Life Insurance | Chapter 1

What are the broad categories of state regulation of the insurance industry?

1. Establishment of the state's department of insurance and the insurance commissioner or superintendent as the head of that department. 2. Criteria for establishing an insurance company in the state. 3. Monitoring the finances of insurance companies. 4. Establishing and enforcing marketing standards and trade practices. 5. Policy approval and issuance 6. Reviewing rates charged by insurance companies for coverage 7. Qualification and licensing of individuals who sell insurance 8. Taxation

What are the two most important benefits of life insurance?

1. Protection against the Final Consequences of Death including loved one's security 2. Living benefits of life insurance

What must Insurance departments consider when examining a company

1. The Company's Financial Soundness -Are sufficient assets available to enable the company to meet its obligations? 2. Types of coverage offered? -Are the life insurance plans properly designed and extensive enouigh to benefit the insuring policy? 3. The company's marketing and advertising practices -Is the company misleading the public or making false promnises to its customers?

What is the second step of the underwriting process?

2. The agent may secure additional information if it is needed. -Sources may also be contacted to verify or expand on the information provided in the application.

What is the third step of the underwriting process?

3. A physical examination of the proposed insured may be required. `• Especially if there might be a health problem or the face amount requested is very high.

How are Occupation, Moral fitness, and lifestyle considered in determining a person's insurability?

4. Occupation • Statistics show that a person who works in an office is much less likely to be killed on the job than a firefighter or a test pilot. 5. Moral Fitness • A drug dealer will likely be a greater risk than someone in a conventional occupation. 6. Lifestyle. People who have potentially dangerous hobbies or avocations, such as sky divingm may pose a greater risk.

What's the fourth step of the underwriting process?

4. The Medical Information Bureau (MIB) will probably be contacted.

What are some additional factors that insurance companies use to determine insurability?

6. Lifestyle 7. Place of Residence 8. Financial condition

How are a person's place of residence and financial condition considered in determining a person's insurability?

7. Place of Residence • Certain foreign countries, for example, may pose extra risks associated with sanitation, climate, health care, living conditions, or political instability. 8. Financial Condition • The prospective policyowner's inability to pay bills, such as premiums, may result in a policy lapse before the insurance company can recover its expenses in issuing the policy.

What is the most well known rating organization?

A.M. Best Company.

What items go into paying of the deceased debts?

Automobile loan balances. Credit card balances. Promissory notes. Accrued taxes: Unpaid income taxes (federal, state and local). Property tax

How would rates be deemed excessive?

Consumers must not be overcharged for insurance.

What costs go into paying attorney fees?

Executor's fees. Executor's attorney fees. Court and probate costs. Appraising estate property. Maintenance or repair of estate property, particularly if it is to be sold. Cost of defending a contested will.

Considering the financial security of loved ones, how should the consumer of a life insurance policy think about dependency period?

Funds need to be available during a time when it may be hard for the surviving spouse to work due to children. -With the high cost of child care, a surviving spouse may not be able to make enough money to enable them to work if they have to pay child care expenses.

What is the goal of the insurance commissioner supervising the operations of a new insurance company?

Goal - To make sure company remains fiscally sound and able to meet obligations. · Commissioner makes periodic inspections of operations and financial affairs of each company authorized to do business in the state.

What kinds of lfe insurance agents are there and how do their companies differ?

Independent agents sell policies issued by a wide number of companies while exclusive agents sell only products of one particular company.

How should the purchase of life insurance feel?

It should be a positive and rewarding experience for clients if presented properly.

Considering the future security of love ones, how should consumers think about Mortgage/Rent?

It would be to have enough funds available to payoff or make mortgage/rent payments for a period of time.

What is life insurance concerned with?

It's concerned with the economic value of a human life.. It's developed from the relationship between an earning capacity of one individual and the financial dependence of others on that breadwinner.

Once a company has been authorized to do business, who supervises it's operations?

Its operations are supervised by the insurance department under the direction of the insurance commissioner.

What do funeral expenses amount to?

" Average cost of a funeral is $7-10,000. • Burial expenses may be separate. . Florist's fees. Burial site maintenance fees.

Considering the future security of loved ones, how should life insurance consumers think about survivors blackout period?

"Widow's blackout period." Period of time when social security stops paying the surviving spouse because there are no longer any dependent children.

What items go into paying off estate taxes?

- Death taxes, federal and state. - Especially important in large, unplanned (or poorly planned) estates. - Federal estate tax rates are progressive. - Generally must be paid in cash within nine months of death. - State inheritance and estate taxes vary widely.

What are the benefits of portfolio investments?

-Can provide significant returns. -Risky. -Many people have lost money to investments that either failed or did not meet expectations. -No guarantees. -Might not live long enough for an investment program to create the needed estate.

What are the living benefits of life insurance?

-Creates an immediate estate at the time it is most needed. -Life insurance proceeds are generally payable in full to the beneficiary shortly after the insured's death. -Typically avoids probate, making funds more readily available than funds from other resources may be. -Guaranteed.

How do savings accounts work?

-Deposit money in a savings account at regular intervals. -Protected by FDIC to certain capped amount. -Must live long enough to accumulate enough to handle all obligations at death. -Interest from savings is taxed as current income.

Considering the future security of loved ones, what should the consumer prepare for regarding the survivor's retirement.

-The surviving spouse's retirement is an important consideration. -Especially if the spouse does not already have a retirement plan.

How culpable are insurance departments for complaints?

. Insurance departments are responsible for seeing that the companies comply with their laws and regulations.

What are five important factors that insurance companies use to determine insurability?

1. Age 2. Physical Condition 3. Medical History 4. Occupation 5. Moral Fitness

How are age, physical condition, and medical history considered in determining insurability?

1. Age • All other factors being equal, the younger a person is the less likely death will occur within the course of а year. 2. Physical Condition • The present condition of the proposed insured - is it good or bad? 3. Medical History • The past health history/record of the proposed insured - is it good or bad?

What is the first step in the underwriting process?

1. An application is completed. • The information on this form provides the bulk of data on the proposed insured that the company will use in its decision to issue or not issue a policy.

What role do rate organizations play?

Rate companies on the basis of their financial stability and other criteria.

How would rates be deemed inadequate?

Rates must be set high enough to pay the insurer's losses and expenses and also to prevent unfair competition.

Considering the financial security of loved ones, how should consumers think about college education?

Sending children to college and giving them the best education possible is a top goal for parents. -The death of one parent can keep this goal from being realized.

What are some other lesser known rating organizations?

Standard & Poor's, Moody's, Duff & Phelps, and Weiss.

What would it mean for rates to be unfairly descriminatory?

The prohibition against unfairly discriminatory rates does not mean that everyone should pay the same for life insurance. · Rate regulation assures that insureds who are charged a high premium do not unfairly subsidize other insureds who are charged a low premium, assuming everyone the group of insureds represents essentially the same risk.

What does standard risk classification refer to?

The standard risk classification refers to rates that are based on a person's age, health, habit and occupation.

How are people whose insurability does not measure up to standards risks classified?

They are classified as as substandard risks. • If they are offered coverage by the company, they will be charged more than most people at their same age.

How regularly does the comissioner inspect domestic companies?

every 3-5 years.

How does state regulation of policy provisions help?

helps reduce problems caused by the complex nature of many life insurance products.

What are those agents who live outside the licensing state called?

nonresident agents.

What is the primary purpose of state regulations?

to prevent unfair discrimination, establish rate regulation, and determine the insurer's solvency.

Is life insurance a luxury or necessity ?

· A necessity often overlooked by the general public, who are not informed.

Who can submit a complaint to the state's insurance commissioner?

· Any person who feels he or she has suffered a wrong submit a written complaint to the state's insurance commissioner.

What does the NAIC attempt to do?

· Attempts to impose a degree of uniformity in state insurance laws and regulations. • Doesn't retain regulatory authority, but actions and recommendations taken at its meetings carry considerable weight with state insurance regulators, state legislatures and the insurance industry as a whole.

Before a policy may be sold in a state, who must review it?

· Before a life insurance policy may be sold in a state, it must usually be filed with the state insurance department. • Policies that fail to meet state requirements are disapproved for sale.

How does the federal government exercise considerable control over the insurance industry?

· By defining what is and is not a valid or qualified life insurance product and keying tax advantages only to those products that meet federal definitions.

What powers does the commissioner have?

· Commissioner has power to take appropriate action against company, namely, revoking its authorization and preventing it from doing further business in the state.

What step does the commissioner take following the inspection?

· Following this inspection, an accurate report of the findings is made to the insurance commissioners of all other states where these same companies operate. · Helps commissioners handle the enormity of the task, given the number of insurance companies that exist.

How do state insurance departments devote their time to insurance agents?

· One of its important duties concerns examination and licensing of agents. An individual must pass a written examination in order to be licensed.

What actions do insurance departments take against reported violations?

· Reported violations must be investigated and appropriate penalties assessed. • Violations of state law or regulations can result in fines, loss or suspension of an agent's license, or loss of authorization for a company to sell insurance. • Imprisonment may result in serious cases.

What does a policy holder need insurable interest for?

• A policyowner must have an insurable interest in the life of the individual he or she is insuring-required by insurance companies.

Who is the NAIC composed of?

• Composed of the insurance commissioners of the 50 states and the DC.

If insurance companies want to avoid adverse selection, why don't they go to that extreme?

• If such underwriting standards were followed, few life insurance policies would be sold.

What happens if there's a problem in the underwring process?

• If there's a problem, the policy may not be issued, or, if it is issued, it may be different from the one for which applied. • The policy issued may limit coverage or the company may charge more for it.

Who exercises primary control over the insurance industry?

• In the U.S. individual states exercise primary control over the insurance industry.

What must rates not be?

• Inadequate · Excessive -Unfairly discriminatory

What role does the federal government in regulating the life insurance industry?

• Influences the industry via taxation. • The way life insurance policies are taxed greatly impacts their marketability. · A policy that offers few or no tax advantages will probably not sell as well as one that offers very attractive tax advantages.

What may insurable interest be based on?

• Insurable interest may be based on love and affection, such as that between spouses or parents for their children. • Insurable interest in a prospective insured's life may also be based on economic factors, such as a business owner who is the key executive or between business partners.

What are the cash value benefits of life insurance?

• Last for the entire life of the insured. • Called "permanent insurance." • Accumulate cash values in addition to their face amounts. • Higher premiums than those paid for term life insurance, which doesn't accumulate cash values. • Prior to the insured's death, this cash value belongs to the policyowner.

How have states made reading policies easier for consumers?

• Many states have adopted readability standards that require policy wording to be simple and clear.

What is insurable interest?

• Means an interest in having the insured remain alive.

What are the withdrawal and loan benefits of life insurance?

• Permanent life policy that permits withdrawals from the cash value. • Money to be used by the policyowner for any purpose. • Amount withdrawn is generally subtracted from the policy's face amount (the death benefit). • Policyowner can also take out loans from the insurance company using the policy's cash value as collateral. • Loan must be paid back. • Any outstanding loan and interest will be deducted from policy's face amount at time of death claim.

How can various family situation be benefited by life insurance?

• Policies with cash value can provide funds during the insured's lifetime. • Funds can become available upon death to meet any of the beneficiary's needs.

What does the the AM Best Company publish?

• Publishes Best's Insurance Reports, which contains statistical data and comments about the background of American and Canadian life insurance companies.

How do state insurance departments handle agents who sell without a license?

• Stiff penalties are dealt to individuals who sell life insurance without a license. • Most states have a continuing education requirement which agents must complete in order to renew their license.

What is the National Association of Insurance Commissioners?

• The National Association of Insurance Commissioners (usually called the "NAIC") is a nongovernmental organization, but it has an important role to play in the regulation of the insurance industry.

What is the goal in selecting people to insure?

• The goal is to offer life insurance to those individuals between high and low levels of risk. • Such people are known as standard risks and are acceptable risks to life insurance companies. • The premium charged for their coverage is the amount charged for most people at their same age.

What act confirmed state jurisdiction and what did it stipulate?

• U.S. Congress confirmed state jurisdiction in 1945 by passing the McCarran-Ferguson Act. • Stipulated states would regulate insurance business conducted within their boundaries.

What is underwriting?

• Underwriting, also called risk selection, is the process that researches and evaluates applicants for life insurance to determine which are acceptable to the company as insureds.