LIfe Insurance Basics

executive bonus

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

Within ___ days of completing the contract, the viatical settlement provider must give written notice to the insurer that issued the insurance policy that the policy has or will become a viaticated policy.

20

Insurance proceeds paid in lump-sum may be needed for:

- costs associated with death - debt cancellation - emergency reserve funds - education funds - retirement funds - bequests

chronically ill

a condition in which a person is unable to perform at least 2 activities of daily living or that requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

it is the _________'s responsibility to make certain that the application is filled out completely

agent

suitability

an insurance producer may not recommend the the purchase, sale, exchange of an insurance policy or annuity contract w/o reasonable belief that the transaction is in he best interest of the insured

needs approach for determining amount of life insurance

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

stock purchase

buy-sell agreement used by privately owned corporations when each stockholder buys a policy on each of the others

cross purchase

buy-sell agreement used in partnerships when each partner buys a policy on the other

substandard

high exposure risk, rated premiums (higher premium)

preferred

individuals who meet certain requirements and qualify for lower premiums (superior physical conditions, lifestyle, habits)

key person insurance

key employee is insured

standard risk

people who are entitled to insurance protection w/o extra rating or special restrictions (average risk)

responsibilities of field underwriter

- proper solicitation of applicants - helping prevent adverse selection - completing the application - obtaining required signature - collecting initial premium and issuing the receipt - delivering the policy

classes of life insurance policies

1. permanent (whole life insurance that remain as long as premium is paid) vs term/pure (temporary) 2. participating (mutual, distributes dividends) vs nonparticipating (does not pay dividends) 3. fixed (guaranteed fixed benefits) vs. variable (cash values accumulate based upon specific portfolio of stocks) 4. group (master policy covering several) vs. individual

life insurance disclosure statement

Every applicant for a life insurance policy must be given a written disclosure statement that provides basic information about the cost and coverage of the insurance being solicited. This disclosure statement must be given to the applicant no later than the time the application for insurance is signed

Medical Information Bureau (MIB) report

MIB is a nonprofit membership trade corporation owned by member insurance companies that receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals, helps insurers know what areas of impairment need to be investigated further

delivery receipts

agent must obtained a signed delivery receipt when he/she hand delivers an individual policy

life insurance surrender comparison index disclosure

all applicants in PA must be given one, provides a life insurance purchaser with a means of making a cost comparison of the same types of life insurance policies having the same premium payment period and pattern. The interest adjusted method at 5% will be used to provide 10 and 20 year surrender comparison indexes - per $1,000 of the face amount of basic insurance. This index is based on the premise that the policy will be surrendered at the end of either 10 or 20 years.

whenever the agent collects premiums, the agent must issue a _____________

premium receipt

factors in premium determination

1. mortality- ratio of number of deaths in a specific population/ certain amount of time vs. number of living people in that population 2. interest- insurance companies invest premiums to earn interest, primary factor in lowering the premium rate 3. expense (loading charge)- insurer operating expense

personal uses of life insurance

1. survivor protection- provide funds necessary for survivors of insured to maintain their lifestyle 2. estate creation and conservation- creates an immediate estate (when the first premium is paid) 3. liquidity- policy's cash value can be borrowed against at any time 4. asset protection- guard one's wealth against creditor claims

in PA, the replacing insurer must notify the existing insurer of a replacement within________

5 business days or following the receipt of the application or on the day the policy is issued (whichever is sooner)

stock redemption

buy-sell agreement used when the corporation buys one policy on each shareholder

entity purchase

buy-sell agreement used when the partnership buys the policies on the partners

viatical producers

represent the providers

field underwriting

risk selection and classification process that determines the acceptability of applicants for insurance

DIsclosure to the consumers must include

- Possible alternatives to viatical settlement contracts; - Proceed taxation information; - Proceeds subject to claims of creditors; - Effect on eligibility for Medicaid or other government benefits; - The viator has 15 calendar days to rescind a viatical settlement. If the insured dies in the rescission period, the settlement contract will be deemed rescinded; - Entering into a viatical settlement contract may cause other rights or benefits to be forfeited; - Funds will be sent to the viator within 3 business days after the viatical settlement provider acknowledges that the ownership of the policy or interest in the certificate has been transferred and the beneficiary has been designated.

Duties of the replacing producer

- present to the applicant a notice regarding replacement signed by both the applicant and producer - obtain a list of all existing life insurance and annuity policies to be replaced - leave the applicant w/ the communications used for presentation to the applicant - submit a copy of the replacement notice to the replacing insurance company w/n 20 days - evidence f these requirements should be maintained for at least 3 years

exceptions to asset protection

-If the insured has filed a petition of bankruptcy within 2 years, the proceeds and cash value are only exempt under certain circumstances; -The amount of premiums paid with intent to defraud creditors is not exempt -a creditor possessing a valid assignment with interest from either the cash surrender value or the proceeds of the life insurance policy

terminally ill

a condition that can reasonably be expected to result in death within 24 months.

gross annual premium

net premium+expense (loading) = gross premium; one year cost for mortality + cost of operating the company

fraudulent viatical settlement act

an act or omission committed knowingly or with intent to defraud for the purpose of depriving another of property or for monetary gain

life settlements

any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for compensation

viatical settlement purchaser

anyone who gives a sum of money as consideration for a life insurance policy or interest in the death benefits of a life insurance policy

Primary criteria used by an underwriter

applicant's health, occupation, lifestyle, hobbies, habits

Traditional net cost index

compares the cash values available to buyers if they surrender the policy in 10 or 20 years. This index does not take into consideration the time value of money (or investment return on the insurance premium had it been invested elsewhere)

interest-adjusted net cost index

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

human value approach to determining amount of life insurance

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

premium payment mode options

monthly > quarterly > semi-annual > annual

viatical settlement provider

person, other than the viator, that enters into a viatical settlement contract

buyers guide

provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. This document explains how a buyer should go about choosing the amount and type of insurance to buy, and how a buyer can save money by comparing the costs of similar policies.Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium.

Replacement

a practice of terminating an existing policy or letting it lapse, and obtaining a new one

net single premium

mortality - interest = net premium (components necessary to keep policy in force until maturity)

conditional receipt

most common, used only when the applicant submits a prepaid application, coverage will be effective either on date of the application or date of the medical exam (whichever occurs last)

medical vs nonmedical application

nonmedical= minimal health concerts, health insurance, medical visits medical= requires medical exam by a professional

decline risks

valid reasons - no insurable interest - applicant is medically unacceptable - potential for loss too great, does not meet definition of insurance - insurance prohibited by public policy or is illegal

change of insured provision

In the event the key employee quits or is terminated, the owner (business) may transfer the coverage to the replacement employee, subject to evidence of insurability

buy-sell agreement

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

premium payment mode

frequency the policyowner pays the premium; higher frequency = higher premium

viatical settlement providers must obtain the following information before entering into a contract:

1. A witness document which contains the following: - The viator consents to the contract; -The viator has a full and complete understanding of the contract and the benefits of the policy; -The viator entered into the contract freely and voluntarily; -The insured is terminally or chronically ill and was diagnosed after the life insurance policy was issued; and -The viator is of sound mind and under no constraint or undue influence; 2. A document giving the insured's consent to the release of medical records to the viatical settlement provider, broker, and insurance company; 3. A document giving the insured's consent to the tolling of the running of the policy's contestable period until after the insurer completes its good faith investigation, if the life policy is being viaticated within 2 years of the policy issue.

sources of underwriting info

1. application- main source 2. producer (agent's) report- becomes part of the application 3. attending physician statement- insurance pays, can also request paramedical exam, medical information bureau (MIB) report or full medical exam 4. investigative consumer report- inspection on applicant from independent investigating firm or credit agency

A viatical settlement broker or provider may contact an insured to request information regarding the insured's health status. The contacts cannot be made more often than every _______ if the insured has a life expectancy of more than one year, and no more than ______ if the insured has a life expectancy of one year or less.

3 months; once per month

insurable interest

for life insurance, this must exist at the time of application: - policyowner's life - life of a family member - life of a business partner, key employee, someone who has financial obligation to the policyowner

Life insurance guarantee association

formed to protect anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers, association pays claims up to a certain limit set by state law, funded by members of the association

viatical settlement broker

licensed person that, for a fee, negotiated viatical settlement contracts b/w viator and viatical settlement provider (represents the viator)

illustration

presentation or depiction that include nonguaranteed elements of a policy over a period of time, must do the following: - distinguish b/w guaranteed and projected amounts - clearly state that in illustration is not part of the contract - identify values that are not guaranteed

classification of risks

standard, substandard, prefered

viators

the insured, owner of life insurance policy

unconditional receipts

used often with property and casualty insurance, coverage begins immediately for a specific length of time until the policy is issued or declines coverage (whichever occurs first)

viatical settlements

allow someone living w/ life-threatening condition to sell their existing life insurance policy and use the proceeds before their death, insured sells death benefit to a third party at a discounted rate (new owner continues to maintain premium payments)

policy summary

written statement describing the features and elements of the policy being issued. Must be provided when policy is delivered