2023 AL Life Insurance Only - Key Facts

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Policy Loan & Withdrawal Options

- Failure to repay a loan has permanent effect on cash value accumulation - Annual interest on a loan is added to the amount of the loan as it accrues - Lapse: Outstanding policy loan + interest > cash value of the policy - Whole Life: A loan can be taken out once the policy develops cash value Automatic Premium Loan rider can be added to policy (but not to term or credit life policy) - Partial surrenders usually allowed in annuities, universal life and variable life policies

Human Live Value Approach vs. Needs Approach - Personal Uses of Life Insurance

- HLVA: Created to establish what a family would lose in income upon death of sole or primary income provider - Needs Approach: Does not consider future earnings

Insurable Interest - Life Insurance Basics

- Insurable interest must exist at the time of application, but not necessarily at the time of a claim - Insurable interest must be based on economics or family relationships - Insurable interest exists if someone would benefit if another person continues to live

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (General)

- Parties: Producer must sign the application, but are not party to the contract - Producer must explain policy provisions, riders, exclusions to the applicant - Owner's Rights section shows who has the right to change the beneficiary, take out a loan, and take cash surrender - Collateral Assignment: Policyowner can temporarily assign policy to a bank as the sole collateral for a loan (policy loans not taxable) - Absolute Assignment: Policyowner can transfer ownership to another person - Entire Contract: Includes the policy, application, and anything else attached - Changes/Modifications: Must be made in writing and signed by company officer (Producer cannot make changes)

Exposure - Key Concepts

A condition that could result in a loss

Life Settlement - Personal Uses of Life Insurance

A contract between life insurance policy owner and a third party

Substandard Risk - Underwriting

A rated policy is one issued to substandard risk with dangerous hobbies or health problems

Offer and Acceptance - Contracts

A specific and definite proposal to enter into a contract

Warranty - Contracts

A sworn statement of truth and guaranteed to be true

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Term Life)

Added to parent's policy to cover the life of a child, child's coverage ends when age 18 (unless the rider is converted to permanent coverage)

Stock Redemption Plan - Business Uses of Life Insurance

Agreement where corporation agrees to buy back the stock of a deceased shareholder

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Children's Term)

All of the insured's children are covered for a single, flat premium

Utmost Good Faith - Contracts

All parties to insurance transaction are honest

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Guaranteed Insurability)

Allows insured to increase coverage periodically without a physical exam (aka guaranteed purchase benefit)

VARIABLE LIFE - Variable Whole Life

Allows insured to self-direct the cash value investment

Law of Large Numbers - Key Concepts

Allows insurers to predict claims more accurately - To be insurable, losses must be calculable - Applies to groups of people, not individuals (more people in the group, more accurate predictions)

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Nonforfeiture Options (Reduced Paid-Up Nonforfeiture)

Amount of coverage in the new policy is reduced from that of the original policy - May be taken any time there is cash value - Provides coverage for life

Immediate Estate - Personal Uses of Life Insurance

An immediate estate is created when life insurance policy is purchased

Express Authority - Producers

Authority written into producer's contract (aka binding authority)

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Nonforfeiture Options (Extended Term)

Automatic nonforfeiture option

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries

Beneficiary does not need to be the age of majority (18 or 21 depending on the state) to receive proceeds; but proceeds cannot be directly paid to a minor child - Proceeds create an immediate estate for beneficiary

WHOLE LIFE INSURANCE - Whole Life

Benefits are bundled/packaged together - Policies must contain table showing guaranteed cash value at end of each year (anniversary date) for first 20 years (show per thousand) - Matures at age 100 - Pays face amount upon death or age 100, whichever is first - Premiums due until death or age 100

Elements of a Contract - Contracts

COAL - Consideration - Offer - Acceptance - Legal purpose

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Level Term)

Can be added to parent's policy to insure a child

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Change of Insured)

Can be used by employer to transfer a key person life insurance policy from one key person to another

TERM LIFE INSURANCE - Conversion

Can convert to Whole Life, but not reverse

Speculative Risk - Key Concepts

Chance of both loss and chance to gain

Pure Risk - Key Concepts

Chance of only loss and no chance to gain

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Family Policy)

Combination policy that automatically covers all family members including newborns (after short waiting period), at no extra premium charge

Risk Classification - Underwriting

Company underwriter determines final rating classification (not the producer) - Preferred, Standard, Substandard

Receipts - Underwriting

Conditional/binding receipts for life and health insurance (binders for property/casualty insurance)

Consideration - Contracts

Consideration clause provides that something of value must be exchanged - Consideration does not need to be equal, and policy cannot be voided due to unequal consideration

TERM LIFE INSURANCE - Convertible Term

Conversion based on insured's current/attained age

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Grace Period)

Coverage continues even if premium is not paid (Ordinary Life Insurance allows 30 days) - If terminated employee dies within grace period of employer provided group life policy without converting, full death benefit is paid to beneficiary - If insured dies during grace period without paying the premium due, face amount is paid to benefit less the overdue premium

Coverage Start - Underwriting

Coverage never begins unless premium is paid - Earliest that coverage can start is the day of application, if applicant paid first premium, has no conditions to fulfill and had not lied on the application - If producer gives applicant a conditional receipt, and underwriter rejects application, then there is no coverage

FLEXIBLE PREMIUM POLICIES - Universal Life

Differs from Whole Life because it has a flexible premium and guaranteed minimum rate of return (aka Interest Sensitive Whole Life) - Partial Surrender: Policyowner can withdraw some of the cash value without paying tax on the interest - Policies are a combination of a 1-Year Renewable Term and Cash Value account - Loans are allowed on policies - Benefits are transparent/stand-alone

Third-Party Policyownership - Business Uses of Life Insurance

Examples include key person and partnership insurance, and policy written on life of a spouse or minor child

TERM LIFE INSURANCE - Decreasing Term

Face amount decreases, not the premium (the type of life insurance provided in mortgage redemption service)

Concealment - Contracts

Failure to disclose a material fact

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Free Look Period)

Free-Look Period: Usually 10 days from policy delivery (if mailed, from date of mailing aka constructive delivery), if policyowner returns the policy they receive a full refund - Policyowner can exercise the free look provision without giving any reason

WHOLE LIFE INSURANCE - Limited Pay Whole Life

Has limits pertaining either to number of years payments are made (such as 20-pay), or the age when all premiums must be paid (such as paid-up at 65) - Matures at age 100 (although paid-up earlier - such as paid-up at 65) - Premiums due for a shorter period of time than Whole Life - On 20-pay life, cash value is equal to face amount upon maturity

Foreign Insurer - Insurers

Has their home office in another state

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Suicide)

If insured commits suicide within a certain period of time after policy issue, no benefit is payable but all premiums are refunded to the beneficiary - In most states, suicide is covered after 2 years (check your state regulations for the time limit in your state) - If insured dies in an accident, insurer may order an autopsy to determine it was not suicide

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Reinstatement)

If insured's policy has lapsed and they want it back, can apply for reinstatement (unless surrendered for cash) - Upon reinstatement, incontestability and suicide provisions start over

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Misstatement of Age)

If insurer discovers insured misstated their age on the application, insurer will adjust the premiums and benefits according to the correct age of insured - Provision runs for duration of the policy - If insured understates their age, it is the face amount that is reduced

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Payor Benefit)

If parent paying the premium on child's policy dies or is disabled, allows the premium to be waived (not the same as Waiver of Premium rider)

Application Requirements - Underwriting

Incomplete application is typically returned (but if approved, coverage begins and company has waived ability to contest a claim) - Applicants can backdate a life insurance application for up to a certain number of months (usually 6 months) in order to obtain a lower premium

Alien Insurer - Insurers

Incorporated outside the U.S. and sells in the U.S.

VARIABLE LIFE - Variable Products

Investing in variable products is considered a hedge against inflation - No guarantees, not backed by the guaranty fund - Agent must be registered with FINRA to sell variable products

Mortality / Mortality Table - Underwriting

Life insurance premiums are based on mortality (death) + company expenses - interest earned on company investments (mortality table based on people and time)

Discrimination & Consent - Underwriting

Life insurers can discriminate based on physical hazards of the applicant (age and health) - HIV consent form states that results of HIV test are only shared with certain individuals (such as underwriter)

Preferred Risk - Underwriting

Likely to receive a premium discount

GROUP LIFE - Group Life Insurance

Master policy issued to policyowner (usually an employer) - Employees receive a certificate of insurance summarizing coverage and listing employee's beneficiary - Employer may require employee to pay premium for dependent's coverage - Contributory Group Life: Requires that 75% of eligible employees enroll in the policy - Noncontributory Group Life: Requires 100% of eligible employees participate (employer pays the total premium) - Typically less expensive than individual policies Conversion from group policy to individual policy permitted for 31 days from termination, regardless of health - Group cannot be formed only to buy insurance - Participation requirements help avoid adverse selection - Experience rating for large groups only (rates based on claims experience of that group)

FLEXIBLE PREMIUM POLICIES - Adjustable Whole Life

May be suitable for those with fluctuating income - Adjusting the premium on Adjustable Whole Life policy affects the face amount (and vice versa)

Stock Insurer - Insurers

May pay dividends to shareholders/stockholders (dividends not guaranteed)

Insurance Laws (State to State) - Key Concepts

Not required to be uniform from one state to another

Implied Authority - Producers

Not written/expressly granted, but is actual authority producer has to transact normal business activities

Government Insurance - Insurers

Offers insurance based on social needs like flood insurance and workers compensation - Does not offer insurance for purpose of preventing fraud

Standard Risk - Underwriting

One with an average life span, most applicants are standard risks

Unilateral Contract - Contracts

Only one party makes an enforceable promise (the insurer)

SPECIALIZED POLICIES - Joint Life

Pays only when first insured dies

SPECIALIZED POLICIES - Joint and Survivorship Life

Pays only when second insured dies

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Accelerated Benefits)

Pays proceeds before death to those with terminal illness

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Waiver of Premium)

Pays the premium on behalf of disabled insured after a short waiting period, until insured recovers or dies (does not pay cash benefit to insured)

SPECIALIZED POLICIES - Survivorship Life

Pays when surviving insured dies - Commonly used in estate planning so death benefit pays estate taxes when due

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Incontestability)

Policies are incontestable if in force for 2 years (new policies are contestable for material misrepresentation for first 2 years)

Contract of Adhesion - Contracts

Policy ambiguities always favor the insured

WHOLE LIFE INSURANCE - Single Premium

Policy has immediate cash value, and can be used to buy a policy paid-up for life

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Proceeds)

Policy proceeds left with the insurer, for the benefit of the beneficiary, are NOT attached by creditors - Proceeds cannot be directly paid to a minor child - If insured buys a policy and dies one month later, insurer must pay the claim

VARIABLE LIFE - Variable Universal Life

Policy that has a flexible premium and investment component (allows policyowner to self-direct cash values into equities)

VARIABLE LIFE - Variable Life

Policy that invests cash values in equities

SPECIALIZED POLICIES - Juvenile Life

Policy written on the life of a minor

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Revocable)

Policyowner can change the beneficiary at any time (beneficiary has no vested rights under policy)

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Irrevocable)

Policyowner cannot change without beneficiary's consent (beneficiary has vested interest in the policy)

TERM LIFE INSURANCE - Level Premium

Premium and face amount are level throughout the term

TERM LIFE INSURANCE - Annual Renewable Level Term

Premium increases annually, with face amount remaining level

WHOLE LIFE INSURANCE - Straight/Traditional Whole Life

Premium is level and coverage provided until insured dies or reaches age 100

Executive Bonus - Business Uses of Life Insurance

Premium paid to employee as a bonus is deductible by the business, amount paid to employee is taxable income to employee - When life insurance purchased as an executive bonus for a corporate employee, policy belongs to that employee

Producer Authority - Producers

Producers have expressed, implied, and apparent authority

Reinsurance - General Key Concepts

Protects insurers in the event of catastrophic loss (most insurers buy this)

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Return of Premium)

Provides level coverage from the whole life policy, and increasing coverage from the rider - Return of Premium rider and Return of Cash Value rider are both increasing term coverage

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Common Disaster)

Provision assumes that the insured died last

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Spendthrift Clause)

Provision not applicable if proceeds are paid in lump sum

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Contingent)

Receives proceeds if primary beneficiary dies before the insured

TERM LIFE INSURANCE - Term Insurance

Renewable with no physical examination, up to certain age

Producers - Producers

Represent the insurance company, not the insured - May be personally liable if violating producer contract - Independent producers own their accounts and are not employees of insurance company

Indemnity - Contracts

Restoring the insured to the same position as before the loss occurred (to make whole)

Hazard - Key Concepts

Something that increases the chance of loss

Buy-Sell Agreements - Business Uses of Life Insurance

Stockholders in small, private corporations often enter into buy/sell agreements with the corporation that are funded by life policies - Policy that provides for business continuation if business partner dies is based on cross-purchase buy/sell agreement

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Nonforfeiture Options

Surrender charges levied by some insurers on annuities and universal life reduce the amount policyowner receives upon cash surrender - If policy with cash value lapses for nonpayment, insured has 60 days from premium due date to select a nonforfeiture option

Peril - Key Concepts

The cause of a loss (such as fire)

Risk - Key Concepts

The chance of loss

CREDIT LIFE INSURANCE - Group Credit Life

The creditor is both the policyholder and the beneficiary - Policy limits on Credit Life cannot exceed the amount of the loan

Insurance - Key Concepts

The transfer of pure risk of loss from individual to insurance company in consideration for a premium

Representation - Contracts

The truth to the best of one's knowledge

CREDIT LIFE INSURANCE - Decreasing Term

The type of policy used to provide Credit Life Insurance - Credit Life is NOT used for mortgage protection - Policy limits on Credit Life cannot exceed the amount of the loan

Reciprocal Insurer - Insurers

Unincorporated association of individuals who insure each other (managed by an attorney-in-fact)

Waiver - Contracts

When insurer voluntarily gives up the right to obtain information they are entitled to

Estate Conversion - Personal Uses of Life Insurance

When life insurance is used to pay estate taxes

LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Class Designation)

When policyowner lists a group of people as beneficiaries