Chapter 2 - Life Insurance
Policy delivery will be accomplished by:
-Personal delivery, with signed receipt of delivery -Registered or certified mail with a signed receipt of delivery -Deliver by reasonable means, as determined by the Commissioner, Director, or Superintendent of Insurance
3 Assumptions When Calculating Premium Rates
-Premiums are paid in advance of the period of coverage -Premiums will be invested and earn interest -Claims will paid by the end of a year
Field Underwriting
-The Producer's resonsibility to probe beyond the stated questions on the application -The application is the primary source of information for an insurer underwriting a potential risk.
Client Complaint: Negligence
Quoting inflated information, misrepresenting a plan of coverage, or neglecting to reveal the effect information might have on the client at a later date. The producer may be guilty of negligence whether the mistakes are intentional or unintentional.
Industrial (Home Service) Life Insurance Policies
Synonymous with debit life insurance and makes up only about .03% of the life insurance today. These small policies, normally $250 to $1,000, were originally sold to pay funeral expenses.
Net Premium
Takes into account interest and mortality factors only. Mortality - Interest = Net Premium
Do Not Call Registry
The Federal Trade Commission amended the Telemarketing Sales Rule to give consumers a choice about whether they want to receive most telemarketing calls. It is prohibited under the Telephone Consumer Protection Act (TCPA) for most telemarketers or sellers to call a number listed on the National Do Not Call Registry. Companies must update their list at least once every 31 days.
Factors in Premium Determination for Life Insurance: Expense
The amount charged to cover each policy's share of expenses of operation (salaries, commission, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency.
Effective Date
The date when insurance coverage begins
Expiration Age
The date when which insurance coverage ends
Policy Reserves
The net premiums paid plus interest earned; reflect possible contract obligations. A Reserve is an amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.
Fixed Life Insurance Policies
The policy has a fixed amount of coverage, benefits and premium. Without riders, future inflationary trends will cause the purchasing power of the policy's benefits to be reduced .
Personal Uses of Life Insurance: Exemption from creditor claims/probate
The policy's values are normally exempt from any creditor claims, unless the policy was assigned as collateral for a loan that still exists at the time of the insured's death.
Insurable Interest
The relationship that must exist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a financial or economic loss by the owner results in the event that the insured dies.
Consequences of incomplete applications
The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with questions unanswered, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application.
Needs Analysis
This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following items into arriving at the proper amount of coverage needed:all financial needs caused by an immediate death/provide lifetime income to spouse/payoff mortgage or other debt/provide funds for childrens education/emergency reserve fund (Subtracts any assets available to fund financial needs after death)
Human Life Value Approach
This approach is a measure of the projected future earnings of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents using the following factors: age/gender/occupation/wage/employee benefits/planned retirement age/ inflation
Declined
This is not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. In this case the applicant is deemed uninsurable.
3 types of receipts that can be issued when the premium is submitted with the application
-Conditional Receipt -Binding (Unconditional) Receipt -Acceptance (Approval) Conditional Receipt
4 Rated Policies
-Graded (Lien) Plan -Rated-up Age -Flat Rate -The Tabular Rate
Two of the approaches used to determine the need and amount of life insurance
-Human Life Value -Needs Analysis
3 Risk Rating Classifications:
-Standard Risks -Preferred Risks -Substandard Risks (Higher Risk Exposure)
Participating Life Insurance Policies
A class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when they are declared by the board of directors. The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However, once all premiums have been recovered, any further dividends are taxable.
Rated Policies: Flat Rate
A constant dollar amount added to the standard rate per $1,000 of coverage. A student pilot or someone who has a hazardous hobby would be flat rated.
Buyer's Guide
A generic brochure developed by the NAIC to assist prospective buyers of life insurance. Descriptions of all basic types of life insurance as well as comparative costs of each are included.
Stranger Originated Life Insurance (STOLI)
A life insurance arrangement in which a "stranger" purchases a policy on an insured for the sole purpose of selling the policy to an investor to profit financially when an insured dies -sole purpose is to make a profit -outlawed in most states since they violate the insurable interest principle
Investor Originate Life Insurance (IOLI)
A life insurance transaction which is initiated by investors purchases insurance on seniors -The policyholder/ investor is compensated by a third-party investor for purchasing the policy -The insured is not responisble for the premiums
Personal Uses of Life Insurance: Viatical Settlements
A terminally ill insured/owner selling his/her policy to a third party for less than the death benefit but more than the cash values in order to obtain cash before death
Gross Premium
Additional charges (expenses) are added to the net premium rate to enable an insurer to meet all costs under the contract. Net Premium (Mortality - Interest)+ Expenses = Gross Premium
Personal Uses of Life Insurance: Cash accumulation
An amount of cash accessible to the policyowner from within permanent life insurance policies
Replacement
Any transaction in which a new life policy or annuity is to be purchased, and the producer knows, or should know, that existing contract(s) will be: -Lapsed, forfeited, surrendered or terminated -Reduced in value -Amended with a reduction in benefit or term -Reissued with a reduced cash value -Subjected to borrowing
Ordinary Life Insurance
Any type of life insurance that is not group, industrial or government insurance. A large number of people are insured with an ordinary life policy making this the larger portion of the life insurance in force today.
Capital Liquidation
Assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents. When income is paid out under capital liquidation the account balance will decrease as each payment is distributed.
Capital Retention/Conservation
Assumes the desired income will be generated by the interest only, thus retaining or conserving the principal
Required Signatures
Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application.
Client Complaint: Inadequacy
Failing to obtain proper type or amount of coverage for a client.
Conditional Receipt
If premium is paid, coverage will be in effect the date of application or completion of the medical exam, whichever is later, as long as the policy would have been issued as applied for.
Personal Uses of Life Insurance: Liquidity
Immediate funds available upon death to pay creditors, taxes and final expenses as well as cash values available for policy loans, withdrawals, and full surrenders
Substandard Risks (Higher Risk Exposure)
Individuals who are not acceptable at standard rates because of poor health, bad habits or occupational hazards. Individuals in this category are issued "rated policies"
Standard Risks
Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy.
Factors in Premium Determination for Life Insurance: Interest
Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. The earned interest reduces the amount of premium paid.
Personal Uses of Life Insurance: Estate creation
Life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors.
Total Premium paid to the insurer Equations
Mortality - Interest + Expenses = Total Premium paid to the insurer
Factors in Premium Determination for Life Insurance: Mortality
Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of birth.
Beneficiary
One or more "parties" named in the policy to receive the policy's benefits if the insured dies while the contract is in force.
Medical Information Bureau (MIB)
Primary purpose is to collect adverse medical information about an applicant's health (supported by insurance companies) and act as an information exchange. MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Canada. These services "alert" underwriters to fraud, errors, omissions or misrepresentations made on insurance applications, and the MIB may help lower the cost of life and health insurance for consumers.
Advertising
Producers are governed under the rules and regulations (referred to as Unfair Trade Practices) with regard to what they can and cannot use or say when soliciting insurance.
Sales Presentation
Producers are required to provide all prospective buyers the following: -Buyer's Guide -Policy Summary (Both must be provided before the policy is delivered)
Personal Uses of Life Insurance: Privacy
Properly owned and named beneficiaries will allow for the payment of death benefits directly to the beneficiaries, bypassing the probate process.
Personal Uses of Life Insurance: Estate conservation
Provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner, (the insured) preserving the insured's estate
Personal Uses of Life Insurance: Survivor protection
Providing funds for surviving spouses and dependents
Rated Policies: Rated-up Age
Rates an insured at older than actual age.
Conservation
The act of saving or keeping the existing policy and preventing it from being replaced
Acceptance (Approval) Conditional Receipt
The coverage becomes effective at application approval. If the company doesn't approve the application, coverage was never in effect.
Individual Life Insurance Policies
The greatest difference between group and individual life insurance is the full latitude of ownership. Unlike group policies, individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which can end upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of keeping the policy to the policyowner.
Policyowner
The individual who has the ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily. Any changes made to a policy must be approved by the policyowner in writing with his/her signature.
Individual Selection Criteria
The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter's responsibility to determine if an individual meets the underwriting requirements of the insurer.
Income Objective & Methods
To analyze the insurance needs in either approach, the producer must also take into consideration the income objective of the proposed insured. Two methods are: -Capital Liquidation -Capital Retention/Conservation
Personal Uses of Life Insurance: Charities
To help fund favorite charitable organizations upon the insured's death
Constructive or legal delivery
occurs only if the premium was paid at the time of application. Once the insurer issues the policy, a legal contract has been formed since the policy becomes the acceptance. Once the insurer mails the policy to the agent, it is considered constructively or legally delivered by the insurer. It is still the agent's responsibility to obtain delivery signatures and explain policy benefits to the policyowner/insured.
Permanent Life Insurance Policies
A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting factors are equal. This policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner
Applicant
A person making application for himself/herself or another to be insured under an insurance contract. The applicant may be the insured, the owner or both.
Variable Life Insurance Policies
A policy introduced in the 1970s that uses separate account(s) for the cash value accumulation. The separate accounts are similar in nature to mutual funds, and a securities license and life license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy's overall death benefit can increase along with the cash values with positive investment performance coming from the separate accounts selected, however, there is no guarantee of return and down markets can cause significant loss of policy value.
Nonparticipating Life Insurance Policies
A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder.
Third-Party Ownership
A policy owned by a person other than the insured.
Nonmedical Application
A policy requested when the applicant's age, medical history or amount of coverage does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required.
Rated Policies: The Tabular Rate
A surcharge is calculated using a table showing past claims history of individuals with similar impairments.
Trial Application
A trial application is one submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.
Personal Uses of Life Insurance: Pre-need plan
A type of coverage with a small face amount, typically purchased to pay the burial expenses of the insured.
Application
A written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the primary source of information used for underwriting purposes.
Group Life Insurance Policies
An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors or members. Group insurance generally provides protection for an employee's named beneficiary, typically their spouse if married. The coverage may be changed only in the Master policy. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability.
Binding (Unconditional) Receipt
If premium is paid, coverage will begin immediately for a specific length of time regardless of whether the applicant is ultimately approved by the insurer. This may also be referred to as a temporary insurance agreement.
Preferred Risks
Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy.
Rated Policies: Graded (Lien) Plan
Initially, only the premium would be refunded in case of death. The death benefit increases over time with the full face amount eventually payable. This is generally used with Senior Life Insurance plans to provide minimal benefits without a medical examination.
Attained Age
Insured's age at any point in time typically used at renewal or conversion
Issue (Original) Age
Insured's age on the policy issue date
Term Life Insurance Policies
Lowest of initial premium outlay and designed for someone with a large insurance need but with limited cash flow. This coverage is often referred to as temporary, as it is usually written to cover a short time period. This policy does not build cash values and the benefit will either remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples with one or more children.
Premium Payment Mode
Mode reflects frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Additional charges are included in modes other than annual to offset the lost interest earnings and increased administration costs. For this reason, the annual mode results in the lowest premium outlay. The more frequently the premiums are paid, the more expensive the mode of payment.
Policy Summary
Normally, a computer-generated illustration detailing: -The premiums (current and guaranteed) to be paid along with current and guaranteed interest rates. -The guaranteed and non-guaranteed cash value and projected dividends, if any. -The surrender values and other guaranteed data pertaining to the policy that is being shown. The producer's name and address, along with the address of the insurance company.
Application consists of
Part 1: general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance. Part 2: questions pertaining to medical background, past and present health, any medical visits, hospitalizations, or surgeries in recent years, medical status of immediate family members, including their ages and causes of death.
Personal Uses of Life Insurance: Security
Peace of mind knowing that future insurability is not an issue, and benefits will be in place as long as the required premiums are paid.
Flexible Life Insurance Policies
Universal and Variable Universal Life policies have given the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies assist the insured during inflationary periods with the changing needs of the policyowner and insured.
Rating applicants
Upon receipt of the information, such as the application, medical exam, blood and urine test results, etc., underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters then determine the classification to be used in the calculation of the premium.
Reclassifications
When reviewing an application, the underwriter may find it necessary to reclassify the risk. This could either increase or decrease the premium.
Changes in the Application
Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application..
Inspection Report
a general report of the applicant's finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider.
Agent's Report
a personal statement submitted by the producer to the insurer regarding the applicant's financial condition, any personal knowledge of the applicant, etc. This information remains confidential between the producer and the insurer, and it does not become part of the entire contract.
Collecting the Initial Premium and Issuing the Receipt
a producer should attempt to collect the initial premium and submit it along with the application to the insurer because the policy will not go into effect until the first premium has been paid.
Attending Physician Statement (APS)
used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. The applicant's treating physician will complete this as part of the applicant's medical history. An applicant must sign a written release to enable a release of the APS. The insurer pays for this.