A.D. Banker - Life Insurance Basics Ch. 14 Part 2

Conversion Rights

1). Conversion on Termination of Group Eligibility 2). Conversion on Termination of Policy 3). Death Pending Conversion

Individual Contracts - Standard Provisions

1). Protection of Beneficiaries from Creditors 2). Prohibited Provisions 3). Free Look/Unconditional Refund 4). Grace Period 5). Designation of Beneficiary 6). Secondary Addressee

Prohibited Charges

An annuity contract issued to a senior age 65 or older may not include a surrender or deferred sales charge for a withdrawal of money from an annuity that exceeds 10% of the amount withdrawn. The charge must be reduced so that no surrender charge, or deferred sales charge, exists after the 10th policy year.

DFS-H1-1980

Annuity Suitability Questionnaire

Non-Contributory

If no part of the premium is derived from funds contributed by the insured employees, all eligible employees must be insured. The amounts of insurance under the policy must be based upon some plan precluding individual selection either by the employees or by the employer or trustees.

Contributory

Premium payment will be paid by the policyholder, either from the employer's funds or from funds contributed by the insured employees, or from both.

Employer Groups

Provides coverage for full-time employees of an employer.

Credit Union Groups

The lives of a group of individual credit union members may be insured under a policy issued to the credit union, who is the policyholder.

Nonforfeiture Options

These options are policy values if there is still cash value after stopping payment of premiums within 60 days of the due date of the default payment. 1). Cash Surrender Value 2). Reduced Paid - up Insurance 3). Extended Term Insurance

Insurability

A group life insurance policy must contain a provision setting forth the conditions, if any, under which the insurer reserves the right to require a person eligible for insurance to furnish evidence of individual insurability satisfactory to the insurer as a condition to coverage.

DFS-H1-1981

Disclosure and Comparison of Annuity Contracts

Agent Duties

Each agent must submit to the insurer as part of each application for life insurance: A signed statement as to whether or not the agent knows replacement is or may be involved in a transaction A signed statement by the applicant as to whether or not such insurance will replace existing life insurance If replacement is involved, the replacing agent must: Give the applicant a NOTICE TO APPLICANT REGARDING REPLACEMENT OF LIFE INSURANCE, referred to as the NOTICE, when the application is being completed. Both the agent and the applicant must sign this notice and a copy left with the applicant. Leave with the applicant the original or copy of all sales proposals used for presentation Submit to the replacing insurer, along with the application, a completed copy of the Notice Regarding Replacement and all sales proposals used for presentation

Death Pending Conversion

If a person insured under the policy dies during the conversion period before any such individual policy has become effective, the amount of life insurance the person would have been entitled to under the individual policy will be payable as a claim under the group policy, whether or not application for the individual policy or the payment of the first premium has been made.

Standard Provisions/Required Provisions

The standard provisions required for individual life insurance policies do not apply to group life insurance policies. 1). Grace Period 2). Incontestability 3). Application Statements Deemed Representations 4). Insurability 5). Misstatement of Age 6). Payment of Benefits 7). Individual Certificate

Secondary Addressee

A contract for life insurance that has been in force for at least 1 year insuring a person 64 years or older may not be lapsed for nonpayment of premium unless after the grace period has expired, and at least 21 days before the effective date of any such lapse, the insurer has mailed a notification of the impending lapse in coverage to the policyowner specifying a secondary addressee if such addressee is designated in writing by name and address by the policyowner. An insurer must notify the applicant of the right to designate a secondary addressee at the time of application for the policy and at any time the policy is in force, by submitting a written notice to the insurer containing the name and address of the secondary addressee. If the grace period is more than 51 days for nonpayment of premiums, the notice of impending lapse in coverage must be mailed to the policyowner and the secondary addressee at least 21 days before the expiration of the grace period. This provision does not apply to any life insurance contract under which premiums are payable monthly or more frequently and are regularly collected by a licensed agent or are paid by credit card or any preauthorized check processing or automatic debit service of a financial institution.

Misstatement of Age

A provision specifying an equitable adjustment of premiums, benefits, or both, to be made in the event the age of a person insured has been misstated. The provision must contain a clear statement of the method of adjustment to be used.

Payment of Benefits

A provision that any sum due by reason of the death of the insured be payable to the beneficiary designated by the insured. When the policy contains conditions pertaining to family status, the beneficiary may be the family member specified by the policy terms. However, in the event there is no designated beneficiary living at the time of death of the insured, the insurer has the right to pay the sum (not exceeding $2,000) to any person equitably entitled by reason of having incurred funeral or other expenses incident to the last illness or death of the insured.

Grace Period

A provision that provides that the policyholder is entitled to a grace period of 31 days for the payment of any premium due after the first.

Incontestability

A provision that provides that the validity of the policy will not be contested, except for nonpayment of premium, after it has been in force for 2 years from its date of issue.

Application Statements Deemed Representations

A provision that states a copy of the application must be attached to the policy when issued. All statements made by the policyholder are representations and not warranties, and no statement made by any insured person may be used in any contest unless a copy of the instrument containing the statement was furnished to the insured person or beneficiary.

Individual Certificate

A provision that the insurer will issue to the policyholder for delivery to each insured an individual certificate containing the group number and the following: Description of the insurance protection to which the certificate holder is entitled Those to whom the insurance benefits are payable Any dependent's coverage The rights and conditions The insured For employee groups, this certificate provides life insurance for the employees and dependents, if applicable, of (employer's name and address) under (group contract number). The employee will be given a copy of the group enrollment application. The benefits are payable to the beneficiaries of record designated by the employee. Current records will be maintained by the employer and the insurer of all insured persons and beneficiaries. The insurance company is required to notify each person (member or employee) when a group policy has been cancelled or expired. The insurer may meet this requirement by notifying the group sponsor (employer) and requesting the sponsor notify each certificate-holder to advise of the expiration or cancellation of the policy.

Advertising and Sales

An advertisement includes any method of communication found in a newspaper, magazine, or other publication; in the form of a notice, circular, pamphlet, letter, or poster; over the radio or television station; or in any other way is an announcement or statement containing any assertion or representation with respect to the business of insurance. Advertising materials and other communications developed by insurers must clearly indicate that the communication relates to insurance products. The form and content of a Life Insurance and Annuity Contracts advertisement must be complete and clear to avoid deception or tendency to mislead or deceive. Advertisements must be truthful and not misleading in fact or in implication. Advertisements must not omit information or use references or illustration that have the capacity to mislead purchasers as to the nature and extent of any policy benefit payable, premium, or loss covered. The name of any policy must be followed by or include the words "Insurance Policy" or "Annuity" or similar words clearly identifying the fact that an insurance policy or annuity is being offered through the use of the full generic name of the product, such as whole life insurance policy, variable life insurance policy, reducing term life insurance, or immediate annuity. Testimonials and endorsements used in an advertisement must be genuine and represent the current opinion of the person giving the testimony. They must be applicable to the policy being advertised and accurately reproduced. An insurer or agent may not put into force insurance coverage prior to a full explanation of the coverage offered and completion of an application form. The name of the actual insurer must be stated in all advertisements. An advertisement must not use a trade name, name of a parent company, particular division, or reinsurer of an insurer, or slogan, symbol, or other device that would be misleading as to the true identity of the insurer. The form number of the policy advertised must be stated in any invitation to contract. An advertisement must not make disparaging, unfair, or incomplete comparisons or statements about other insurers or create the impression that the insurer is in any way endorsed by the state of Florida or the United States Government. Each insurer must maintain at its home office a complete file containing: Every printed, published or prepared advertisement of its individual policies Typical printed, published or prepared advertisement of its blanket, franchise, and group policies A notation attached to such advertisement indicating the manner and extent of distribution and the form number of any policy advertised Advertisements submitted by and approved for use by agents, brokers or others The file must be available for inspection by the Office. All advertisements must be maintained in the file for a period of 4 years or until the filing of the next regular report or examination of the insurer, whichever is longer.

Prohibited Practices

An agent is prohibited from knowingly making, issuing, circulating, or causing to be made, is-sued, or circulated, any estimate, illustration, circular, statement, sales presentation, omission, or comparison which: Misrepresents: Benefits, advantages, conditions, or terms of any insurance policy Dividends or share of the surplus to be received on any insurance policy Insurance policy as being shares of stock Ownership interest in the company The financial condition of any person or as to the legal reserve system upon which any life insurer operates For the purpose of inducing, or tending to induce, the lapse, forfeiture, exchange, con-version, or surrender of any insurance policy For the purpose of effecting a pledge or assignment of, or effecting a loan against, any insurance policy Makes any false or misleading statements as to the dividends or share of surplus previously paid on any insurance policy Uses any name or title of any insurance policy or class of insurance policies misrepresenting the true nature thereof Uses any advertisement that would mislead or otherwise cause a reasonable person to believe mistakenly that the state or the Federal Government: Is responsible for the insurance sales activities of any person Stands behind any person's credit Guarantees any returns on insurance products Is a source of payment of any insurance obligation, or sold by any person

Assignment of Proceeds

Any person insured under a group life insurance policy may assign all or any part of the incidents of ownership. This includes, but is not limited to, the privilege of having an individual life insurance policy issued and the right to name a beneficiary. The assignment is valid for the purpose of vesting in the assignee without prejudice to the insurer on account of any payment it may make or individual policy it may issue prior to receipt of notice of the assignment.

Conversion on Termination of Group Eligibility

Coverage on an individual under a group life insurance policy will cease due to termination of employment or membership in the class eligible for coverage under the policy. The individual and dependents are entitled to convert to an individual policy of life insurance, provided an application for the individual policy is made, and the first premium is paid to the insurer within 31 days after termination. This coverage is issued without evidence of insurability and will not include health or other supplementary benefits. The individual policy must be on any one of the forms customarily issued by the insurer at the age and for the amount applied for, except that the group may exclude the option to elect term insurance. The amount of coverage on the individual policy cannot exceed the amount of life insurance provided under the ceased group policy. The premium on the individual policy will be at the insurer's then customary rate applicable to the form and amount of the individual policy, at the class of risk to which the individual currently belongs, based on the person's attained age as of the effective date of the individual policy.

Grace Period

Every insurance contract provides that the insured is entitled to a grace period of no less than 30 days within which payment of any premium after the first may be made. The payment may, at the option of the insurer, be subject to an interest charge not in excess of 8% per year for the number of days of grace that elapsed before the payment of the premium. The policy will continue in force if the payment was made during the grace period. If there is a claim during the grace period before the overdue premium is paid, or the deferred premiums of the current policy year, if any, are paid, the amount of such premium or premiums with interest not in excess of 8% per year may be deducted from any settlement under the policy. If the insured is 64 or older, Florida law adds an additional 21 days to the grace period for a total of 51 days.

Dependent Coverage

Except for a policy issued under a creditor group policy, a group life insurance policy may be extended to insure the employees or members against loss due to the deaths of their spouses and dependent children. The amounts of insurance for any covered spouse or dependent child under the policy may not exceed the amount of insurance for which the employee or member is insured.

Conversion on Termination of Policy

If the group life policy terminates or is amended to terminate the insurance of a class of insured persons, every person whose insurance terminates, including the insured dependents of a covered person, and who has been insured for at least 5 years prior to termination date is entitled to have the insurer issue an individual policy of life insurance, subject to the same conditions and limitations. The group policy may provide that the amount of such individual policy may not exceed the smaller of the amount of the person's group life insurance protection, less the amount of any eligible life insurance for which she becomes under any group policy issued or reinstated by the same or another insurer within 31 days after such termination or $10,000.

Life Laws - Marketing Methods and Practices - Agent Responsibilities

In addition to the Unfair Methods of Competition previously discussed, and the Code of Ethics, the Florida Life Insurance Solicitation Law provides the following requirements for agents when soliciting life insurance to an applicant: An agent must inform the prospective purchaser, prior to a life insurance sales presentation, that he/she is acting as a life insurance agent and will inform the prospective purchaser of the full name of the insurance company which the agent is representing. In sales situations in which an agent is not involved, the insurer must identify its full name. Terms such as "financial planner," "investment adviser," "financial consultant," or "financial counseling" must not be used to imply that the insurance agent is generally engaged in an advisory business in which compensation is unrelated to sales unless such is actually the case. Any reference to policy dividends must include a statement that dividends are not guaranteed. A system or presentation which does not recognize the time value of money through the use of appropriate interest adjustments must not be used for comparing the cost of two or more life insurance policies. It may be used for the purpose of demonstrating the cash-flow pattern of a policy if the presentation is accompanied by a statement disclosing that the presentation does not recognize that, because of interest, a dollar in the future has less value than a dollar today. A presentation of benefits must not display guaranteed and nonguaranteed benefits as a single sum unless they are shown separately within close proximity. A statement regarding the use of the life insurance cost indexes must include an explanation that the indexes are useful only for the comparison of the relative costs of two or more similar policies. A life insurance cost index which reflects dividends or an equivalent level annual dividend must be accompanied by a statement that it is based on the insurer's current dividend scale, and is not guaranteed.

Replacement regulations do not apply to the following:

Industrial Insurance Group, franchise, and individual credit life insurance Group life insurance and life insurance policies issued in connection with a pension, profit sharing or other benefit plan qualifying for tax deductibility of premiums An application to the existing insurer that issued the existing life insurance where a contractual change or conversion privilege is being exercised Existing life insurance that is a non-convertible term life insurance policy which will expire in 5 years or less and cannot be renewed, unless such policy has tabular cash values Proposed life insurance that is to replace existing life insurance issued under a binding or conditional receipt delivered by the same company Variable life insurance or annuities under which the death benefits and cash values vary in accordance with unit values of investments held in a separate account

Records

Insurers and agents must maintain, or make available, the records of the information collected from the consumer, and other information used as the basis in making recommendations that resulted in insurance transactions. These records must be kept for 5 years after the insurance transaction is completed.

Suitability

Insurers are required to set forth standards and procedures for making recommendations to consumers which result in transactions involving annuity products. They must also establish a system for supervising recommendations to ensure that the insurance needs and financial objectives of consumers are appropriately addressed. Suitability requirements apply to any recommendation, or advice, made to a consumer by an insurer or agent which results in the purchase, exchange, or replacement that was recommended. Suitability information is information related to the consumer which is reasonably appropriate to determine the suitability of a recommendation made to the consumer. This information includes: Age Annual income Financial situation, needs, and experience Financial/Investment objectives Intended use of annuity Financial time horizon Existing assets Liquidity needs Liquid net worth Risk tolerance Tax status

Prohibited Provisions

Maximum Interest Rate on Policy Loans The maximum fixed interest rate on a policy loan cannot exceed 10% a year and the maximum adjustable rate cannot exceed a rate calculated annually as permitted by law.

Buyer's Guide

The buyer's guide provides information to improve the buyer's ability to select the most appropriate plan of life insurance, improve the buyer's understanding of the basic features of the policy that was purchased or is being considered, and help with the ability to evaluate the relative costs of similar plans of life insurance.

Free Look/Unconditional Refund

The free look/unconditional refund period for life insurance must be at least 14 days. If requested, a full refund will be returned to the payor upon receipt of the policy by certified mail within the free look period.

Cash Surrender Value

The insured takes immediate cash payments of the cash value, which is reduced by any policy debt.

Extended Term Insurance

The insured uses the cash value to purchase a term policy at the same policy value. The term is the period of time the cash value can pay the term policy premium.

Reduced Paid - up Insurance

The insured will take a paid-up policy for a reduced face amount of insurance. No further premiums are paidV but there is a lower coverage amount.

Supervision

The insurer must establish a supervision system to ensure compliance with suitability requirements. The system must include: Maintaining reasonable procedures to inform its agents of the requirements and incorporate the requirements into agent training materials Establishing standards for agent product training Providing product-specific training and materials that explain all material features of its annuity products to its agents Maintaining procedures for the review of recommendations to ensure there is a reasonable basis for determining that the recommendation is suitable Maintaining procedures to detect recommendations that are not suitable Providing an annual report to senior management which details a reasonable review to determine the effectiveness of the supervision system

Disclosure

The insurer will provide the life insurance buyer's guide and policy summary to every applicant prior to accepting the initial premium. In the case of an unconditional refund offer for at least 14 days, the buyer's guide and policy summary must be delivered with the policy or prior to policy delivery.

Employee Life

The lives of a group of individual employees may be insured, for the benefit of persons other than the employer, under a policy issued to the policyholder who is the employer or trustees of a fund established by an employer. A class of employees may not be created solely to be covered under an employer's group health plan. Employees include: Those employed in one or more subsidiary corporations, individual proprietors, or partnerships under common control Individual proprietor or partners Directors of a corporate employer, former employees, or retired employees Elected or appointed officials employed by a public body

Labor Union Groups

The lives of a group of individual labor union members and their dependents may be insured, for the benefit of persons other than the union, under a policy issued to the policyholder who is the labor union or the trustees of a fund established by the labor union.

Association Groups

The lives of a group of individual members, employees, or dependents of an association may be insured, for the benefit of persons other than the association, under a policy issued to the association.

Debtor/Creditor Groups

The lives of a group of individuals may be insured under a policy issued to a creditor to insure debtors of the creditor.

Designation of Beneficiary

The policy owner can name primary and secondary beneficiaries. The owner has the right to change the beneficiary designation, unless specified as irrevocable. Insurable interest is an issue if the policy applicant is not the insured and chooses a third-party to be the beneficiary on the insured's life policy. The third-party must have an insurable interest in the insured's life. Unless the agent is a family member or has an insurable interest, the agent may not be a named beneficiary.

Policy Summary

The policy summary is a written statement describing the elements of the policy, such as: A prominently placed title: STATEMENT OF POLICY COST AND BENEFIT INFORMATION Name and address of the insurance agent, or if no agent is involved, a statement of the procedure to follow to receive responses to questions regarding the policy summary Full name of the insurance company and the home or administrative office location Generic name of the basic policy and of each rider The following amounts and values for the first 5 years and later years to show premium and benefit pattern: The annual premium for the basic policy and for each optional rider The guaranteed amount payable upon death Total guaranteed cash surrender values Cash dividends payable at the end of the year Effective policy loan annual percentage, if applicable Life insurance cost indexes for 10 and 20 years Equivalent level annual dividends Statement that dividends, if applicable, are based on company's scale and not guaranteed Date on which the policy summary was prepared The failure of an insurer to provide or deliver a buyer's guide or a policy summary constitutes an omission which misrepresents the benefits, advantages, conditions, or terms of an insurance policy.

Policy Replacement

The purpose of this section is to regulate the activities of insurers and agents with respect to replacement of existing life insurance, and to protect the interests of life insurance policyowners by establishing minimum standards of conduct by assuring that the policyowner receives information to make decisions and reduce the opportunity for misrepresentations and incomplete disclosures.

Duties of Replacing Insurance Company

The replacing insurance company must: Send the applicant, when requested in the NOTICE, a completed Comparative Information Form containing complete information regarding the proposed insurance. This must be done within 5 working days of the date the application and the NOTICE are received at its home or regional office. Send to the existing insurer a copy of the NOTICE immediately upon receipt at its home or regional office. Provide to each prospective purchaser a buyer's guide and a policy summary prior to accepting any applicant's initial premium or premium deposit, unless the policy or policy summary contains a provision for an unconditional refund for a period of at least 10 days, in which event the buyer's guide and policy summary must be delivered with the policy or prior to delivery of the policy. Maintain copies of NOTICE, requested Comparative Information Forms, all Sales Proposals used, and a replacement register, cross indexed, by replacing agent and existing insurer to be replaced, for at least 3 years or until the conclusion of the next succeeding regular examination by the Insurance Department, whichever is later.

Group Life

There is no required minimum number of lives that must be covered under a group insurance policy in Florida, as long as the group or organization itself is eligible under state law. All group policies issued in this state must include the standard provisions.

Protection of Beneficiaries from Creditors

Upon death of the insured, the insurance must be used exclusively to benefit the person so designated in the policy and the proceeds will be exempt from creditors unless a valid assignment provides otherwise. If such benefits are paid to the insured's estate, by design or otherwise, the proceeds become part of the estate as administered in accordance with the probate laws of the state in the same manner as other assets of the estate. In this case, the proceeds may be subject to the claims of the insured's creditors. The cash surrender values of life insurance policies are not liable to attachment, garnishment, or legal process in favor of any creditor of the insured person or named beneficiary.

Policy Settlement

When a policy becomes a claim by the death of the insured, settlement will be made upon receipt of proof of death and surrender of the policy. The settlement options vary and the policyowner, or if approved by the policyowner, the beneficiary determines the method. When a policy provides for a settlement, or payment of its proceeds, in a lump sum, the payment must include interest as of the day the insurer received written proof of death of the insured. The interest will be calculated based on the Moody's monthly corporate bond yield average, but cannot be less than 8%. If a policy provides for payment of proceeds in installments, a table showing the amount and period of each installment must be included in the policy.

Duties of Insurers and Agents

When making a recommendation to a consumer which results in an insurance transaction to purchase or exchange an annuity, the agent or insurer must have reasonable grounds for determining that the recommendation is suitable for the consumer based on suitability information, and that there is a reasonable basis to believe the following: The consumer has been informed of the various features of the annuity, including any surrender period, surrender charges, potential tax penalties, mortality, expense and advisory fees, charges and features of riders, limitations on interest returns, and market risks The consumer would benefit from certain features, such as tax-deferred growth, annuitization, or death/living benefits The annuity (as a whole), underlying subaccounts, riders and product enhancements, and, in the case of exchange or replacement, the entire annuity transaction is suitable for the consumer The exchange or replacement of an annuity is suitable after considering whether the consumer will incur a surrender charge, begin a new surrender period, lose existing benefits, or be subject to increased fees; would benefit from product enhancements; and has had another annuity exchange or replacement within the preceding 36 months Before executing a purchase or exchange of an annuity, an agent or insurer must make reasonable efforts to obtain information concerning the consumer's suitability information. The agent or insurer must use form DFS-H1-1980, known as the Annuity Suitability Questionnaire, to obtain such information. The issuance of an annuity must be reasonable based on all circumstances actually known to the insurer at the time the annuity is issued. An agent or an insurer does not have any obligation to a consumer if: A recommendation has not been made A recommendation was made and discovered later to be based on materially inaccurate information provided by the consumer The consumer refuses to provide relevant suitability information and the transaction was not recommended The consumer decides to enter into an insurance transaction that is not based on a recommendation of the insurer or insurance agent Before executing a replacement of an annuity contract to a consumer, the agent or insurer must provide contract comparison information to the consumer by using form DFS-H1-1981, known as the Disclosure and Comparison of Annuity Contracts. This compares the existing annuity contract and the recommended annuity contract to determine suitability of the recommendation to the consumer. A copy of this form must be provided to the consumer no later than the date of delivery of the contract.

Replacement

means any transaction in which new life insurance is to be purchased and it is known, or should be known, that existing life insurance will be: Lapsed, forfeited, surrendered, or otherwise terminated Converted to reduced paid-up insurance, continued as extended term insurance, or reduced in value by the use of a nonforfeiture option Amended as to a reduction in benefits or in the term for which coverage would otherwise remain in force Reissued with a reduced cash value Pledged as collateral or subjected to borrowing for amounts exceeding 25% of the loan value