Chapter 2 Life Insurance Basics

Determining Lump-Sum Needs

1)Costs associated with death 2)Debt cancellation 3)Emergency reserve funds 4) Education funds 5)Retirement fund 6)Bequests(Donation)

Minor

A person under legal age.

Cash Value

Equity amount accumulated in permanent life insurance.

What is underwriting?

Risk selection and classification process

Adverse Selection

insuring of risks that are more prone to losses than the average risk

What are 3 factors that determine the premium for a particular policy?

1) Morality 2) Interest 3) Expense

Personal Contract

An agreement between an insurance company and an individual that states that insurance policies cover the individual's insurable interest.

In a life insurance policy, when must insurable interest exist?

In life insurance, insurable interest must exist between the policyowner and the insured at the time of the application.

What is the purpose of the agent's report?

Provides the agent's personal observations concerning the proposed insured

Liquidation

Selling assets as a method of raising capital.

Life Insurance

Coverage on human lives

Illustrations

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

Utmost Good Faith

That there will be no fraud, misrepresentations or concealment between the parties.

Death Benefit

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

When would an insured be required to sign a statement of good health?

At the time that they delivery the policy.

Survivor Protection

Can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of his/her death.

Contract

Is an agreement between two or more parties that can be enforced by law

Apparent Authority

The appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Ambiguities in a Contract of Adhesion

The courts have held that any ambiguity in the contract should be interpreted in favor of the insured.

Who is responsible for all written and distributed insurance advertisement?

The insurer is responsible for all advertisements.

What are some common personal uses of life insurance?

1)Survivor Protection 2)Estate Creation 3) Cash Accumulation 4) Liquidity 5) Estate Conservation

Estate

A person's net worth

Viatical Settlements

Allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before their death

Contract of Adhesion

Is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured), insurance polices are not drawn up through negotiations.

Aleatory Contract

There is an exchange of unequal amounts or values.

Beneficiary

A person who receives the benefits of an insurance policy.

Law of Agency

Acts of the agents within the scope of their authority are deemed to be the acts of the insurer

What does insurance solicitation mean?

An attempt to persuade a person to buy an insurance policy and it can be done verbally or in writing

Who is required to sign an application for life insurance?

Both the agent and the proposed insured(usually the application) must sign the application.

Facultative Reinsurance

Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.

Social Security Income "Blackout" Period

Social Security blackout period is the time during which the surviving spouse and/or children do not receive any social security survivor benefits. Blackout period begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirements benefits, as early as age 60.

Viator

The owner of the life insurance policy( or certificate holder under a group policy) who enters or seeks to enter into a viatical settlement.

What is a policy summary?

A policy summary is a written statement describing the features and elements of the policy being issued.

Unilateral Contract

Only one of the parties to the contract is legally bound to do anything

Liquidity

The policy's cash value can be borrowed against at anytime and used for immediate needs.

What are the four steps a producer must complete when replacing an existing policy?

1) Present to the applicant a Notice Regarding Replacement this signed by both the applicant and the producer. 2) Obtain a list of all the existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all the companies being replaced. 3) Leave the applicant with the original or a copy of the written or printed communications used for presentation to the applicant. 4) Submit tot he replacing insurance company a copy of the replacement notice with the application

Solvency

Ability to meet financial obligations(an insurance company maintains enough assets to pay claims).

What information does a Buyer's Guide provide?

Basic (generic) information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance and also the comparison of policy cost.

Human Life Value Approach

Gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money.

What information is gathered in Parts 1 & 2 of the application?

In part 1 & 2 of the application you get General Information and Medical Information

What is the purpose of key person insurance?

In the event of death of a key employee, the business would use the money for the additional cost of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. Money is received tax free if they die.

Surplus Line

Is an insurance for which there is no readily available admitted market( typical done outside the normal line of authority).

Reciprocal

Is insurance resulting from an interchange of reciprocal agreements of indemnity among person known as subscribers, collectively known as Reciprocal Insurance Company or Exchange. The company is put into effect and administered through an attorney-in-fact common to all persons.

How can an insurance company use the information it obtains from the MIB?

It is a systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered. Can be used only as an aid in helping insurers know what areas of impairment they might need to investigate further.

What is the needs approach to determining amounts of life insurance based upon?

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

What two things does a contract need to make it legal?

It must have both :insurable interest and consent.

Estate Creation

Life insurance creates an immediate estate. (An estate is earning, saving, and investments)

Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed.

Estate Conservation

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

Conditional Contract

Requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations.

What is the purpose of the Insurance Guaranty Association?

They are formed to protect policyowners, insureds, beneficiaries, and anyone entitled to payment under an insurance policy form the incompetence and insolvency of insurers.

In a Viatical Settlement, what does the viator receive when the policy is sold?

Viator's usually receive a percentage of the policy's face value from a third party who purchases the policy.

Implied Authority

is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal.

Reinsurance

A contract under which one insurance company (the reinsurer) indemnifies another insurance company for part or all of its liabilities( insurance for the insurance company).

Consideration

Is something of value exchanged for something else of value

Lump-sum

Payment of the entire benefit in one sum

How does a substandard risk policy differ from a standard risk?

Substandard > applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. Standard > Are entitled to insurance protection without extra rating or special restrictions.

Express Authority

The authority granted to an agent by means of the agent's written contract.

When does an insurance policy go in effect?

The conditional receipt says that the coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for.