Chapter 4 Life Insurance Policies

Convertible term

A term life policy that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability.

Hazardous Occupation or Hobby:

If the insured dies as a result of a hazardous occupation or hobby, the insurer will not pay the claim.

Senior Citizen Grace Periods

In Florida, anyone over the age of 64 will receive an additional 21 days beyond the normal policy grace period.

Decreasing term

Term life insurance that provides a decreasing face amount over time with fixed premiums. These policies are usually used for mortgage protection.

Unauthorized Entities

The potential for criminal activity within the insurance business, Adverse economic impact on authorized insurers and insurance licensees, The potential for unpaid claims due to dishonesty and actuarial unsoundness, No state or federal guaranty fund to cover unpaid claims, Adverse economic impact on health-care providers from unpaid claims

Domestic insurance company

A company that resides and is incorporated under the laws of the state in which its home office is located.

Family Income Policies

Whole life and decreasing term insurance (begins date of purchase)

Family Maintenance Policy

Whole life and level term (begins date of death)

Coercion

is when an agent uses physical or mental force, with the intent of convincing an applicant to buy insurance.

Suicide Clause:

The policy will be voided and no death benefit will be paid if the insured commits suicide within 2 years from policy issuance. Some states mandate 1 year, but most are at 2 years. However, the company will return premiums paid.

Foreign insurance company

A company whose home office is located in another state. It is considered to be a foreign company in all states except for its home state.

Incontestable Clause

Prevents the insurer from denying a claim or voiding a life insurance policy, except for nonpayment of premiums, after the policy has been in force for 2 years

The Financial Services Commission may hold hearings for any purpose within the scope of theinsurance code deemed necessary, such as

Person engaging in unfair competition, or any unfair or deceptive act, Person engaging in business of insurance without a license, The best interest of the public would be served

Paid-Up Additions Option:

Purchase single payment whole life coverage

Straight life

This is basic whole life insurance with a level face amount and fixed premiums payable over the insured's entire life. Premium payments made until death of insured or age 100.

Group life

insurance written for members of a group, such as a place of employment, association, or a union. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required.

Universal life

is a variation of whole life insurance, characterized by considerable flexibility. Allows its policy owners to determine the amount and frequency of premium payments which will adjust the policy face amount.

Assignment Clause

The right to transfer policy rights to another person or entity.

Family Plan Policies

These are designed to insure all family members under one policy. Usually the family head is covered by permanent (whole life) insurance and the spouse /children are included on the same policy as term life riders. The term coverage on the spouse and children are normally convertible to permanent coverage without evidence of insurability.

Limited Pay life

This is whole life insurance where the insured is covered for his entire life, but premiums are paid for a limited time. As the premium payment period shortens, cash values increase faster. Premiums are only paid until the insured is 65 years old. With a 20-pay life policy, the insured only pays for 20 years. The policies are in effect until the insured's death or they reach age 100.

Guaranteed Insurability Rider

(future increase option): Permits the policy owner to buy additional permanent life insurance coverage at specific points of time in the future, normally starting at age 25 and ending at age 40. It also includes specific events like marriage and births, without requiring the proof of insurability. Usually the benefit is allowed every 3 years, up to the original face amount of the policy.

Consideration Clause

A policy owner must pay a premium in exchange for the insurer's promise to pay benefits. The amount and frequency of premium payments are contained in the

Joint Life Policy

A policy that covers two or more people. The age of the insureds are "averaged" and a single premium is charged. It uses permanent insurance (as opposed to term) and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies.

Suicide Clause

In Florida, if an insured commits suicide within 2 years of policy issue, the beneficiary will only receive a refund of premiums paid. After two years, the face amount will be paid in the event of suicide.

CERTIFICATE (Group life)

Instead of a policy, the participants under a group plan are issued certificates of insurance as evidence that they have coverage.

Ordinary life

Is made up of several types of individual life insurance, such as temporary (term)), permanent (whole)

Modified whole life

Low premiums in the early years and jumps to a higher premium in the later years and remains fixed thereafter. Premiums increase just once.

Accidental Death and Dismemberment

May be added to a life insurance policy. Pays a principal sum for loss of both hands, both arms, both legs, or loss of vision in both eyes.

PERSONS REQUIRED TO BE LICENSED

Must be at least 18 years old 1. Must be a US citizen or legal alien 2.Must be a Florida resident 3. May not be an employee of the United States 4. Department of Veterans Affairs 5. May not be a funeral director or direct disposer 6. Complete a 40-Hour pre-licensing education course 7. Pass the insurance state licensing examination

Dividend Options

Participating policies pay dividends to policy owners if the company's operations result in a divisible surplus. Recall that dividends are a return of overcharged premiums, and are therefore not taxable. Insurers typically pay dividends on an annual basis.

Every insurance policy issued in the state of Florida must specify the following

The names of the parties to the contract, The subject of the insurance, The risks insured against,The effective date and period of coverage,The premium,The conditions pertaining to the insurance, The form numbers and edition dates of all endorsements attached to the policy

Collateral assignment

The partial and temporary transfer of rights to another person or entity. Collateral assignments are usually intended for securing a loan.

Grace Period

The period of time policyowners are allowed to pay an overdue premium during which the policy remains in force, usually 30 days

Free Look:

The policy owner is permitted 14 days in Florida once the policy is delivered to look over the policy and return it for a refund of all premiums paid.

Industrial Policies

When an insured has industrial life insurance policies with a single insurance company that total $3,000 or more in face value, the insured has the option to convert all of these policies into one ordinary life insurance policy at standard premium without evidence of insurability.

Nonforfeiture Options

When a policy owner decides he does not want his life insurance policy anymore, he has the option to surrender his policy. If there is cash value remaining he must use one of the options

Family Plan Policy Example

1. Husband - Whole Life Policy 2. Wife (spouse) - Term Policy - convertible without proof of insurability 3. Children - Term Policies - convertible usually at age 18 or 21 without proof of insurability

The certificate must contain the following information

Group policy number, Description of insurance protection to which the certificate-holder is entitled, The name of the insured, beneficiaries and dependents (if any), The rights and conditions

Whole Life Insurance

Provides both living and death benefits. Provides permanent life insurance protection for the insured's entire life. It also provides living benefits such as cash value and policy loans.

One-Year Term Option:

Purchase one-year term protection

Alien insurance company

is one that is chartered and organized in any country other than the United States. It is considered an alien insurance company in all states.

Qualifying events

include the death of the employee, termination of employment (except for termination because of gross misconduct) or a reduction in work hours, which results in the participant no longer qualifying for group coverage.

Reduced Paid-Up Option

the policy owner pays no more premiums but the face amount is decreased.

Fraud

occurs when someone intentionally deceives another with the intent to gain financially

Unfair Claims Settlement

1. Failing to adopt and implement standards for the proper investigation of claims 2. Misrepresenting pertinent facts or insurance policy provisions relating to coverage at issue 3. Failing to acknowledge and act promptly upon communications with respect to claims 4. Denying claims without conducting reasonable investigations based upon available information 5. Failing to affirm or deny coverage of claims upon the written request of the insured within a reasonable time after proof-of-loss statements have been completed 6. Failing to promptly provide a reasonable explanation in writing to the insured on the basis of the insurance policy for denial of a claim or for the offer of a compromise settlement

MAINTAINING A LICENSE

A licensee may not transact insurance business in Florida until the licensee is appointed by an insurer. An agent needs to abide by the following guidelines to maintain their license: 1. 24 hours of continuing education every two years for agents licensed less than 6 years 2. 20 hours of continuing education for every two years for agents licensed more than 6 years 3. Any continuing education must include minimum 3 hours in ethics and 3 hours in annuities 4. Notify the Department within 30 days when there is a change of address 5. Pay license fees, appointment and renewal fee Continue to be appointed with an insurance company 6. Notify the Department of Insurance within 30 days if they have been charged with a felony

Automatic Premium Loan Rider

Allows the insurance company to deduct overdue premium from an insured's cash value if a payment is missed on a life policy.

Single Premium life

Allows the insured to pay the entire premium in one lump-sum and have coverage for the insured's entire life.

Accelerated Benefit Rider

Allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and expected to die within 1-2 years .

Misstatement of Age or Sex

Allows the insurer to adjust the policy benefits if the insured's age or sex is misstated on the policy application.

Automatic Premium Loans

Allows the insurer to automatically use the policy cash value to pay an overdue premium. There is no cost for this provision.

Cost of Living Rider

Allows the policy face amount to be adjusted to account for inflation based on the consumer price index

Modified Endowment Contracts (MEC)

For those policies that do not meet the 7-pay test, they are considered and will lose favorable tax treatment. The 7-pay test is a limitation on the total amount you can pay into your policy in the first seven years of its existence. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a seven-year period. For example, if yearly premium is $500, in a seven year period a total amount paid would equal $3,500. If you paid $3,501, it has now exceeded the 7-pay test and is no longer a life insurance contract. It will now be taxed as an investment

Multiple protection policies

Pays a benefit of double or triple the face amount if death occurs during a specified period. If death occurs after the period has expired, only the policy face amount is paid. The period may be for a specified number of years - 10, 15, or 20 years or to a specified age such as 65. These policies are combinations of permanent insurance and level term insurance.

Graded whole life:

Starts out with a low premium then has slight increases yearly for a set period of time.Premiums then level off for the remainder of the policy. For example, a policy can start out low in a graded whole life and increase a small amount every year up until the fifth year, then levels off for the remainder of the policy.

Level term

has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period.However, the premiums will increase at each renewal.

The Consolidated Omnibus Budget Reconciliation Act (COBRA)

is a federal law that requires employers with 20 or more employees to include a continuation of benefits provision for former employees and their dependents. COBRA guarantees that the participant can continue the group coverage (at their own expense) at group rates if their participation in the group plan is terminated because of a qualifying event.

Controlled Business

is coverage written by an agent on his/her own life, health, property, immediate family, or business associates. Most states will not issue a license to a person if it is determined that their primary purpose is to write

Credit life insurance

is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. A decreasing term policy is most often used.

Excess Business

is permitted when an agent's own company is not able to write the amount of insurance requested by the applicant. Its that portion of a risk above the limits of that which the agent's own insurer will accept. A licensed life agent may place excess or rejected risks with any other authorized insurer without being required to secure an appointment as to such other insurer.

Accumulate Interest Option:

Allows dividends to accumulate interest

Agencies

1. An insurance agency is any business location where insurance transactions take place that can only be performed by licensed insurance agents 2. There must be an agent in charge at each licensed agency location where insurance transactions take place 3. A licensed insurance agent may be the agent in charge of additional branch office locations of the agency as long as insurance activities do not occur at any location when the agent is not physically present

There are several types of whole life insurance such as

1. straight whole life, limited pay whole life, single-premium whole life, modified whole life, graded whole life

A term life policy that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. A term life policy that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Renewable term

A feature of term insurance that allows the policyowner to renew the coverage after the designated term expires without having to prove insurability.

Equity Index Universal Life lnsurance (EIUL)

A permanent life insurance policy that allows policyholdersto tie accumulation values to a stock market index. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option.Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns. Potential extra interest based on the investments of the company's general account.

Waiver of Premium Rider:

Allows the policyowner to waive premium payments during a disability and keeps the policy in force. The disability must be total and permanent and have sustained through the waiting period (90 days or 6 months). After a certain age (usually 60 or 65),

Advantages of whole life insurance

Covers the entire life of the insured, Living benefits - cash value and policy loans, Fixed premiums

Conversion

In Florida, group life policies must contain a conversion privilege that allows for conversion to an individual policy for a specified period of time.

Juvenile Insurance

Life insurance which is written on the lives of children is called juvenile insurance. The adult applicant is usually the premium payor as well, until the child comes of age and is able to take over the payments. A payor provision is typically attached to _______ policies. It provides that, in the event of death or disability of the adult premium payor, the premiums will be waived until the child reaches a specified age (such as 18, 21, or 25).

GROUP LIFE INSURANCE ELIGIBILITY

Participants are given a period of time, known as the eligibility period, to join the group plan. Other plans use an open enrollment period, in which case all new employees must wait until the next enrollment period before joining the group plan. In Florida, there is no minimum number of insureds required for a group life insurance policy.

Accidental Death Benefit Rider (multiple indemnity)

Pays an additional sum to the beneficiary if the insured dies due to an accident. The amount paid is a multiple of the policy face amount such as double or triple the original benefit.

Reinstatement:

Permits the policy owner to reinstate a policy that has lapsed- as long as the policy owner can provide proof of insurability and pays all back premiums, outstanding loans, and interest. Most states allow reinstatement up to 3 years. However, some states are 5-7 years.

Policy Loan Provisions

Policies that have cash value also have policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years. In most states, this is 3 years. The policy owner has the right to the policy's cash value. Policy loans are not taxable.

Drawbacks of whole life insurance

Protection is more expensive because of living benefits, Premium paying period may extend beyond the income-earning years

Reduced Premiums Option:

Reduces premium payments

Cash Option:

Take the cash

Annual renewable term

Term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability.

Increasing term

Term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.

SUSPENSION, TERMINATON, REVOKING OF A LICENSE, AND OTHER PENALTIES

The Chief Financial Officer has the power to suspend or revoke the license of an insurance agent who violates the Insurance Code. In lieu of suspension or revocation, the CFO has the authority to issue fines or order probation.

Home agencies

The Department of Financial Services considers all of these factors when determining whether an agent's home is an insurance agency: 1. The agent advertises home location in newspapers, phone books, or other ways 2. There is a sign on the house indicating an agent is there 3. The agent meets clients there 4. Insurance transactions take place at the location

Entire Contract

The insurance policy itself, any riders and endorsements/amendments, and the application comprise the entire contract between all parties. Insurance producers cannot make changes to a policy. found at the beginning of every life insurance policy issued. Only an authorized officer of the insurer is permitted to make changes to the contract.

Aviation:

The insurer will not pay the claim if the insured dies due to involvement with aviation, such as a military pilot flying a jet aircraft.

War or Military Service:

The insurer will not pay the claim if the insured dies while in active military service or due to an act of war.

Insuring Clause

The insurer's basic promise to pay benefits in the event of a covered loss.

Absolute assignment

When the assignee receives full control of the policy and rights to the policy benefits from the current policy owner.

Cash Surrender

allows the policy owner to receive the policy's cash value. Policy owner no longer has coverage at this point.

Adjustable life policies

are distinguished by their flexibility that comes from combining term and whole life insurance into a single plan. The policyowner determines how much face amount protection is needed and how much premium the policyowner wants to pay. Adjustable life insurance allows you tovary your coverage as your needs change. Consequently, no new policy needs to be issued when changes are desired.

Code of Ethics

establishes a broad outline defining appropriate and inappropriate business behavior for life insurance agents.

Rebating

happens when an agent refunds part of their commission, or exchanges anything of value to induce someone to purchase an insurance policy. Rebating is allowed in Florida if the agent rebates insureds in the same actuarial class.

Payor Rider:

if the individual paying the premiums on a juvenile life policy becomes disabled or dies before that child reaches a certain age, such as 18,21, or 25. The policy premiums will be waived until the child reaches a specified age in the contract

Industrial life

insurance issues very small face amounts, such as $1,000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage.

Whole life

insurance provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100.

Term life

insurance provides pure death protection since it only pays a death benefit if the insured dies during the policy term. This insurance does not accrue cash value.

Misrepresentation

is when an agent uses publications, sales materials, or makes statements that that are false, misleading, or deceptive to unfairly influence the purchase of a policy.

Churning

occurs when an agent has a policyholder replace one policy for another with the same company for the sole purpose of making more commission. This can involve using the cash value and/or dividends of an existing policy to purchase another policy with the same insurer. This normally is done using misrepresentation or deception and is not in the policyholder's best interest.

Sliding

occurs when an agent tells an applicant that in order to get the product they want, they are required by law to get an additional product as well. It can also mean falsely representing to an applicant that specific coverage is included in the policy applied for with no additional charge.

Twisting

occurs when an insurance agent convinces a policy owner to cancel their current policy so that they can purchase new life insurance policy with another company. This would involve the agent using misrepresentations or incomplete comparisons of the advantages and disadvantages of the two policies. ______ is a form of misrepresentation and is illegal.

Defamation

occurs when an oral or written statement is made that is intended to injure a person in the insurance business or be critical and misleading about the financial condition of a person or company.

Return of Premium Rider

pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a certain time period specified in the policy. It also returns premiums to the living insured at the end of a specified period of time, as long as the premiums have been paid.

Extended Term Option

permits the policy owner to use the policy's cash value to buy extended term insurance. No premium payments are made.

Replacement Rule

sets forth the requirements and procedures to be followed by insurance companies and agents when a proposal is being made in which a prospective life insurance buyer will be replacing existing insurance contracts with the proposed new insurance

The Solicitation Law

spells out the information and procedures required of agents and insurers when proposing life insurance to a prospective buyer;

Variable life insurance

was created to help offset the effects of inflation on death benefits. It's permanent life insurance with many of the same characteristics of traditional whole life insurance. The main difference is the manner in which the policy's values are invested. With traditional whole life, these values are kept in the insurer's general accounts and invested in conservative investments selected by the insurer to match its contractual guarantees and liabilities. With variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options. Values held in these separate accounts are invested in riskier, but potentially higher yielding, assets than those held in the general account. The basic characteristics of a variable life policy are: fixed premiums, a guaranteed minimum death benefit which fluctuates over the minimum, and cash values which fluctuate and are not guaranteed.