Life Insurance Basics

Corporate-Owned Life Insurance

A corporation might purchase a life insurance policy to cover key people i border to indemnify the business against the low of knowledge and experience, and to assist in financing the cost of employee benefit plans such as deferred compensation plans.

Mortality Charge

The mortality charge is a part of a life insurance premium, and is the actual cost of insurance in a life policy.

Split-Dolalr Life Insurance

This allows employees to buy life insurance at reduced costs, "splitting" premium costs with employers. 1. The employer pays the cost of the insurance that will be applied to the cash value of the policy. The policy's cash value can be entered as an asset on the company's balance sheet. 2. The employee pays the cost of the actual insurance proceeds benefit. 4. Upon the employee's death, the employer i paid the greater of the premiums paid or the cash value of the policy. The employee's beneficiary is paid the death benefit minus the amount paid to the employer.

Producer - Responsibilities Solicitations and Sales Presentations

*Read in Book* pg. 31

Advertising Regulations

*Read in Book* pg. 32

Chronically Ill

1. Being unable to perform at least two activities of daily living, or ADLs (eating, toiling, transferring, bathing, dressing, or continence). 2. Requiring substantial supervision by another person to protect the individual from threats to health and safety due to severe cognitive impairment.

Business Continuation Insurance

1. Helps a business continue to operate when the death of the owner might otherwise cause the company to go out of business 2. Protects assets of the business from forced liquidation by making funds available to surviving family members and/or partners.

General Account vs. Separate Account

1. Money invested in a fixed policy goes into the general accounts of the company, and consequently the safety of such an investment may be affected by he stability and strength of the company. 2. A separate account is held by an insurance company for the investments made through variable contracts. The general and separate accounts may not be co-mingled.

Ordinary vs. Industrial (Home Service)

1. Ordinary life insurance policies normally have face value amounts of more than $1,000, and have a variety of structures and benefits. 2. Industrial life policies are simple policies with: a) benefits of $1,000 or less (but may be more) b) premiums that are collected at the insured's home on a weekly or monthly basis. The name comes from the fact that they were originally sold to industrial workers who were paid weekly; they are also known as home service policies since the agent normally comes to the home to collect the premium. The agent's territory is called his "debit." This method of marketing today represents less than 2% of life insurance in force in the U.S.

Permanent life insurance

1. Permanent insurance protection 2. More expensive to own 3. Builds cash value 4. Loans are permitted against the policy 5. Favorable tax treatment of policy earnings 6. Level premiums

Viator

1. the owner of a life insurance policy or a certificate holder under a group policy who enters or seeks to enter into a viatical settlement contract. 2. a person with a catastrophic or life threatening illness who has a life insurance policy and sells or intends to sell it in a viatical settlement; one who owns and assigns a life insurance policy in a viatical settlement.

Section 303 Stock Redemption

A Section 303 Stock Redemption takes place when a corporation buys its own stock from the estate of a stockholder to pay death taxes, funeral expenses and the cost of estate administration. The sale is income tax free to the estate. It's purpose is to keep the stock of a closely held company from being sold to outsiders upon the death of one of the shareholders. To be eligible for this stock redemption, the stock must be included in the stockholder's gross estate for estate tax purposes, and the value of the stock must comprise more than 35% of the adjusted gross estate. The corporation must redeem the stock out of corporate surplus and the redemption must generally occur within four years after death. life insurance makes it possible to assure cash will be available to the corporation when it is needed to pay for the stock buy back without raiding corporate cash reserves. The business is the owner and beneficiary of the policy.

Viaticated Policy

A life insurance policy or certificate that has been the subject of a completed viatical settlement contract or viatical loan contract.

Viatical Settlement Broker

A person that, on behalf of another and for a fee, commission or other valuable consideration introduces victors to viatical settlement providers, or offers or attempts to negotiate viatical settlement contracts between a viator and one or more viatical settlement providers.

Viatical Settlement Provider

A person, other than a viator, that enters into or effectuates a viatical settlement contract.

Expense Charge

A premiu expense charge imposed by an insurer is typically found on universal life insurance policies and is designed to enable the insurer to recover its business acquisition costs and premium taxes.

Viatical and Life Settlements - General Rules

A viatical or life settlement purchase agreement is the contract or agreement in which the viatical or life settlement buyer agrees to buy all or part of a life insurance policy on the life of someone with a critical or terminal illness. This gives the buyer access to the policy's death benefit.

Viatical Loan Contract

A written agreement through which a life insurance policyholder or a person covered under a group policy who has a catastrophic, life-threatening or chronic illness or condition secures a loan from a viatical loan provider by using the policy as collateral. The secured loan amount is less than the face value of the policy; the difference between the loan principal and the face value of the policy is used to pay, among other things, the accrued loan interest. Upon repayment of the viatical loan, the viatical loan provider's collateral interest in the policy terminates and the security interest is released to the original policyholder, or his or her designee. Viatical loans do not include loans taken against the cash value of a life insurance policy for the purpose of paying premiums due.

Fraudulent Viatical Settlement Act

Because of widespread fraud in some segments of the viatical settlement industry, many states have developed Fraudulent Viatical Settlement Acts to detail the legal conduct of these types of policy contracts. Some provisions of the various acts include: 1. requiring and defining the licensing and conduct of viatical settlement brokers 2. requiring disclose of a) facts regarding viatical settlements, including the financial consequences of selling a life insurance policy in a viatical settlements b) possible alternatives to a viatical settlement 3. making it unlawful to solicit or sell viatical settlement contracts using untrue facts or by engaging in any type of fraud regarding viatical settlement contracts.

Cash Accumulation

Certain kinds of policies allow the owner to save money due to the cash value that accumulates.

Estate Conservation

Estate conservation provides funds to pay taxes, probate fees, and other final expenses allowing the estate to pass fully to their heirs.

Estate Planning

Estate planning is the establishment of trusts or purchase of annuities to provide for continued long term income streams for dependents.

Effect of Non-payment of Premium

If the insured does not pay the premium when due, and after any grace periods expire, the policy is canceled and the insured no longer has insurance.

Coordination with Social Security, Employee Benefit Plans, and Other Assets

If there are sources of available income, such as Social Security, an employee life insurance policy, pension payments, investments, etc., those amounts should be considered when computing the amount of a life insurance policy purchase. If those sources are not figured in, the policy amount could be inflated beyond what is actually necessary.

Executive Bonuses

In an executive bonus life insurance plan, the company pays the executive a bonus so that an individual can purchase cash value life insurance with him or her as the owner, insured, and designator of the beneficiary.

Debt and Final Expenses

Includes burial costs, medical bills, and other debt.

Fraudulent Acts & Prohibited Practices

It is prohibited to enter into a viatical settlement within two years of the insurance policy's issue unless: 1. the policy was issued as the result of the victor's conversion from a group policy so that coverage has been in effect for 24 months or more. 2. the insured has become terminally ill or disposes of ownership interests in closely held corporation subject to terms of a buyout agreement in effect at the time the original life policy was issued.

Viatical Settlement Broker Authority & Licensing

Life and annuity agents must obtain a license before selling viatical agreements by submitting the proper application and paying the appropriate fee.

Security

Life insurance can offer a certain amount of financial independence and freedom from doubt or anxiety over money issues for the survivors of the insured.

Life and Health Guaranty Association

Most states have

Load Expense Charges

Mutual funds are usually sold through a financial advisor. The load is a sales charge, or commission, that compensates the advisor for his or her services, including fund selection advice when you buy shares of the fund and throughout the course of the investment. There are two general categories of mutual fund costs: sales charges and annual expenses

Interest Earnings

Premium dollars are invested in various investments-stocks, mutual funds, real estate, etc., and the returns on these investments, including earned interest, help to keep the overall cost of life insurance premiums down.

Change of Insured Provision

The change of insured provision allows a company to maintain a key person policy for a succeeding key person if the original individual leaves the company, without the need to cancel the policy and issue a new one.

Insurer Operating Expenses

The costs of doing business, including buildings, salaries, agent commissions, technology, and supplies can raise or lower premium amounts equal the insurer operating expenses.

Mortality

The likelihood of death among members of a group. Life insurance policies deal with mortality. Mortality tables use individual health factors along with age and sex o help predict longevity. Example - An overweight person's life expectancy may be less than that of the same person with a normal weight, and could be moved to the rate of an individual of an older age.

Permanent vs. Term

The two basic types of life insurance policies are term life insurance and permanent life insurance. Term life offers coverage for a specific and predetermined period of time, and its only benefit is a death benefit. Permanent life offers a death benefit and the accumulation of cash value, three examples of which are whole, universal, and variable life policies.

Group Policies

Written on a group of people under a single master policy usually issued to their employer or another trustee. Individual group members usually issued certificates of coverage rather than copies of the policy. 1. The master policyholder or sponsor assists in the plan's administration. 2. Coverage is generally term life but can be permanent insurance. 3. If an employer is the master policyholder and pays premiums, costs on policies with a face amount of up to $50,000 are income tax-deductible for the employer.

Front end load

a sales charge at the time the investor/insured buys the shares. Also called A shares

Rear end load

sales charge at the time the investor/insured sells the shares. Also called B shares.

Level load

When funds have a level load, the investor pays an annual sales charge. A level load may be lower than a front or back-end load, he/she may pay more if the shares are owned for many years. Shares that have a level load are referred to as C shares. There are also No-Load Mutual Funds, that do not have sales charges.

What Must Be Disclosed

*Read in book*

Viatical Settlement Purchaser

1. A person who gives money as consideration for a life insurance policy or an interest in the death benefits of a life insurance policy. 2. A person who owns, acquires or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy that has been or will be the subject of a viatical settlement contract, for the purpose of deriving an economic benefit.

Other Contributing Individual Factors

1. Age 2. Gender (sex) 3. Tobacco Usage-Smoking, chewing, etc. Tobacco users will have a higher premium. If the insured stops using tobacco for a period of one to two years or longer, they may be able to re-qualify for a non-tobacco user premium 4. Occupation 5. Avocations/Hobbies

Net Premium

Gross policy premium minus agent's or broker's commissions; the premium available to pay anticipated losses, prior to any loading for other expenses.

Pre-Existing Conditions

Pre-exiting conditions are health conditions the applicant has at the time of policy application. Health conditions that the insured has had may affect whether a policy will be issued with exclusion riders for those conditions or fi the application will be declined.

Factors in Premium Determination - Morbidity

The likelihood of illness or accident happening with a particular group of people. Accident and health insurance policies are concerned with morbidity and actuarial tables help to show that morbidity. These statistics are then used to help determine the premium for health and accident policies for different groups.

Premium Concepts - Net Single Premium

When an insurer charges a net single premium for a life insurance policy, the policy owner pays one large single premium at the policy's inception. This cash along with interest that will accuse on it, will be sufficient to cover all insurer expenses associated with the policy as well as develop cash value and cover the death benefit risk. The policy owner does not need to make any further payments.

Personal Uses of Life Insurance

While many people think of using life insurance benefits only after death, there are many uses for policy value during a person's life as well.

Term life insurance:

1. Temporary insurance protection 2. Low cost 3. No cash value 4. Usually renewable 5. Conversion (depending on the policy) to permanent life insurance

Participating vs Nonparticipating

A mutual life insurer may issue policies on both a participating (sharing in the profits of the company) and nonparticipating basis, provided that the right or absence of participation is related to the premium charged. The policy must clearly state whether it is participating or nonparticipating. (Also par/non-par.).

Business Uses of Life Insurance

Business Life Insurance provides capital needed to keep a business running through the economic impact of an owner or major employee's death. If the company pays premiums as an expense and deducts the premium cost from taxable income, the death benefit will be subject to income taxation. If the premiums are paid with after-tax dollars, there will be no income tax imposed upon payout of the policy's death benefit.

Human Life Value Approach

The needs approach attempts to determine how much life insurance will be needed by surviving dependents to cover their needs and expenses, and also any expenses that result from the death of the insured.

Viatical Loan Borrower

The owner of a life insurance policy or the certificate holder under a group life insurance contract insuring the life of a person with a catastrophic, life-threatening or chronic illness or condition who enters into a viatical loan contract with a viatical loan provider.

Deferred Compensation Plans

1. An arrangement in which an employee agrees to defer some of their current income until a future date, such as retirement. 2. The employer uses the deferred income to purchase cash value life insurance. 3. The cash value of the insurance is used to help supplement the employee's retirement income, or if the employee dies before retirement his or her beneficiary will receive the death benefit. 4. Deferred compensation plans are non-qualified plans for tax purposes (not tax-deductible) allowing companies to choose which employees can participate. These plans are usually reserved for the company's officers, executives, or other highly paid employees.

Group and Individual Life Insurance Underwriting Differences

1. Exposure to claim payment is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group because of this reduced adverse selection - everyone is insured. 2. Underwriters look more closely at specific health history of an insured. 3. Insurers cannot discriminate against an individual in the group who has poor health. People who might be declined individually may be included in a group policy as a condition of employment/membership in the group. 4. Adverse Selection - Over time, health risks in the group change as people are added to or subtracted form the group and can lead to an uneven balance between older and unhealthy people compared to eh number of younger and healthy individuals. 5. Group credit life usually lists the creditor as the beneficiary in order to pay off the debt. Individual credit life lists the individual credit life lists the individual as beneficiary who will be responsible for paying off the debt when the insured dies.

Viatical Settlements

In a viatical settlement, a terminally ill policy owner sells his or her life insurance policy at a discount for cash to a third party. The insured gains access to money for medical bills prior to death rather than the policy beneficiary getting the death benefit later. When the original owner dies, the third party receives the policy's entire death benefit. The new owner is actually investing in the death benefit of the policy.

Survivor Protection

This provides income for spouses, children and other dependents after the death of the insured.

Fixed vs. Variable Life Insurance

A fixed life insurance policy is one that has a set, guaranteed interest rate. A variable policy has an interest rate that changes along with a set of mutual funds or other stock market indicator. When the stock market performs well the cash value in the variable products increases. If the value of the stocks, mutual funds, or other indicators decreases, the cash value in the variable product will also decrease. The cash value within the fixed product will always increase at a pre-determined rate, but because there is more risk with the variable policy there is a chance for greater return on the cash value (as well as the chance for loss).

Avoiding Adverse Selection

Adverse selection is insuring too heavily those needing coverage the most (the sick and elderly) without the balanced insuring of those that do not need it as much (the young and healthy). 1. It is a major part of the underwriter's job to avoid adverse selection and charge sufficient premium. 2. If premiums are too high, healthy individuals will likely find coverage elsewhere leaving the sick and those using benefits as the only ones maintaining coverage, as their now pre-existing conditions preclude them from obtaining coverage elsewhere.

Advertising

An advertisement can be: 1. printed material and descriptive literature produced by an insurer to be used in newspapers, magazines, radio and television scripts, billboards, and other publications and displays. 2. sales aids of all types produced by an insurer for presentations to the public, including circulars, leaflets, booklets, illustrations, form letters, and others 3. prepared sales presentations and presentation material for use by agents, brokers, and other representatives insurers.

Gross Annual Premium

As opposed to the net single premium, the gross annual premium is a pay-as-you-go policy. The insurer charges the policy owner the cost of maintaining the policy that year, though this cost is generally evened out to stay the same over the life of the policy. Over time the cost for the annual premium policy will exceed the single premium policy, unless the insured were to die early in the policy period where only a few premiums had been paid. The full annualized premium is due each year. If policy owner is paying the premium on a monthly basis and the insured were to die in the middle of the year, the cost for the remainder of that year's premium that had not yet been paid would be subtracted from the death benefit before settlement.

Terminally Ill

Having an illness or sickness that can reasonable be expected to result in death in 24 months or less

Insurable Interest

The concept of insurable interest is an underwriting test for an application of insurance that demonstrates the person purchasing a policy has a legal interest in the continued longevity of the insured. In life insurance, the owner must have insurable interest in the insured at the time of application, and examples of this would be a: 1. Spouse 2. Parent 3. Child 4. someone with a business relationship with the insured, such as a partner or employer However, insurable interest is not required at the time of the insured's death.

Types of Information Gathered

The needs approach attempts to determine how much life insurance will be needed by surviving dependents to cover their income needs and expenses, and also any expenses that result from the death of the insured. There are three steps in this technique: 1. Identify the needs that arise or continue to exist after the death of the insured. 2. Identify any existing available resources (savings, employer life insurance, Social Security, etc.) 3. Calculate the difference between the needs and the available resources. This figure will represent the household's unmet needs, and is the amount to be covered by a life insurance policy.

Regulation of Variable Products

The state securities and regulated industries bureaus enforce uniform securities acts. Primary focus is on cases involving securities fraud and sale of illegitimate products including boiler room sales activity. These bureaus enforce anti-fraud, securities registration and broker/dealer licensing laws. They review securities registration to ensure compliance with the full disclosure and investor protection sections of the code and also review the disciplinary history of broker-dealers and agents to determine whether licenses should b revoked. In addition to the state bureaus the federal government set up the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) to administer the federal securities laws. It is the primary mission of the Sec to protect investors and maintain the integrity of the securities markets.

Contribution to Surplus/Policy Reserves

These are the liquid cash reserves insurers must maintain to meet expected death benefit payments and cash value payouts from canceled policies. 1. A certain amount of each premium payment must go toward the build-up of the monetary reserves set aside for claim payments. 2. The amount of insurance that can be issued is based on this reserve, or surplus amount.

Planning for Income Needs

Income needs would include a readjustment fund to maintain the family's lifestyle while adapting to life without the deceased, income during the period when children are dependents, and a source of income for the lifetime of the spouse.

Key Employee Life Insurance

1. Protects the business owner when an individual or a small group of people is essential for the business' continued operation. 2. Employer buys life insurance on the life of the key employee, usually equal to one to two years' salary. 3. employer is the beneficiary and owner of the policy, and if the key employee dies, the business can use the death proceeds to hunt for and hire someone to take the place of the deceased key employee.

Examinations, Record Retention, Investigations

1. The department may examine or investigate any person or business that is necessary or material to the examination of a licensee. 2. Records must be kept for five years. 3. Any costs incurred during an exam of a provider or broker will be charged to the provider/broker.

Disclosure to Consumers

A disclosure statement must be given to each viator or insured before the individual is asked to sign any documents and at the time the viatical settlement is signed by all parties. The disclosure statement must be signed and contain the following: *Read in book*

Viatical Settlement Contract

A written agreement entered into between a viatical settlement provider and a viator. The agreement must establish the terms under which the viatical settlement provider will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy or certificate, in return for the victor's assignment, transfer, sale, devise or bequest of the death benefit of ownership of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider.

Liquidity

Life insurance can be an excellent source of liquidity because the proceeds from life insurance are paid in cash and are tax-free. This can be useful of paying off debts and providing cash to pay taxes when there are not enough liquid assets to do so.

Premium Payment Modes

Premiums can be paid: 1. annually 2. semiannually 3. quarterly 4. monthly 5. through a Bank Check Plan in which the premium is deducted on a monthly basis from the insured's bank account. The mode in which premium is paid affects the actual amount paid. 1. The annual mode is generally the least expensive. 2. Annual and Bank Check Plan modes are the most likely to stay in force longest.

Classes of Life Insurance Policies - Individual Policies

Single policies written on or for a particular individual who receives a copy of the policy. The policy can be one of a great number of types.

Stranger/Investor - Originated Life Insurance (STOLI)/(IOLI)

Stranger originated life insurance is also referred as investor initiated life insurance. One of the requirements of a life insurance policy is that the owner must have an insurable interest in the life of the insured at the time of policy application. In stranger originated life insurance a third party is involved who has no relation with the policy owner and initiates the purchase of the policy by paying the premiums and later buying the policy thereby profiting upon the death of the insured. Such transactions violate the law which is specifically designed to ensure that the person buying the life insurance policy review benefit from it and has an economic interest (called insurable interest) in the continued life and not death of the insured.

Buy-Sell Agreements/Cross-Purchase Plans

These are arrangements between partners or associates in which surviving members agree to purchase the ownership interest in the company from the deceased owner's estate at a predetermined price. 1. Life insurance is the funding vehicle. 2. A licensed attorney draws up the actual agreement binding the owners contractually to carry out the purchase upon the death of the other.

Determining Lump-Sum Needs

Lump-sum needs (or immediate cash needs) might include: 1. Funds for last expenses - funeral costs, applicable taxes, outstanding debts, medical costs, etc. 2. An emergency fund to help with unexpected expenses, especially in the period immediately following the death of the insured 3. Educational needs of the family 4. Mortgage and other payment funds.