Chapter 2 Life Basics

At the time of a life insurance policy delivery, a producer must provide which of the following?

A copy of the illustration that matches the policy for which it was approved

Flate Rate

A flat additional premium may be assessed on a temporary (1 to 5 years) or permanent basis.

Graded (lien) plan

A graded death benefit usually provides 50% of the face amount to start and increases to the full face amount over 1-2 years. The substandard premium does not change. This is generally used with senior life insurance plans to provide minimal benefits without a medical examination

Applicant

A person applying to be insured under an insurance contract. The applicant, owner, and insured may be the same or up to three different persons. (not necessarily the insured)

Application

A written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the primary source of information used for underwriting purposes.

All of the following are examples of a third-party ownership EXCEPT:

A) J is named as the owner and beneficiary of G's policy B) S applies for a policy on herself and names her husband as the beneficiary C) T applies for and owns his 2-year-old son's policy, but names his wife as beneficiary. D) J applies for his life Insurance policy and names his trust as the owner and beneficiary. Answer: B Third party ownership exists when the insured and the owner of the policy are different persons.

Information Required: Existing Coverage

Any Insurance policies already covering the proposed insured.

Trial Application

Application submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.

Premium Determination for Life Insurance

Assumptions and Calculations: When calculating premium rates life insurers assume that all: Premiums are paid annually in advance of the period of coverage Premiums will be invested and earn interest Claims will be paid on the last day of the year

A business owner buys a life policy on his own life: He/she may be all of the following, Except

Beneficiary

California Life policy Illustration (Summary) and Buyer's Guide Requirements

California law require that the purchaser of life insurance be provided with a copy of the NAIC Buyer's Guide to Life insurance not later than the time of policy delivery (there are similar Guides for both annuities and long-term care insurance)

Effective Date

Date when insurance coverage begins.

Information Required: Limited Temporary Life Insurance Eligibility

Determines if the proposed insured is eligible for coverage until the policy is issued. If not, no policy will be issued and any payment made will be refunded.

Information Required: Ownership

Established who will actually own the policy and be responsible for paying the premiums.

Information Required: Premium

How premiums will be paid( direct bill, electronic transfer, etc.) and how often they will be paid( annually, quarterly, etc.)

Cost Comparison Indexes

If an agent or insurer makes a presentation comparing the cost of life insurance which does not recognize the time value of money, the agent must present the Life Insurance Surrender Cost Index and the Life Insurance Net Payment Cost Index.

Information Required: Personal

Includes name, address, drivers license number, Social security number, income, employment, tobacco use, number of dependents, etc.

Policyowner

Individual who has ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily.

Substandard Risks(Higher Risk Exposure)

Individuals who are not acceptable at standard rates because of poor health, bad habits, or occupational hazards. Individuals in this category are issued "rated policies" as follows

Attained Age

Insured's age at any point in time typically used at renewal or conversion.

Issue(Original) Age

Insured's age on the policy issue date.

Factors in Premium Determination for Life Insurance:Interest

Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. Interest earnings reduce the amount of premium needed to fund the future liability of the policy death benefit.

Group Selection Criteria

It is important to compare the selection criteria for individaul vs. group insurance. Group insurance is issued based on the characteristics of the group as a whole instead of each individual. Having one insurable individual in the group will not cause a declination. Group insurance underwriting will be discussed in greater detail in an upcoming chapter.

Premium Payment Mode

Mode is the frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Payment modes other than annual may result in higher premiums to offset the lost interest earnings and increased administration costs. For this reason, an annual mode results in the lowest premium outlay while monthly premiums result in the highest. The more frequently premiums are paid, the more expensive the mode of payment.

Calculate Premium

Mortality-Interest=Net premium

Gross premium

Net Premium+expenses+gross premium

Beneficiary

One or more "Parties" named in the policy to receive the policy's benefits if the insured dies while the contract is in force. The beneficiary cannot be the insured, but can be the owner/applicant.

Factors in Premium Determination for Life Insurance:

Premiums are based on expected mortality, interest, and expenses, and these factors are used by all insurers to determine premiums.

Underwriting Process

Selection Classification Rating

Solicitation

Soliciting insurance can be done through traditional forms such as advertising in local print media, on radio or television, or through direct mail. Seeking opportunities to conduct sales appointments with potential clients is also considered solicitation. Many producers also obtain referrals from new and existing clients, who lend credibility to the producer and his/her products and services. Contracting these referrals is solicitation, and is also protected by other laws which may require prior approval to contact.

Risk classifications include:

Standard, Preferred, Substandard(higher risk exposure): graded plan, rated up age, flat rate, tabular rate;

Factors in Premium Determination for Life Insurance:Expenses

The amount charged to cover each policy's share of expenses of operation (salaries, commission, premium taxes, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency.

Expiration Date

The date when insurance coverage ends.

Insured

The individual whose life is covered under the policy. The insured's death results in the payment of the policy proceeds.

Declined

This is not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. In this case, the applicant is deemed uninsurable. Being declined by one insurance company does not mean a person will be declined by all other insurance companies.

Information Required: Business Coverage

Used only if the policy is being purchased for busienss uses.

Information Required: Beneficiary

Who will receive the benefit and the payout order

Inspection Report

a general report of the applicant's finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider. The applicant must be made aware of any information gathering and has rights provided under the FCRA

Agent's report

is a personal statement submitted by the producer to the insurer regarding the applicant's financial condition, any personal knowledge of the applicant, etc. This information remains confidential between the producer and the insurer, and it does not become part of the entire contract. (agent's personal ideas about them not part of contract)

DMV report

may be requested to provide info regarding applicant's driving history.

If an applicant has engaged in high risk HAZARDOUS ACTIVITY QUESTIONNAIRE

required to determine based on the risk and frequency if those activities will affect insurability.

Life Insurance Net Payment Cost Index

used to compare similar policies, however this index shows the cost based on the death benefit payable after a surrender period of 10 or 20 years rather than the cash surrender value. The presentation of these indices must be accompanied by an explanation that these are measures of the relative cost of similar plans of insurance and that a low index number represents a lower cost than a higher index number.

Life Insurance Surrender Cost Index

used to compare the cost of similar policies based on determining the guaranteed cash surrender value, if any, available at the end of the 10th and 20th policy years.

Graded (Lien) Plan

A graded death benefit usually provides 50% of the face amount to start and increases to the full face amount over 1-2 years. The substandard premium does not change. This is generally used with senior life insurance plans to provide minimal benefits without a medical examination.

Third-Party Ownership

A policy owned by a person other than the insured.

Types of receipt that can be issued when a premium is submitted with the application: Temporary Insurance Agreement

A receipt that provides immediate coverage during the underwriting period ( rather than a specified number of days) until a policy is issued or the application is declined.

Tabular Rate

A surcharge is calculated by adding 25% of the base rate to the standard premium for each "Table" number based on the condition causing the substandard rating. There are 10 standard tables used

Preferred Risks

Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy.

Information Required: Nonmedical Questions

Information Regarding foreign travel, high risk occupations, and hazardous hobbies. It ialso determines if the applicant has already applied for coverage, been rejected for coverage, or applied for bankruptcy.

Individual underwriting by the insurer

Insurable Interest - Before the process of underwriting begins, the underwriter will make the final determination as to whether insurable interest exists. In California, every person has an insurable interest in the life and health of: Himself/herself Any person on whom he/she depends wholly or in part for education or support Any person under a legal obligation to him for the payment of money or respecting property or services, of which death or illness might delay or prevent the performance Any person upon whose life any estate or interest vested in him or her depends (video) Underwriting is the process of selection, classification and rating, determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged. The purpose of underwriting is to prevent adverse selection. The sources of underwriting include the application, medical exams, an Attending Physician's Statement, the Medical Information Bureau (MIB) Report, an inspection report, agent's report, DMV records, and a hazardous activity questionnaire.

Factors in Premium Determination for Life Insurance:Mortality

Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of birth. The mortality rate is taken from the Mortality Table that shows life expectancy and the death rate per 1,000 people living in the United States. This table allows the insurer to rate policies using the law of large numbers, so accurate mortality predictions are extremely important. The higher the age group, the higher the mortality rate - translating to a higher premium. The Mortality Table also show that males have a higher mortality rate than females. Based on this statistic, males will pay a higher rate than females.

Premium Concepts

Net Premium - Excludes the expense component and takes into account interest and mortality factors only. The process of calculating this rate requires: The age and sex/gender of the insured and the benefits to be provided The mortality rate to be used and the rate of interest assumed Gross Premium - Additional charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating expenses, commissions, medical examination costs, etc. Policy Reserves - The net premiums paid plus additional interest earned must be set aside for future claims and possible contract obligations. A Reserve is the actuarial amount needed to cover potential liabilities to policyholders, such as cash surrender and nonforfeiture values. Earned vs. Unearned Premium - Premiums are earned for each day the policy is in force. Premiums paid in advance are considered unearned premiums until coverage has been provided, and the insurer has "earned" the right to retain the premium.

Individual Selection Criteria

The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter's responsibility to determine if an individual meets the underwriting requirements of the insurer. Example: The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will, at this time, require additional information in the form of an Attending Physician Statement (APS) and/or a medical examination. The underwriter may rate or deny the application based on this additional information. The MIB report reveals past medical concerns and cannot be used as the only medical report for rating or denying an application.

Information Required: Product

The policy, riders, and options for which application is being made.

Rated-up Age

The premium for a "rated-up" policy is that of a standard risk, but for an insured 5 to 10 or more years older than the actual age of the proposed insured.

Insurable Interest

The relationship that must exist between the applicant and the insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a financial or economic loss by the owner results in the event that the insured dies. Examples of insurable interest include a policy taken out on a family member, business partner, or debtor of the policyowner.

An applicant submits the initial premium at the time of application and is provided a conditional receipt requiring a medical exam to determine insurability. The applicant is killed in a car accident before the medical exam can be performed. Which of the following statements regarding coverage is correct:

There is no coverage because A conditional receipt will not be effective until the date of application or medical exam, whichever is later. Since the applicant died before the medical exam was performed there is no coverage.

Collecting the Initial Premium and issuing the Receipt

Whenever possible, a producer should collect the initial premium and submit it along with the application to the insurer. The types of receipts that can be issued when a premium is submitted with the application are: Conditional Receipt, Temporary Insurance Agreement, Trial Application

Nonmedical Application

Application used when a policy requested does not require a medical examination for underwriting. Health question son the application are asked by hte producer and are the only medical information required initially. On the basis of answers provided in a nonmedical application, the underwriter may order additional medical testing, such as collection of blood and urine, EKG, physician exam, etc. prior to accepting the proposed insured.

Disclosures and Consent Issues Relating to AIDS and HIV Testing

California law established standards that prevent insurers from unfairly discriminating against individuals of the same class when it comes to testing for the presence of HIV, AIDS, and AIDS-related conditions (ARC). Life insurance applications cannot contain questions about prior HIV testing unless the question is limited to prior testing for the purpose of obtaining insurance. Geographic location or personal information such as occupation, marital status, relationship of insured to beneficiary or known or suspected homosexuality or bisexuality cannot be used to require an HIV test. A current and prior HIV positive test result (two positive blood tests) may be the basis of a decline for life insurance. All tests require informed consent and the results must remain confidential in accordance with privacy protection provisions. Applicants for life insurance must be given a disclosure that they will be tested for HIV/AIDS and have the opportunity to name a health care professional with whom a positive test result may be shared. If no healthcare professional is named, they must be urged to seek counseling. The insurer must pay for the cost of the testing. Negligent disclosure of HIV results to a third party which identifies an individual may result in a civil penalty of up to $1,000.

California Senior Market and Policy Illustrations

Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must disclose on those illustrations, or on an attached cover sheet, the following statement: "This is an illustration only. An illustration is not intended to predict actual performance. Interest rates, dividends, or values that are set forth in the illustration are not guaranteed, except for those items clearly labeled as guaranteed." All preprinted illustrations containing non-guaranteed values must show the columns of any guaranteed values in bold print.

Completing the application and Field Underwriting

An application is a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the producer's responsibility to probe beyond the stated questions, which is known as field underwriting. The application is the primary source of information for an insurer underwriting a potential risk. If attached to the policy, a copy of the application becomes part of the entire contract. Required Signatures - Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application. Changes in the Application- Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application. Consequences of Incomplete Applications - The producer's primary underwriting role is to make sure the application provides proper information for the insurer. - The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with questions unanswered, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application.

Standard Risks

Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy.

Information Required: In california, life insurance applications generally ask for the following types of information:

Personal, Ownership, product, Beneficiary, Business Coverage, Premium, Existing Coverage, Limited Temporary life insurance eligibility, Nonmedical Questions.

Types of receipt that can be issued when a premium is submitted with the application: Conditional Receipt

Provides that coverage is effective as of the date of application or date of completed medical exam (if required), whichever is later, as long as the insurer would have issued the policy as standard or better. This receipt provides conditional coverage even if the underwriting process has not been completed. If an applicant is a substandard risk, there is no conditional coverage.

Classification of Risks

Rating applicants- Upon receipt of information such as the application, medical exam, blood and urine test results, etc., underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters then determine the classification to be used in the calculation of the premium.

Policy Delivery

When the insurer determines that an applicant is an acceptable risk, the insurer will send the policy to the producer for delivery to the insured. It is the producer's responsibility to deliver the policy and collect any premiums (if not paid at the time of application). The producer is expected to explain the policy to ensure the policyowner/insured understands the benefits, including any ratings, endorsements, exclusions, and riders.

Information sources and regulations: Two parts of application

Part 1 contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance. Part 2 contains questions pertaining to medical background, past and present health, any medical visits, medications, height/weight, hospitalizations/surgeries in recent years, and the medical status of immediate family members (includes ages, causes of death, etc).

Producer Responsibilities

Producers are the initial point of contact for most insurance transactions. Transacting insurance can involve any of four different phases in the sale of products: solicitation, negotiation, execution of a contract, and handling matters subsequent to a contract.

Life insurance Illustrations

should be presented to be understandable and not misleading. An illustration is a document that shows the cash accumulation in a life policy over a minimum of 20 years on both a "guaranteed" (maximum cost of insurance, minimum interest credits) and a "nonguaranteed" (current cost of insurance and interest credits assumptions) basis. Known as "Basic Illustration" Policy illustration requirements apply to all group and individual life insurance polices, except: -Vairable life insurance -Individual and group annuity contracts -Credit life insurance -Life insurance policies with no illustrated death benefits on any individual exceeding $10,000 Each insurer marketing policies must notify the Commissioner whether a policy form is to be marketed with or without an illustration. If a policy form is marketed with an illustration. -Name of insurer -Name and business address of producer or insurer's authorized representative, if any -Name, age, and gender of proposed insured -Underwriting or rating classification upon which the illustration is based -Generic name of policy, the company product name (if different) and form number - Initial death benefit - Dividend option election or application of non-guaranteed elements, if applicable When using an illustration for life insurance, an insurer or agent will not: -Represent the policy as anything other than a life insurance policy -Use or describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead -State or imply that the payment or amount of non-guaranteed elements is guaranteed -Use an illustration that does not comply with the requirements of this regulation -use an illustration that at any policy duration depicts policy performance more favorable to the policyowner than that produced by the illustrated scale of the insurer whose policy is being illustrated. -provide an applicant with an incomplete illustration -represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact -Use the term "vanishing" or a similar term that implies the policy becomes paid up, to describe a plan for using non-guaranteed elements to pay a portion of future premiums -Use an illustration that is "lapse-supported" except for policies that can never develop nonforfeiture values -use an illustration taht is not self-supporting A basic illustration must also include all of the following: - a brie description of the policy being illustrated, including a statement that it is a life insurance policy - a brief description of the premium outlay or contract premium for the policy - A brief description of any policy features, riders or options, guaranteed or non-guaranteed, shown in the basic illustration and the impact they may have on the benefits and values of the policy - Identification and a brief definition of column headings and key terms used in the illustration - The date prepared, usse age of the applicant, and number of years the policy will be in force If a basic illustration is used by an insurance producer, or other authorized representative of the insurer, in the sale of life insurance and the policy is applied for as illustrated, a signed copy of that illustration must be submitted to the insurer and provided to the applicant at the time of the policy application.

Medical Examinations

are conducted by physicians or nurses who provide results of an examination and information regarding the applicant's present health. Examinations are usually requested by the insurer after determining if the amount of coverage, age of applicant or his/her health history warrant the examination. They are commonly requested due to the higher amounts of insurance applied for coupled with the high degree of cardiovascular concerns, high cholesterol and enzyme levels, as well as the prevalence of the HIV virus. Additional medical testing may include a simple physical exam, a stress test on a treadmill, or even an electrocardiogram (EKG).Medical exams are at the insurer's expense. The results of the Medical Examination is the only report that might be copied and made part of the policy.

Attending Physician Statement (APS)

is used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. The applicant's treating physician will complete this as part of the applicant's medical history. An applicant must sign a written release to enable a release of the APS. The insurer pays for this.

Constructive or legal delivery

occurs only if the premium was paid at the time of application. Once the insurer issues the policy, a legal contract has been formed since the policy becomes the acceptance. Once the insurer mails the policy to the producer, it is considered constructively or legally delivered by the insurer. It is still the producer's responsibility to obtain delivery signatures and explain policy benefits to the policyowner/insured. If a policy is not approved as applied for, the insurer may make a "counteroffer" to the applicant. The insurer may issue a policy with a higher rating or exclusions to the policy. The producer must hand-deliver the policy to the applicant to collect any additional premium, explain any substandard rating or changes in coverage and premium, and reinforce the value of the contract. When the initial premium is not paid with the application, the producer must collect the premium before coverage can begin. The producer must also obtain a Statement of Good Health from the applicant/insured at the time of policy delivery that verifies the insured has remained in the same health status continuously since the time of application. If the applicant is not in good health, the policy should be returned to the insurer for further underwriting. An insurer is required to deliver a life insurance policy to the owner in order to start the free look period. Policy delivery in California will be accomplished by: Personal delivery, with a signed receipt of delivery Registered or certified mail with a signed receipt of delivery First-class mail with a signed receipt of delivery Delivery by reasonable means, as determined by the Commissioner If an insurer does not deliver the policy by reasonable means as determined by the Commissioner, the burden of proof will be on the insurer to establish that the policy was delivered. A policy is considered to have been received 6 months after the date of issuance if premiums have been paid to date.

MIB (medical information bureau) report

primarily used to collect adverse medical information about an applicant's health and act as an information exchange. MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Canada. MIB's Underwriting Services are used exclusively by MIB's member life and health insurance companies to assess an individual's risk and eligibility during the underwriting of life, health, disability income, critical illness, and long-term care insurance policies. These services "alert" underwriters to fraud, errors, omissions or misrepresentations made on insurance applications. In addition, MIB may help lower the cost of life and health insurance for consumers. MIB's coded reports represent general medical information and other conditions (typically hazardous hobbies and adverse driving records) affecting the insurability of the applicant. If the coded reports are inconsistent with the information provided by the applicant, underwriters are required to conduct a further investigation to obtain more information about the reported medical histories or conditions prior to making an underwriting decision. Because the MIB information is general, the MIB cannot solely be used to decline an applicant for insurance.