Lesson 2
Materially Inaccurate Presentations
A violation of this article will occur if an agent or insurer recommends the replacement or conservation of an existing life insurance policy or annuity by use of a materially inaccurate presentation or comparison of an existing contract's premiums, benefits, dividends and values.
Other Factors Affecting Premiums
Amount of Coverage, Cash Values, Premium Mode,Duration of Payment,Earned and Unearned Premium, and Reinsurance
The following are required on a life insurance application
Amount of life insurance in force. Age of the insured. Health history.
Substandard rating is still an "acceptable" rating for the insurer
Because the extra premium charge makes up for the additional risk.
There are several reasons for an insurer to seek reinsurance:
Expansion of the capacity of the ceding company. The insurer's capacity is the maximum amount of insurance of a particular type that the company can accept while still maintaining adequate reserves and surplus in relation to risk. Stabilization of the company's underwriting results and securing protection against large losses.
Mortality cost
For the insurer increases each year as the chance of the company paying the death benefit also increases.
CONSERVATION
Means any attempt by the existing insurer to dissuade (to stop) a policyholder from replacing existing life insurance or annuity.
MODE OF PREMIUM PAYMENTS
Refers to the frequency of premium payments made by the policyholder.
A way for insurers to avoid having to pay for large or catastrophic losses is
Reinsurance
What has to accompany the request for an attending physician's statement?
Signed authorization from the insured
BASIC ILLUSTRATION must include?
The name of the insurer, the name of the proposed insured, and a brief description of the policy being illustrated, including a statement that it is a life insurance policy
Treaty reinsurance
The types of insurable risk and values of the contracts are agreed in advance by the insurers involved.
Cash value or "Equity"
This reserve, which is credited with TAX DEFERRED interest as it accumulates
Duration of Payment
Various life policies can be paid for with a single premium, over the whole of a person's life or over a limited period.The longer the premium payment period is, the smaller the amount of each payment and vice versa.
Specific or facultative reinsurance
is negotiated on an individual basis with each party free to act in their own best interests in accepting or rejecting a particular risk.
6.0 Premiums PREMIUM
is the overall amount specified in the policy as the charge for the various insurance benefits provided.
PREMIUM RATES
is the price for each exposure unit covered by the insurance.
Illustration
means a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years
For Estate Planning purposes
the two main methods that may be used in order to calculate the proper amount of life insurance are 1. Human Life Value Approach 2. Needs Analysis
Identify the provisions regarding life insurance and annuity contracts, non-printed illustrations of non-guaranteed values for senior citizens
this is an illustration only. an illustration is not intended to predict actual performance. interest rates, dividends, or values that are set forth in the illustration are not guaranteed, except for those items clearly labeled as guaranteed
The Medical Information Bureau (MIB) is a non-profit organization supported by:
Insurance companies
Given an insurance situation, be able to identify correctly: rate/premium and preferred/ standard/substandard risk.
PREFERRED is the best underwriting classification a company will usually offer presenting the lowest risk to the insurer and the lowest premium to the policyholder.
Where replacement is involved, the replacing (new) insurer must:
Forward to the existing (old) insurer, within three working days of receiving the application, written notice of the replacement and a policy summary of the proposed life insurance or annuity.
The case below is a common practice when using a non-medical application for life insurance?
If answers given on the health statement do not meet underwriting standards the insurer may require a medical examination
To compensate for this increased risk as the insured ages, life insurance policies must do one of the following:
Increase the premium. Reduce the death benefit. Charge an averaged, level premium over the term of the contract. This is referred to as the LEVEL PREMIUM CONCEPT.
EARNED PREMIUM
Insurers allocate a portion of premiums paid by insureds
Reinsurance
Is insurance for insurance companies. It is the spreading of a risk among a number of insurance companies in the event that the risk is either unusually costly, higher than normal, or the insurability of the risk is borderline.
The following is used to establish life insurance rates
Mortality, interest, and expense
The following would have the lowest premium?
Preferred Risk
UNEARNED PREMIUM
The portion of the premium which applies to coverage for the remainder of the year
A basic illustration must also include
The premium outlay and mode the applicant plans to pay and the contract premium. The corresponding guaranteed death benefit, as provided in the policy.The corresponding GUARANTEED CASH VALUE available upon surrender.
Traditional Net Cost Method three disadvantages to using this method:
1. It assumes the policyholder will have the policy for exactly the number of years used in the calculation. 2. All dividends and cash values are only assumptions, projections, and current figures. If dividends or cash values are higher or lower than expected, cost averages are affected. 3. The calculation does not take into account when the premium is paid, that is, the time value of money. Note: Interest Adjusted Cost Method does take into account the time value of money
Common premium modes
Are annual (once per year), semi-annual (twice per year), quarterly (four times per year), monthly via mail and PRE-AUTHORIZED CHECK (automatically debited from a checking account).
"Traditional net cost method" and "life insurance interest adjusted cost comparison index"
Are measures of the relative costs of similar plans of life insurance
The interest (or investment return)
Factor is based on the expected earnings by the insurer from investing policy reserves and is deducted from the mortality cost. There are two assumptions that are made by the insurance company regarding this interest: First, it is assumed that the company will earn a "specific net rate of interest" on all of its investments. The second assumption made by the company is that a full year's interest will be earned on each premium that is paid.
Some people are considered a higher risk to the company and therefore require a higher premium.There are several methods that may be used to determine this extra premium:
Flat additional premium: A constant additional premium, per $1,000 of death benefit, is added to the standard cost. Graded death benefits: A reduced death benefit will be paid in the first year of the policy and the insurance company will then increase the benefit over a certain time period. Rated‑up age: This method charges the insured a premium for a higher age than the actual age. Tabular rating: Using this method, insureds are classified according to a table reflecting the extent to which mortality risks with their degree of impairment exceed the standard risk. This is the most common method used by underwriters.
When determining the amount of premium that must be charged for a life insurance policy, which WILL NOT be taken into consideration?
Interest received (WILL NOT) The number of policyholders expected The death benefit
Medical Information Bureau (MIB)
It is a non-profit organization financed by member life insurance companies who report medical impairments found during the underwriting process. The purpose of the MIB is to prevent fraud and to protect current policyholders against the selection of adverse risks by insurance companies.
Identify the term mortality table including how it is developed
It is from these tables that basic life insurance charges and premiums are calculated. Life insurers have developed MORTALITY TABLES, which predict how many persons per 1,000 in a particular age group will die in a given year
The type of premium in which the insured pays an averaged amount that is more than enough to meet the cost of the contract in the early years and less than is necessary in the later years to meet the cost of the contract is called?
Level premium
The most frequently used sources of underwriting information are:
Medical Examination. Attending Physician's Statement (APS). Medical Information Bureau (MIB). Inspection & Credit Reports (a.k.a. Consumer Reports). Telephone Interview with Applicant. Motor Vehicle Reports (from DMV).
ADVERSE UNDERWRITING DECISIONS Examples
Terminating coverage, classifying an individual as a substandard risk, or declining an application
Duties of Agents regarding replacement
The agent must list the contract numbers of all policies to be replaced and present the applicant with a "Notice Regarding Replacement" that advises the applicant to consider their decision carefully. The notice must be signed by both the agent and the applicant.
Regarding life insurance applications, be able to identify the types of information required on the application, why insurers attach them to a life policy, and why they become part of a life policy
The first part of the application asks for the age.The second part of the application provides both current and past medical information concerning the proposed insured.It is important to note that Parts I and II become part of the insurance contract while the agent's statement does not; it is confidential information between the agent and the insurance company
Basic illustration must include all the following
The name of the insurer. The age, sex and name of the proposed insured. A brief description of the contract premium for the policy. A brief description of any policy features, riders or options shown in the basic illustration and the impact they may have on the benefits and values of the policy. Identification and a brief definition of column headings and key terms used in the illustration.
EXPENSE LOADING
These expenses are added to the calculation and may include premium taxes, costs of licenses and fees, and the expenses of policy acquisition (underwriting and other costs associated with "putting the policy on the books").
Interest Adjusted Cost Method
This procedure calculates the cost of life insurance, taking into account the time value of money (investment returns on sums placed in premium dollars had these sums been invested elsewhere). This method is similar to the traditional net cost method but is more accurate because it accounts for an interest rate.
There are two types of reinsurance agreements entered into by insurance companies:
Treaty reinsurance and Specific or facultative reinsurance
Be able to identify the following and their role in the underwriting process: Medical Information Bureau (MIB), attending physician's statement (APS)
Underwriters have several other sources from which information about applicants can be obtained to formulate a risk profile of the individual. The specific sources used, and number of sources used, depend on the underwriting guidelines established by the company; the most notable criteria being age of the prospective insured and the value of the policy. The larger the death benefit and the older the proposed insured, the more comprehensive the underwriting process.
7.0 Policy Replacement Longer policies are retained by insurers
With long-lasting policies, renewal fees help the insurer to recoup the cost of issuing the policy and agents may enjoy the benefits of renewal commissions and enhanced customer relations.And potentially policyholders through dividends.
The purpose of replacement laws
is to ensure that full and clear information (as well as accurate and complete disclosure) that is not misleading is provided, allowing the policyholder to make a decision in his or her best interest. Note that the intent of replacement law is to protect the consumer, not the interests of agents and insurers.
The proper objective of any life insurance program
is to provide the amount and type of insurance the prospect needs at a premium he or she can reasonably afford.
When someone dies without a will
it is called dying "intestate" and property can only be transferred as an intestate distribution under state laws
5.0 Underwriting Life Insurance Identify the term mortality
likelihood of death, grows with age; every year that passes a person is slightly more likely to die than the year before
REPLACEMENT
means any transaction in which new life insurance or a new annuity is to be purchased and it is known, or should be known
3 types of illustrations defined
1. "Basic Illustration" means a proposal used in the sale of a life insurance policy that shows both guaranteed elements and non-guaranteed elements based on the insurer's disciplined current scale. When used in a basic illustration: a) "Disciplined Current Scale" means a scale of nonguaranteed elements that is reasonably based on actual recent historical experience. b) "Non-Guaranteed Elements" means premiums, benefits, values, credits or charges under a policy of life insurance that are not guaranteed or not determined at issue. 2. "In Force Illustration" means an illustration furnished at any time after the policy that it depicts has been in force for one year or more. 3. "Supplemental Illustration" means an illustration furnished in addition to a basic illustration that may be presented in a format differing from the basic illustration.
Existing insurers or agents that undertake conservation
Must provide the policyholder with a policy summary for the existing life insurance (within 20 days of receiving notice of replacement). The replacing insurer may request that the existing insurer provide copies of the summaries and the existing insurer must comply within five working days of the request. The existing insurer must also maintain evidence of policy summaries or other statements used in any conservation effort for at least three years.
4.3 life insurance and annuity illustrations Identify the requirements applicable to insurer for life insurance policy illustrations
Ensure that policy illustrations are understandable. Ensure that policy illustrations do not mislead purchasers of life insurance or annuities.Providing illustration formats.Prescribing standards to be followed when illustrations are used.Specifying the disclosures that are required in connection with illustrations.In the case of a policy designated as one for which illustrations will be used, the insurer must provide each policy owner with an annual report on the status of the policy.
When using an illustration an insurer, or its producers or other authorized representatives, must not do any of the following:
Provide an applicant with an incomplete illustration. State or imply that the payment or amount of non-guaranteed elements is guaranteed. Use the term "vanishing" or "vanishing premium," or a similar term that implies the policy becomes paid up by using nonguaranteed elements to pay a portion of future premiums.Represent the policy as anything other than a life insurance policy. use or describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead.Use an illustration that at any policy duration depicts policy performance more favorable to the policyholder than that produced by the illustrated scale of the insurer whose policy is being illustrated. Represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact.
