Exam FX Chapter 2: Life Insurance Basics
Types of Solicitation and Sales Presentations
Advertisements Illustrations Life Insurance disclosure statements
Changes on the Application or Amendments
Agent should never erase of white out mistakes. They can correct them and get the insured's initials for approval or start an entirely new application
Licensing
An application for a viatical settlment license requires: -an audited financial statement (not more than 1 year and 120 days old) -an unaudited financial statement (as end of recent quarter)
Insurance proceeds paid in a lump-sum may be needs for any of the following expenses:
Cost associated with death debt cancellation emergency reserve funds education funds retirement fund bequests
Group vs Individual
Individual: life insurance is written on a single life. Group: life insurance is written as a master policy covering the lives of more than one individual under the single policy.
Selection Criteria and Unfair Discrimination
Insurance companies will discriminate in favor of good risk and against poor risk. However, they cannot discriminate between individuals of the same class and equal life expectancy in the rates, benefits or any terms and conditions in the contract.
3 primary factors to determine premiums
Mortality, Interest, Expense
Premiums with the application
Most agents collect the first premium and submit it along with the application to the insurer. This requires a premium receipt, which will also determine when the coverage will be effective.
Producer Responsibilities
Solicitation and Sales Presentations Underwriting: Field and Company Premium Determination Policy Issue and Delivery
Permanent vs Term
Term life insurance: temporary life insurance provided for a specific period of time. Also known as pure life insurance. Permanent life insurance: refer to whole life insurance policies that remain in effect to age 100, as long as the premium is paid. Permanent insurance provides lifetime protection, and includes a saving element.
Insurable interest
The policyowner must face the possibility of losing money or something of value in the event of loss.
Life insurance policy cost comparison methods.
Traditional Net Cost Index Interest-Adjusted Net Cost Index
Chronically ill
a condition in which a person is unable to perform at least 2 activities of daily living or that requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment
Participating vs Nonparticipating
a participating (mutual) life insurance policy: any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a saving program, or by the purchase of term insurance. Nonparticipating: does not pay dividends to policyowners.
Viatical Settlement provider
a person (other than a viator) who enters into or effectuates a viatical settlement contract. This term does not include a bank, financing entity, or the issuer of a life insurance policy providing accelerated benefits.
Substandard risk
applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, dangerous habits. High risk and pay high premiums.
Lump-sum
payment of the entire benefit in one sum
Buyer's Guide
provides basic, generic information about life insurance policies that contains and is limited to, language approved by the Department of Insurance.
Liquidation
selling assets in order to raise capital
Standard risks
those who are entitled to insurance protection without extra rating or special restrictions. Average risk.
Mortality tables
used by insurers to indicate the number of individuals within a specified group of individuals starting at a certain age who are expected to be alive at a succeeding age.
Liquidity
a policy that provides liquidity means the policy's cash values can be borrowed against at any time and used for immediate needs.
Executive Bonus
an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance on the employee.
Solicitation and Sales Presentations
an attempt to persuade a person to buy an insurance policy and it can be done orally or in writing.
Most common type of receipt
conditional receipt, which is used when the application submits a prepaid application. Coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last.
Business uses of life insurance
creates an immediate payment upon the death of insured. Most common use by businesses is as employee protection.
Types of buy-sell agreements
cross purchase entity purchase stock purchase stock redemption
Executive bonuses are tax_______ to the employer and income ________to the employee
deductible; taxable
Expense
each premium must carry a proportionate share of operating costs for the insurer. Insurer's largest expense is the commissions paid to its agents.
Cash value
equity amount accumulated in permanent life insurance
Net Single Premium
includes the mortality and interest components necessary to keep the policy in force until maturity. Mortality - interest= net premium
Factors that determine amount of personal life insurance
individuals establish how much coverage is appropriate based on their ability to pay the premium, serve their needs, and protect their survivors.
Buy-sell funding
legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.
Advertisements
must be accurate and not misrepresent facts.
Viatical brokers represent....
the insured (viator)
Viators
the insured under a viatical agreement is called a Viator
Replacement
the practice of terminating an existing policy or letting it lapse and obtaining a new one.
Viatical producers represent....
the providers
Mortality
the ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population.
Underwriting
the risk selection and classification process. Involves careful analysis of many factors to determine the acceptability of applicants for insurance.
Rating classification
used to decide whether or not the applicant should pay a higher or lower premium. There are 3 ratings: standard, substandard and preferred.
Survivor Protection
An insurance policy that provides the necessary funds for survivors who have lost their primary wage earner so that they can keep their current lifestyle.
Suitability
An insurance producer may not recommend the purchase, sale or exchange of an insurance policy or annuity contract without the reasonable belief that the transaction is in the best interest of the insured.
Sources of Underwriting information and regulations
Application Producer report Attending physician statement Investigative Consumer Report Medical Information Bureau Medical Examinations and Lab Tests Including HIV
Estate Creation and Conservation
Estates can be created through earnings, savings and investments. However, the purchase of life insurance creates an immediate estate.
Fixed vs Variable life insurance and annuities
Fixed life insurance or annuities: contracts that offer guaranteed minimum or fixed benefits that are stated in the contract. Variable life insurance or annuities: contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. They keep pace with inflation and are determined by the values of securities backing it.
2 Approaches to help producers and buyers determine the needed amount of protection
Human life value approach Needs approach
Exceptions to the contractual agreement which states that a creditor has no right to the proceeds of the insured.
If the insured filed a petition for bankruptcy within 2 years The amount of premiums paid with intent to defraud creditors is not exempt A creditor possessing a valid assignment from the policyowner may recover the amount secured by the assignment with interest from either the cash surrender value or the proceeds of the life insurance policy.
Outline of Coverage
No policy may be delivered or issued in PA unless an appropriate outline of coverage either accompanies the policy or contract, or is delivered at the time application is made.
4 classes of life insurance policies
Permanent vs Term Participating vs Nonparticipating Fixed vs Variable Life Insurance Annuities Group vs Individual
General Rules
Viatical settlement providers must obtain the following information before entering into a contract. -a witness document which contains: viator consent, viator complete understanding, viator entered freely and voluntarily, the insured is terminally or chronically ill and was diagnosed after the life insurance policy was issued, viator is of sound mind and under no contract or undue influence. -a document giving the insured's consent to the release of medical records to the viatical settlement provider, broker, and insurance company -a document giving the insured's consent to the tolling of the running of the policy contestable period until after the insurer completes its good faith investigation, if the life insurance policy is being viaticated within 2 years of the policy issue
Minor
a person under legal age
Beneficiary
a person who receives the benefits of an insurance policy
Estate
a person's net worth
Viatical settlement provider
a person, other than a viator, that enters into a viatical settlement contract
Illustration
a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.
Delivery Receipt
a signed receipt to prove that the agent delivered a policy to the policyowner.
Statement of good health
a statement signed by the insured and verifies that the insured has not suffered injury or illness since the application date.
Life insurance disclosure statement
a written disclosure statement given to an applicant that provides basic information about the cost and coverage of the insurance being solicited.
Solvency
ability to meet financial obligations
Viatical Settlements
allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before death.
Fraudulent viatical settlement act
an act or omission committed knowingly or with intent to defraud for the purpose of depriving another of property or for monetary gain by a person who commits or permits employees or agents to do any of the following: -present or prepare false information in support of or concerning a fact material to one of the following, with the knowledge that such will be presented to others. -destroy, remove, conceal, or change assets or records of anyone engaged in the business of viatical settlements, with the purpose of furthering or hiding fraud -misrepresent or conceal the financial conditions of a licensee or insurer -transact viatical settlements without necessary legal authority -file false information with or conceal information about a material fact from an insurance regulatory official -knowingly present or prepare a fraudulently obtained insurance policy -embezzlement, theft, misappropriation or conversion of moneys, funds, premiums, or other property of anyone engaged in the business of viatical settlements of insurance -attempt to commit, assist, aid or abet in, or conspire to commit any of the acts mentioned above.
Life Insurance Surrender Comparison Index Disclosure
applicants must be given one. The purpose of a surrender comparison is to provide a life insurance purchaser with a means of making a cost comparison of the same types of life insurance policies having the same premium payment period and pattern.
Declined
applicants who are rejected.
Incomplete applications
are unacceptable! Unless an adult is applying for insurance on a minor child.
Needs Approach
based on the predicted needs of a family after the premature death of the insured. Factors considered by needs approach include, income, amount of debt, investments, expenses.
Signatures required
both the agent and the proposed insured MUST sign the application.
Traditional Net Cost Index
compares the cash values available to buyers if they surrender the policy in 10 or 20 years. Does not take into account time value of money.
Interest-Adjusted Net Cost Index
compares the death benefits that are paid at death in 10 or 20 years. Accounts for time value of money.
Life Insurance
coverage of human lives
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 individuals life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money.
Effective Date of Coverage
if the applicant has not paid their first premium with the application, the agent must collect at the time of delivery.
Part 1: General information
includes general questions about the applicant, such as: name, age, address, birth date, gender, income, marital status, and occupation.
Part 2: Medical Information
includes information about medical background, present health, recent medical visits, medical status of relatives, and causes of death of deceased relatives.
Preferred risks
individuals who meet certain requirements and qualify for lower premiums than the standard risk.
Disclosure to consumers
must be signed by provider or broker and viator which contains the following: -possible alternatives to viatical settlement contracts -proceed taxation information -proceeds subject to claims of creditors -effect of eligibility for medicaid -viator has 15 calendar days to rescind viatical settlement -entering into a viatical settlement contract may cause other rights or benefits to be forfeited -funds will be sent to the viator within 3 business days after the viatical settlement provider acknowledges that the ownership of the policy or interest in the certificate has been transferred and the beneficiary has been designated
Gross Annual Premium
one year cost for mortality, plus the cost of operating the company. Net premium + expense= gross premium
Life and Health Insurance Guaranty Association
pays covered claims up to certain limits set by state law. They are funded by all authorized insurers, who are forced to be part and pay into the association. It's purpose is to protect the insured from incompetence and insolvency of insurance companies.
Policy Review
personal delivery gives the agent the opportunity to make sure the insured understands all aspects of the contract and review it with them.
Illustrations
presentation or depiction of nonguaranteed elements of a life insurance policy
Agent's Report
provides the agent's personal observations concerning the proposed insured. The agent's report does not become a part of the entire contract, it is part of the application process.
Mode
refers to the frequency the policyowner pays the premium. Either annually, semi-annually, quarterly or monthly.
Viatical settlements are not policy options, they are ______ contracts in which the insured sells the death benefit to a _______ party at a discounted rate.
separate; third
Interest
since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds. This interest is a primary factor in lowering the premium rate.
Key Person
someone who has specialized knowledge, skills or business contracts whose death can cause a business to suffer financial loss.
Death Benefit
the amount paid upon the death of the insured in a life insurance policy
The Application and it's parts
the application is the starting point and basic source of information used by the company in the risk of selection process. Part 1: General information Part 2: Medical Information
Replacing Insurer
the company that issues the new policy
Existing Insurer
the company whose policy is being replaced
The unconditional (binding receipt)
used often with property and casualty insurance. Coverage begins immediately for a specific length of time, until the policy is issued.
Policy Summary
written statement describing the features and elements of the policy being issued.
Viatical Settlement purchaser
anyone who gives a sum of money as consideration for a life insurance policy or interest in the death benefits of a life insurance policy. This person owns a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which is or will be the subject of a viatical settlement contract. DOES NOT include: -a viatical settlement licensee -an accredited investor, qualified institutional buyer, or qualified purchaser who purchases a viaticated policy from a viatical settlement provider -a financing entity -a special purpose entity -a related provider trust
Life settlement
any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for some form of compensation, usually cash.
Asset Protection
the use of life insurance to guard one's wealth against creditor claims without engaging in practices that are ultimately illegal, such as concealment or fraudulent transfer.
Terminally ill
a condition that can reasonably be expected to result in death within 24 months
Viatical Settlement broker
a licensed person that, for a fee, negotiates viatical settlement contracts between the viator and viatical settlement providers.
Viators received a ______ of the policy's face value from the person who purchased the policy.
percentage. Note: Viators continues to pay premium payments and will eventually collect the entire death benefit
Reasons for life settlements
policyowner may feel that they no longer need the coverage or premium costs have grown too high