Life Insurance Basics
the 4 categories of information that needs to be gathered
1. debt 2. income 3. mortgage 4. expenses
Life insurance application basic components
1. general information 2. medical information
Purchase of life insurance for personal use - 4 reasons
1. survivor protection 2. cash accumulation 3. estate creation 4. estate conservation
what is the difference between a buyer's guide and a policy summary?
A buyer's guide provides GENERIC information on various types of policies. A policy summary provides SPECIFIC information on the policy being issued.
Types of Buy-Sell Agreements
Cross Purchase Entity Purchase Stock Purchase Stock Redemption
Cash Accumulation
permanent policies have living benefits
Survivor protection
planning for survivor needs
Preferred risks
Individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.
An underwriter may obtain information on an applicant's hobbies, financial status, and habits by ordering a(n)
Inspection report an inspection report may be ordered about an applicant from an independent investigating firm or credit agency. It is a general report of the applicant's finances, character, work, hobbies, and habits
NO premium =
NO coverage
What are illustrations in a life insurance policy?
Presentations of nonguaranteed elements of the policy
Buyer's Guide
Provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance.
premium payment mode
Refers to the frequency the policy owner pays the premium
what are the personal uses of life insurance?
Survivor protection, estate creation and conservation, cash accumulation and liquidity
True or False: Insurers cannot refuse coverage solely on the basis of adverse information on an MIB report
TRUE
effective date of coverage
policy is delivered and the premium is paid
Executive bonuses
The employer gives the employee a wage increase in the amount of insurance premium; employee is the policyowner
What is insurance underwriting?
The process of risk selection and classification
What is the purpose of the buyer's guide?
To allow the consumer to compare the costs of different policies
what is the purpose of key person insurance?
To minimize the risk of financial loss caused by the death of a key employee
Field underwriter
a life insurance producer is the company's field underwriter
What document describes the specific information about a policy?
policy summary
Human Life Value Approach (amount of insurance)
potential earning of the insured (considering salary, years to retirement, inflation)
Needs Approach (amount of insurance)
predicted needs of the surviving family (considering debt, income, Social Security blackout, expenses)
Life insurance
coverage on human lives
what term describes the fee a person pays an insurance company to receive coverage?
premium
Key Person Insurance
protects against the loss of a key employee or key executive by making the business the beneficiary if a key person dies. this helps prevent financial loss. The business is the applicant, policyowner, premium payer, and beneficiary.
what is the main responsibility of a company's underwriting unit?
risk selection
3 classifications of risks
1. standard 2. substandard 3. preferred
at what point does coverage begin when an agent issues a conditional receipt for a life insurance policy?
either on the date of the application or the date of the medical exam (whichever occurs LAST)
Liquidation
selling assets in order to raise capital
The mode of premium payment a. is the factor that determines the amount of dividends in a policy b. is the method used to compute the cash surrender value pf the policy c. does not affect the amount of premium paid d. is defined as the frequency and the amount of the premium payment
d. is defined as the frequency and the amount of the premium payment mode refers to the frequency the policyowner pays the premium: monthly, quarterly, semiannually, or annually. The amount of premium will change accordingly
Which of the following individuals must have insurable interest in the insured? a. beneficiary b. underwriter c. producer d. policyowner
d. policyowner
What is the purpose of key person insurance? a. to provide health insurance to the families of key employees b. to insure retirement benefits are available to all key employees c. to maintain an account that insures the owner of a company remains solvent d. to lessen the risk of financial loss because of the death of a key employee
d. to lessen the risk of financial loss because of the death of a key employee A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills, or business contacts. A business can lessen the risk of such loss by the use of key person insurance.
what are the three main instances when insurable interest exists in life insurance?
1. insuring your own life 2. the life of a family member 3. or the life of a business partners or someone who has a financial obligation to the policyowner
3 key factors for life insurance
1. mortality 2. interest 3. expense
what are the three factors that determine the premium for a particular life insurance policy?
1. mortality 2. interest 3. expense
3 primary factors that are used in premium determination
1. risk mortality-rate of death within a specific group 2. interest 3. expense
Attending Physician Statement (APS)
A statement usually obtained from the applicant's doctor.
mortality tables
Used by insurers to indicate the number of individuals within a specified group of individuals (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age.......tables that help insurers predict the expectation of life and the probability of death for a given group
Life insurance in business - Buy-sell agreement
a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. also referred to as a business continuation agreement
Medical Information Bureau (MIB) report
a membership corporation owned by member insurance companies. it is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. it is a way for companies to compare information they have collected
Minor
a person under legal age
Estate
a person's net worth
What is needed if insurers plan to seek and use information gathered from investigators?
a written Disclosure Authorization Notice
Policy summary
a written statement describing the features and elements of the policy being issued
Which of the following applicants could the insurer charge a higher rate of premium and not violate regulations regarding unfair discrimination? a. an applicant who is a smoker b. an applicant who was born in another country c. an applicant who is legally blind d. an applicant who has been a victim of domestic abuse
a. an applicant who is a smoker smoking or not smoking is a rating factor
Solvency
ability to meet financial obligations (ex. insurance company maintains enough assets to pay claims)
Who must be a member of insurance guaranty associations?
all insurers authorized to write insurance within a state
What is the KEY SOURCE underwriters use for information about the applicant?
an insurance application
Substandard (High Exposure) risk
applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. these policies are also referred to as "rated" because they could be issued with the PREMIUM RATED-UP, resulting in a higher premium
Retirement Fund
as a source of retirement income
When must insurable interest exist in a life insurance policy?
at the time of application
When must the policy summary for a life insurance policy be delivered to the policyowner?
at the time of policy delivery
What does liquidity mean in a life insurance policy?
availability of cash value
When J. applied for a life insurance policy, the agent informed him that a medical exam would be required. The exam may be completed by a. a home office underwriter b. a paramedic or examining physician at the insurer's expense c. the agent d. a physician of the applicant's choice and at his expense
b. a paramedic or examining physician at the insurer's expense the applicant may be allowed to select the physician or paramedic facility to perform the examination. the insurer pays the cost of such an examination
All of the following are personal uses of life insurance EXCEPT a. cash accumulation b. buy-sell agreement c. survivor protection d. estate creation
b. buy-sell agreement Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.
A key person insurance policy can pay for which of the following? a. hospital bills of the key employee b. costs of training a replacement c. loss of personal income d. workers compensation
b. costs of training a replacement a key person insurance policy will pay for costs of running the business and replacing the employee
An underwriter may obtain information on an applicant's hobbies, financial status, and habits by ordering a(n) a. attending physician statement b. inspection report c. medical information bureau report d. medical examination
b. inspection report an inspection report may be ordered about an applicant from an independent investigating firm or credit agency. It is a general report of the applicant's finances, character, work, hobbies, and habits.
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as a. juvenile protection provision b. survivor protection c. life planning d. survivorship insurance
b. survivor protection
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as a. juvenile protection provision b. survivor protection c. life planning d. survivorship insurance
b. survivor protection life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection
If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about a. which individual will pay the premium b. whether an insurable interest exists between the individuals c. the gender of the applicant d. the type of policy requested
b. whether an insurable interest exists between the individuals
If a policy includes a free-look period of at least 10 days, the Buyer's Guide may be delivered to the applicant no later than a. prior to filling out an application for insurance b. with the policy c. upon issuance of the policy d. within 30 days after the first premium payment was collected
b. with the policy
Which of the following is the basic source of information used by the company in the risk selection process? a. warranty b. consumer report c. application d. agent's report
c. application
All of the following are personal uses of life insurance EXCEPT a. estate creation b. cash accumulation c. buy-sell agreement d. survivor protection
c. buy-sell agreement buy-sell agreement is for business uses of life insurance
which of the following statements concerning buy-sell agreements is true? a. benefits received are considered income taxable b. buy-sell agreements pay in the event of a medical emergency c. buy-sell agreements are normally funded with a life insurance policy d. premiums paid are deductible as a business expense
c. buy-sell agreements are normally funded with a life insurance policy A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.
Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation? a. blackout approach b. lump-sum approach c. human life value approach (HLVA) d. needs approach
c. human life value approach (HLVA) human life value approach is determined by the loss of income that would result with the death of the insured, after making adjustments for expenses, inflation, etc.
Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation? a. blackout approach b. lump-sum approach c. human life value approach (HLVA) d. needs approach
c. human life value approach (HLVA) is determined by the loss fo income that would result with the death of the insured, after making adjustments for expenses, inflation, etc.
All advertisement are the responsibility of the a. advertising agency b. department of insurance c. insurer d. soliciting agent
c. insurer the insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.
All of the following are factors that an underwriter could use to select and classify risk EXCEPT a. occupation b. avocation c. national origin d. morals
c. national origin
Which of the following is the best reason to purchase life insurance rather than annuities? a. to create regular income payments b. to liquidate a sum of money over a lifetime c. to create an estate d. to liquidate a sum of money over a period of years
c. to create an estate with insurance, the death benefit creates an immediate estate should the insured die
The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective? a. as of the policy delivery date b. as of the first of the month after the policy issue c. as of the policy issue date d. as of the application date
d. as of the application date if the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application
Which of the following is a generic consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process? a. insurance index b. policy summary c. illustrations d. buyer's guide
d. buyer's guide
If an insured changes his payment plan from monthly to annually, what happens to the total premium? a. stays the same b. doubles c. increases d. decreases
d. decreases because the insurer would have the entire premium to invest for a full year, they would reduce the premium amount
A producer agent must do all of the following when delivering a new policy to the insured EXCEPT a. explain the policy provisions, riders, and exclusions b. collect any premium due c. explain the rating procedures if the policy is rated differently than applied for d. disclose commissions earned from the sale of the policy
d. disclose commissions earned from the sale of the policy A producer must explain policy provisions, exclusions, and riders at the time of delivery, as well as the rating procedures, especially if the policy is rated differently than applied for. The producer must also collect any due premium and have the insured sign the statement of continued good health.
All of the following are factors that an underwriter could use to select and classify risk EXCEPT a. morals b. occupation c. avocation d. national origin
d. national origin
Cash value
equity amount accumulated in permanent life insurance
Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?
estate conservation
How does the premium mode affect the total premium paid for insurance for the year?
higher frequency of premium payments will result in higher overall premium
higher frequency =
higher premium
Standard risks
individuals who are entitled to insurance protection without extra rating or special restrictions. representative of the majority of people at their age with similar lifestyles. The AVERAGE risk.
What type of report provides information about the applicant's hobbies, habits and financial status?
investigative consumer report
If an insured changes his payment plan from monthly to annually, what happens to the total premium?
it will decrease
Bequests
leaving funds to the insured's church, school, or a charity
Mortality tables are used by insurance companies to predict what?
life expectancy and death rates for specific groups of individuals
what type of insurance creates an immediate estate?
life insurance
Estate Creation
life insurance creates an immediate estate
what is included in Part 2 of a life insurance application?
medical information about the prospective insured
all other factors being equal, which premium payment mode will require an overall higher premium: monthly or annual?
monthly
Can insurers advertise the existence of the guaranty association during solicitation and sale of insurance policies?
no, advertising of the existence of the guaranty association for the purpose of solicitation and sale of insurance policies by insurers is an illegal business practice
Buy-sell funding
not really insurance, but a business continuation agreement
Education funds
paying for children's education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market
Emergency Reserve Funds
paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members
Debt Cancellation (as an alternative to Estate Liquidation)
paying off debts of the insured such as home mortgage, or auto loans.
Lump-sum
payment of the entire benefit in one sum
what type of life insurance offers an applicant a cash value element?
permanent insurance (usually, whole life)
The higher the risk, the higher the ________?
premium
what is the term that describes the frequency and the amount of the premium payment?
premium mode
Illistrations
presentation or depiction of non-guaranteed elements of a life insurance policy
monthly > quarterly > ___________ > _____________
semi-annual > annual
Costs associated with death (postmortem)
taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance
Adverse selection
tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk
What must an agent do if the premium is not paid with the application?
the agent must obtain the premium and a statement of continued good health at the time of policy delivery
If the initial premium is not paid with the application
the agent will be required to collect the premium at the time of policy delivery. the policy does not go into effect until the premium has been collected.
what is the purpose of the agent's report during the application process?
the agent's report discusses the agent's personal observations about the proposed insured that may help in the underwriting process
Death benefit
the amount paid upon the death of the insured in a life insurance policy
A business is the owner and beneficiary of a key-person life policy. When the business collects the policy benefit, how is it taxed?
the benefit is received tax free
Who is the beneficiary on a key-person life insurance policy?
the employer
If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter's main concern?
the existence of insurable interest between the applicant and the insured
premium payment mode
the higher the frequency, the higher the premium
When planning for survivor protection in life insurance, what needs to be considered?
the insured's current assets, liabilities, and survivor's needs
Who must have insurable interest in the insured?
the policyowner
In calculating the amount of life insurance needed, what is the needs approach based on?
the predicted needs of a family after the premature death of the insured
mortality
the ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population
Key Person
third party ownership- business is the owner; employee is the insured
what is the purpose of insurance guaranty associations?
to protect policyowners, insureds and beneficiaries from financial losses caused by insolvent insurers
Stock purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Cross purchase
used in partnerships when each partner buys a policy on the other
Stock redemption
used when the corporation buys one policy on each shareholder
Entity purchase
used when the partnership buys the policies on the partners
Estate Conservation
using life insurance proceeds to cover estate taxes
