gap between needs and assets. If there are gaps, which products may be used to fill in these areas? It takes into consideration permanent needs as well as temporary needs. This method can be used for death or disability.
Convertible -
exchange for a permanent policy premium based on attained or original age - Level, decreasing, increasing can be convertible - Convert term to permanent, NOT Permanent to term, to term to term.
Uniform Simultaneous Death Act and Common Disaster Clause
is a law used when insured and beneficiary died at the same time. It sets up sequence of payment when it cannot be determined who died first. It assumes the beneficiary died first. -places a time element on the survival period of the primary beneficiary by stipulating that the primary beneficiary must survive the insured by a specified period of time such as 30, 60, or 90 days otherwise the policy assumes the beneficiary died first.
Disciplined current scale
means a scale of nonguaranteed elements constituting a limit on illustrations currently being illustrated by an insurer that is reasonable based on actual recent historical experience. This scale is prohibited from including any projected trends of improvements in experience beyond the illustrate date.
Graded Premium
(more than one increases - eventually levels out) Death Benefit (Face) remains level to age 100
Limited Pay
(20 yr pay, Paid up at 65, Paid up) Death Benefit (Face) remains level to age 100
Straight Pay
(Pure/Continuous/Ordinary) -Death Benefit (Face) remains level to age 100
Cash Surrender Value (CSV)
- Can never reinstate the policy if this option is exercised -Leaves insured with no life insurance.
Replacement requirement does not apply to
- credit life, group life, exercising a contractual change or conversion, transactions with the same insurer
Replacement of Life & Annuities (Article 8)
--Replacement is any transaction involving the sale of a new policy and the existing policy is to be lapsed, forfeited, surrender, terminated, converted to reduced amount, amended to effect a reduction of benefits or term of coverage, or reissued with a reduction of cash value. Insurers and agents who are involved in life insurance replacement transactions are subject to the laws and regulations designed to protect consumers. Replacement of individual life and annuity contracts is also known as Article 8. Its purpose was to: * Set minimum standards of conduct *Require full and clear information so applicant can make an informed decision * Reduce the opportunity for incomplete disclosures/misrepresentations * Impose penalties for failure to comply.
Nonguaranteed elements
-means the premiums, benefits, values, credits or charges under a life policy that are not guaranteed or not determined at issue (date created)
Collecting the Initial Premium/Issuing the Receipt
1. Conditional Receipt 2. Unconditional "Binding Receipt" 3. Policy Effective date 4. COD Application or Rated Policy 5. Backdating 6. Preliminary Term
The insurer and licensed agents shall not- when it comes to Illustrations
1.Represent the policy as anything other than a life insurance policy (i.e. not as a retirement plan) 2.Use non-guaranteed elements in a misleading manner 3.State that the payment of a non-guaranteed element is guaranteed 4.Use an illustration that is not in compliance 5.Use an illustration that depicts policy performance in a more favorable way than is produced by the insurer whose policy is being illustrated 6. Provide an incomplete illustration 7.Represent that policy payments will not be required for each policy year in order to maintain the illustrated death benefits, unless it factual 8.Use the term "vanishing premium" to imply that premiums are paid up, to describe a plan which uses non-guaranteed elements to pay a portion of the future premiums. 9.Use an illustration that is not "self-supporting or lapse-supported" 10.Interest rates used to determine illustrated non-guaranteed elements shall not be greater than the earned interest rates.
Illustrations for Life/Annuity to Seniors
Every insurer and agent offering individual life or annuity contracts to senior citizens, with either pre- printed or non-preprinted illustrations that contain non-guaranteed values, shall disclose on those illustrations the following statement: THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, OR VALUES THAT ARE SET FORTH IN THE ILLUSTRATION ARE NOT GUARANTEED, EXCEPT FOR THOSE ITEMS CLEARLY LABELED AS GUARANTEED. ***All preprinted illustrations shall contain this notice in 12 point bold print, with at least 1⁄2 inch space on all four sides, as part of the document itself or as an attached cover sheet.**
The Agent
Field underwriter-agents personal contact
Taxation- Premiums
For individuals premiums are considered a personal expense therefore they are not tax deductible. Premiums paid by employers for group insurance are general considered a business expense and therefore are tax deductible. When a business buys life insurance other than a group policy premiums are usually not tax deductible. For test purposes keep it simple:
Annuities- Date Income?
Immediate(withdraw<12 months) vs Deferred(Withdraw>12 months)
Insurer's Duties
Make sure all compliance rules are being followed. Give written notifications to the other insurers within 3 working days. Maintain records for 3 years. Provide a policy summary and comparison to the policyowner. Extend free look to 20 days Penalties - For licensees the first penalty is $1000, thereafter the penalty is $5,000 to 50,000. For insurers the first fine is $10,000 thereafter the penalty is $30,000 to 300,000.
Least to most expensive - Term and Whole Life
Term 1. Decreasing, Increasing, Level Whole Life 1. Graded, Modified, Straight/Ordinary, Limited Pay, Single Pay, Endowments
Human Life Value
The dollar value one's life is determined as the amount of income earning ability that is lost by dependents upon the insured's death (loss of future earnings). Basically, it is insuring someone's earning potential.
Sucession
The terms primary, contingent, tertiary have to do with the order or claim to the proceeds.
Buy Sell Agreement (legal document funded by insurance)
This is a contractual agreement that states the intent to purchase the business from the deceased owners estate or heirs and sets a predetermined value on the business. Any type of life insurance can be used to fund this type of agreement. This agreement can be used by sole proprietorships, partnerships, or closed corporations.
Life Policy Comparisons -Traditional Net Cost vs Interest-Adjusted Net Cost
Traditional Net Cost: Compares total premiums paid minus dividends and cash value at set number of years. It does not take in to consideration the time value of money. Interest-Adjusted Net Cost: Similar to traditional net cost but it assumes premiums were invested at 5% compounded. This method takes into consideration interest or time value of money.
Conservation
is an insurer or agents attempt to keep the existing policy from being replaced the policy being proposed.
Illustrated scale
means a scale of nonguaranteed elements currently being illustrated. This scale cannot be more favorable than the lesser of either the disciplined current scale or the currently payable scale.
Underwriter's Concerns
****Insurable Interest - A common interest in another person continuing to live or a financial loss that would result at death. It must be present at the time of application only. (Acceptable situations are those based on love, affection, blood marriage and some type of economic dependency) Selection Criteria - does the applicant meet insurability requirements or criteria. The criteria upon which underwriters base their decisions include information about the insured's lifestyle, occupation, hobbies, and other factors such as health. Underwriters must guard against moral and morale hazards.
Annuity Parties
**Annuity - A series of payments guaranteed for a specified period of time or life of the annuitant. **Annuitant - aka as the recipient is the person who is to receive the income. **Annuity Option - aka payout or settlement option is the method used to liquidate or distribute the principal and interest. **Beneficiary - Annuities use a beneficiary designation in case of death of the annuitant prior to annuitization (accumulation period) or if there is a guarantee in the payout option. **Policy-owner - May or may not be the annuitant. Policy owner can change the annuity date, beneficiary, or settlement option.
Cost Basis- Exclusion Ratio- 1035 Exchange
**Cost Basis - An accounting term for the amount that is not taxed. It is also called the investment in the contract or principal. **Exclusion Ratio - The relationship or ratio of cost basis to total expected return from an annuity. Used to calculate the percentage of each annuity payment which is considered to be a return of cost basis. Formula: Exclusion Ration = investment in the contract divided by expected return *Investment in the contract = amount paid into the annuity *Expected return = total # of years of payout x annual payment **1035 Exchange - Method of exchanging a life contract for an annuity or an annuity for another annuity and still maintain the tax-deferred status of the invested funds.
Net Versus Gross Premium
**Net Premium - Takes into account interest and mortality factors only. It requiresthe following for calculating this rate. a) Age and Sex of insured b) Benefits to be provided c) Mortality rates to be used d) Rate of interest assumed Formula for Net is Mortality - Interest = Net or Pure **Gross Premium - Takes into account interest, mortality, and expenses. The expenses or loading are added to the net premium. Formula for Gross is Mortality - Interest + Loading = Gross
Family Specialized Policies
- Family Income(Insures Breadwinner only): Combines whole life insurance and decreasing term -Family Maintenance(Insures Breadwinner Only): Whole life and level term -Family Protection Policy(Insures entire family): Entire family received life insurance coverage under a single policy -Jumping Juvenile- It features low premiums and a death benefit that increases when the child becomes in adult (AGE 21)- 5x amount when the insured child reaches age 21
Special Use Policies
- Joint life(First to Die):Single policy written on two or more lives. Death benefit paid when first person dies -Joint and Survivorship Life( Last to die/2nd to die): Written on two or more lives. Death benefit paid when the last person dies. -Adjustable Life - Term and Whole Life combined into a single policy. Policyowner controls face, premium, and type.
Employee Benefit Plans (Deferred Compensation Plans)
- Key employee or owner avoids immediate taxation of salary or bonus by deferring it (salary reduction). Employer invests deferred income into a life insurance policy, uses the cash value to set up a reserve fund to pay the employee later. Premium is not deductible but benefits will flow back tax free to the employer who then pays the employee taxable income. Life insurance funds the agreement so it pays family if employee dies before drawing the income.
Mortality
- The mortality tables are based on the law of large numbers. *** The table contains the yearly probability of dying, number of dying during designated year, number living at end of designated year and it is based on last birthday.
Universal Life aka Flexible Premium Adjustable Life
- Unbundled- Term ins. with cash account -the policy has a cash value component that grows with the insurer's financial performance but has a guaranteed minimum interest rate. -Monthly from the made: *Mortality(cost of protection) and expenses(cost of administration) are deducted. *Then interest(Earnings credited) is credited. -Policy expires when there's no $ to pay the mortality charge. -Must choose one at time of application 2 DEATH BENEFITS AVAILABLE: 1. = Level 2. = F.A. + CV = Increasing
Reduced Paid Up
- Uses the CSV as a single premium to purchase a policy the same type as the original (permanent) with a reduced or lower face amount. A reduced amount of insurance remains in force for duration of policy period. - PROVIDES THE LONGEST PROTECTION
Extended Term
- Uses the CSV to purchase a policy of a different type (term) for the same face amount as the current policy until CSV is exhausted. This is the automatic option. Extended term cannot be renewed or converted. Full amount of protection remains in force for a reduced period of time. - PROVIDES THE MOST PROTECTION
(Split Dollar)
- is a method of purchasing life insurance. Permanent policy must be used. Corporation pays the premium or it can be shared for a policy on the employee's life. At the employees death the employer gets a portion of the death proceeds to reimburse for premiums paid and the balance of the death benefit goes to the employees beneficiaries. This is only one form of split dollar
Standard Policy Provision Pt. 2
--Entire Contract (addresses validity of the contract and changes) - States the contract must consist of the policy, copy of the application (Part I and Part II of app), riders and any amendments. --Payment of Premium - Specifies when, where, and how premiums are to be paid. The various premiums modes (frequency) such as monthly, quarterly, semi-annually and annually will be identified. Note the least expensive is annually. Most expensive is monthly --Grace Period - Period of time after the premium due date before the policy lapses for nonpayment of premium. Purpose is to prevent an unintentional lapse. The grace period is normally 31 days for ordinary Minimum grace period is 30 days. There is coverage during the grace period. --Reinstatement - Right to reactivate the policy if it has not been surrendered.
Illustrations
-A life insurance policy "illustration" is a set of projections, prepared by the actuarial department of the insurance company. ... For term insurance, a policy illustration usually shows at least three things: current and maximum premiums for each year; total premiums paid up to that year; and each year's death benefits. -In order to protect consumers the DOI established regulatory standards for illustrations and disclosures used by insurers. Insurers are urged to not to used footnotes. These rules apply to all group and individual life insurance policies and certificates
Other Premium Factors that affect Mortality
-Age - older = higher mortality charge -Sex - woman live longer so lower mortality charge -Health - past and present -Occupation or avocation - degree of risk -Personal Habits - smoking, socializing, drinking
Field Underwriting- Proper Solicitation
-Agent shall act in a professional manner. No high-pressure tactics, or pretext interviews. Agents are governed under the Unfair Trade Practices as to what they can and cannot say and the NAIC model for Solicitation. -The following are to be given to all applicants on or before policy delivery. **Buyers Guide **Policy Summary
Standard Policy Provision Pt. 4
-Automatic Premium Loan - APL enables the insurer to automatically borrow from the cash value the amount needed to pay the premium to prevent the policy from lapsing at the end of the grace period. Added to permanent policies only. -Free Look - Right to Examine - Examination Period - Cancellation Period - A period of time beginning with the receipt of the policy to look it over and return it for a full refund if dissatisfied for any reason. Acceptable methods of delivery to begin the free look period are personal delivery, first class mail, registered or certified mail, all with a signed receipt. The following are the number of days for free look. o Notlessthan10daysormorethan30-Belowage60o Notlessthan30days-Ifit'sareplacementpolicyo Notlessthan30days-Seniors-Age60ormore(Inhealthinsuranceasenioris65) -Assignment - This is a transfer to another person of all or a portion of the policyowner's right. May or may not change order of beneficiaries. Two types of assignment o Collateral - Is a temporary and partial assignment. It is a lien against the death benefit. It does not change order of beneficiaries. Help secure a loan o Absolute - Also known as a complete assignment transfers all "incidents of ownership". It is a permanent and complete assignment of policy ownership right
Standard Policy Provision Pt. 1
-California policy provisions are required to follow NAIC model laws. Wording must be EQUAL or more favorable to the insured. --Insuring Clause - Insurer's promise to pay the policy benefits in accordance with the contract provisions. --Consideration Clause - Identifies the fact the policy owner must pay something of value for the insurer's promise to pay benefits. This valuable consideration is called premium. --Ownership Rights - States the policyowner has the right to assign, select and change payment mode, beneficiary and settlement options. The policyowner has right to receive cash, dividends, make loans, exercise options such as converting and so on.
Decreasing
-Decreasing face amount - Level premium As a POLICY used when Covering mortgage Credit debt -As a RIDER used on Family Income Policy (Used to produce income) Insure Insured or spouse
Dividend FACTS
-Dividends are a return of unearned/excess premiums -Dividends are not taxable -Interest on dividends is taxable -Dividends are never guaranteed -Dividends are generated by divisible surplus -Divisible surplus is generated by better than expected (savings on) mortality, interest, or expenses. Any one or combination of those factors. -PARTICIPATING means the product pays dividends -NONPARTICIPATING means the product does not earn dividends. -Dividends must be distributed at least annually and tend to increase. -No automatic option -Chosen at time of application. -Can be changed
Uses of Life Insurance
-Establish Clients Financial Objectives Identifying a client's personal overall financial objectives is the key component to determine the proper life products. -Identify Current Assets -Develop And Implement A Plan
Insurable Interest in Life Insurance
-If the policy-owner is not the insured (that is a 3rd party applicant) then insurable interest must exist. -If you policyowner names someone else as beneficiary there must be an insurable interest between the beneficiary and the Insured.
Variable Life aka Variable Whole Life
-In a variable life policy, YOU get to manage the portion left over after insurance company profits and insurance costs are paid - Designed as a hedge against inflation - Governed by both SEC & DOI 3 IMPORTANT ASPECTS: - Fixed premium -Guarantees minimum death benefit which is the original issued amount - No guarantee on min. cash vale
Standard Policy Provision Pt. 3
-Incontestability - Policy becomes incontestable after two years. Claim cannot be denied or policy voided for material misrepresentation, concealment or even fraud after the first two years. This provision protects the beneficiary. It protects the insurer the first 2 years of a contract. Note the clause does not apply in the following situations: Impersonation, no insurable interest, intent to murder -Policy Loans - After the policy has been in effect for a specified period of time (usually 3 years) it must contain some cash value which policyowner has access to through a policy loan. This is an advance on the cash proceeds and insurer will charge interest stipulated in the contract. Loan interest may be fixed or variable.
Increasing
-Increasing Term -Increasing face amount Usually level premium. Can be increasing premium on some riders •Used as a RIDER Cost of Living Return of cash value Return of premium
Standard Policy Provision Pt. 5
-Misstatement of Age or Sex - The face amount is adjusted to what the premium would have purchased at the correct age or correct sex. It does not void coverage. Adjust Benefits -Policy Change Provision (Conversion) - allows insured to exchange their policy for another. This exchange is usually made from one policy type to another policy form with the same face amount. Usually no proof of insurability is required if new premium is higher. If premium on new policy is lower, proof of insurability can be required. -Modifications - Modifications or changes in the policy, or any agreement in connection with the policy must be endorsed or attached to the policy in writing and signed by the executive officer of the Insurer. -Medical Examinations and Autopsy -- This provision gives the insurer the right, at insurer's expense, to conduct a medical examination of the insured as often as reasonably required when a claim is pending, and to have an autopsy in case of death where it is not forbidden by law.
Whole Life(Three Categories)
-Permanent Protection -Product has both Death Benefit and Living Benefits -Living benefits cash, loan, and nonforfeiture options
Medical exams and medical history
-Physical Exams and Attending Physician Statements -**Attending Physician Statements (APS) - Needed when a condition is revealed **Physical Exam by Insurer: May or may not be required. Paid for by the insurer
Settlement Options FACTS
-Policyowner may choose at time of application and may change if no proceeds have been paid. -Beneficiary can choose if one was not chosen C but cannot change -Insurer never chooses -Lump sum cash is the automatic settlement option. -Lump sum cash passes tax exempt -Principal is the entire death benefit at the time of death and is tax exempt. -Interest earned and paid on the proceeds is taxable. -Settlement options consist of both principal and interest.
Primary vs Contingent vs Tertiary
-Primary - the person or persons with the right to receive the proceeds upon the death of the insured. -Contingent (Secondary) - the party with the rights to receive the proceeds upon death of the insured providing the primary beneficiary predeceases the insured -Tertiary - the party that receives the proceeds if there is no living primary or contingent beneficiarie
Nonforfeiture
-Protects policyowner against loss of benefits (forfeiture) when policy is not kept to maturity. Adds - flexibility to policy. -There are three options: 1. Cash Surrender Value (CSV) 2. Extended Term 3. Reduced Paid-Up
Term
-Pure Protection(contract is one which only provides insurance cover in the event of death or incapacity due to illness, sickness or infirmity) -Product has Death Benefit only -No living benefits -NO cash, loan, or nonfortfeiture Options 1)Level 2)Decreasing 3)Increasing
Rating
-Rate is the cost of a given unit of insurance. Rates are usually expressed per $1000 of face amount of insurance. Premium is the amount paid by the insured to receive policy benefits. It is the rate multiplied by the number of units of insurance purchased. A policy fee is usually included in the final premium. Ex. $100,000 policy rate is .50 per $1000 or $50.00 Premium would be $50.00 + 5.00 (fee) = $55.00
Typed of Beneficiaries
-Revocable - Policyowner can change at anytime. Beneficiary does not have a vested interest - Irrevocable - Beneficiary has a vested interest. Once named, beneficiary cannot be changed even by the policyowner. Policyowner cannot make changes in the policy, surrender the policy, nor take policy loans without irrevocable beneficiary's consent. Beneficiary has a vested interest in the cash and death benefit.
Accidental Death (Double Indemnity)
-Rider will double or triple the face amount. Death must occur within 90 days resulting from accident. This rider becomes inoperative at age 65 or 70. Does not build cash values
Expenses
-Sometimes referred to as LOADING. This factor is the operating expenses or overhead. -Ex. - agent commissions, acquisition costs, expense of running the company taxes, etc.
Standardization
-Title Page (Face Page) - Usually the first page of the contract. It includes policy number, name of the Insured and Insurer, issue date, premium, limits. Right to cancel. Warns insured to read policy carefully. -Insuring Clause - A statement by the insurance company stating the promise to pay in exchange for the insured's premium and compliance with policy terms. This paragraph will be signed by the President and Secretary of Insurer -Conditions - This section details the rights of both the insurer and insured. It would include the provisions for reinstatement, suicide, payment of claim as examples. -Exclusions - What's not covered. Standard exclusions are: I - W - A - S - H
WHY settlement Options?
-Triggered by death or endowment or any time a policyowner or beneficiary does not want a lump sum payment. Only option that would generate a monthly income
WHY Dividend Options?
-Triggered by insurer surplus (profits). Participating policies/policyowners share in these profits by receiving a nontaxable dividend. Dividend options are the insureds preference for receiving those dividends
WHY Nonforfeiture Options?
-Triggered by lapse, cancellation, can no longer afford and want to know what their options are.
Conditional Receipt
-a receipt for the first premium, which states insurance will be effective on that date if the company accepts the risk as applied for. There are two types of conditional receipts. ** Conditional Insurability Receipt-Coverage is effective if applicant is insurable on the date of the application or the date the required medical exam is completed whichever is later and only if issued as applied for. **Conditional Approval Receipt-Coverage is effective only after application has been approved by insurance company
Level Premium
-fixed, guaranteed for policy period Identified by type of death benefit and/or options -Level face amount -Level premiums -As a POLICY used when Children are at home Career changes -As a RIDER used on Family Maintenance Policy (used to produce income) Insure insured or spouse Children's Level Term Rider Family Protection
Settlement Options: CLIFF
1. CASH-Lump-sum: The beneficiary receives the full death benefit all at once in a single payment. 2. LIFE INCOME:(monthly check) Guarantees payment for the lifetime of the recipient however no minimum guarantee payment. 3. INTEREST: Also known as the temporary option. Proceeds held by insurer and interest earned is sent to the recipient at least annually. Guarantees a minimum interest earning. PROTECTS THE PRINCIPAL 4. FIXED AMOUNT: Pays a specified amount consisting of both principal and interest until the money is exhausted 5. FIXED PERIOD: Also known as period certain. Pays a specified amount for a specified period of time.
I - W - A - S - H
I - Ilegal act W - War & Military Service. Coverage was suspended during a war or "act of war". Act of war would describe the Korean and Viet Nam conflicts. Traditionally the two clauses used were: Status Clause - Coverage suspended while serving in militaryResult Clause - Excludes payment is death was as a result of war. A - Aviation - Flying other than as a fare-paying passenger on a commercial flight. Extra premium can be paid to cover civil aviation deaths such as private pilots S - Suicide - Temporary exclusion for 2 years. Insurer's liability during this time I typically a refund of premiums without interest. H - Hazardous Occupations or Avocations - May be excluded. Usually covered for an extra premium
Non-medical Applications
If policy is issued based on the application alone this is called a non-medical application. The following are tested facts on non-medical. 1) There are health questions 2) Underwriter can still request a physical exam or go to other underwriting sources 3) Underwriter can still reject 4) Not available for all ages 5) Low face amounts Advantages of nonmedical applications: 1) Less demand on the medical profession 2) Processing of the application is expedited 3) Insurers expenses reduced by not having to pay for medical exams
Inspection reports
Non-medical information. Risky behavior (moral/morale) **DMV, court records, mode of living, finances, character, work, and hobbies. Larger cases they may interview friends, neighbors, or acquaintances. **Credit Report - Poor credit can lead to costly early lapses. Insurance must be affordable. It helps prevent over-insurance. Credit reports can also indicate whether someone is a moral or morale risk.
3)Policy effective date 4) COD Application or Rated Policy 5) Backdating 6) Preliminary term
Policy effective date - Date coverage if effectivePrevious TQ - App taken COD then no coverage until policy is delivered and premium paid COD Application or Rated Policy- Agent signs transmittal when premium received. Insured signs health statement. Backdating - Companies may allow backdating up to 6 months to save age. Preliminary term - provides temporary coverage until permanent policy is issued a some later date.
Whole Life
Primary purpose -In a whole life policy, the insurance company takes what's left and invests it into its own relatively conservative portfolio of stocks, bonds, and alternative investments (mostly bonds.) -Lifetime protection. Secondary - cash •Endows (Matures) - The guaranteed cash will increase in increments and equal the original death benefit at 100 •Guarantees 3 premium factors - mortality, interest, and expenses •Level premium - level face - as cash increases pure protection decreases •Types of Whole Life means: methods to pay which is how whole life is identified -Straight Pay (pure, ordinary, continuous, typical) Limited Pay, Single Pay, Modified or Graded
Principal
Principal is the amount of money used to purchase the annuity. The principal would be equal to the "single premium" paid, or a total of all the periodic payments (premiums) paid. Sometimes it is referred to as the amount invested in the annuity
Unconditional "Binding" Receipt
Sometimes referred to as unconditional only, binding only or temporary insurance. Coverage is effective as of the date of application regardless of whether applicant is insurable or not. Coverage lasts for a specified period of time.
The Application
The application is a formal written request sometimes referred to as an OFFER;) -Agent's primary underwriting role to make sure that the application is complete and provides the proper information needed by the insurer. ---Part I - General InformationName, address, occupation, sex, DOB. Past & present life insurance Alcohol & drug use Avocation and foreign travel ---Part II - Medical InformationPast & present medical history on those to be insured Living & deceased relatives --Agents Report: Agent's relationship with insured
Illustration
means a presentation or depiction that includes nonguaranteed elements of a policy over a period of years as is either: -Basic illustration" is a proposal used in the sale of life insurance policy that shows both guaranteed and non-guaranteed elements. -"Supplemental illustration" means an illustration furnished in addition to the basic illustration that may be presented in a different format than the basic illustration. This type of illustration may only depict the nonguaranteed elements that are permitted in a basic illustration. It must conform to the same scale requirements for illustration. The rules for supplement illustrations are found in CIC 10509.957 -"In force illustration" means an illustration furnished at any time after the policy has been in force for one year or more. -"Lapse-supported illustration" means an illustration of the policy form failing the test of self- supporting using persistency rates underlying the disciplined current scale for the first 5 years and 100 percent policy persistency thereafter.
Currently payable scale
means a scale of nonguaranteed elements in effect for a policy form as of the illustration preparation date or declared to become effective within the next 95 days.
Generic name
means a short descriptive title of the policy being illustrated such as "whole life", "term life" or "flexible premium adjustable life".
