Chapter 3 Life insurance basics

3 types of temporary insurance

1. Conditional receipt 2. 30 Day interim term 3. acceptance form of receipt

3 primary factors used in premium determination

1. Risk (mortality - rate of death within a specific group) interest (Premiums are invested to earn interest) expense ( also known as loading charge also affects premium rates. Insurers have operating expenses, each premium must cary some of this cost.

life insurance policy illustration must do the following

A distinguish between guaranteed and projected amounts B. Clearly state that an illustration is not a part of the contract C. identify those values that are not guaranteed

fixed vs flexible

A fixed is the same premium amount all the time, Flexible is where insured can pay more or less than the planned premium

Buy - Sell Agreement or business continuation agreement

A legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.

Limited pay

A level annual premium. The policy is designed so that coverage will be paid before year 100. More common one is a 20 year policy is completely paid on year 20.

Modified pay

A lower premium is paid in the first few policy years, then higher premium is paid for remainder of term

Agents report

A written report from the agent submitted to the insurer along with the application disclosing what the agent knows, observed, or learned about the proposed insured's risks.

Personal financial planning. Information needs to be gathered under what 4 categories?

A. Debt B. Income C. Mortgage D. Expenses

Information in disclosure for life settlement

A. Explanation of alternatives to selling out B. Some of proceeds of life settlement may be taxable. C. Proceeds of life settlement may be owed to creditors D. Recipt of the proceeds will affect public assistance E. Proceeds will be sent to owner within 3 business days after life settlement provider has received acknowledgement that ownership of policy has been transferred F. Entering into a life settlement contact may cause other benefits under policy to be forfeited. G. Total amount paid my life settlement provider and net amount to be paid to owner H. Date funds will be available I. Life settlement provider is required to issue new owner consumer information book. J. Insured may be contacted by wither the provider or broker to determine health status K. Life settlement providers name, business and email address and phone number

Stranger - originated life insurance policies are in direct opposition to the principle of A. Insurable interest B. Law of large numbers C. Good faith D. Indemnity

A. Insurable interest

underwriters investigate using these resources

A. MIB = Medical information bureau. Insurances report to this B. DMV= Driving record C. Physician / Medical records D. Additional Medical testing E. Financial Reports = check for history of malfeasance F. Personal Interview G. Hazardous activity questionnaire

Life insurance illustration must contain the following

A. Name of insurer B. Name & Business address of insurance sales person C. Name, age, sex of proposed insured (except when a composite illustration is permitted under this regulation.) D. Underwriting or rating classification upon which the illustration is based E. Generic name of policy, company product name if different and form number F. Initial death benefit G. Dividend option election or application on nonguaranteed elements if applicable H. Illustration date I. Prominent label stating " Life insurance Illustration"

Reasons someone would be denied insurance

A. No insurable interest B. Medically unacceptable C. Potential for loss is so great it does not meet the definition of insurance D. Insurance is prohibited by public policy or is illegal.

Which of the following will be included in a policy summary? A. premium amount and surrender value B. Copies of illustrations and application C. Comparisons with similar policies D. Primary and secondary beneficiary designations

A. Premium amounts and surrender values

Responsibility of a field underwriter ( agent)

A. Properly solicit applicants B. Help prevent adverse selection C. Complete the application D. Obtain required signature E. Collect initial premium and issue receipt F. Deliver policy

when using illustration in sale of life insurance policy the agent may NOT do any of the following

A. Represent the policy as anything other than life insurance policy B. Describe nonguaranteed elements in a manner that could be misleading. C. Use an illustration that depicts policy's performance as being more favorable than it really is. D. Provide an incomplete illustration E. Claim that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits unless that is a fact F. Use the term "vanish" or "Vanishing premium" or a similar term that implies the policy becomes paid up G. Use an illustration that is not self supporting

3 income periods that most insureds are exposed to are...

A. family dependency period. Spouse and dependents will rely on insurance B. Preretirement period. Surviving spouse C. Retirement Period. On social security

life settlement

An arrangement that allows the policyowner sell their existing life insurance policy to a third party for compensation. You are also required to inform the owner has the right to rescind a life settlement within 30 days after the contract is executed by all parties

Investigative consumer report

An extensive report that includes information on an individual's character, general reputation, personal characteristics, and mode of living.

Key person insurance

An insurance a business can take out on an employee who has a special skill / knowledge that would hurt the company if the passed away. with this policy the key employee is the insured and the business is all the following. Applicant/policyowner/ premium payer/ beneficiary

Business continuation plan

Arrangements between the business owners that provide that the shares owned by any one of them who dies or becomes disabled shall be sold to and purchased by the other co-owners or by the business.

A key person insurance policy can pay for which of the following? A. Hospital bills of the key employee B. Cost of training a replacement C. Loss of personal income D. Workers comp

B. Cost of training replacement

A producer agent must do all of the following when delivering a new policy to the insured except A. Explain the rating procedures if the policy is rated differently than applied for B. Disclose commissions earned C. Explain policy provisions, riders, exclusions D. Collect premium due

B. Disclose commissions

Which of the following is NOT a type of information that needs to be gathered in order to determine the value of someone's life when using the needs approach? A. Expenses B. Estimated Longevity C. Outstanding debt D. Mortgages

B. Estimated longevity

Regarding the taxation of business overhead policies A. Premiums are not deductible, but expenses paid are deductible B. Premiums are deductible, and benefits are taed C. Premiums are not deductible and benefits are taed D. Premiums are not deductible, but benefits are deductible

B. Premiums are deductible and benefits are taxed

A life insurance policy can be delivered by all of the following means except A. certified mail B. priority mail C. first class mail with delivery receipt D. Personal delivery by a trained employee of insurer with delivery receipt.

B. Priority mail

What is the needs approach?

Based on the predicted needs of a family after the premature death of the insured. Take into consideration debt, investments and ongoing expenses

If a consumer requests additional information concerning an investigative consumer report, how long does the insurer or reporting agency have to comply? A. 10 Days B. 3 Days C. 5 Days D. 7 Days

C. 5 Days

which of the following methods of calculating the amount of life insurance needed takes into account the insureds wages, years until retirement and inflation? A. Blackout approach B. Lump sum approach C. Human life value approach D. Needs approach

C. Human life value approach

If an insured issued a policy based on the application that had unanswered questions, which of the following will be true A. Policy will be void B. Insurer may deny coverage late, because of the information is missing on the application C. The policy will be interpreted as if the insurer waived its right to have an answer on the application D. The policy will be interpreted as if the insured did not have an answer to the questions.

C. The policy will be interpreted as if the insurer waived its right to have an answer on the application

An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will coverage begin? A. application date B. Agent submits application to company and company issues a conditional receipt C. Agent delivers policy, collects initial premium, and statement of good health received D. On the designated effective date.

C. when agent delivers policy, collects premium and collects statement of good health

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. Application date

Which of the following are a generic consumer publication that explains life insurance in general terms in order to assist in the decision making process A. Insurance index B. Policy summary C. Illustration D. Buyers guide

D. Buyers guide

signing and dating a delivery receipt for a life insurance policy helps to establish all of the following timeframes except. A. Incontestability period B. Free look period C. Right of rescission D. Grace period

D. Grace period

What is the mode of the premium payment

D. Is defined as the frequency and the amount of the premium payment

What is the purpose of key person insurance? A. provide health insurance to families of key employees B. Insure retirement benefits are available to all key employees C. maintain an account that insures the owner of a company remains solvent D. Lessen the risk of financial loss because of the death of a key employee

D. Lessen the risk of financial loss bc of the death of key employee

Under what circumstances would a life insurance contract qualify as a "standard Policy" A. When it meets guidelines established by the commissioner, as described in the model policy article of the California insurance code B. When if conforms to the NAIC Model illustration requirements C. When it contains all of the essential elements of an insurance contract, as described in the model policy article of the California insurance code. D. Under no circumstance

D. under no circumstance

The purchase of life insurance creates and immediate.....

Estate

Limit of liability

Face value / amount or death benefit of an individual life insurance policy, subject to any exclusions or riders (face amount - policy loan and interest = limit of liability

what is HIPPA

Health Insurance Portability and Accountability Act

Debt cancellation

Insurance may be used to create a fund to pay off debts of the insured such as home mortgage or auto loans

Emergency reserve funds

Insurance proceeds may be used to assist in paying for sudden expenses following the death of insured, such as travel expenses and lodging for family members coming from a distance.

How does life insurance have value like property

It can be a valuable part of an individuals estate, providing immediate cash to pay debts and provide financial security to the survivors Like land or buildings, the cash value of a life insurance policy can be used as collateral to secure a loan Life insurance may be paid for in manageable installments called premiums

Level Premium

MOnst life insurance policies have a level premium, which means that the premium remains the same throughout the duration of the contract.

what must a policy summary contain

Name & address of agent, name and office address of insurer, generic name of basic policy and each rider. , It will include premium, cash value, dividend, surrender value and death benefits figures for specific policy years

Single premium

Policyowner makes one lump sum to pay premium.

Illustration

Presentation that includes nonguaranteed elements of a policy.

temporary insurance agreement

Protection period offered by binding receipts. During this time period, an insurance company is liable for the maximum amount guaranteed under the binding receipt / temporary insurance agreement

buyers guide

Provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance.

process of issuing a life insurance policy

Solicitation and Sales Presentations -> Underwriting: Field and Company -> Premium Determination -> Policy Issue and Delivery

fraudulent life settlements

Stranger originated life insurance or STOLI. Stranger buys life insurance on a stranger to sell it as life settlement. Purchase solely to sell them

Field underwriter

The agent is usually the one who has solicited the potential insured.

What does it mean when a life insurance policy provides liquidity to the policyowner?

They can borrow against the cash value to be used for immediate needs

Business overhead expenses (BOE) insurance

Unique type of insurance sold to small businesses who must continue to meet overhead expenses such as rent, utilities, salaries etc. following a disability

Stock purchase (used for buy-sell agreements)

Used by privately owned corporations when each stockholder buys a policy on each of the others

Cross purchase (used for buy-sell agreements)

Used in partnerships when each partner buys a policy on the other

Stock redemption (used for buy-sell agreements)

Used when the corporation buys one policy on each shareholder

Entity purchase (used for buy-sell agreements)

Used when the partnership buys the policies on the partners

Policy summary

a written statement describing the features and elements of the policy being issued

Executive Bonus

an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee

Harry has just received his life insurance policy. In reviewing the title page, Harry was able to ascertain the following information except A. He had purchased a 20 year renewable term insurance B. His total premium C. His spouse was beneficiary D. His children have been covered by child rider

c. Spouse assigned as beneficiary

Traditional net cost index

compares the cash values available to buyers if they surrender the policy in 10 or 20 years

Interest-adjusted net cost index

compares the death benefits that are paid at death in 10 or 20 years, if the insured died at that time, and accounts for the time value of money

Unconditional (binding) receipt

if a premium is paid, coverage will begin immediately for a specific length of time (such as 30-60 days) regardless of whether the applicant is approved by the insurer.

Retirement fund

insurance proceeds may be used as a source of retirement income

Bequests

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

How do you calculate an insureds life value

looking at wages, inflation, number of years to retirement and time value of money

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

underwriting

risk selection and classification process

conditional receipt

used only when the applicant submits a prepaid application

Disclosure statement

written description of agreed terms of payment