IL Life Insurance Contracts

What are 4 Elements of a contract in order for it to be legal? HINT: OA/C.C.P

(1) an offer and acceptance; (2) a consideration on the part of both parties to the contract; (3) legal (MENTAL)capacity= (competent parties) (genuine ascent) (4) LEGAL purpose = (purpose of contract is legal)

Some reasons to purchase Life Insurance

-immediate creation of an estate -the instant creation of funds payable to a named beneficiary when an insured person dies. Reasons to purchase life insurance (1) final expenses (2) estate taxation funds (3) funds for survivors to live on (4) education expenses (5) to provide funds to pay off indebtedness (6) to supplement retirement income.

More on Whole Life Insurance 1. Death Protection Coupled With Cash Savings

1. Death Protection Coupled With Cash Savings — A whole life policy protects an insured permanently for the remainder of his or her life. It provides a level death benefit which is also referred to as -face amount -face value -coverage limit -coverage amount -policy proceeds. A whole life policy never needs to be converted nor renewed as does a term life insurance policy. A continuous premium, straight life or whole life policy is also characterized by a level or fixed premium as long as the contract remains in force. = This means that the premiums cannot be increased or decreased. A cash savings feature is also provided as part of the contract. Once it begins to build, the cash savings value increases with every subsequent premium payment. This "build-up" of cash value comes from portions of the premiums paid and any interest paid by the insurer. The cash value continues to build each year until it equals the face amount at age 100, assuming that there are no outstanding loans against the cash value. Therefore, at age 100 the policy "matures" or "endows" and the policy owner will receive back all his or her premiums (plus some interest). "Mature" = means that the cash value equals the face amount. A traditional whole life policy is a level death benefit, level premium policy. This means that the death benefit and premiums paid for coverage are pre-determined for the insured's "whole life." In any permanent life insurance plan the cash value accumulates on a tax-deferred basis.

According to the Time When Benefits Commence (cont.)

2. DEFERRED ANNUITY may be funded with any type of premium plan. This classification of an annuity is different from the immediate annuity since it DOES include an accumulation period. This means that there is a lengthy period between the time the contract is purchased and when the income or annuity phase commences. **useful for those who wish to defer income until the future (i.e., retirement). Contributions may accumulate over time and every year the insurer credits the funds with a certain rate of interest which is tax-deferred. three options to receive cash from the fund in the future (1) a lump sum distribution, of which the interest credited is taxable (2) systematic or periodic withdrawals (3) convert the fund to the annuity phase and begin to receive an income stream per month. For example, if a new physician is just beginning his or her practice and wants to set aside funds for the future but his or her current expenses are high, one method available in order to achieve this objective is to purchase a flexible premium deferred annuity. A deferred annuity emphasizes safety of principal, asset accumulation and tax deferral of interest.

More on Whole Life Insurance 2. Pre-Determined Characteristics

2. Pre-Determined Characteristics — A whole life policy provides permanent protection up to age 100 and is a fixed death benefit, fixed premium policy which is characterized by a death benefit, a cash savings value (i.e., equity build-up), permanent protection and a fixed, level or pre-determined premium. The cash value is referred to as the "equity" portion of the contract. The equity build-up functions in a similar fashion to the equity build-up in one's home. Once the cash value begins to build in a traditional whole life policy the insurer also pays a fixed interest rate upon it (i.e., 3%, 4%) which helps to increase it even further. This interest rate is also fixed, level or pre-determined for life. All the major elements mentioned including the face amount, annual premium and the interest rate paid on the cash value as it accumulates are pre-determined. The cash value of a whole life policy is predetermined as well. Once the policy is purchased and as long as the premium is paid on a timely basis, the policy owner will be able to know exactly how much the cash value will be at any year in the future. The policy will stipulate that the cash value will be a dollar amount per $1,000 of coverage (i.e., $400 per $1,000 of coverage) at any particular point in the future. This means that the future cash value accumulations are also predetermined.

Disposition of Proceeds (Settlement Options)

2. Straight Life Annuity with Period Certain — PERIOD CERTAIN = (i.e., a guaranteed minimum) pays a benefit (i.e., income) for life but pays a survivor benefit if the annuitant dies before the end of the period certain (i.e., ten years). In other words the annuitant or survivors are entitled to a guaranteed income of at least a specified number of years (i.e., period certain) OR a refund if the annuitant dies before the end of the guaranteed refund period (i.e., refund life annuity). This refund availability indicates that there will be a guaranteed minimum returned to a beneficiary if the annuitant dies. For example, if an annuitant is to receive $2,000 per month for five years certain, and she dies after the second year, her beneficiary possesses two options to choose from that will provide a refund or return of annuity (income) proceeds. Remember that a refund annuity or annuity certain classification guarantees a definite number of income payments. INSTALLMENT REFUND — This refund will pay the beneficiary the same monthly income benefit that the annuitant was receiving until the end of the period certain. In our previous example, this would be $2,000 per month for five (5) years. CASH REFUND — This option is available where the beneficiary of the annuitant chooses to receive the refund in a lump sum. In our previous example, the cash refund amount would be $120,000 ($2,000 per month for five years). A cash refund may also be described as one that pays a lump sum to a beneficiary when the premiums paid to the insurer exceed the payments (i.e. payouts) made to the annuitant. AN ANNUITY CERTAIN = An annuity certain may provide income or installments for a fixed period of time if that is what the owner decides. This means that the monthly income will be paid for a specified period only (i.e., not for life). If the annuitant dies prior to the end of that period, payments continue to the designated beneficiary for the remainder of the specified period. An annuity certain may also be paid for life but with a guaranteed (i.e., certain) income period. This means that if the annuitant lives for thirty years, he or she will receive the monthly payments during that time. However, if the annuitant dies within the guaranteed period, an installment or lump sum refund will be paid to the beneficiary. Again, the purpose of any "life annuity" is to make sure that the annuitant will not outlive his or her income.

Decreasing Term Insurance

A decreasing term life insurance policy is generally written as a separate contract. However, some insurers make it available as part of a combination policy where it is attached as a rider to a whole life plan. Characterized by a reducing or decreasing face amount of coverage each year. Since the face amount decreases, the premium remains level or fixed during the life of the policy. Decreasing term life insurance is NOT RENEWABLE at the end of the limited term since there is no longer any face amount left. It has reduced each year for the limited period until there is no longer a death benefit. This type of policy is generally used to cover a decreasing obligation such as a home mortgage boat loan other type of debt. The premium is lower than level term due to the fact that the face amount decreases as the rate per $1,000 of insurance increases. A decreasing term life insurance policy may AKA a mortgage protection or mortgage redemption plan.

Explain and Describe Risk Management. How risk management is accomplished? (D.S.E.R) AND What methods are available to manage risk? (A.R.R.S.T)

A process used by insurers to manage loss exposures. Risk management is accomplished by: (1) Detecting or identifying the potential loss exposure (2) Selecting a method or tool to reduce risk (3) Executing or identifying a course of action (4) Reviewing periodically the measures taken detect, select, execute, review ______________________________________________________________________________________________________________________________________________________________ **Risk may be reduced or managed by Purchasing an insurance contract. ______________________________________________________________________________________________________________________________________________________________ Methods available to manage risk include Avoidance (i.e., don't invest what you can't risk to - loose) Retention (i.e., a deductible or waiting period in a - - health insurance policy): Reduction (i.e., taking measures to reduce the severity of a loss); Sharing (i.e., entering into a partnership); Transfer (i.e., purchasing an insurance policy or incorporating). Avoid, Retain, Reduce, Share, Transfer ______________________________________________________________________________________________________________________________________________________________ WHAT IS AN INSURANCE CONTRACT FOR INSURERS, AND HOW DOES TRANSFER WORK (LOOK THESE UP LATER)

What is the distinguishing feature or lack there of that makes it an INVITATION, what must be present to make it complete.

A submitted application with an initial premium, is an invitation. THE PREMIUM The offer is not complete unless the premium is included.

Term Life Insurance

A term life insurance contract is defined as a policy that provides -pure -limited -temporary protection for a specified period of time. The face amount of the policy is payable if death occurs during this limited period only. **Nothing is paid if the insured survives the term period. Term life insurance possesses no cash savings value, no loan or non-forfeiture values, and no dividend options. Because it provides temporary protection only, term insurance offers the maximum amount of life insurance for the lowest initial outlay of funds (i.e., lowest initial premium). All life insurers have term life products available. Most insurers utilize various marketing names for their products. Therefore, all insurers call their term policies by different marketing names. No matter what the marketing name, there are only two types of term insurance: (1) level term (2) decreasing term

Whole Life Insurance

A whole or straight life insurance contract is one of the most common types of life insurance policies sold today. Whole life policies are based upon the assumption that premiums will be paid by the policy owner throughout the insured's lifetime or to age 100, whichever occurs first. This means that the whole life policy will "mature" or "endow" at age 100. Therefore, in a whole life policy, if the insured lives to age 100, he or she receives back all premiums paid. Insurers use age 100 to calculate death benefits and premiums since they assume everyone will be deceased by that age. This means further that the insured had free insurance coverage for his or her entire life. This type of policy is also referred to as a straight life ordinary life continuous premium life insurance contract.

Define the Aleatory Feature of a life insurance policy.

ALEATORY FEATURE = This means there are UNEQUAL values involved in the contract. For example, the premium paid for coverage is a lot less than the potential benefit paid out. The insured receives a lot of coverage in return for a smaller premium. An aleatory contract is a contract where an uncertain event determines the parties' rights and obligations. For example, gambling, wagering, or betting typically use aleatory contracts. Additionally, another very common type of aleatory contract is an insurance policy. SUMMARY = PAY LITTLE and RECEIVE LOT. "I PAY ALEATORY FOR A LOT"

Annuity Contracts

ANNUITY = a product only sold by a life insurance company which helps to protect an individual against outliving his or her income. A savings type vehicle that is primarily used to set aside funds for the future. Could be defined as the liquidation of an estate. opposite of life insurance which involves the immediate creation of an estate. primary function = the systematic reimbursement or liquidation of funds (i.e. savings) for a specified period or for life. Therefore, an annuity is a systematic approach to liquidating an estate (i.e., funds). An individual deposits in or makes contributions to an annuity during the pay-in or accumulation phase. During this phase, the individual is also known as the policy owner or contract owner. The policyholder possesses contractual rights in the annuity contract when the contract is purchased. When the policy owner decides to receive income in the future, as soon as the first periodic payment is made by the insurer, the policy owner is now known as the ANNUITANT and the annuity or income phase begins. The owner must also designate a beneficiary who will have access to the accumulated funds if the policy owner dies. This amount is really not a death benefit in the whole life or term insurance sense since it only includes the amount contributed and interest accumulations credited. This "death benefit" indicates that an annuity possesses an insurance aspect. During the accumulation phase, the principal grows or appreciates at interest. The interest earned as the principal grows is tax-deferred. When a periodic payment is received at some point in the future, it is considered to represent a combination of principal plus interest.

Modified and Graded Premium Whole Life

Additional types of whole life plans are characterized by an alteration of the premium schedule used. The premiums for these policies are initially less in the early years than a traditional whole life policy. Cash values accumulate in these policies just as they do in other types of whole life insurance in relation to the premiums paid. Those who feel that they need whole life insurance or permanent protection but have limited means and cannot afford the traditional whole premiums may opt for these plans. These policies are characterized by a redistribution of premiums which are the actuarial equivalent of traditional whole life premiums.

Key concepts:

Adjustable Life Adverse Selection Annuities Annuity Refund Options Combination Plans Determining Life Insurance Premiums Endowments Fixed and Variable Annuities Graded Premium Life policy Insurable Interest Insurance Defined Joint Life Law of Contracts Modified Life policy Whole Life policies Single Premium Whole Life Superannuation Term Life Insurance Last-Survivor Life Universal Life Variable Life Variable Universal Life Whole Life policies

According to Disposition of Proceeds (Settlement Options)

An annuity may also be described according to settlement options available or the way in which the income is disposed of including: STRAIGHT LIFE ANNUITY = This contingency option, also referred to as a pure life annuity or "life" annuity, **classified according to the length of time for which the annuitant will receive income. **It provides income to the recipient, once it commences, for life with no refund paid to the annuitant's family upon his or her death. This settlement option possesses the greatest amount of risk since there is no survivorship (i.e., no refund). The purpose of a straight life annuity is to protect against outliving ones income. A straight life annuity protects against superannuation. In other words protects the annuitant against using up income due to longevity. Insurers paying out under life annuities may suffer adversely if there is a sudden decrease in the mortality rate. This means that more people are living longer and therefore, insurers are paying life incomes longer as well. In addition, since women have a longer life expectancy than men, monthly payments would be smaller to a female, all things being equal. For example, Joe and Joan are twins and inherit an equal amount of money from their favorite aunt. If they both purchase an annuity with the funds and each contract includes the same life income option, Joe's monthly income payments from the annuity contract will be higher since his life expectancy is shorter than that of Joan.Since this classification of annuity pays income to an annuitant for life, the insurer bears a greater risk. In addition, **if the mortality rate decreases suddenly during any particular period of time, the insurer will be at a greater disadvantage. This means that if more people are suddenly living longer, the insurer will be paying income to its annuitants for longer periods of time.

What is Insurable Interest? When does Insurable Interest need to be present?

An individual may not purchase life insurance covering the life of another person unless he or she possesses an insurable interest in the life of that person. This involves a financial or economic interest in the person to be covered. This doctrine or rule was designed to prevent fraud or preclude a person from insuring another and then murdering the insured in order to collect policy proceeds. Insurable interest in life insurance must exist at the time of application. However, in some cases, it will be required to be present at least at the time the policy is issued or at the contract's inception. ______________________________________________________________________________________________________________________________________________________________ In property insurance = insurable interest must be present at the time of loss (i.e. when a claim occurs). Anyone purchasing life insurance on his or her own life possesses an unrestricted and unlimited insurable interest in himself or herself. ______________________________________________________________________________________________________________________________________________________________ When is Insurable interest automatically present? Relationships between spouses Relationships between parents and children Relationships between business partners or a key-employee; Relationships between debtor-creditor (i.e., borrowing money).

What are the requirements of Insurable Interest? When must Insurable interest be present? Does insurable interest need to be present at time of death?

An individual would possess an insurable interest in a nephew or niece if they live in the individual's household and he or she was the legal guardian. Again, the basic requirement that must exist when life insurance is purchased by one party or entity on the life of another is the existence of insurable interest. Further, insurable interest must exist when the applicant is applying for the insurance (i.e., at the time of application). Do not confuse the concept of insurable interest with the fact that a proposed insured must "prove insurability" in order to receive coverage from a life insurance policy. Insurable interest must exist at the time of application while a proposed insured will not "prove insurability" until a completed application is submitted to a home office underwriter. Insurable interest is not required to exist at the time of death. Therefore, once in effect, a policy owner may continue to pay premiums on a policy covering another even if insurable interest no longer exists (i.e. divorce or a partnership).

Number of Lives

Annuities may be classified according to the NUMBER OF LIVES covered. There are THREE BASIC TYPES: INDIVIDUAL ANNUITY — The most common form, this type covers one life only. Generally, there is no survivorship with this type of annuity. JOINT LIFE ANNUITY — This type of annuity is designed to pay benefits to two or more annuitants at the same time. All benefits, however, will end once the first annuitant dies. In this manner, it is similar to a joint life insurance policy. JOINT AND SURVIVOR ANNUITY — Benefits under this type of annuity are paid throughout the lifetime of one or more annuitants. THEREFORE, payments continue until the last annuitant dies.

According to the Type of Premium Paid

Annuities may be funded with a single OR periodic premium. SINGLE PREMIUM ANNUITIES This type of annuity is characterized by a lump sum or single payment. In other words, the annuity is entirely funded by a single premium. Monthly income payments made to the annuitant may begin immediately (i.e., 30 days following the single premium) or beginning at some time in the future (i.e., deferred). PERIODIC PREMIUM ANNUITIES made up of two forms. 1) level premium annuity characterized by level or constant payments each year which funds the annuity. For example, John, age 35, purchases a level premium annuity with an annual premium of $1,200. John will pay that level sum each year until retirement (i.e., age 65). At that time, he will begin to receive monthly income payments. 2) FLEXIBLE PREMIUM ANNUITY characterized by periodic (yearly) flexible premiums from the date of purchase to a specified age (i.e., such as retirement). The premium each year may vary depending upon the ability of the policy owner to pay. Most flexible premium plans require a minimum commitment each year of $100 or $250. As long as a minimum payment is made, the policy owner may contribute whatever he or she can afford each year. The future annuity benefit will be dependent upon the total amount of accumulated funds when a payout is scheduled to commence (i.e., retirement). Annuity Premiums Annuities possess their own mortality tables which are different from those used for life insurance. Items of consideration --interest rate paid --the amount of total contributions or accumulations --the settlement options selected. An annuitant's occupation or hobbies do not influence since these items will not affect the liquidation of funds.

Family Maintenance Policy

Another specialized type of policy available which is similar to the family income policy is the FAMILY MAINTENANCE POLICY. = a whole life policy with a LEVEL TERM insurance rider attached. Using the same information as the previous example, if the insured dies during the 20 year period, the beneficiary will receive monthly income from the date of death for 20 years. Again, the lump sum whole life death benefit may be paid at the time of death or at the end of the income period (i.e., 20 years). This policy is more expensive than the family income policy since level term insurance will be more expensive than decreasing term coverage. Like the family income plan, if the insured survives the initial 20 year period and dies thereafter, only the whole life death benefit is paid to the beneficiary. Again, in order for the beneficiary to receive any income payments from the rider, the insured must die during the twenty year period. If this occurs, the beneficiary receives monthly income for twenty years (and then the lump sum whole life death benefit is paid).

Describe and Explain Pure Endowment?

Another type of endowment, known as a pure endowment, is *a policy that will pay the face amount only if the insured is alive at the end of the endowment period. *No death benefit will be paid if the insured dies prior to the expiration of the endowment period. These types of policies are less expensive than traditional endowments and have actually been outlawed in some States. While a whole life policy endows or matures at age 100, an endowment matures at the end of the endowment period. This means that the cash value of an endowment is equal to the policy's face amount at the end of the specified period. For example, a $50,000 whole life policy is predetermined to mature at age 100. A $50,000 twenty-year endowment matures at the end of the 20 year period. Further, if a policy owner wished to make sure that his life insurance policy paid him $50,000 at retirement (i.e., age 65), or that it would pay his beneficiary $50,000 if he died prior to age 65, he would purchase a $50,000 endowment at age 65. Recommendation Example — You are an agent. Your potential customer wishes to buy a life insurance policy that will provide him with $20,000 in twenty years. What do you recommend he purchase? The only policy he can purchase to provide him with this amount in twenty years is a $20,000, twenty-year endowment. He would not purchase a twenty-pay whole life policy because this contract will not provide him with $20,000 in cash at the end of twenty years. A 20-pay life policy is not designed to mature until age 100.

Equity Indexed Life

Another type of life insurance product that is relatively new is equity indexed life insurance. This type of policy combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index. Instead of a specific interest rate as in a traditional whole life plan, interest earnings are credited based on increases in the specific equity index (for example, the S&P index) to which the policy is linked. Therefore, credited interest is linked to an index without the downside risk connected with directly investing in the stock market. These policies are characterized by A) guaranteed minimum interest rate B) tax deferral of interest accumulations C) policy loan access. The equity index returns are designed to keep pace with or beat inflation which protects the policyholder against downside market risk. Equity indexed life insurance contracts combine term life insurance with an investment feature, similar to a universal life plan. Death benefit amounts are based upon the coverage amount selected by the contract owner plus the account value.

Describe the characteristics of the Limited-Payment Whole Life Policy.

Another variation of the traditional whole life policy involves (is the) limited-pay policies. These are whole policies with the same characteristics as previously reviewed. However, premiums paid for protection are not paid throughout the lifetime of the insured. These policies possess a greater emphasis on savings, so to speak, than traditional whole life plans since they are characterized by fixed, level or pre-determined premiums but these are only paid for a specified number of years or "limited payment period" (i.e., 10 years rather than to age 100). Once the limited payments are satisfied, the policy is"paid-up" for life. No further premiums are due. Therefore, whenever the insured dies in the future, the death claim will be paid. Even though the policy is paid-up earlier, it is still designed to "mature or endow" at age 100. A limited-payment policy paid-up in ten years is called a "10-pay life policy." One that is paid-up in twenty years is called a "20-pay life policy." If the policy is paid-up in thirty years it is referred to as a "30-pay life policy." If an insured desires to pay up the policy by retirement age, he or she would purchase a "life paid-up at age 65" policy. Since the initial premiums are obviously greater than a traditional whole life policy, limited-pay policies possess a heavier savings element, even though the cash value will not equal the face amount until age 100. Limited payment life insurance policies are identical to the traditional whole life plan except for the different premium plan utilized.

UL CONTINUED

CORRIDOR = The amount of pure insurance protection above the cash value. For life insurance to qualify for tax purposes, there must be "space" between the total death benefit and the cash value of the policy. An automatic increase in the death benefit results when the cash value approaches the initial face amount under Option A. (Again, if this space is not present, the policy will lose its favorable tax treatment since it would not meet the Internal Revenue Code's definition of life insurance.) For cash value accumulations to receive favorable tax treatment (i.e., tax deferral), a specific percentage of universal life premiums must be used to purchase the death benefit amount. Insurers are required to provide policy owners an annual statement that will indicate what the cost (i.e., premium) of coverage will be that year, the available amount of the cash savings plan, the other expenses applicable, the interest rate to be paid for the upcoming year and the interest earnings credited for the previous policy year.

Describe and Explain Contracts of Adhesion, Ambiguities or confusing language, and the conditional nature of an insurance policy.

Contracts of adhesion = a contract drawn up or drafted by New York Life (the insurer) and either accepted or rejected by the person considering the purchase. ambiguities or confusing language = all and any ambiguity or confusing language that result in conflict will be decided (by a court if necessary) will rule in favor of the insured. Therefore, the fact that an insurance policy is a contract of adhesion aids a policy owner when there is a dispute regarding the contract language in the policy. The conditional nature = of an insurance contract is considered to be conditional because the insurer promises to pay a valid claim if death occurs during the policy period. In other words, payment of a claim will result based on certain conditions which must be satisfied.

Define Estoppel and describe a circumstance in which estoppel might occur.

ESTOPPEL = This legal principle involves a broken promise. It PROHIBITS AN INSURER FROM DENYING A CLAIM due to specific actions by the insurer or its representatives or due to inaction by the insurer. False representation(i.e., an agent states that the insured is covered if death is caused as a result of war). party relies on that statement (i.e., the insured Harm then results to the insured (i.e., the insurer attempts to deny the claim when the insured is killed in a war). If these three elements are present, the insurer will be "estopped" or prevented from denying the claim.

Endowments

Endowment policies are whole life contracts which provide for the payment of a death benefit to a beneficiary upon the death of an insured during a specified (i.e., endowment) period. However, if the insured survives the endowment period, he or she will receive the cash value which is equal to the death benefit amount at that time. In other words, an endowment pays at the earlier of death or at the end of the endowment period. Endowments were originally designed to combine life insurance with a * HEAVIER SAVINGS ELEMENT/COMPONENT. They may be issued for endowment periods of ten, twenty or thirty years or up to a specified age such as age 65. Therefore, these contracts are referred to as 10-year endowments, 20-year endowments, 30-year endowments or endowments at age 65. An endowment possesses the quickest cash value buildup of all whole life policies except for single premium life. The endowment with the shortest endowment period will be the one with the highest initial premium. In other words, a 10-year endowment will be more expensive per year than a 20-year endowment assuming that all things are equal. Therefore, an endowment is characterized by an accelerated cash value when compared with other traditional whole life products. A traditional endowment will provide the policy owner with a specified dollar amount at the end of the specified endowment period if he or she survives that specified period.

Define Legal Purpose

Essentially, legal purpose is the requirement that the object of, or reason for, the contract must be legal. contract must be in existence with the public interest in mind. The contract can not be contrary to public policy organized crime contract or a contractual agreement to buy stolen goods are not of legal purpose

Combination Plans and Variations

Family Income WL and Decreasing Term. A family maintenance policy combines whole life and level term. Family Policy WL and Level Term. Does not terminate when primary insured dies. Joint Life Covers two or more lives and pays when first insured dies. Then policy terminates. Last-Survivor Life Cover two lives only and pays when the last insured dies. Then policy ends. Also known as second to die insurance.

What is required for a Unilateral Contract (Life Insurance Contract) to be binding?

First of all: Technically an insurance policy is a unilateral contract Secondly: A unilateral contract generally requires the performance of an act in order for the contract to be binding. CONSIDERATION? (EXCHANGE OF A GOOD)? RIGHT? **A unilateral contract may also be described as a promise in exchange for an act already performed or an act in exchange for a promise. This also means that it is a contract where only one party must perform (i.e. the insurer makes the promise). For example, John completes a life insurance application and submits it to New York Life. Then New York Life (insurer) informs John that it has accepted the offer by John (issuance) of the policy. The act performed by New York Life (the insurer) is the "promise" to provide coverage and pay valid claims.

Graded Premium Whole Life

Graded Premium Whole Life — A graded premium whole life contract is characterized, like modified life, by a lower premium than traditional whole life in the early years of the contract. However, it increases each year for the initial period. The premium then jumps to an amount higher than the traditional whole life premium and remains fixed for life. The maximum introductory (i.e., early) period offered by insurers under these plans is generally up to ten years

Describe the features of a Counter-Offer? What has happened when a counter offer occurs.

If the insurer makes a counter-offer, = the original offer made by the applicant has been rejected by the insurer. the insurer has rejected the applicants offer and countered with a new offer The original offer is off the table so to speak. No contract will exist unless the applicant accepts the insurer's counter-offer.

Additional Term Insurance Characteristics and Information

Increasing Term Rider — Term insurance riders may be added to whole life policies. An increasing term insurance rider provides an increasing amount of death coverage each year. There are several types of riders that provide a higher amount of death protection each year including: -------------------------------------------------------------- Return of premium — Pays a death benefit equal to the cumulative total of premiums paid. Return of cash value — Pays a death benefit equal to the policy cash value at death. Increasing benefit rider (IBR) — Another name for the return of premium or return of cash value riders. -------------------------------------------------------------- Cost of living adjustments (COLA) — Increases the death benefit by a certain percentage each year.

Newer Types of Annuities

Insurers also offer EQUITY INDEXED ANNUITIES as well as MARKET VALUE ADJUSTED ANNUITIES. NON-VARIABLE ANNUITY PRODUCT = whose renewal interest rate is linked to (but the funds are not directly invested in) a stock market-related index (i.e., Standard & Poor's 500 Index) is referred to as an indexed annuity. AKA = EQUITY INDEXED ANNUITY = this is a form of fixed annuity and provides the contract owner with safety of principal (since the principal is guaranteed) and a guaranteed minimum return (i.e., 3%) since a high percentage of the contract owner's premium is invested in high grade government bonds. This provides a downside guarantee if the market performs poorly. In other words, this type of contract allows the owner to participate in market gains without assuming the risk of a market decline. It also provides the opportunity for appreciation (i.e., upside potential) in the stock market. Generally, the contract owner is obligated to remain in the contract for some minimum period of time, such as three years, and then return a percentage of the appreciation (i.e., 10%) in the selected equity index over that time. "percentage of the appreciation" = may also be referred to as the participation rate. MARKET VALUE-ADJUSTED ANNUITY/(AKA modified guaranteed annuity) (MVA) = shifts some but not all of the investment risk from the insurer to the policy owner since the annuity account value will fluctuate as market interest rates fluctuate. In other words it is a type of single premium-deferred annuity that allows contract owners to lock in a guaranteed interest rate over a specified maturity period (i.e., usually two to ten years). They function in a similar fashion to that of bonds with regard to bond value fluctuations (i.e., when interest rates fall, bond prices rise, etc.). MVAs generally provide higher interest rates than traditional annuities. They also possess lower reserving requirements and pass on more risk to the contract owner since, when surrendered, there will generally be both a market value adjustment and a surrender penalty assessed to the owner. In other words, when the contract is surrendered early the owner will receive the value of the contract minus a surrender charge.

Life Insurance Needs Analysis (cont.)

It is especially important to consider Social Security since no retirement income will be provided to survivors during the so-called "blackout period." = This is the period of time from the insured's death until the surviving spouse is permitted to receive retirement income benefits. However, benefits are provided for other dependents (i.e., children) during the blackout period until the youngest child reaches age eighteen (18). By subtracting liquid assets from total capital needs, the individual will arrive at the approximate amount of life insurance "needed." -------------------------------------------------------------- Planning for income needs of survivors is extremely important. The planning process involves: (1) information gathering including personal information (i.e., ages, health history) and financial information such as wages, personal assets, investments and earnings, pension plans and savings (2) identifying and prioritizing the client's objectives (3) analyzing the client's current financial condition (4) developing and implementing a plan (5) periodically reviewing the plan. Life insurance proceeds many times will be used to replace the salary or the lost services of the deceased. The producer must also aid the proposed insured and family in determining the proper amount of life insurance when considering what amount of capital should be retained or be available at death and if these available funds will be sufficient enough to protect against a forced liquidation of property. Either of these approaches may be utilized successfully although the human life value approach does not consider those who receive financial benefit from the individual's continued life.

Joint Life Policy

JOINT LIFE POLICY = covers two or more individuals under one contract. Generally it is purchased to cover a husband and wife. When the first spouse dies, the face amount is paid to the named beneficiary. Coverage is then terminated. In other words, protection ceases after the first spouse dies. No further life insurance is provided under the policy for the survivor. This policy might be purchased by a couple who feels that their main or primary need is for death coverage when "the first spouse dies." This type of policy is sometimes referred to as "first-to-die" insurance and although not considered a traditional whole life plan, cash value insurance is utilized.

Define Legal Capacity as it refers to contracts

Legal capacity = both parties (i.e., applicant and insurer) must be competent (of normal intelligence and sound mind has the capacity to dispose of his or her property by will as he or she sees fit) to enter into a contractual agreement, also known as competent parties. The parties (i.e., applicant and insurer) arriving at an agreement must possess the capacity to enter into that contract. In other words, the parties involved in the agreement must be competent to enter into that agreement. If a person is competent, he or she possesses such capacity. This requirement may also be referred to as competent parties. Most people (and insurers) are considered competent to enter into a contract with some exceptions including but not limited to:

Describe the recognition of life insurance

Life insurance has been recognized as an essential element in an individual's or family's financial planning program.

Definition of Life Insurance What occurs when a life insurance contract pays?

Life insurance involves the transfer of potential financial risk from one party to another. PAY OUT UPON DEATH = instantly or immediately creates an estate (value, funds, money, assets or capital). In other words, it instantly creates funds for a named beneficiary. The word "estate" in this instance = means value, funds, money, assets or capital. * Therefore, life insurance involves a transfer of risk from one party to another. However, a more specific definition of this concept is the immediate creation of funds.

Universal Life (UL)

Like adjustable life, universal life provides its owner with more flexibility than a traditional whole life plan. It may be referred to as an adjustable or nontraditional type of life insurance since it allows the policy owner to change the coverage amount at his or her discretion since it is characterized by a flexible or adjustable death benefit. This policy's premiums pay for pure protection (i.e., term insurance) and a portion is deposited into its cash value. The cash value in this policy may be referred to as: (1) a cash value fund (2) a cash savings plan (3) policy equity (4) a savings feature. Therefore, this type of policy may be described as a combination of term insurance and a cash savings plan. Just as in traditional whole life, a fixed interest rate is paid on the cash savings plan as it accumulates. --The fixed interest rate paid on the cash savings plan in a universal life contract will vary based on the index (e.g., money market index) to which it is connected and therefore, influences the yearly increase in the cash value. Therefore, the "investment" gains in the policy are credited to the cash value. In addition, universal life policies are characterized by a flexible premium. Some insurers offer a target premium schedule to allow policy owners to pay premiums like they would under a traditional whole life policy. However, after the initial target premium is paid, the policy owner may pay whatever he or she wishes each year or nothing at all (i.e., flexible premiums). If no premiums are paid in a particular year, the cost of insurance protection is withdrawn from the cash value. UL is a life insurance product that provides --flexibility along with a cash value. This policy provides flexible death protection, flexible premium life insurance. It may be referred to as transparent since it is characterized by "unbundled" premiums. Traditional whole life policies possess "bundled" premiums. This means that a policy owner of a universal life policy is provided with information describing where the policy costs (i.e cost of death protection, etc.) are allocated. Funds withdrawn from the cash savings plan are not considered to be loans if they are used to pay for death protection. This type of policy is referred to as an interest sensitive contract.

List those who lack the capacity to enter a contract. Including but not limited to... What type of contract creates an exception for those who lack capacity? HINT= M.I.IC.C.E

Minors, except those entering into agreements for necessities (i.e., food, clothing, shelter, etc.). Laws will vary by State as far as determination of "age of majority" Cognitively imparted or Cognitively challenged individuals (Insane or mentally incompetent individuals) Individuals under the influence of alcohol or drugs at the time of application Persons forced or coerced into a contract Convicts (based on State law) Enemy aliens (any native, citizen, denizen or subject of any foreign nation or government with which a domestic nation or government is in conflict and who is liable to be apprehended, restrained, secured and removed. Usually, the countries are in a state of declared war.) Minors, Insane, Influenced, Coerced, Convicts, Enemy.

Modified Whole Life Policies

Modified Whole Life Policies — This type of policy is characterized by a lower premium in the first few or early years of the policy. The premiums continue to be pre-determined but are lower than a traditional whole life plan during the initial five years, for instance. The next year the premium increases to an amount higher than the traditional whole life premiums would have been and they remain fixed for life. In other words, once the premium "jumps" following the initial period, it will remain level for life. Again, the contract is still designed to mature or endow at age 100. For EXAMPLE, an individual desires whole protection but cannot afford the traditional policy's $625 annual premium. If he or she buys a modified life policy the premium may be $350 for the initial five years and then increase in the sixth year to $650, remaining level for life. The insurer will still be receiving approximately the same amount of premium but the modified plan's cost is simply redistributed so it is more affordable early on.

Annuity Contracts (cont.)

Most individuals purchase an annuity contract in order to receive income in the future (i.e., retirement). It is attractive to investors since insurers generally pay higher interest rates than other traditional savings vehicles (i.e., certificates of deposit or money market funds). However, early withdraw could assess/have penalties If the policy owner dies or becomes disabled, funds can be withdrawn without penalty. The parties involved in an annuity contract include the insurer, the contract owner, the annuitant and the beneficiary. The contract owner has the right to name a beneficiary who will have access to the funds in the event of the owner's death prior to annuitization (i.e., the annuity or pay out phase). An annuity possesses some insurance aspects in that a mortality factor is used to determine periodic payments, although it is not the same mortality factor as used in whole life or term life insurance. In addition, as mentioned previously, a beneficiary must be named in the event that the contract owner dies prior to the annuity phase. If no beneficiary is listed on an annuity contract and the owner dies prior to the "annuitization, the proceeds are paid to the owner's estate. Annuities may be classified in several categories including: (1) according to the type of premium paid; (2) according to when benefits commence; (3) according to the units expressed (i.e., type of income); (4) according to the disposition of proceeds; and (5) according to the number of lives covered.

RENEWABILITY Explain and Describe

Most types of level term insurance Policy's provide the right to renew at the end of the specified period without requiring proof or evidence of insurability. The renewal premium of the policy is based upon the insured's attained age. The most common type of renewable term insurance is annual renewable or yearly renewable term life. = the policy is renewable (at the policy owner's option) at the insured's attained age. The attained age premium will increase each year as the insured's age increases. Renewable term policies may be written for "renewable" periods of 1, 5, 10, 15, 20 or 25 years. The cost of a renewable term life insurance policy is greater due to the possibility of adverse selection, since the insured is older when the coverage is renewed. Renewal premiums are based on attained or current age. Renewable term, like any form of life insurance, protects the insurability of an insured. An age limitation is usually included in these contracts such as "Renewable to Age 70."

List 3 components of loss that must be present in order for a pure risk to be insurable. (A.D.M)

NOT every type of risk is insurable!!! In order for pure risk to be insurable it must involve a chance of loss that is accidental = happening by chance, unintentional, and not expected definite = clearly stated and not vague measurable = quantifiable ("how do we do this, law of large numbers?") In addition, THE LAW OF LARGE NUMBERS must also apply. This is a mathematical law of probability that states that the larger the number of occurrences, the more predictable losses will be. As the number of exposures increase, the more the actual results will approach the results expected for a specific event.

According to Disposition of Proceeds (Settlement Options) (cont.)

NOTE: No matter which life annuity option is selected, the purpose of either is to make sure that the annuitant will not outlive his or her income. One of the primary reasons why an individual purchases an annuity is to make sure he or she can receive income for life. Since females possess a greater life expectancy than males, monthly income paid to a female annuitant will generally involve smaller monthly payments than those paid to a male (i.e. all other criteria being equal such as the value of the annuity, the age of the annuitants when they begin to receive monthly payments, etc.).

Traditional Whole Life Insurance Products-

Numerous types of traditional life insurance contracts are available to the insurance buying public including continuous premium or whole life, term life insurance, endowments, interest sensitive products, combination policies and several others. Traditional forms of whole life insurance include straight life or continuous premium life, limited payment life, single premium life, modified life and graded premium life insurance.

Financial burdens Associated With Death

Possible FINANCIAL BURDENS OF DEATH 1) Funeral and burial expenses are most obvious. However, there are numerous ADDITIONAL COSTS A) ESTATE tax liability B) state INHERITANCE (death) tax liability C) Current DEBT obligations at the time of death D) Outstanding MEDICAL expenses E) ATTORNEY or probate fees or F) costs associated with estate administration.

Define Risk and Describe 2 types of risk

RISK = The concept of risk may be identified as the UNCERTAINTY of financial loss. PURE RISK = is the only type of risk that is insurable since it involves a chance of loss Only, and NOT gain. SPECULATIVE RISK (i.e., placing a wager on the Super Bowl) provides the opportunity for loss or gain. A speculative risk may not be insured since it possesses the opportunity of financial loss or gain. Again, by purchasing insurance an insured's financial uncertainty with regard to a possible loss is reduced. Hmmmm, what about when people insure valuable art? That seems like speculative risk?

Return of Premium Term Insurance (ROP)

Return of Premium term life insurance is a new product that combines the advantages of traditional term life insurance such as affordable, guaranteed level-premium periods (ten, fifteen, twenty years, etc.), with a return of premium feature. At the end of the level premium period, all of the premiums paid during the life of the contract will be returned to the policyholder. The insurers that offer this product charge a little more for it than for other forms of term insurance. During the level-premium period, the insurer is able to invest portions of the premium to achieve growth or earnings. As a result, they are able to return 100% of the premiums to the policyholder at the end of the level-premium period. If the insured dies during the life of the contract the death benefit is paid to the beneficiary. The return of the premium paid to the policyholder is income tax free because the policyholder is simply receiving back the same amount that he or she paid for coverage.

Survivorship Life

SURVIVORSHIP LIFE = This is a policy usually covering two lives, generally used to cover a husband and wife. No death benefit is paid when the first spouse dies. When the second spouse or "last survivor" dies, the death benefit is paid. This policy is also called "last-survivor" or "second-to-die" life insurance and utilizes cash value insurance. The primary reason that this type of policy is purchased is to pay estate taxes and other administrative expenses connected with an estate. Premiums for policies covering multiple insureds are generally based upon the joint probabilities of both individuals to be insured.

According to the Type or Source of Income

Some annuities may be classified by the source of income payments provided. A FIXED ANNUITY = guarantees a predetermined income or level benefit payment amount which is paid each month for the life of the annuitant. The recipient (i.e., the annuitant) will receive the same monthly income or fixed dollar amount each month for the rest of his or her life. Fixed annuities are derived from the insurer's general account assets since it is this account that provides an interest rate guarantee as well as the fixed dollar or income guarantee. A fixed annuity guarantees safety of principal (as long as the insurer remains solvent). This type of annuity is a conservative product in comparison to a variable annuity. Since it is characterized by a predetermined amount of income, its purchasing power would be most affected by inflation. Once the predetermined income begins in a fixed annuity, the beneficiary receives a guaranteed refund when the annuitant dies (if a period certain has been selected). This type of annuity is designed to limit the policy owner's investment risk since the contract provides a guaranteed return. This means that the insurer invests the funds in safe and conservative investments which allow it to guarantee the annuity benefit. Since the values are guaranteed to the owner of the contract, it is the insurer who assumes the investment risk. The insurer is required by the contract to provide the promised benefit whether or not it earns its assumed interest rate. The investment account used is the general account which guarantees a return. The general account of an insurer holds all of its assets.Again, a fixed annuity guarantees a minimum amount of interest to be credited to the purchase payment. Income payments do not vary from one payment to the next. The insurer can afford to make guarantees because the money in a fixed annuity is placed in the general account of the insurer, which is part of the investment portfolio. The insurer makes investments that are conservative enough to ensure a guaranteed rate to the annuity owners.

Describe BINDING FORCE as it relates to CONSIDERATION

Sometimes a consideration is referred to as a bargained exchange. Therefore, the consideration (exchange of value) is the binding force in the insurance policy. That makes sense, in business law I learned a display of intention to honor contract could be binding in the court of law, to hold parties to said contract.

What methods do we use to reduce Adverse Selection

Sound and competent underwriting may reduce adverse selection. Thoroughly underwriting all individual risks submitted. policy provisions to reduce adverse selection -the two-year suicide clause -incontestable clause -pre-existing condition limitation -War and aviation exclusions Insuring large groups of individuals (i.e., group life insurance) may also reduce this danger.

Family Policy

THE FAMILY PROTECTION POLICY = this policy or rider may cover the entire family under one policy. Whole life coverage will be purchased on the life of the primary insured (i.e. breadwinner) with level term life insurance covering the spouse and all children. a combination of whole life and level term insurance. Term Insurance — Some insurers require that the insured (i.e., breadwinner), spouse and children prove insurability in order to be covered. However, all children later born or adopted into the family will be automatically covered for an amount of level term insurance. No rider has to be added to provide this coverage. Coverage is provided from the moment of birth (or adoption) and usually runs up until the child reaches age 18. Since term life protection is provided, the spouse and children will possess a conversion right generally available to those covered by term life coverage. Therefore, if the breadwinner dies, the surviving family members may convert to permanent life insurance if they wish without proving insurability. Amount of Coverage — Most family policies provide an amount of whole life coverage on the husband; 50% of that amount in term life coverage on the spouse; and 25% of that amount on each child as he or she is born. Premiums charged are based on the life or age of the primary insured. The policy does not end if the primary insured dies. Coverage continues for survivors as long as premiums are paid. Therefore, this policy provides coverage for all family members although the benefit levels are different.

Define and describe the concept of insurance, in generic terms.

THE TRANSFER OF RISK = This means that one person or entity is transferring the chance of a possible loss to another party. The transfer is accomplished through an insurance contract or agreement between two parties. The two parties (applicant and insurer) ultimately arrive at an agreement for insurance protection. Insurance helps to reduce the uncertainty with regard to possible financial losses. Insurance may also be described as a social device used for the transfer of risk. Insurance spreads the risk of loss from one person to a large number of persons through the pooling of premiums. --Essentially Insurance is a social device used to reduce the uncertainty of potential fiscal loss by spreading the risk of loss among a group, through the accumulated premiums they all pay. Therefore, it may also be described as the transfer of risk through the accumulation of funds or pooling of premiums. In other words, insurance reduces financial risk.

According to the Time When Benefits Commence

TWO BASIC CLASSIFICATION FOR WHEN BENEFITS BEGIN (IMMEDIATE & DEFERRED) 1. IMMEDIATE ANNUITY — This annuity generally provides the first installment benefit or payment to an annuitant thirty (30) days after the annuity is funded or purchased. This type of annuity must always be purchased with a single or lump sum premium. No payments are made to the annuitant until the entire purchase price of the annuity has been provided to the insurer. An immediate annuity is best suited for a person who needs "immediate" income (i.e., someone who is totally disabled). Therefore an immediate annuity is purchased with one lump sum and provides monthly benefits usually commencing a month after being purchased. There is no accumulation period in an immediate annuity.

Give a technical description of an Insurance Policy

Technically an insurance policy could be describes as a UNILATERAL CONTRACT= Because the language is developed by one party - the insurer. Therefore, it is sometimes considered to be a one-sided contract.

Convertibility Feature

Term life policies allow a policy owner to exchange a term life policy for a whole life contract without evidence of insurability. The conversion privilege increases the flexibility of term insurance. If the policy owner's needs change in the future, he or she may always convert the "temporary" protection to a plan of permanent coverage (i.e., whole life) without taking a medical exam. Conversion is permitted on an attained age or original age basis. ATTAINED AGE METHOD = characterized by the issuance of a whole life policy on the conversion date with policy premiums based on the current or attained age of the insured. This is the method generally utilized when a conversion takes place. The original age method involves a RETROACTIVE CONVERSION = (like it sounds, RETRO) In other words, the whole life policy purchased includes the date and premium rate which would have been charged had it originally been purchased years earlier rather than a term life policy. In addition, if this method is selected, the policy owner must also fund the whole life policy in an amount equal to what the cash value would have been if the whole life policy was purchased originally.

Define Consideration in regards to contract law. What must occur for consideration to be fulfilled.

The consideration is something of value must be exchanged between the parties in order for the contract to be recognized as legal. Without this consideration (exchange) the contract will not be recognized as legal. Exchanging something of value between the Insured and Insurer. INSURED consideration = that is Premium Paid and the representations (i.e., statements) he or she makes on the application. INSURER consideration = the promise to pay legitimate claims for coverage provided during the policy period. Sometimes a consideration is referred to as a bargained exchange. Therefore, the consideration is the binding force in the insurance policy.

UL CONT

The fixed interest rate, a guarantee of sorts, may change each year based on the money instrument to which it is connected (i.e., treasury bill rate, money market rate, etc.). The face amount originally purchased may not be guaranteed if the owner is not funding the plan (i.e. paying premiums). It may only be based on the amount of death protection the cash value is able to purchase that particular year. If the policy owner pays no premium in a particular year and there is insufficient cash to maintain the death benefit desired, the policy owner may adjust the death benefit to whatever amount the cash savings plan is able to purchase. In order for the cash value of a Universal Life policy to receive favorable tax treatment (tax deferral), a specific percentage of the premiums must be used to pay the death benefit. When this occurs, the policy continues to maintain its favorable tax treatment because the contract continues to satisfy the IRS definition of life insurance. UL offers two death benefit patterns including Option A and Option B. Under Option A, a level death benefit is provided. The net amount at risk (NAR) is adjusted after each month. This means that a mortality charge is deducted from the policy's cash savings plan on a monthly basis. Therefore, the cash value and NAR (benefit) together provide a fixed death benefit. Option B provides an increasing death benefit as the cash value increases. Therefore, UL Option B will pay a beneficiary an amount equal to the death benefit and the cash value upon the death of the insured.

Interest/Market Sensitive Products

The following are other types of more modern and newer life insurance plans in existence which are characterized by a flexible, adjustable or variable death benefit or premium. They function a bit differently than traditional whole life policies in several ways. Interest sensitive whole life policies, sometimes referred to as current assumption whole life, utilize changing interest rates (or a rate of return) in order to determine cash values. The changing interest rates are NOT used to determine death benefits nor future premiums. Other types of modern or non-traditional life insurance products include but are not limited to:

What distinguishes the Offer and Acceptance for a life insurance contract

The offer and acceptance is sometimes referred to as the agreement. An offer is a proposal by one party that, if accepted by another, will create an agreement. If a proposal is made by one party, and accepted by receiving party, then an agreement is created. "offer" is generally made by the applicant for insurance. The insurer either accepts or declines (rejects) the offer based on its underwriting criteria. the acceptance can be demonstrated by the insurer issuing or the producer delivering the policy.

Parties Involved in the Contract

There are TWO PARTIES INVOLVED IN ANY INSURANCE CONTRACT THE POLICY OWNER = is responsible for the payment of premiums and possesses all ownership rights of the contract. The insurer issues the policy once the application is approved. THIRD PARTY OWNERSHIP = When a policy owner is a different entity than the insured person, third party ownership is present. For example, when a spouse owns a policy covering the life of the other spouse or a business owns a policy covering the life of a key employee, a third party ownership situation is present.

Term Insurance Advantages and Disadvantages

There are many uses, advantages, and disadvantages of term life insurance. Term life policies are designed to provide temporary death protection. PRIMARY ADVANTAGES include (1) protecting one's insurability (2) protection against borrowed funds (3) providing additional coverage as a rider or supplement to whole life insurance (4) to meet one's needs if cash flow is his primary consideration (5) as a means of hedging definitely known contingencies. DISADVANTAGES are present with regard to term life insurance as well including but not limited to: (1) no protection is in effect once the term protection ends (2) even though premiums are low in the early years, they increase dramatically as the insured ages (3) term insurance provides no savings feature nor cash values (i.e., no equity).

Life Insurance Needs Analysis (cont.)

There are other methods available that may be used to determine the amount of life insurance needed including: a multiple of earnings such as five times a person's annual salary; the interest only method where it is determined how much insurance is needed to maintain after-tax family consumption levels if the principle is held by the insurer for future payments; the single needs method which identifies the amount of insurance needed based upon a specific need (i.e., loan or debt, education fund, death taxes, etc.); the "seat of the pants" method where an amount is arbitrarily selected; and the capital needs analysis. This last method involves determining the immediate cash needs of an individual or family such as final expenses, medical expenses associated with death, probate costs, cost of living expenses, debt elimination, an emergency fund, education funds and Federal and State death taxes which must be paid within six months of the death; and continuing income needs such as readjustment income, dependence period income, life income for a survivor and retirement income.

Determining Life Insurance Premiums

There are three primary elements or factors utilized to aid in determining what an insurer will charge for its life insurance product. The three elements that influence the gross premiums charged for life insurance are: (1) a mortality factor (2) an interest factor (3) an expense factor. The mortality factor is determined from a mortality table which provides an indication of the "probability of death" of an individual at a particular age. Premiums for life insurance are based upon the anticipated number of individuals within a given group who will die within a specific period of time. In other words, F provides us with a predicted death rate or "death assumption." The mortality factor is generally determined from a Commissioner's Standard Ordinary mortality table. = This is a generic table used by most insurers today although some insurance companies utilize mortality factors derived from their own experience (i.e., death claims paid). The age of an individual has the greatest effect on one's mortality expectations. The interest factor is a reflection of an insurer's return on their investments. Insurers invest the premiums they collect in a myriad of investment vehicles. The wiser their investment decisions, the better return they will realize. The expense factor is derived from the funds the insurer "pays out." This may include death claims paid, compensation to sales representatives (i.e., commissions), salaries and benefits provided for other employee such as directors, managers, clerical and other staff and all other administrative costs incurred.

List and Describe 2 primary Life Insurance Needs Analysis

There are two primary approaches to determine the suitability = how much life insurance is needed. human life value approach is a capitalized value outlook. It will forecast the potential lost earnings of a person as a measure of how much insurance to purchase. -- calculated by multiplying the projected earned (income per year) X (number of years until retirement), less expenses (i.e., income taxes and cost of living). This provides an approximate coverage amount that is needed. ______________________________________________________________________________________________________________________________________________________________ Needs approach or analysis is used in cases where the amount of life insurance needed is based upon the individual's (or family's) financial goals and objectives. education fund goals emergency funds bequests charitable gifting or retirement income goals of a spouse will influence the amount of coverage needed. ages, wages and health history of all parties concerned should be reviewed. ______________________________________________________________________________________________________________________________________________________________ The needs approach will focus on determining lump sum needs and will utilize all the costs associated with death (i.e. post mortem costs) plus financial objectives in order to arrive at a person's or family's total capital needs. Once this is done, the liquid assets of the person should be calculated which includes savings, pension or profit sharing benefits, life insurance proceeds and any other income the person is entitled to such as Social Security retirement income, interest from bonds or other investments, dividends from mutual funds or stock, or rental income. ______________________________________________________________________________________________________________________________________________________________ In addition, purchasing life insurance as a charitable gift also has its tax advantages. For instance, if the owner of a policy transfers all or a part of an existing whole life policy to a charitable organization, he or she will receive an income tax deduction based on the cash value of the policy at the time of the transfer. In addition, if a new policy is purchased and the charity is named owner and beneficiary, future premium payments made by the purchaser are tax-deductible (i.e. tax-deductible gift).

Define Genuine Assent in contract law.

There must be a genuine assent (assent = expression of approval or agreement) between the parties means that neither party is under duress or any undue influence.

Single Premium Whole Life

This is a type of limited-payment policy that is fully paid-up with a single or lump sum premium. Even though the initial premium (i.e., lump sum) is obviously higher than the previously mentioned policies, the single premium policy is potentially the least expensive of all whole life policies considering the entire life of the contract (or the total premium paid over the life of the policy). --These policies may also possess tax advantages with regard to borrowing from the equity portion of the policy.

Family Income Plan

This plan is comprised of a whole life policy and a DECREASING TERM insurance rider attached to it. "a family income policy is a combination of whole life and decreasing term life protection." The family income policy provides monthly income payments to the beneficiary, beginning at the death of the insured and continuing for the remainder of the decreasing term insurance policy period selected. Since decreasing term insurance is involved, every month the insured lives, the FIP rider decreases in coverage. If the insured lives to the end of the selected period, the FIP ends. In other words, in order for any income to be paid to the beneficiary from the rider, the insured must die within the decreasing term period. If the insured dies within this period, the beneficiary receives monthly income for the remainder of the term period. When the income ceases, the face amount of the whole life policy is paid to the beneficiary in a lump sum. In other words, the face amount of the whole life policy is paid following the expiration of monthly income (i.e., term) period. A FAMILY INCOME PLAN = will pay a death benefit to the beneficiary plus an additional income for a specified period. FOR EXAMPLE = assume that a family income rider is attached to a $40,000 whole life policy. The rider will pay $1,000 per month to the beneficiary for a potential income period of 20 years if the insured dies. This 20 year period is measured from the date of purchase. Therefore, if the insured dies after the policy was in force for 10 years, the beneficiary would receive $1,000 per month for the remaining 10 years. Once the income is exhausted, the insurer then pays to the beneficiary the $40,000 lump sum whole life death benefit. Theoretically, a family income plan will pay a lump sum and monthly benefits during the period of time that the dependent children are at home and need care.

Variable/Universal Life

This plan provides a combination of variable whole life and universal life insurance. This type of policy offers the policy owner a combination of investment options with a flexible premium payment and a guaranteed minimum death benefit. It is a hybrid of VWL and UL. It may also be referred to as AKA = Universal Variable Whole Life. The "universal" aspect of the contract is characterized by flexible premium payments. Target premiums may be paid at any time, reduced or skipped. The policy will remain in effect as long as there is sufficient cash value to at least pay for the cost of insurance (i.e., term coverage). UVL is an insurance, securities and investment product with a death benefit payable to a named beneficiary. Therefore, it is a policy characterized by a flexible premium and flexible death benefit and allows the owner to control the investment portion of the contract.

Level Term Insurance

This type of contract provides term insurance protection for a stipulated face amount of insurance for as long as the policy remains in force. It is characterized by a level face amount (death benefit) and increasing premiums (at the end of the renewable period) according to one's age. Level term insurance is renewable. This means that when coverage is renewed at the end of the renewable period, the insured is not required to prove insurability again. Proof of insurability is required at the time of application. When an individual buys a level term policy, his or her insurability is protected since the policy will stay in force as long as the premium is paid. Some yearly or annual renewable level term policies include a "re-entry provision." This provision allows the insured to renew the policy and pay a lower renewal premium by proving insurability. For example, an annual renewable $200,000 level term policy may cost $500 in premium for a 43 year old male. If the insured does not die during the year and wishes to be covered the next year, he may "renew" coverage at the same death benefit amount without proving insurability. However, since he is another year older and the chance of death is increased, he must pay a higher premium due to this increased risk. In the second year the insured may pay $518; and in the third year $536, and so forth.

Credit Life Insurance

This type of coverage protects a lender against the premature death of a borrower before the latter party has the opportunity to pay off a debt or loan. The amount of life insurance on the life of the borrower cannot exceed the amount of the borrowed funds. Decreasing term life insurance is generally used to provide such coverage. The lender or creditor (i.e., bank) is the policy owner, pays the premium, and is the beneficiary. A lender or creditor cannot require a borrower or debtor to purchase credit life coverage as a condition of securing a loan. The lender also has an insurable interest in the life of the borrower. By purchasing this is a type of business life insurance, the lender will not be left with an uncollectible debt should the borrower die before paying off the loan. This is another illustration of third party ownership.

Adjustable Whole Life Insurance

This type of policy provides flexibility with regard to the face amount of whole life protection. It provides flexibility since at any particular point in time it allows the face amount to be adjusted depending upon the insured's changing needs. This policy possesses the usual features of a level-premium cash-value type of life insurance. It provides permanent protection and possesses a cash value. It includes an adjustment provision which permits the face amount of coverage to be adjusted, higher or lower, depending upon the personal or family needs of the policy owner. The insured also has to prove insurability in order to qualify for the additional coverage as well. Since the face amount has been "adjusted", the cost of protection will increase or decrease accordingly. The plan of life insurance may be altered when any adjustments are made but only with respect to the future. This means that adjustments to the face amount are prospective (i.e., the future) and not retroactive. Therefore, any increase in premium increases future cash values and any decrease in premium produces the opposite effect. When an adjustment is made in a policy year, the new face amount and the premium will be fixed for the coming policy year. Individuals whose needs change frequently (i.e., marriage, children) or whose income fluctuates from year to year may find this policy to be advantageous. Again, the primary advantage of this policy is that it allows the policy owner to increase or decrease the death benefit in the future after he or she purchases it. Therefore, this policy provides the policy owner with the flexibility to change the face amount of coverage and the premiums.

According to the Type or Source of Income (cont.)

VARIABLE ANNUITY a contract issued by an insurer that provides the contract owner with the option of having premiums invested and managed differently. --generally consists of two investment accounts General Account & Separate Account. General Account = A guaranteed return is provided when funds are invested in the general account. When funds are invested in a Separate Account. = "separate account," FUNDS are being invested in equity products such as common and preferred stocks, bonds, and other such vehicles. There is a greater potential for higher returns in a variable annuity but there is no guarantee present as there is in the general account. (The Separate Account. holds all of the variable account options of the insurer.) ** IN The VARIABLE ANNUITY allows the contract holder to control the investment of his or her premiums assuming the investment risk. This means that the contract holder assumes the investment risk when funds are directed to the separate account. However, more flexibility is provided since the contract owner can determine how much risk he or she is willing to assume. The benefits ultimately paid by the contract will be determined by the performance of the separate account (i.e., stock market performance). If an equity fund (i.e., a mutual fund) performs well, the monthly income amount paid to the annuitant will increase. If the fund does poorly, the monthly installment payment will decrease. In other words, just like the cash value in a variable whole life insurance policy, the cash in a separate account of a variable annuity contract is not guaranteed. Variable annuities are characterized by fixed "units amounts" rather than fixed dollar amounts in a fixed annuity. When benefits payments are to commence, these units are converted into a fixed number of units upon which monthly benefits will be based. -A FINRA (formerly NASD) license is needed in order to sell this or any type of variable product. This license is also known as a Series 6 license. -A securities license is required because variable products are considered a security. In addition, a life insurance license is also needed. Therefore, these products are regulated at the Federal and State level. This product allows the owner to keep pace with economic conditions and create a bit of a hedge against inflation. A variable annuity is characterized by variable or flexible premiums, variable rates of return. Its performance advances or declines with economic and market conditions. This product also provides the contract owner with flexibility and control over the investment portion of the contract.

Variable Life Insurance

Variable life insurance (VL), = combines the protection and savings features of whole life insurance with the growth potential of securities such as common and preferred stocks, bonds, and other like investments. In other words, the cash value of a VL policy is deposited into a separate account which, in turn, is invested in securities. Variable life insurance is a type of life insurance contract where benefits, payable upon death or surrender of the policy, may vary depending upon the investment performance of the separate account that is invested in securities. The policyholder may select the securities vehicle to be used to fund the cash value. The annual premiums paid on VL are level or fixed. The cash value and the death benefit of this policy may increase if investment performance is good. If the cash value increases, the face amount also increases, thus the variable nature of the coverage limit.

Combination Plans and Variations

Various types of combination plans are in existence which combine whole life and term life coverages. Some variations are also present which provide coverage under one contract for more than one life. Most policies that combine whole life and term insurance are actually permanent plans with a term insurance rider attached to them. Policies covering multiple insureds generally consist of whole life protection.

Annuity Contracts (cont.)

WITH REGARD TO TAX PURPOSES, annuities are classified as qualified or non-qualified. NON-QUALIFIED ANUITY = NOT TAX QUALIFIED The contract owner receives tax deferral of interest earned but there is no tax deduction of premiums (or yearly tax savings through a salary reduction). Annuities purchased outside qualified pension plans do not receive tax-favored treatment of premium payments. In other words, premiums are not tax-deductible. Non-qualified annuities may be purchased by any individual or entity, but again, the premium payments are not tax-deductible. QUALIFIED ANNUITY = is purchased as part of a tax qualified retirement plan. If the premium paid for a qualified annuity is in the form of a contribution by an employer to a qualified retirement plan, the premium is tax-deductible. Some qualified annuities permit employees to fund the plan through a salary reduction (i.e., TSA). In this case, the plan is funded with pretax dollars which lowers the employee's yearly taxable income. The interest earned is tax-deferred. Whether the annuity is qualified or non-qualified, accumulations (i.e., interest earned) are tax-deferred.

When is Insurable interest automatically present?

When is Insurable interest automatically present? Relationships between spouses Relationships between parents and children Relationships between business partners or a key-employee; Relationships between debtor-creditor (i.e., borrowing money). legal guardian.

Types of Whole Life Insurance

Whole Life (WL) / Straight Life / Continuous Premium Life Death benefit Tax-deferred cash value (i.e., equity) Permanent insurance Level, fixed or predetermined premium All premiums returned if you live to age 100 (115 now) Limited Payment & single premium Whole Life Death benefit Tax-deferred cash value Permanent insurance Pre-determined premium for limited payment period Modified / Graded Premium Whole Life Death benefit Tax-deferred cash value Permanent insurance Lower premium than whole life in first five (5) years Higher premium than whole life in year six and fixed thereafter Adjustable Whole Life Death benefit Tax-deferred cash value Permanent insurance where face amount and premium may change Looks to the Future (i.e., prospective) Flexible / Adjustable death benefit based on changing needs

What is Adverse Selection?

adverse selection is paramount a process that involves the danger to which an insurer is exposed when approving more bad applications than good ones. An applicant who is in poor health and the underwriters somehow allow the application to be approved

Type of contract where those who lack capacity could still enter into?

contracts for necessities, i.e., food, clothing, shelter, etc.