Michigan- Life Insurance Basics

Variable Life Insurance

(or annuities) are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it. Because the values are supported by investment, they may decrease or increase.

Fixed Life Insurance

(or annuities) are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract.

What does the term "Advertisement" include?

-Direct mail; Newspapers; -Magazines; -Radio scripts; -Television scripts; -Billboards; -Circulars; -Leaflets; -Booklets; -Depictions; -Illustrations; -Form letters; Lead-generating devices of all kinds; -Prepared sales talks.

What are the Responsibilities of Field Underwriter during the Process?

-Proper solicitation of applicants; -Helping prevent adverse selection; -Completing the application; -Obtaining the required signatures; -Collecting the initial premium and issuing the receipt, if applicable; -Delivering the policy.

Other Characteristics of Group Policies

-The group must exist for a reason other than purchasing group insurance; -Individual members covered under the group master policy must have the right to convert their coverage to an individual policy without evidence of insurability should they leave the group.

Key Person

A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance. With this coverage, the key employee is the insured, and the business is the Applicant; Policyowner; Premium payer; and Beneficiary. In the event of death of a key employee, the business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage.

-Buy-sell Funding

A buy-sell agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

Insurable Interest

A financial interest in the life of another person; a possibility of losing something of value if the insured should die. In life and health insurance, insurable interest must be stated at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

Producer Report

As a field underwriter, the agent (or producer) can be considered the most important source of information available to the company underwriters. The agent's report provides the agent's personal observations concerning the proposed insured. The agent's report does not become a part of the entire contract, although it is a part of the application process.

-Liquidity

As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner. That means the policy's cash values can be borrowed against at any time and used for immediate needs.

Advertising

Every insurance company must establish and at all times maintain a system of control over the content, form, and method of dissemination of all advertising of its policies. The insurer whose policies are advertised is responsible for all these advertisements, regardless of who wrote, created, presented, or distributed the advertisements.

Life and Health Insurance Guaranty Association

Guaranty Associations are formed to protect policyowners, insureds, beneficiaries, and anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers. The association will pay covered claims up to certain limits set by state law. The Association is funded by its members through assessment. All authorized insurers, which are required to be the members of the Association, contribute to a fund to provide for the payment of claims for insolvent insurers.

Example: Buy-Sell Funding

Here is an example of a cross-purchase buy-sell agreement: Partnership AB has two partners, A and B. The value of the business is $1,000,000. The partners each have an equal interest ($500,000 each). A buys a life policy on B for $500,000, and B buys a life policy on A for $500,000. If A dies, B gets 100% ownership of the business and A's heirs receive $500,000.

Selection Criteria and Unfair Discrimination

Information the companies obtain relating to risk factors aid the underwriters in determining the extent of the risks involved. In order to avoid adverse selection, the company will discriminate in favor of good risks and against poor risks. However, insurance companies cannot unfairly discriminate between individuals of the same class and equal life expectancy in the rates, benefits, or any terms and conditions of the contract.

Determining Lump-sum Needs

Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:

Solicitation and Sales Presentations

It begins with solicitation. Means an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing. This includes providing information about available products, describing the policy benefits, making recommendations about a specific type of policy, and trying to secure a contract between the applicant and the insurance company. Any sales presentations used by insurers or their agents in communication with public must be accurate and complete.

Premium Determination

Once the company determines that an applicant is insurable, they need to establish an appropriate policy premium. The premium will be used to cover the costs and expenses to keep the policy in force. Premiums are paid in advance.

Permanent vs. Term

Regarding the length of coverage, all life insurance policies fall into 2 categories: temporary and permanent protection.

Declined Risks

Rejected applicants; Risks that the underwriters assess as not insurable are declined. For example, a risk may be declined for one of the following reasons: -There is no insurable interest; -The applicant is medically unacceptable; -The potential for loss is so great it does not meet the definition of insurance; -Insurance is prohibited by public policy or is illegal.

Interest

Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds (invested in bonds, stocks, mortgages, etc.). This interest is a primary factor in lowering the premium rate.

Medical Information Bureau (MIB)

The MIB is 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 systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered. The MIB can be used only as an aid in helping insurers know what areas of impairment they might need to investigate further. An applicant cannot be refused simply because of some adverse information discovered through the MIB.

Field Underwriter

The agent is the company's front line, because the agent is usually the one who has solicited the potential insured.

Producer Report

The agent's report allows the agent to communicate with the underwriter and provide information about the applicant known by the agent that may assist in the underwriting process.

Survivor Protection

The death of the primary wage-earner will usually stop the flow of income to a family. The death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. 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. -Planning for survivor protection requires careful examination of current assets and liabilities as well as determining what survivors' needs may be.

Expense

The expense factor, also known as the loading charge, also affects premium rates. Insurers have various operating expenses, so each premium must carry a proportionate share of these operating costs. The insurer's largest expense is the commissions paid to its agents. Other ongoing expenses include payroll, rent, and taxes.

Human Life Value Approach

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

Attending Physician's Statement (APS) Steps

The insurance company must pay for this information, but it is often less expensive than ordering an examination. The next step would be a paramedical exam (which often includes blood work and a urine sample). A paramedical exam is conducted by a registered nurse or a paramedic. Under certain circumstances the underwriter may require a full medical examination by a licensed physician for additional information. All these are at the insurer's expense. A full medical exam occurs routinely for applicants requesting higher amounts of coverage, or if the application raised additional questions concerning the health of the prospective insured, or for applicants beyond a certain age. Each company establishes standard requirements, based on age and amount of coverage, and reserves the right to request additional information and testing, at their own expense.

Needs Approach

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

Life Insurance Policy Cost Comparison Methods

To help consumers make educated decisions on purchasing life insurance, the industry developed specific methods and indexes that measure and compare the actual policy costs. These comparisons are usually included in policy illustrations. Traditional methods of comparing costs are interest-adjusted net cost method and comparative interest rate method.

Investigative Consumer (Inspection)

To supplement the information on the application, the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. They are general reports of the applicant's finances, character, work, hobbies, and habits. Companies that use inspection reports are subject to the rules and regulations outlined in the Fair Credit Reporting Act.

-Liquidation vs. Retention of Capital

Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset (such as a home).

Changes on the Application/Amendments

When an answer to a question on the application needs to be corrected, agents have the option, depending on which insurer they represent, of correcting the information and having the applicant initial the change, or completing a new application. An agent should never erase or white out any information on an application for insurance.

Substandard (High Exposure) Risks

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.

Advertising rules

apply to any insurance advertisement intended for presentation, distribution, dissemination or other advertising use when used or made either directly or indirectly by or on behalf of the insurance company.

Standard Risks

are persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. They are the average risk.

Retirement Fund

as a source of retirement income;

Bequests

leaving funds to the insured's church, school, or a charity.

What Advertisements May Not Describe?

may not describe a policy limitation, exception or reduction in a positive manner to imply that it is a benefit. For example, the advertisement may not state that "even pre-existing conditions are covered after 2 years." The advertisement must fairly accurately describe the negative features of the limitations. Each agent and agency must keep a file of all advertising printed, published or prepared by the agency along with records of the advertising distribution. Files must be maintained for a period of 4 years from last use.

Nonparticipating (Stock)

policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders.

Life Insurance

protects against financial loss associated with an insured's death, and pays a death benefit to beneficiaries upon the death of the insured. The policyowner of the insurance contract pays a premium to the insurer. The insurer issues a policy covering the insured. In the event of the insured's death, the insurer pays the death benefit to the beneficiary. -May be purchased by individuals or businesses.

Buyer's Guide

provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. This document explains how a buyer should go about choosing the amount and type of insurance to buy, and how a buyer can save money by comparing the costs of similar policies. Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium. If the policy contains an unconditional refund provision of at least 10 days (free- look period), a buyer's guide can be delivered with the policy.

Participating (Mutual) Life Insurance

refers to any policy that distributes its nontaxable dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance.

Mortality Tables

used by insurers, 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. In other words, these tables help the insurers predict the expectation of life and the probability of death for a given group.

The Unconditional (Binding) Receipt

used most often with property and casualty insurance. With the binding receipt, coverage begins immediately for a specific length of time, until the policy is issued. Binding receipts usually stipulate that coverage is effective from the date of the application for only a specified period of time, such as 30 or 60 days, or until the company either issues or declines coverage, whichever occurs first.

Factors in Premium Determination

There are three primary factors that are used in premium determination: risk (mortality - rate of death within a specific group), interest and expense.

Preferred Risks

are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.

Each producer who initiates the application must submit the following

-A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction; -A signed statement as to whether the producer knows replacement is or may be involved in the transaction.

Examples of underwriting practices in life/health insurance that would constitute unfair discrimination between individuals of the same class

-Discriminating in policy rates and benefits based solely on: Age or gender; Physical or mental impairment; Blindness or partial blindness; or Genetic characteristics or genetic testing -Investigating as part of the underwriting process a proposed insured's sexual orientation

What must a Life Insurance Illustration do?

-Distinguish between guaranteed and projected amounts; -Clearly state that an illustration is not a part of the contract; -Identify those values that are not guaranteed as such. An agent may only use the illustrations of the insurer that have been approved, and may not change them in any way.

Duties of the replacing producer

-Present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer. A copy must be left with the applicant. -Obtain a list of all existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all companies being replaced. -Leave the applicant with the original or a copy of written or printed communications used for presentation to the applicant. -Submit to the replacing insurance company a copy of the replacement notice with the application.

Signatures Required

Both the agent and the proposed insured (usually the applicant) must sign the application. If the proposed insured and the policyowner are not the same person, such as a business purchasing insurance on an employee, then the policyowner must also sign the application. An exception to the proposed insured signing the application would be in the case of an adult, such as a parent or guardian, applying for insurance on a minor child.

Business Uses of Life Insurance

Businesses use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured. The most common use of life insurance by businesses is as an employee benefit, which serves as a protection for employees and their beneficiaries. There are also other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees.

Example- Premiums With The Application

If an agent collects the initial premium from an applicant and gives the applicant a conditional receipt, and the applicant dies the next day, the underwriting process will proceed as though the applicant were still alive. If the insurer ends up approving the coverage, then the applicant's beneficiary will receive the death benefit of the policy. If, on the other hand, the insurer determines that the applicant was not an acceptable risk and declines the coverage, the premium will be refunded to the beneficiary, and the insurer is not required to pay the death benefit.

Individual Underwriting By The Insurer

In order to properly select and classify insurance risks, the insurer needs to obtain the applicants' background information and medical history. There are several sources of underwriting information that are available to the underwriters.

Michigan Policy Replacement

In the state of Michigan, the replacing insurer must notify the existing insurer of a replacement within 3 business days following the receipt of the application or on the day the policy is issued, whichever is sooner. When replacing a policy, insurers must maintain copies of any proposals used, proof that the applicant received the Notice Regarding Replacement, and the applicant's signed statement acknowledging the replacement. These must be kept for 3 years, or until the next examination by the Commissioner.

-Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. For example, some life policies (those that provide permanent protection, such as whole life) accumulate cash value that is available to the policyowner during the policy term.

Policy Issue And Delivery

Once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured. Although personal delivery of the insurance policy is the best method of finalizing the insurance transaction, mailing the policy directly to the policyowner is acceptable. When the insurer relinquishes control of the policy by mailing it to the policyowner, policy is considered legally delivered. However, it is advisable to obtain a signed delivery receipt.

Duties of the replacing insurance company

Require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant; and Send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the application is received in the replacing insurance company's home or regional office. A policy summary or ledger statement containing policy data on the proposed life insurance or annuity must be included.

-Security

The purchase of life insurance provides the policyowner a sense of security in case uncontrollable circumstances make it impossible for a wage earner to continue in such capacity. Life insurance can guarantee future financial certainty for the surviving family of the insured.

-Replacing Insured's Salary or Lost Services

The surviving spouse who was the caregiver of the children may have to train to enter the job market. If the spouse works outside the home, a new expense for day care must be considered.

Use and Disclosure of Insurance Information

When insurers plan to seek and use information from investigators, they must first provide the applicant or insured with a written Disclosure Authorization Notice. The notice will state the insurer's practice regarding collection and use of personal information. The disclosure authorization form must be written in plain language, and must be approved by the head of the Department of Insurance.

Premium Receipt

Whenever the agent collects premiums, the agent must issue a premium receipt. The type of receipt issued will determine when coverage will be effective.

If the full premium was submitted with the application

and the policy was issued as requested, the policy coverage would generally coincide with the date of application. Sometimes it is possible to lower the premium rate by backdating (or antedating) an application for insurance. If the applicant chooses to do this, the policy may be backdated for no more than 6 months before the date of the application or the medical examination, whichever is later. All premiums must be paid from the effective date of the policy. The only allowable reason that an application may be backdated is to affect a lower premium.

Policy Summary

is a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. A policy summary will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. The policy summary must be provided when the policy is delivered.

Term Life Insurance

is temporary life insurance provided for a specific period of time. It is also known as pure life insurance.

Replacing insurer

is the company that issues the new policy

Existing insurer

is the company whose policy is being replaced

Morality

is 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.

Policy Replacement

means any transaction in which new life insurance or a new annuity is purchased and, as a result, the existing life insurance or annuity has been or will be any of the following: -Lapsed, forfeited, surrendered, or otherwise terminated; -Reissued with any reduction in cash value; -Converted to reduced paid-up insurance, continued as extended term insurance or otherwise reduced in value by the use of nonforfeiture benefits or other policy values; -Amended so as to affect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid; -Used in a financed purchase.

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. In this case, the policy does not go into effect until the premium has been collected. The agent may also be required to get a statement of good health from the insured. This statement must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date.

Valid Insurable Interest may Exist between Policyowner and Insured when the Policy is Insuring?

1. Policyowner's own life; 2. The life of a family member(a spouse or a close blood relative); 3. The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as debtor to a creditor).

-Estate Creation

A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time. -is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, he/she will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost.

Premium Payment Mode

In regards to insurance premiums, mode refers to the frequency the policyowner pays the premium. An insurance policy's rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest for a full year before paying any claims. If the policyowner chooses to pay the premium more frequently than annually, there will be an additional charge because the company will have additional expenses in billing the premium. However, the premium may be paid annually, semi-annually, quarterly, or monthly. Higher Frequency = Higher Premium Monthly > Quarterly > Semi-Annual > Annual

Determining Amount Of Personal Life Insurance

Individuals seeking to buy life insurance may need assistance trying to establish how much coverage is appropriate, based on their ability to pay the premium, serve their needs, and protect their survivors. Insurance companies have developed 2 basic approaches to help producers and buyers to determine the needed amount of protection: human life value approach and needs approach.

Example- Human Life Value Approach

Let's assume that a 40-year-old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. Out of his annual income, $40,000 is spent on family needs, and the remaining $10,000 goes to the insured's personal expenses. This means that the human life value of this insured to his family is $1,000,000 ($40,000 a year spent on family needs x 25 years to retirement). Based on this assumption, and taking interest and inflation into consideration, the insurance company will determine the right amount of insurance to produce the same annual amount of income for the family if the insured were to die.

-Estate Conservation

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

Conditional Receipt

Most common type of receipt. Used only when the applicant submits a prepaid application. The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for. This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages.

Why is Insurable interest not required of beneficiaries?

Since the beneficiary's well- being is dependent upon the insured, and the beneficiary's life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased. If an individual has an insurable interest in the life of another person and wishes to insure the life of that person, that other person must consent in writing or sign the application. This applies to life insurance policies of $10,000 or more, unless the insured is younger than 18.

Information Sources and Regulation- Application

The person applying for insurance must submit an application to the insurer for approval for a policy to be issued. The application is one of the main sources of underwriting information for the company.

Attending Physician Statement

When smaller amounts of insurance are requested and there is no prior medical history of concern, the home office underwriter may make an underwriting decision solely on the basis of the application. If, however, the underwriter sees answers to certain questions that could indicate greater risk, and the underwriter wants to obtain specific medical details, the underwriter will request a statement from the applicant's physician.

Interest-adjusted Net Cost Method

considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. This means that each year premiums and dividends are figured, interest is taken into consideration. Two versions of the interest-adjusted method are the surrender cost index and the net payment cost index.

Part 1- General Information

of the application includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. It will also inquire about the existing policies and if the proposed insurance will replace them. Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary.

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;

Participating Concept

permits the insurer to establish a more generous margin in the form of an intentional overcharge, which will be returned to the policyholder if not needed.

Notice of Information Practices

Agents are required to disclose to a prospect the facts about information collection practices, as well as the products they are proposing to sell.

-Types of Buy-sell Agreements Used For Partnerships and Corporations

-Cross Purchase - used in partnerships when each partner buys a policy on the other; -Entity Purchase - used when the partnership buys the policies on the partners; -Stock Purchase - used by privately owned corporations when each stockholder buys a policy on each of the others; -Stock Redemption - used when the corporation buys one policy on each shareholder.

Laws and Regulations for Insurers Requiring an Applicant to Submit to an HIV Test

-The insurer must disclose the use of testing to the applicant, and obtain written consent from the applicant on the approved form; -The insurer must establish written policies and procedures for the internal dissemination of test results among its producers and employees to ensure confidentiality; -The test must be administered in a manner that meets the protocol of the U.S. Department of Health and Human Services; -The insurer must disclose the test results as authorized by the applicant in writing; -If the applicant has not identified a physician to receive test results, the positive test results and the identity of the applicant must be sent to the state Department of Health; -The reporting of test results must include the name and address of the reporting company.

Planning for Income Needs

Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns:

Classification of Risks

In classifying a risk, the Home Office underwriting department will look at the applicant's past medical history, present physical condition, occupation, habits and morals. If the applicant is acceptable, the underwriter must then determine the risk or rating classification to be used in deciding whether or not the applicant should pay a higher or lower premium. A prospective insured may be rated as one of the three classifications: standard, substandard, or preferred.

Medical Examinations and Lab Tests Including HIV

Medical examinations, when required by the insurance company, are conducted by physicians or paramedics at the insurance company's expense. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent in recording medical information on the application. The medical exam requirement is more common with life insurance underwriting. If an insurer requests a medical examination, the insurer is responsible for the costs of the exam.

Premiums with the Application

Most agents attempt to collect the initial premium and submit it along with the application to the insurer. In addition, collecting the initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued.

-Social Security Income "Blackout" Period

Social Security blackout period is the time during which the surviving spouse and/or children do not receive any social security survivor benefits. Blackout period begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. (Unmarried children under the age of 18 or up to 19 if they are attending secondary school full time can also receive benefits. Technically, the social security check will be made payable to the surviving spouse until the youngest child is 16, and directly to the child between the ages of 16 and 18.)

Requiring an HIV test is not considered unfair discrimination as long as the following conditions are met

-The testing is required for all individuals in the same class; -Proposed insured is not denied coverage on the basis of such testing alone (if no other conditions specified in the Insurance Code apply); -The tests and testing procedures have been approved by the United States Food and Drug Administration (FDA) and otherwise comply with applicable state and federal laws. Insurers are permitted to ask a proposed insured whether he or she has tested positive on an AIDS-related test.

Policy Review

Personal delivery of the policy allows the agent an opportunity to make sure that the insured understands all aspects of the contract. Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and explaining what effect they have on the contract. In addition, the agent should explain the rating procedure to the client, especially if the policy is rated differently than applied for, or has been modified or amended in any other way. The agent should also explain any other choices and provisions available to the policyowner that may become active at this time.

Classes of Life Insurance Policies

There are many types of life insurance products available for consumers. Although all life insurance products offer death protection, each type also includes its own unique features and benefits and is designed to serve different insureds' needs. You will study different types of policies in greater detail later in this course. For the purposes of this chapter, however, you need to understand some basic definitions and characteristics of different classes of life insurance policies.

Part 2 - Medical Information

of the application includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. If the amount of insurance is relatively small, the agent and the proposed insured will complete all of the medical information. That would be considered a nonmedical application. For larger amounts, the insurer will usually require some sort of medical examination by a professional. It is the agent's responsibility to make certain that the application is filled out completely, correctly, and to the best of the applicant's knowledge. The agent must probe beyond the stated questions in the application if he or she has any reason to believe the applicant is misrepresenting or concealing information, or does not understand the specific questions asked. Any information that is misleading, inaccurate or illegible may delay the issuance of the policy. If the agent feels that there could be some misrepresentation, he/she must inform the insurance company. Some insurers require that the applicant complete the application under the agent's watchful eye, while other insurers require that the agent complete the application in order to help avoid mistakes and unanswered questions.

Costs Associated with Death (Post Mortem)

taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance;

Insurance Solicitation - Michigan Life Insurance Laws

the policyowner must face the possibility of losing money or something of value in the event of loss.

What is an Unfair Trade Practice?

to make any statement that an insurer's policies are guaranteed by the existence of the Insurance Guaranty Association.

This regulation does not apply if the application for the new life insurance is made to the same insurer that issued the existing policy, or to an affiliate of that existing insurer. It also does not apply if the new life insurance is provided

Under a group term life insurance policy; Covering situations in which there is no direct contact between the covered person and the agent, such as employees of an employer or debtors of a creditor; or For life insurance policies issued in connection with a pension, profit sharing, or other benefit plan qualifying for tax-deductibility of premiums. Another exception to this regulation is the transactions in which the existing life insurance is a nonconvertible term policy which cannot be renewed and would expire within 5 years after the initiation of the transaction.

Permanent Life Insurance

is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid. Permanent insurance provides lifetime protection, and includes a savings element (or cash value).

Safety Margin on Nonparticipating Policies

is narrower, because the cost of the insurance to the policyholder cannot be adjusted at a later time. The gross premium charged on nonparticipating policies must reflect, at least for competitive reasons, the actual cost of providing the insurance. Any profit realized in the operation will be used to provide dividends to stockholders as well as surplus funds that may be used as a buffer for future adverse experience.

Participating Policy (par)

is one on which annual dividends are paid to the policyholder. Originally such policies were issued only by mutual life insurers, but today many stock life insurers also offer participating policies. Under a participating policy, a substantial safety margin is built into the premium, sufficient to reflect a willful overcharge, but justified on the assumption that if the extra premium is not needed, it will be returned to the policyholder as a dividend. Because of the long-term nature of life insurance contracts, insurers calculate premiums on a conservative basis. Once the premium rate on traditional policies is established, it must be guaranteed for the entire policy. It cannot be altered, even if the basic factors used in the computation should change considerably. Over a long period of time, substantial shifts in the premium factors could occur: mortality rates may change, expenses of operating the company may increase, and interest rates may go up or down. If the current premium rates are to be adequate for insurers to fulfill their obligations on contracts that may continue for many decades in the future, a safety margin must be used in calculating the premium.

Comparative Interest Rate Method (CIR)

is the rate of return that must be earned on a "side fund" in a buy term invest the difference plan so that the value of the side fund will be equal to the surrender value of the higher premium policy at a designated point in time.

Underwriting

is the risk selection and classification process. It involves a careful analysis of many different factors to determine the acceptability of applicants for insurance. In other words, underwriting is the process in which an insurance company determines whether or not a particular applicant is insurable, and if so, what premium to charge.

The Application

is the starting point and basic source of information used by the company in the risk selection process. Although applications are not uniform and may vary from one insurer to another, they all have the same basic components:

Group Life Insurance

is written as a master policy, issued to the sponsoring organization, covering the lives of more than one individual member of that group. Individuals covered by group life insurance do not receive a policy, but receive a certificate of insurance from the master policy. The amount of coverage on certificate holders must be determined according to nondiscriminatory rules. The rate and coverage are based upon group underwriting with all individuals covered for the same amount and rate. The cost of coverage paid by the employer in excess of $50,000 is taxed to the employee.

Individual Life Insurance

is written on a single life. The rate and coverage is based upon the underwriting of that individual.

Illustrations

means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

Primary Criteria an Underwriter uses in Assessing Desirability?

of a particular candidate for life insurance are the applicant's health (current and past), occupation, lifestyle, and hobbies or habits. The underwriter will use many different sources of information in determining the insurability of the individual risk.

Debt Cancellation (as an alternative to Estate Liquidation)

paying off debts of the insured such as home mortgage, or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan.);