Chapter 2- Life Insurance Basics

Process of Issuing a Life Insurance Policy- Policy Issue and Delivery

Effective date of coverage - policy is delivered and the premium is paid If the premium not paid with the application, the agent must obtain the premium and a statement of continued good health at the time of policy delivery

Process of Issuing a Life Insurance Policy- Underwriting

Field underwriting (by agent) Application - completed and signed Agent's report - agent's observations about the applicant that can assist in underwriting Premiums with application and conditional receipts Company underwriting Multiple sources of information (e.g. application, consumer reports, Medical Information Bureau) Selection criteria - cannot discriminate unfairly Risk classification - 3 types of risks: standard, substandard, and preferred

Amount of Personal Life Insurance

Human life value approach - potential earnings of the insured (considering salary, years to retirement, inflation) Needs approach - predicted needs of the surviving family (considering debt, income, Social Security blackout, expenses)

Know This! Insurers cannot refuse coverage solely on the basis of

adverse information on an MIB report. Medical Information Bureau

Know This! Insurers cannot

advertise protection by the Insurance Guaranty Association.

Know This! NO premium, NO

coverage.

Know This! Only participating policies distribute

dividends to policyowners.

Know This! A buyer's guide provides

generic information on various types of policies. A policy summary provides specific information on the policy being issued.

Know This! The higher the risk, the higher the

premium

Process of Issuing a Life Insurance Policy- Premium Determination

3 key factors for life insurance: mortality, interest and expense Premium payment mode - the higher the frequency, the higher the premium Premiums are paid in advance

Process of Issuing a Life Insurance Policy- Solicitation and Sales Presentations

Advertisements - must be truthful and not misleading Illustrations - presentation of nonguaranteed elements Buyer's guide - generic information about life policies; must be provided at the time of application Policy summary - description of features and benefits of the policy being issued; must be provided when the policy is delivered

Know This! Insurable interest must exist at the time of

Application

Business Uses of Life Insurance

Key person - third-party ownership - business is the owner; employee is the insured A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance. Key person insurance may be issued as term or permanent life, with whole life and universal life policies being used most often. With this coverage, the key employee is the insured, and the business is all of the following: Applicant; Policyowner; Premium payer; and Beneficiary. In the event of death of a key employee, the business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage. Buy-sell funding - not really insurance, but a business continuation agreement A 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. This is also referred to as a business continuation agreement. There are several types of buy-sell agreements that can be used for partnerships and corporations: Cross Purchase - used in partnerships when each partner buys a policy on the other; Entity Purchase - used when the partnership buys the policies on the partners; Stock Purchase - used by privately owned corporations when each stockholder buys a policy on each of the others; and Stock Redemption - used when the corporation buys one policy on each shareholder. Executive bonuses - employer gives the employee a wage increase in the amount of insurance premium; employee is the policy owner

Personal Uses of Life Insurance

Survivor protection - planning for survivor needs The death of the primary wage-earner will usually stop the flow of income to a family. The death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection. Planning for survivor protection requires careful examination of current assets and liabilities as well as determining what survivors' needs may be. Cash accumulation - permanent policies have living benefits Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed. For example, some life policies (those that provide permanent protection, such as whole life) accumulate cash value that is available to the policyowner during the policy term. Estate creation - life insurance creates an immediate estate Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, they will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost. Estate conservation - using life insurance proceeds to cover estate taxes Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets.

Know This! In a life settlement, the owner

sells an existing life policy to a third party. Example: A person, age 70, owns a $1,000,000 life insurance policy. He recently sold his business for $5,000,000 and decided he no longer needed the insurance coverage. The cash value is $390,000, which the insurance company would give the policyowner if he cashed in the policy. A life settlement provider may offer him, after reviewing his medical records, $575,000 for the policy. Once ownership is transferred and the policyowner has received the funds, the life settlement company will assume premium payments until the insured dies, at which time the life settlement company will receive the proceeds of the policy - $1,000,000.

Know This! A life insurance producer is

the company's field underwriter.

Know This! An insurance application is

the key source underwriters use for information about the applicant. Application The person applying for insurance must submit an application to the insurer for approval for a policy to be issued. The application is one of the main sources of underwriting information for the company.

Know This! The policyowner must have insurable interest in

the life of the insured.