FP512 Insurance, Risk Management, Employee Benefits

Planning Considerations for Term Policy

- Good fit for those who have a Limited budget & do not want to spend a lot - Used for a temporary life insurance need - Provides a large death benefit with low initial outlay when compared to a permanent policy

Universal Life Insurance Characteristics

-Flexible Premium -Adjustable death benefit -unbundled cash value & pure insurance cost -cash value is determined by current interest rates; not guaranteed -The policy will remain in force as long as the cash surrender value can support the monthly deductions for mortality and administrative expenses. If the cash surrender value is insufficient to support the deductions, the policyowner is required to deposit additional premium to avoid a policy lapse.

Payments from a variable annuity contract taxation

-For variable annuities, the exclusion amount is determined by dividing the cost basis by the term over which the benefits are expected to be received. All payments in excess of the exclusion amount are taxable. -Payments beyond projected life expectancy are fully taxable except for annuities with an annuity starting date on or before December 31, 1986. Formula for exclusion ratio: variable annuity exclusion amount = investment in the contract/annuitant's life expectancy in months Otherwise same rules as non variable annuity

Financial Needs Analysis Method for life insurance needs analysis

-examines all recurring expenses that remain to dependent survivors after wage earner dies a. Final expenses—last medical costs and funeral costs b. Readjustment—covers the period following death; nonrecurring costs as the family adjusts to the death of a provider; typically two years c. Dependency period income fund—period of the highest needs because the children/dependents require income for current living and other routine costs to maintain a household d. Mortgage payment fund—an effective way of reducing the amount of income needed during the dependency period is the ability to pay off the mortgage and other debts at the death of an income producer e. Education fund—establishing a lump sum for education can eliminate some of the income strain during the dependency period f. Life income for the surviving spouse—the need for this arises if the spouse is either not employed and does not have the necessary skills to become employed All are inflated by the CPI Annuity Methods - pay just enough to meet needs of dependents Purchasing power preservation model - provides for annuity income and capital preservation on an inflated basis so that there is no loss in purchasing power at the end of the life expectancy period of the surviving spouse

Life insurance contract onwer

-may assign or transfer the policy -is entitled to cash value & dividends -may borrow against the cash value -may assign the policy Absolute assignment: all rights to someone else (including right to CV) Collateral assignment: all/portion of the death benefit to a creditor as security for a loan

Capital Retention Method for life insurance needs analysis

-method of determining the amount of life insurance needed that uses interest only to furnish the continued support of the family. Under this method, the original principal or capital saved by the client still remains at the end of the income period for distribution to the children or other heirs. -This method assumes the income stream will continue in perpetuity; therefore, the amount of life insurance may be overestimated. -annual income needed = salary/current income - SSI annual income/rate of return + annual income amount

Variable Universal Life

-product with investment options for the cash value and no minimum guaranteed rate of return or interest -Flexible premium payments -DB are not guaranteed -CV can decline to 0 and lapse unless additional premium payments are made -suitable for higher risk tolerance and investment experience since clients direct the cash value investments

Second to die Survivorship policy

-provide Db when the second or last insured dies -premiums are lower because the life expectancy is longer -estate tax planning mechanism for the second spouse to receive estate liquidity when estate taxes are a lot -premiums may increase after death of first insured

First to die life insurance policy

-provides DB when first insured dies -may cost less than 2 policies, but more than 1 -used in buy-sell agreements -inclusions of the DB in gross estate depend on incidents of ownership

Beneficiaries of Life insurance

-the person who the proceeds are payable to 1. Primary: 1st person 2. Contingent: 2nd person should the primary die before the insured 3. revocable bene: owner holds right to change bene designation 4. irrevocable bene: cannot change bene w/o bene consent Can be: individuals, trust, estate of the insured, minors, charitable organizations

Rating Companies

1. A.M. Best, Inc.—ratings are based on public information and interviews with management 2. Fitch—uses public information and management interviews; public information alone may be used to assign ratings 3. Moody's Investors Service—may assign ratings on the basis of public information alone 4. Standard & Poor's Corporation—rates companies only upon reque

Human Life Value Method for life insurance needs analysis

1. According to the principle of human life value, the purpose of life insurance is to replace an individual's economic value. 2. This method considers the income of the individual through the remaining work-life expectancy, including raises. Then, applying a discount rate to this total, the present value of the life is determined.

Annuity

1. Annuities are insurance-based products that can be used to save for retirement on a tax-advantaged basis 2. Annuities provide a periodic payment for a specified period or for someone's lifetime 3. Annuitization occurs when the annuity owner elects to convert the money in an annuity into a stream of periodic income payments

Life Insurance Tax Treatment

1. Death benefits paid to individual beneficiaries are not usually included in gross income 2. Income earned but not withdrawn on the cash surrender value of a cash value policy is not currently taxable to the owner of the policy; if the insured dies without surrendering the policy, the cash value accumulations are never taxed 3. Partial withdrawals are received tax free up to basis (except MECs) 4. Policy loans can be tax free (except MECs) 4. The annual cash value increase in a life insurance policy is not subject to current income taxation

Choosing life insurance policies

1. Financial Strength of the insurer (rating, surplus reserves, diversification, cash flow/liquidity, historical earnings, management) 2. Policy Illustrations: guaranteed & nonguaranteed values. Unreasonably high rates, mortality assumptions, investment experience/interest rates, lapse & persistency rates/statistics 3. Evaluating Policies: underwriting, assumptions, analysis (past dividend and interest rate history vs illustration, track performance)

Settlement Options (upon an insured's death)

1. Lump Sum 2. Interest Only (DB stays invested and is paid later) 3. Fixed-period installments (prin & int are paid over a set period) 4. Fixed-amount (monthly amount is paid until prin & interest are gone) 5. Life Income - benefits paid an an annuity

Life Insurance Death benefit Taxation

1. Lump-sum death benefits—generally excludable from gross income 2. Interest-only payments on death benefits—if the beneficiary receives interest payments only rather than a lump-sum death benefit, the interest payments are taxable as ordinary income in the year earned 3. Installment payments of death benefits a. If the beneficiary receives installment payments that are part principal and part interest, the principal portion of the death benefit installment payments is tax free to the beneficiary. The interest portion of installment payments, accruing after the date of insured's death, is taxable to the beneficiary as ordinary income in the year earned. b. Life insurance proceeds received as an annuity—if the death benefit from a life insurance policy is received periodically in the form of an annuity (as a settlement option), each payment has a return of basis component and an interest component. Find the exclusion ratio (the cost basis/total amount of payments) = ratio, multiply ratio by the monthly payment to find the amount not taxable (total pmt-nontaxable amount = taxable amount)

Endowment Life Insurance (pure & regular)

1. Pure endowment policies pay the face value only if the insured survives the endowment period (not sold in the United States) 2. Regular endowment policies pay the face value as a death benefit if the insured dies within the endowment period or pay the face value (usually in the form of an annuity) if the insured survives beyond the endowment period

Principal-agent relationship

1.) An agent acts on behalf of and instead of a principal in engaging in business transactions 2.) An agent may bind the principal in contract with a third person 3.) An agent has a degree of independent discretion

Basic Provisions of Annuities

1.) Free withdrawals, typically up to 10%-15% of the contract's accumulated value 2.) Surrender charge, generally imposed when the full value of the annuity contract is surrendered or if a withdrawal exceeds the contract's annual free withdrawal amount 3.) Crisis waivers or surrender charge waivers of the annuity contract surrender charge for withdrawals exceeding the annual free withdrawal amount a.) Death b.) Disability c.) Nursing home d.) Terminal illness e.) Unemployment

variable annuity riders

1.) Guaranteed step-up death benefit rider 2.) Long-term care coverage rider 3.) Guaranteed lifetime withdrawal benefit (GLWB) rider 4.) Guaranteed minimum withdrawal benefit (GMWB) rider 5.) Guaranteed minimum income benefit (GMIB) rider 6.) Guaranteed minimum accumulation benefit (GMAB) rider

Appropriate coverage to have in asset accumulation phase

1.) Health, disability, life, and property and casualty insurance 2.) Emphasis on life and disability, especially if there are dependents

Appropriate coverage to have in conservation phase

1.) Health, disability, life, and property and casualty insurance 2.) May consider exploring long-term care insurance options to lock in lower premiums

Indemnity principles

1.) Insurable interest—a relationship where the person applying for the insurance will incur a loss from the destruction, damage, or death of the insured subject. Must be present at time of insurance & loss 2.) Life insurance policies are the exception to the indemnity principle, with the recovery amount being the face value of the policy, not the actual value of the insured life 3.) Actual cash value (ACV)—the amount that can be recovered from a loss 4.) Replacement cost—the amount that can be recovered under a contract using a replacement-cost loss settlement provision 5.) Stated value contracts set an agreed-upon value of the property at the inception of the contract;

Employer-employee relationship

1.) To determine whether a relationship is one of employment, examine the surrounding circumstances a.) The employer controls or has the right to control the employee in the performance of physical tasks b.) Employees have little or no independent discretion c.) Employees are paid for time rather than results

Deductible

A deductible is a stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy

Single premium deferred annuity (SPDA)

a lump-sum premium with an annuitization period deferred until some point in the future; the premium earns interest that accrues tax deferred

Principal's duties to an agent

a. A principal has an obligation to perform in accordance with his contract with an agent b. A principal has a duty to compensate, indemnify, and reimburse an agent c. A principal has a duty of cooperation; a principal is required to assist an agent in performing the agent's duties and not to prevent such performance d. A principal has a duty to provide safe working conditions

Adverse selection

a. Adverse selection is the likelihood that people with the highest risk of loss are also most likely to purchase insurance b. Adverse selection also includes higher-risk persons seeking insurance coverage at standard rates c. Adverse selection is more common in insurance policies with premiums that increase with age

Types of Term Policies

a. Annual renewable term—level face amount, exponentially increasing annual premiums b. Level term (3, 5, 7, 10, 15, 20, or 30 years)—level face amount; premiums remain fixed for the term selected and increase if the policy is renewed c. Decreasing term—level premiums, decreasing face amount. This type of policy has historically been used for mortgage protection. The death benefit is designed to decrease over time, as the principal balance of the mortgage decreases.

Payments from annuity contract taxation

a. Before the annuitant reaches the age of projected life expectancy, each payment from a fixed annuity is considered as a partial return of tax-free basis and as partially taxable income by use of an exclusion ratio a. Formula: fixed annuity exclusion ratio = investment in the contract/ expected return b. Payments beyond projected life expectancy are fully taxable. (Note: if the annuity payments began on or before December 31, 1986, the exclusion ratio applies for the entire payment period.) c. If the annuitant dies before life expectancy and has not completely recovered his basis, the unrecovered basis is deductible on the annuitant's final income tax return as a miscellaneous itemized deduction not subject to the 2% of AGI floor Premature distributions (before age 591⁄2) are subject to a 10% penalty. There is no penalty for withdrawing basis on contracts purchased before August 14, 1982. Earnings accrue tax free until withdrawn

Six steps of the risk management process

a. Determine the objectives of the risk management program b. Identify the risks to which the subject is exposed c. Evaluate the identified risks as to the probability of occurrence and potential loss d. Determine alternatives for managing risks and select the most appropriate alternative for each risk e. Implement the most appropriate alternative f. Evaluate and review periodically

Agent's duties to principal

a. Duty to perform— follow instructions, use reasonable skill and diligence in performing agency obligations b. Duty to notify—an agent is required to notify the principal of material information that relates to the subject matter of the agency c. Duty of loyalty 1.) An agent may not compete with his principal 2.) After termination, the agent may not disclose trade secrets or confidential information 3.) Conflicts of interest—any benefits received by an agent acting adversely to his principal belong to the principal, who may recover them from the agent d. Duty to account—an agent must account to his principal for any monies or property rightfully belonging to the principal that have come into the agent's hands.

Annuity Settlement Options

a. Fixed period—payments continue to the annuitant for a specified term and to a designee if the term exceeds the annuitant's life; the insurer determines the amount of the payment on basis of the fixed period selected b. Fixed amount—payments are made periodically in a fixed amount determined by the annuitant; the insurer determines the length of time for which payments will be made c. Straight (single) life annuity—payments continue until the death of the annuitant, then cease; this option offers the highest periodic payment d. Life annuity with period certain—payments continue to the annuitant(s) for the annuitant's lifetime; however, if that is shorter than the guaranteed term, payments will continue to a designee for the remaining term e. Joint and survivor annuity—payments continue until the death of the last of the two annuitants

Withdrawals from an Annuity before the pmt period (accumulation period)

a. For annuities purchased before August 14, 1982, the FIFO method of taxation is used for withdrawals, such that withdrawals up to the owner's tax basis are not included in taxable income but rather are a return of capital b. For annuity contracts purchased on or after August 14, 1982, the last-in, first-out (LIFO) method of taxation is used for withdrawals; withdrawals are presumed to come from earnings first and are taxed to the extent of earnings

Life Insurance Dividend Taxation

a. Generally, dividends distributed are not taxable but are considered a return of premium, which reduces the policyowner's investment in the contract (basis) b. If dividends distributed exceed premiums, the excess amount of dividends received above the policyowner's basis in the contract is taxed to the policyowner as ordinary income c. If the policyowner chooses to leave the dividends with the insurance company, any interest earned on the dividends is taxed as ordinary income to the policyowner in the year earned

Withdrawals and MECs from life Insurance Contract

a. Generally, withdrawals from the cash value are subject to first in, first-out (FIFO) basis treatment b. Modified endowment contracts (MECs) are life insurance policies for which premiums paid within the first seven years of the policy or within seven years of a material change to a life insurance policy exceed amounts specified under the Internal Revenue Code (called the 7-pay test). "Once a MEC always a MEC" cannot 1035 to get out Withdrawals and/or loans on MECs are subject to LIFO basis recovery. MECs are also subject to a 10% penalty on taxable amounts (taxable amounts include last-in, first-out (LIFO) above the basis, no tax liability, or 10% penalty on the basis) withdrawn before age 59 1⁄2. Once a MEC, always a MEC.

Transfers of Life Insurance Policies (selling them) for value Taxation

a. If an existing policy is transferred (sold) for valuable consideration, the insurance proceeds are includible in the gross income of the transferee (buyer) to the extent that the proceeds exceed the basis (amount paid for policy plus any subsequent premiums paid), meaning that the death benefit loses its tax-free status b. There are five instances when the transfer of a policy will cause the death benefit to retain its tax-free status: transfers to 1.) the insured; 2.) a partner of the insured; 3.) a partnership in which the insured is a partner; 4.) a corporation in which the insured is an officer or shareholder; and5.) a transferee whose basis in the policy is determined by reference to the transferor's basis (tax-free exchange or gift) The buyer's new DB included in gross income is the DB at purchase price - the purchase price - the premiums paid = amount taxable

Methods used to potentially lower insurance premiums

a. Increase the deductible (property and casualty or health insurance) b. Increase the length of the elimination period (disability or long-term care insurance) c. Install an alarm (property insurance) d. Improve health and diet (life and health insurance) e. Avoid tobacco use or smoking (life and health insurance) f. Reduce the number of years of coverage (long-term care insurance or disability)

Surrender of a Life Insurance Contract Taxation & Calculation

a. Investment in the contract (basis) = premiums paid - dividends received - outstanding loans or withdrawals b. Gain at surrender (taxed as ordinary income) = cash surrender value - investment in the contract

Federal Estate Tax on Life Insurance proceeds

a. Life insurance death benefits avoid probate if there is a named beneficiary b. The following situations will cause the death proceeds from a life insurance policy to be included in the decedent-insured's gross estate 1.) The decedent gifted the policy within three years of the decedent's death 2.) The proceeds are payable to the estate, the executor of the estate, or creditors of the estate 3.) The decedent-insured retained incidents of ownership in the life insurance policy at death a.) Right to assign the policy b.) Right to change the beneficiary c.) Right to change policy provisions c. If the decedent owns the policy and the proceeds are payable to the spouse, the proceeds are included in the decedent's gross estate, but the unlimited marital deduction can be utilized, and the proceeds can be deducted from the decedent's gross estate and removed from estate taxation d. If someone owns a life insurance policy on the life of another and dies, the includible amount in the owner's gross estate depends on whether the policy is paid up

Life Insurance Taxation of Policy Surrenders

a. Lump-sum payment 1.) The gain at surrender equals the cash surrender value (CSV) minus the investment in the contract, taxed as ordinary income b. Interest payments 1.) Upon maturity, if the owner leaves living benefit proceeds with the insurer and selects the interest-only option, the interest is taxable as ordinary income when received or credited to payee 2.) If the interest option is selected before maturity and the right to withdraw proceeds is given up, constructive receipt of the gain is avoided and the ultimate receiver of the proceeds will have the tax liability for the interest c. Installment payments—the portion of living benefit installment payments that are not a return of principal are taxed as ordinary income

5 elements of an insurance contract (to be binding)

a. Offer and acceptance 1.) Offeror is the persona applying & acceptor is the insurance company. 2.) Can be accepted through underwriting b. Consideration 1.) The insurance contract requires an exchange of value to be legally binding 2.) For life insurance the premium must be paid to make the contract binding c. Legal object—the subject of the insurance contract must be for a legal business or a legal purpose to make the contract enforceable; if the object of the contract is illegal, the contract is void d. Legal capacity—the individuals, groups, or businesses entering into the insurance contract must be capable of entering into a contract per the law 1.) If one of the parties is incompetent, the contract is voidable by such party e. Legal form—although insurance contracts are not required to be written, their form and content are generally governed by state law; therefore, contracts must generally be filed and approved by a state regulatory agency before sales can proceed

Life Insurance Premium Taxation

a. Premium payments for individual life insurance (whether the owner is an individual or a corporation) are not income tax deductible 1.) Special circumstance—if a corporation pays the premium on a policy covering an employee and the corporation is not a beneficiary, the premium is considered compensation to the employee and is deductible by the employer b. Employers may deduct premiums for group term life insurance provided to their employees, subject to limits provided by the tax laws

Loan provision of life insurance

a. The insured may obtain a loan from the insurance company up to the cash surrender value using the policy's cash value as collateral b. The automatic premium loan provision (APL) provides for the premium to be automatically charged against the cash value if the premium is not paid by the insured on the due date c. Outstanding loans reduce the death benefit payable at the time of death

Policy reinstatement requirements

a. The lapse period cannot exceed three to five years as defined in the contract b. The policy must not have been surrendered for the cash value c. Acceptable proof of the insured's insurability must be provided d. All premiums due from the time of the lapse must be paid with interest

Credit Life

a. The lender and the borrower are protected from financial loss in the event the borrower dies before completing payment of the debt b. Face amount is usually the balance of the loan

An insurable risk has four elements:

a. There must be a sufficiently large and similar sample of individuals or events to make the losses reasonably predictable b. The loss must be measurable and definite c. The loss must be accidental d. The loss cannot be catastrophic to society

Exclusions

a. Those perils that are not covered in a policy b. Examples are wars, earthquakes, and floods

Types of Whole Life Insurance

a. Whole (ordinary, or straight) life—premiums are level and are paid for life; face amount of insurance remains constant for life; insurance company guarantees a minimum cash value build-up at each age and assumes the investment risk b. Limited-pay life—face amount of protection remains constant for life, but premiums are paid for a specific term after which no further premiums are due (premiums are higher than ordinary whole life) c. Graded premium whole life—low first-year premium that increases each year for the early policy years and then levels off, usually within the first 5-10 years d. Modified premium whole life—premiums are lower for the first three to five years (term-like premium) and then increase to a premium: 1.) slightly more than what a whole life premium would have been at the age of inception, but 2.) slightly less than the level premium for an ordinary life policy at the insured's age when the premium increases

Fundamental Risk

affect a large group of people. EX: recession, earthquake

Particular Risk

affects individuals or a small group of people

Flexible premium deferred annuity (FPDA)

allows periodic, nonfixed contributions; earnings accumulate free from current income tax and are then distributed at some point in the future

Deferred income annuity (DIA)

also known as longevity annuity 1.) Future income start dates are selected at contract issue rather than making that decision in the future, like most deferred annuities 2.) The elected start date may be any time after the first contract year and generally up to age 85 3.) Purchase rates (annuitization rates) are established at the time of the initial premium payment or subsequent premium payments

Qualified longevity annuity contracts (QLACs)

an insurance option that ensures retirees have a stream of regular income throughout their advanced years 1.) Maximum allowed investment—a 401(k) or similar plan, or IRA, may allow plan participants to use up to 25% of their account balance or $135,000, which-ever is less, to buy a QLAC without concern about noncompliance with the age 72 minimum distribution requirements 2.) Maximum age at commencement of income—the specified annuity starting date must be no later than the first day of the month next following the attainment of age 85

Intentional Tort

battery (harmful touching), assault (threat causing apprehension), libel (written falsehood), slander (oral falsehood), false imprisonment (unlawfully holding against will), trespass to land, invasion of privacy, and intentional infliction of emotional distress

Equity-indexed annuity (EIA)

contract is credited with a return based on changes in an equity index, such as the Standard & Poor's 500 Composite Stock Price Index; the insurance company typically guarantees a minimum return (or floor), which varies depending on the issuing company 1.) Combines guaranteed minimum return with ability to earn return linked to equity markets 2.) May be suitable for clients who want to participate in equities market without the investment risks or costs of a variable annuity 3.) Factors used in computing the interest rate a.) Floor—minimum rate credited to a contract, regardless of index changes b.) Participation rate—determines how much of the increase in the value of the underlying index will be used to compute the interest rate that is credited to the contract (e.g., if index increases by 10% and participation rate is 80%, contract would be credited with 8% interest) c.) Interest rate cap—maximum rate of interest the EIA can earn regardless of the participation rate and actual index return d.) Spread or administrative fee—interest for some EIAs is determined by subtracting a percentage (spread or administrative fee) of up to 3% from any gain in the index e.) High-water mark-credits index-linked interest on the basis of any increase in the index value from the level at the beginning of the annuity's term to the highest index value at various points during the annuity's term (usually an annual anniversary)

A deferred annuity

defers annuitization until some point in the future chosen by the owner

Nonfinancial Fisks

exposure to a risk that does not cause financial loss (e.g., pain and suffering)

Term Life Insurance Characteristics

guaranteed premium for the term, guaranteed death benefit, and no cash value a. Pure insurance protection that pays a death benefit if the insured dies during a specified term b. Coverage ceases at the end of the term unless renewed c. The premium may increase annually or may be constant for a set number of years, after which the premium will increase (e.g., five-year renewable term) d. The face amount is generally level e. There is usually no cash value, savings, or investment component f. Inexpensive at young ages g. Provisions 1.) Renewable—most term life insurance policies can be renewed without evidence of insurability (usually limited to age 70); premiums increase exponentially as the insured ages 2.) Convertible—most term life insurance policies have a provision to convert to a permanent insurance policy without evidence of insurability up to a specified age; generally, the premium for the new policy is based on the insured's attained age at conversion h. Appropriate for those individuals looking to cover temporary life insurance needs or for those who cannot afford the higher cost associated with permanent insurance

Insured Commits Suicide

if the insured commits suicide within the first two years of the policy, the insurance company will refund the premiums (without interest) that were paid on the policy to the beneficiary. After the stipulated period, full benefits would be paid in the case of suicide

Grace period

insured has 30-31 days from due date of premium to avoid a policy lapse

Current assumption whole life (CAWL)

interest-sensitive policy in which the insurer's current investment experience under nonparticipating policies is credited to cash values this is a pooling of policies by an insurer so that each group has its own dedicated investment pool and mortality experience. -Premiums may be adjusted annually or periodically

Pure Risk

involves only the chance of loss or no loss; in other words, there is no chance of gain. Pure risks are insurable. 1.) Personal risk—loss of income or asset resulting from the loss of ability to earn income caused by a disability, death, or sickness 2.) Property risk—direct or indirect loss to the property itself from theft or destruction (e.g., fire or accident) 3.) Liability risk—intentional or unintentional injury to property or others (e.g., tort liability or loss of a civil suit) 4.) Risk from the failure of others—failure to meet or follow through on an obligation (e.g., breach of contract)

Speculative Risk

involves the chance of both loss or gain (e.g., gambling) and is not insurable

The National Association of Insurance Commissioners (NAIC)

is an organization made up of the states' insurance commissioners for the purpose of coordinating insurance regulation a. The NAIC has no legal authority to force states to adopt its regulations, but most states abide by all or most of them b. The NAIC makes recommendations for model legislation or policy, and each state commissioner must determine whether or not to implement these recommendations

accidental death benefit rider

is generally in the same amount as the face amount of the policy (sometimes referred to as double indemnity) a. Death must occur within 90 days of the accident to qualify b. Cause of death must be related to the accident c. Age limitation is usually imposed d. Excludes suicide, death from disease, and acts of war

Private Insurance

is insurance marketed by private companies a. Life insurance—protects against economic losses to survivors and dependents b. Health insurance—protects against accidents and illnesses c. Disability insurance—protects against loss of income due to disability d. Long-term care insurance—protects against costs associated with long-term care for those unable to perform activities of daily living e. Property insurance—protects against many perils that result in loss to or damage/ destruction of property f. Liability insurance—protects against the insured's negligence

An immediate annuity

is typically purchased with a single premium, and income benefits begin immediately, or soon after the premium is paid

Strict (absolute liability)

liability that may be imposed without proof of the defendant's negligence or bad intent the standard imposed when a person or organization is held responsible for any damages, even when there has been no negligence

Social insurance

mandatory insurance administered by the government with benefits mandated by law. The purpose of social insurance is to protect people from large fundamental risks a. Social Security b. Medicare c. Workers' compensation d. Medicaid

Bonus Annuity

may offer a bonus in the form of a credit that may be added to the initial premium (investment) 1.) The initial bonus percentage or initial bonus amount is the actual bonus paid by the insurer, generally, at inception of the contract, may be expressed as a percentage of the initial premium or a specific dollar amount, and must be stated in the contract 2.) Bonus annuity contracts generally have longer surrender charge periods and may have higher annual management fees

Property damage

monetary loss

Static Risk

o result from factors other than changes in the economy. They occur regularly and can be insured EX: earthquakes, floods

A cost-of-living rider

offers additional insurance as inflation protection (usually indexed to the CPI) will increase the benefit by inflation each year. The insurer requires no evidence of insurability

guaranteed insurability rider

permits the policyowner to purchase additional life insurance at specific intervals without providing evidence of insurability

Wrongful age claim & adjustment calculation

premium of $25 per $1000 for 40 and $15 per $1000 for age 35. Claims age 35 is age 40. Claims age 30 = $300 premium/25 = 20 * 1000 = 20,000 DB Correct DB = $300/15*1000 = 12,000

Variable Annuity

premiums are invested in subaccounts directed by the owner 1.) Variable annuities are only suitable for investors who have a risk tolerance that matches the investment risk 2.) The income upon annuitization will vary depending on the variable returns of the underlying subaccounts 3.) A variable annuity benefit could result from a single premium or flexible premium and may be immediate or deferred 4.) The owner of the contract directs the investment of the contract's cash value among available subaccounts and bears the investment risk 5.) This product is sold with a prospectus

Fixed annuity

premiums are invested in the general account of the insurer 1.) The insurer bears the investment risk 2.) Generally, the annuitant receives a minimum guaranteed interest rate 3.) Upon annuitization, a fixed periodic payment will be determined depending on the form of the annuity 4.) A fixed annuity is suitable for a more conservative investor

spendthrift clause

provides protection against the beneficiary's alienation of the policy proceeds by denying the beneficiary the right to convey, alienate, or assign his interest in the policy proceeds a. Provides protection against creditors of the beneficiary b. Protects the proceeds only while in the possession of the insurance company

disability waiver of premium rider

provides that the insurance company agrees to waive all premiums due on the policy should the insured become totally and permanently disabled a. Cash value continues to increase and dividends will continue to be paid to the insured

Dynamic Risk

result of changes in the economy. Insurance cannot cover. EX: change in business cycle, inflation

Risk avoidance

risk may be avoided if the person refuses to engage in an action that creates a risk (e.g., refusal to fly or drive) High frequency/probability & high severity

Risk Reduction

risk may be reduced through loss prevention methods and/or safety improvements High frequency/probability & High & low severity Some examples of risk reduction through loss prevention include installing hand rails, fire sprinklers, and security systems

Risk retention

risk may be retained; therefore, no action is taken to avoid, transfer, or reduce risk. Risk may be voluntarily or involuntarily retained 1.) Self-insurance, coinsurance, and deductibles are examples of risk retention 2.) Risk retention can be coupled with other methods of managing risk High & low frequency/probability & low severity The potential loss is small, and the business or individual believes any losses that occur can be covered out of pocket. Or, the cost of transferring the risk is high, so there may be no reasonable alternative

Risk Transfer

risk may be transferred, either through an individual or an insurance contract Low frequency/probability & High Severity This is primarily insurance but can also be accomplished through waivers or subcontracting. With insurance, the risk of loss is transferred to an insurance company in exchange for a relatively small cost, the premium

Financial Risk

risk that may cause financial loss

Public insurance

seeks to enhance public trust in financial institutions. This type of insurance is usually mandatory and administered by the government or quasi-governmental institutions. a. Federal Deposit Insurance Corporation (FDIC) b. Pension Benefit Guaranty Corporation (PBGC) c. Securities Investor Protection Corporation (SIPC)

Vicarious liability

someone is held legally liable for the torts of another (e.g., the person's child, employee, or agent)

Interest Adjusted Method used to compare life insurance policies AKA Surrender cost index or next payment cost index

start with face value a. Calculate the value of all premiums inflated at a selected fixed interest rate for the selected term (annuity due) b. Calculate the value of all dividends inflated at a fixed interest rate (same one) for the selected term, and subtract this amount from the result found in the previous statement c. Subtract the cash value at the end of the selected term d. Determine the insurance cost (result of above) e. Calculate the annual PMT, with N = selected term and I/YR = interest rate f. Calculate the cost per $1,000 per year disadvantages based on items that are not guaranteed

common disaster clause

stipulates that settlement of the policy is withheld for a specified number of days (usually 30) after the death of the insured; furthermore, any surviving beneficiary who dies within this period is considered to have predeceased the insured

Negligence per se

the act itself constitutes negligence, thereby relieving the burden to prove negligence the duty of care owed by the defendant in a lawsuit is determined by reference to a statute. act is considered negligent because it violates a statute

Express Authority

the actual authority that an insurance company gives representatives (agents) a. Usually granted in writing by an agency agreement or contract b. The insurance company is responsible for the acts of agents per express authority

Comparative negligence

the amount of damages is adjusted to reflect the extent to which the injured party's negligence contributed to the cause of injury (same with multiple defendants); many states allow recovery for the portion of damages not caused by the injured party

Implied Authority

the authority that the agent is not expressly given by the principal but that an agent in similar circumstances normally possesses a. The authority that is reasonably necessary to carry out the agent's duties b. If implied authority exists, an insurer will be liable for the acts of the agent even if the agent knowingly or unknowingly misleads the insured

Negligence (standard of care)

the failure to act in a way that a reasonably prudent person would have acted under the circumstances

Contributory negligence

the injured party's own negligence contributed to his injuries ■ The injured party can usually recover nothing even if his negligence was slight ■ Last clear chance rule—an exception to the contributory negligence rule; a claimant whose own negligence contributed to his injuries can still recover if the defendant had a last clear chance to avoid the accident but failed to do so

Indemnity

the insured may recover from the insurance company only to the extent of the actual financial loss

Riders and endorsements

two terms used interchangeably a. Describe written additions to an insurance contract b. Provide a means to correct a policy in the case of a conflicting term

Apparent authority

when the insured is led to believe the agent has authority, either express or implied, where no such authority actually exists a. The insured is unaware that the agent has exceeded expressed or implied authority, and the insurer makes no attempt to stop the agent (a notice issue) b. Apparent authority may bind the insurer

Risk

· A risk represents the possibility of a loss—or a negative deviation from a desired outcome. o EX: lose your home·

Hazard + 3 Types

· a hazard increases the potential for loss o EX: oily shop rags next to the space heater a. Physical hazard—physical characteristics of the person or property that increase the chance of loss (e.g., oily rags left near a furnace or high blood pressure) b. Moral hazard—the chance of loss from dishonesty (e.g., a person intentionally causes a loss or overstates the amount of the loss when a peril occurs) c. Morale hazard—indifference to loss (due to existence of insurance), which creates carelessness and increases the chance of loss (e.g., failure to lock car doors)

Tort

—an infringement on the rights of another; the wrongdoer creates a right in the damaged party to bring a civil action

Single premium immediate annuity (SPIA)

—the annuity payments to the annuitant begin one payment interval following the premium payment; typical examples include structured settlements from civil suits and payouts of life insurance proceeds, defined benefit plans, and other pension plans

Damages for bodily injury resulting from a tort (3 types)

■ special damages to compensate for measurable losses; ■ general damages to compensate for intangible losses (pain and suffering) that cannot be measured monetarily; or ■ punitive damages (i.e., amounts assessed against the negligent party as punishment)

Nonforfeiture Provisions

After a lapse due to non-payment: 1. Receive cash or surrender Value: The policy is surrendered and the cash value net of any applicable surrender fees and outstanding loans is sent to the policyowner. At the time of surrender, excess cash received over the net paid premiums (basis) is considered ordinary income and is taxable to the policyowner in the year received 2. purchase a reduced amount of paid-up insurance using the cash value as the single premium. The death benefit will be reduced, but no future premiums are due. The face amount of the policy will be based on the net single premium and the assumptions of the insurance company regarding mortality and other expenses. 3. Paid-up term insurance: The death benefit remains equal to the face amount of the original policy but no additional premiums are due. The period of the term insurance is determined by the net single premium the cash value can purchase according to the assumptions of the insurance company regarding mortality and other expenses

Life Income Settlement Options (4 types)

Benefits are paid as an annuity a. Single-life annuity— bene receives a specified amount of money periodically until the beneficiary dies (this provides the highest periodic payment) b. Life annuity with period certain—bene is paid a specified amount of money periodically for life, but the payments are guaranteed for a certain number of periods. In the event of the beneficiary's death before the specified period ends, the payments continue to the beneficiary's estate or to a contingent beneficiary, until the guaranteed period ends. c. Life annuity with refund—the beneficiary is paid income periodically for life. If the DB has not been recovered at the time of the beneficiary's death, the total amount of payments received does not equal or exceed the basis of the annuity. The remainder up to the basis of the annuity is paid to the contingent beneficiary either in installments or in a lump sum. d. Joint and survivor annuity—provides payment to two payees; at the death of the first payee, the payment may or may not be decreased to the second payee but will cease on the death of the second payee

Peril

Cause of financial loss o EX: Hurricane, flood, fire

Variable Life (Whole Life Type) Characteristics

Combine protection/savings of traditional life with growth potential of mutual fund investments. The cash value is invested in subaccounts chosen by the policyowner. -the premium is fixed & higher than whole life -the face amount may vary with no guarantee of cash value -The death benefit may go up in value but cannot fall below the face value - Variable life insurance is suitable only for clients with a higher risk tolerance

Appropriate coverage to have in distribution phase

Emphasis on health insurance and long-term care insurance

Universal Life B Option 2

Increasing Death benefit Option -The DB is the face amount of the policy plus the cash value -The NAR stays the same -Option B is more expensive not suitable for individuals on fixed incomes or individuals who cannot manage the flexibility of the policy

Principal

Insurance Company

Agent

Insurance Company Rep An agent can legally bind a principal if the agent is within the scope of his authority; in the case of insurance, acts of an agent are deemed to be acts of the insurer

Contract of adhesion

Insurance contracts are accepted or rejected by the insurance but cannot be modified later also not transferrable other than life insurance

Criminal Acts

Insurance does not cover this

PURPOSE OF INSURANCE

Insurance is a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool a. The larger the number of members in the group, the greater the probability that actual loss experience will equal the expected loss experience b. Insurers cannot predict who is going to experience a loss, but they can predict with reasonable certainty how many losses will occur and set realistic premium rates

Unilateral & conditional contract

Insurance is unilateral in that only the insurer promises to perform Conditional upon the insured paying the premium & experience a loss

Universal Life A Option 1

Level Death benefit Option -The DB is the face amount of the policy -Net amount at risk is the cash value - DB -In Option A, the NAR decreases as the cash value increases

Unintentional torts

Negligence an act or failure to act in a reasonably prudent manner, and such act or failure to act causes harm to another. Elements include duty, breach of duty, causation, and actual loss

Tax-free 1035 exchanges

No gain or loss for the following: 1.) An exchange of a life insurance policy for another life insurance policy, an endowment policy, an annuity contract, or a qualified long-term care insurance policy 2.) An exchange of an endowment policy for another endowment policy, an annuity contract, or a qualified long-term care insurance 3.) An exchange of an annuity contract for another annuity contract or a qualified long-term care insurance policy a.) An exchange of annuity contract for a life insurance policy cannot be accomplished tax free 4.) An exchange of a qualified long-term care insurance policy for another qualified long-term care insurance policy

Whole Life Insurance Characteristics

Permanent Insurance. -Provides a guaranteed DB for the life of the insurance -required fixed premium payment until death or maturity -Good fit for those who like guarantees a. Provides lifetime protection b. Cash value accumulation 1.) Earnings on cash value are credited to the policyholder; tax deferred accumulation c. Policies may be participating (i.e., policyowners may receive dividends allowing them to participate in the surplus or returns resulting from a block of policies) or nonparticipating d. Appropriate for people who have a long-term insurance need or desire a cash savings/investment feature

Life Insurance Programming Method for life insurance needs analysis

Programming involves evaluating a person's present financial position, forecasting future financial obligations, and determining the proper life insurance amount to meet future obligations

Replacing life insurance policies

Reasons for replacement a. Life insurance needs have changed b. Existing policy no longer meets the client's needs Disadvantages of replacement a. Insured may no longer be insurable or may be insurable only at higher rates b. Incontestable period may reset in new policy c. Older policy may have features not available in new policies d. New policy may generate new acquisition costs e. Surrendering existing policy may result in taxable gain f. Premiums for replacement policy may be higher based on insured's attained age at issue

Net Cost Method used to compare life insurance policies

Start with face value 1. A period is selected (10, 20, or 30 years) 2. The total premiums are added for the selected period 3. Dividends for the selected period are deducted 4. The cash value at the end of the selected period is deducted from the net premiums -Insurance cost - 5. The net cost per year is calculated by dividing the insurance cost by the term insurance cost is 6. The net cost per $1,000 of insurance per year is calculated by dividing the net cost per year by the face of the policy in thousands Disadvantages No TMV, based on items that are not guaranteed, sensitive to assumptions, yields a cost per $1K which is less than true cost