Life Insurance Basics

Needs Approach

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

Term Life Insurance

is temporary protection provided for a specific period of time. It is also known as Pure Life Insurance.

Natural Premium

is the amount of premium that must be collected from each member of a group composed of the same age, sex and risk in order to pay $1,000 for each death that will occur in the group each year.

Policy Summary

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

Substandard (High Exposure) Risk

applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are often referred to as "rated" because they could be issued with the premium rated-up, resulting in a higher premium.

Replacing Insurer

is the company that issues the new policy (when coverage is switched)

Gross Annual Premium

is the one year cost for mortality, plus expense loading. Loading includes commissions, taxes, advertising, and while not an expense, includes the amount added to a pure or basic rate to provide for a profit margin to the insurer. _________________= cost of 1 year mortality + (commissions + taxes + advertising + profit margin)

Retention of capital

is the retaining of assets, to prevent invading the principal (ex. Home)

Underwriting

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

Blackout Period

is the time during which the surviving spouse and/or children do not receive any social security benefits. Begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. *S.S. full retirement age depends upon the year in which the individual was born.

Unconditional (binding) Receipt

is used most often with property and casualty insurance. Coverage begins immediately for a specific length of time, until the policy is issued. Generally 30-60 days, or until the company either issues or declines coverage, which ever comes first.

Illustration

means the presentation or depiction that includes non-guaranteed elements of a policy of individual or group life insurance over a period of years. It must distinguish between guaranteed and projected amounts.

Participating Policy (Mutual)

refers to any policy that distributes its non-taxable dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of new term insurance. Permits the insurer to establish a more generous margin in the form of an intentional overcharge, which will be returned to the policy holder if not needed.

Backdating

the policy may be _________ for no more than 6 MONTHS before the date of the application or the medical examination - whichever is later. Only reason for this is to lower a premium.

Medical Information Bureau (MIB)

a membership organization owned by member insurance companies. It is a non-profit trade organization which receives adverse medical information on individuals. Compares the information they have collected on a potential insured with information other insurers may have discovered. Can only be used as an aid in helping insurers know what areas of impairment they might need to investigate further. An applicant cannot be refused simply because of some adverse information discovered.

Delivery

Once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured. Mailing is acceptable. When the insurer relinquishes control of the policy by mailing it to the policyowner, policy is considered legally delivered. Obtain a signed delivery receipt.

Attending Physician Statement

Paid for by the insurance company, requested upon the answers to certain questions on an application, warranting specific details from a physician. Paramedical exam is conducted by a registered nurse or a paramedic.

Declined Risks

Risks that underwriters asses as not insurable are declined. - there may be no insurable interest, the potential for loss is too great, insurance may be prohibited by public or is illegal.

Interest

Since premiums are paid before claims are incurred, insurance companies invest the money in an effort to earn _______. This is a primary factor in lowering the premium rate.

Rating Classification

Standard, Substandard, or Preferred, used when deciding whether or not the applicant should pay a higher or lower premium.

Notice of Information Practices

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

Bequests

An insured may wish to leave funds to their church, school, or other organization at the time of their death.

Existing Insurer

is the company whose policy is being replaced (when coverage is switched)

Conditional Receipt

says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, unless the coverage is declined or rated, or issued with riders excluding specific coverage.

Emergency Reserve Funds

Insurance proceeds may be used to assist in paying for sudden expenses and lodging for family members coming from a distance.

Three factors determining insurable interest

1. Insuring one's own life 2. Insuring the life of a family member (relative or spouse); and 3. Insuring the life of a business partner, key employee, or someone who has a financial obligation to them.

Factors in Premium Determination

Mortality tables, Interest, and Expense

Debt Cancellation

Insurance may be used to create a fund to pay off debts of the insured such as home mortgage or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan.)

Expense

The insurer collects the mortality charge to pay the policy face amount if an insured dies. Since the insurer earns interest on the premiums it collects, the expected interest is subtracted from the mortality cost to arrive at the NET PREMIUM. Then, the insurer adds its expected operating costs (underwriting, overhead, and commissions) to calculate the GROSS PREMIUM that the insured pays. Mortality - Interest = Net Premium Net Premium + Expense (loading) = Gross Premium Mortality - Interest + Expense (loading) = Gross Premi

Costs Associated with Death (Post Mortem)

These costs take into account the final medical expenses of the insured, funeral expenses, and day to day expenses of maintaining the family including rent, or mortgage payments, car payments, utilities, groceries, etc. - also would include estate taxes, day care, insurance premiums, etc.

Unfair trade practice

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

Stock Purchase Method

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

Cross Purchase Method

used in partnerships when each partner buys a policy on the other.

Stock Redemption Method

used when the corporation buys one policy on each shareholder.

Entity Purchase Method

used when the partnership buys the policies on the partners.

Premium Receipt

when issued will determine when coverage will be effective.

Individual Life Insurance

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

Personal uses of Life Insurance

Survivor Protection - Can provide necessary funds for the survivors of the insured to be able to maintain their lifestyle in the event of his/her death. Estate Creation - the purchase of a life insurance contract he/she will have an estate of at least the amount the moment the first premium is paid. Cash Accumulation - used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. Estate Conservation - proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell out the assets.

Comparative Method

The (CIR) Competitive Interest Rate is the rate of return that must be earned on a "side fund" in a BUY TERM INVEST THE DIFFERENCE PLAN so that the value of the side fund will be equal to the surrender value of the higher premium policy at a designated point in time.

Human Life Value Approach

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

Net Single Premium

includes the mortality and interest components necessary to keep the policy in force until maturity. Mortality - Interest = ______________

Mortality Tables

indicate the number of individuals within a specified group (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age. They indicate to a life insurance company the NATURAL PREMIUM for an individual applying for life insurance.

Permanent Life Insurance

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

Executive Bonuses (Section 162 Plan)

is 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. The employee owns the policy and therefore has all control. Since the employer treated the premium payment as a bonus, that amount is tax deductible to the employer, and income taxable to the employee.

Nonparticipating Policy (Stock)

policy does not pay dividends to policy owners; however, taxable dividends are paid to stockholders. The gross premium must reflect, at least competitive reasons, the actual cost of providing the insurance. Any profit realized in the operation will be used to provided dividends to stockholders as well as surplus funds that may be used to buffer for future adverse experience.

HIV Test

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

Retirement Fund

Insurance proceeds may be used as a source of retirement income.

Liquidation of capital

Selling assets is a method of raising capital

Insurable Interest

To purchase insurance, the policy owner must face the possibility of losing money or something of value in the event of loss. It must exist between the policyowner and the insured at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not _________ _________ exists.

Application Procedures

Underwriting - the risk selection process Application - the starting point, and basic source of information used during risk selection process. Pt. 1 = general info, pt. 2 = medical information. Agent (Producer's) Report - provides the agent's personal observations concerning the proposed insured. This report does not become part of the entire contract, even though it is part of the application process.

Buy-Sell

agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. (AKA - Business Continuation Agreement) (Methods are Cross Purchase, Entity Purchase, Stock Purchase, and Stock Redemption)

Producer Report

allows the agent to communicate with the underwriter and provide information about the applicant known by the agent that my assist in the underwriting process.

Investigative Consumer (Inspection) Report

an inspection report from an independent investigating firm or credit agency, which covers financial and moral information. They are general reports of the applicant's finances, character, work, hobbies, and habits. Reports are subject to rules and regulations outlined in the Fair Credit Reporting Act.

The Nebraska Senior Protection in Annuity Transactions Act

applies to any recommendation to purchase or exchange an annuity made to a senior consumer by an insurer or insurance producer that results in the recommended purchase or exchange. The insurer or producer must have reasonable grounds to believe that the recommendation is suitable based on facts disclosed by the senior consumer regarding his or her financial situation, current insurance and investments, and future needs.

Variable Life Insurance or Annuities

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

Fixed Life Insurance or Annuities

are contracts that offer a guaranteed minimum or fixed benefits that are stated in the contract.

Standard Risk

are persons who, are entitled to insurance protection without extra rating or special restrictions. Representative of the majority of people at their age and with similar lifestyles.

Preferred Risk

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

Approval Conditional Receipt

coverage begins only when the pre-paid application is approved by the insurer (but before the policy is delivered). Therefore, there is no coverage during the initial underwriting process. Rarely used.

Group Life Insurance

is written as a master policy, issued to the sponsoring organization, covering the lives of more than one individual member of that group. The cost of coverage in excess of $50,000 is taxed to the employee. - Group must exist for a reason other than purchasing a group insurance; and - Individual members covered under the group master policy must have the right to convert their coverage to an individual policy without evidence of insurability should they leave the group.

Key Person Insurance

lessening the risk of financial loss to an important employee, someone who has specialized knowledge, skills or business contacts. The employee is the insured, and the business is the applicant, policyowner, premium payer, and beneficiary. (Taxation - No tax deduction for business, but benefits are paid tax-free) * Employees must give permission for coverage.

Replacement

means any transaction in which the new life insurance or a new annuity is purchased and, as a result, the existing life insurance or annuities have been or will be: -lapsed, forfeited, surrendered, or otherwise terminated -reissued with any reduction in cash value -used in a financed purchase -Amended, affecting reduction in benefits or in the term -pledged as collateral or subjected to borrowing, whether in a single loan or under a schedule of borrowing over a period of time for amounts in the aggregate exceeding 25% of the loan value set forth in the policy

Interest-Adjusted Net Cost Method

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

Statement of good health

must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date. Generally if the the premium was not collected at the time of the application, requested upon delivery of the policy.

Buyer's Guide

provides basic, generic, information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. It 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. Insurer's must provide to all prospective policy applicants prior to accepting their initial premium. If the policy contains an unconditional refund provision of a least 10 days (free look period), a buyer's guide can be delivered with the policy.

Mode

refers to the FREQUENCY the policy owner pays the premium. May be paid annually, semi-annually, quarterly, or monthly. * Higher frequency = Higher premium Monthly > Quarterly > Semi-Annual > Annual

Duties of the replacing insurance company

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

Duties of Producer (Notice Regarding Replacement)

signed by both the applicant and the producer. The original copy is left with the applicant. List of all existing annuity/life policies to be replaced, including policy numbers and the names of all companies being replaced. Submit to the replacing insurance company a copy of the replacement notice with the application.