Life and Health Ch 2

standard risks

person who bears the same health, habits, sex/gender, characteristics as those reflected in the mortality table (average life expectancy)

preferred risks

person who meet certain requirements and qualify for lower premiums, like ideal health and weight

Which of the following describes group life insurance? A Multiple policies issued to an employer to cover a specific group of executives B A single policy issued to an individual covering husband, wife and children C A single policy issued to a business to cover the lives of employees D A single policy issued to a group of individuals who have formed an alliance to obtain life insurance at reduced rates.

C - A single policy issued to a business to cover the lives of employees

what are the Consequences of Incomplete Applications?

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.

Controlled Business

Possessing a license solely for the purpose of writing business on one's own self, immediate family, relatives, employer, and employees.

Martin is age 30 when he applies for life insurance. The underwriter classifies him the same as a person age 40 and his policy is issued with a premium for a person age 40. What substandard rating has been applied to Martin's policy?

Rated-up age

Rated-up Age

Rates an insured at older than actual age

TEST TIP Life Expectancy Rates are as follows:

* Higher age = Higher Mortality Rate * Younger age = Lower Mortality Rate * Males = Higher Mortality Rate (males die sooner = pay premiums shorter period) *Females = Lower Mortality Rate (females live longer = pay premiums longer)

Group requires the employer to determine a Participation Percentage:

** 75% participation required if employees are required to participate in sharing premiums ** 100% participation is required if the employer pays the entire premium Premiums are based on the average age of the group. The grace period is 31 days for group insurance.

Classes of Life Insurance Polices: Group

- 40% of all life insurance in the U.S. - 85% of that is employer-employee - master policy issued to plan sponspor - normally written as renewable term (provides no cash value) - generally provides protection for an employee's named beneficiary. Employee has no ownership rights -amount of coverage can be limited to a fixed dollar

Do Not Call Registry

- Companies must update their list at least once every 31 days. - calls to your home before 8 a.m. or after 9 p.m. are prohibited.

Policy delivery will be accomplished by:

- Personal delivery, with signed receipt of delivery - Registered or certified mail with a signed receipt of delivery - Deliver by reasonable means, as determined by the Commissioner, Director, or Superintendent of Insurance

TEST TIP The following are 4 things are unique to Variable Stock Market products:

- Uses separate accounts in the stock market - Requires 2 licenses to sell - life insurance and securities license (FINRA registered) - Insured bears ALL investment risk - Considered a hedge against inflation

2/2 Needs Analysis

- determines a need for coverage upon the premature death of an individual. - always assumes the death of the individual to be Factors include: *funeral expenses *medical expenses *permanent needs (retirement) *temporary needs (mortgage, education) *emergency (reserve) funds

Participating

- issued by mutual insurers - dividends considered return of excess premium and are not guaranteed - policy owner has dividend options to choose from

Non-Participating

- issued by stock insurers - no policy dividends are paid

Term

-Lowest of premium outlay - designed for someone with a large insurance need but with limited cash flow. - aka "Temporary" bc it may cover short term needs - NO cash value - Benefit can be level, increasing, or decreasing

Individual

-policy-owner is the applicant, and controls policy -Coverage on one named insured -may be written as any type -may provide cash accumulation -may provide estate or benefits to terminally-ill while living *policy owner receives a policy and maintains control

Income Objective... producer can use these 2 methods of to determine how much insurance is needed:

1. Capital Liquidation 2. Capital Retention/Conservation

There are 3 types of receipts:

1. Conditional receipt, 2. binding receipt, 3. Acceptance (approval) conditional receipt

To which of the following clients would a producer MOST likely recommend term life insurance? A George - in his second year of medical school; married with one child B Kathy - age 70 with two adult children, both of whom are married C Roger - a 62-year-old retired bachelor D Mary - a 26-year-old corporate lawyer with no children

A -- George - in his second year of medical school; married with one child

flat rate

A constant dollar amount added to the standard rate per $1,000 of coverage.

Application

A document that is used to collect information provided by the applicant/insured for underwriting purposes. After the policy is issued, any unanswered questions are considered waived by the insurer.

Applicant

A person making application for himself/herself or another to be insured under an insurance contract. The applicant may be the insured, owner or both. If the applicant is someone other than the named insured, they must have permission of the named insured.

Viatical Settlements

A terminally ill insured/owner selling his/her policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available.

1/2 Capital Liquidation

Assumes both principal and interest are liquidated over time to provide income

2/2 Capital Retention/Conservation

Assumes the income will come from investment earnings only

Which of the following is a personal use of life insurance? A Creating an insurable interest B Creating an immediate estate C Compensating a business for the death of a key person D Providing protection against living too long

B -- Creating an immediate estate

Test tip: What is the difference between term and permanent insurance?

Cash value is only available in permanent insurance.

An insurance company must adhere to the __________ when gathering information about an applicant from third parties.

Fair Credit Reporting Act (FCRA)

Industrial insurance is also known as:

Home service (or debit policy)

Binding Receipt

If premium is paid, coverage will begin immediately for a specific length of time regardless of whether the applicant is ultimately approved by the insurer. This may also be referred to as a temporary insurance agreement.

*what is the date when insurance coverage begins?

Inception date

Graded (Lien) Plan

Initially, only the premium would be refunded in case of death. The death benefit increases over time, maxing out when the full face amount is payable. **used with senior life insurance plans to provide minimal benefits without a medical examination.

Flashcard: Underwriting Process

Insurability is determined Classification of risk and rating MIB report may be requested

Attained Age

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

Principal of Life Insurance

It spreads out the result of financial loss caused by a death among many persons, so the cost for each individual is small.

Mortality Cost formula

Mortality Cost - Interest (investment return) = Net Premium (pure rate) Net Premium (pure rate) + Loading (insurer expenses) = Gross Premium

Which of the following types of life insurance is the most common out of all life coverage in force in the United States?

Ordinary

Flashcard: Policy Delivery

Producer explains rating, premiums, coverages, and policy benefits Constructive delivery Statement of Good Health

If after meeting with a client, a producer returns to the agency office and notices that the application has unanswered questions, what is the best course of action for the producer to take?

Return the original application back to the applicant for completion prior to submission

How are STOLI's different from a life settlement?

STOLI's are originated with the sole purpose of making a profit

In a STOLI/IOLI transaction, what are the insureds basically doing?

Selling their mortality to another for up-front cash

Industrial (Home Service)

Synonymous with debit life insurance and makes up only about .03% of the life insurance today. These small policies, normally $250 to $1,000, were originally sold to pay funeral expenses. Some states require the face amount to be less than $2,500. The Home Service agent may also be referred to as a Debit agent.

Capital liquidation assumes:

The balance of the account will reduce over a period of time once payout begins

A life insurance applicant pays the initial premium at the time of application and receives a Conditional Receipt. If coverage is issued as applied for, when did coverage go into effect?

The date of the application or upon the completion of any required medical exam (whichever is later)

Replacing Insurer

The insurer responsible for issuing the new policy.

When reviewing an application, the underwriter decides to reclassify the risk. What does that mean for the client?

The premium could increase or decrease

Mortality Cost

The rate developed from studying and interpreting statistics developed from the deaths of millions over long periods of time.

Insurable interest

The relationship that must exist between the applicant and 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.

charities

To help fund favorite charitable organizations upon the insured's death.

A producer submits a completed application to the insurer along with the premium check after giving the applicant a conditional receipt. If the applicant completes the required medical exam, but dies prior to the insurer issuing a policy as applied for, what is the insurer's responsibility?

To pay the claim in full as long as the conditions of the receipt were fully satisfied by the insurer

Flexible

Universal and Variable Universal Life policies have given the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies assist the insured during inflationary periods with the changing needs of the policyowner and insured.

Variable -

Uses separate account to invest a portion of premiums; may help protect against inflation; and an Insurance license and FINRA registration required in order to sell

Which of the following policies offers the least guarantees?

Variable Universal Life

Producer Andy is sent a newly issued policy by his insurer. Andy should now:

Visit the insured in person to deliver the policy

Reclassifications

When reviewing an application, the underwriter may find it necessary to reclassify the risk. This could either increase or decrease the premium.

Substandard Risks (Higher Risk Exposure)

issued rated policies person who is not acceptable at standard rates because of bad health or habits.....

If a proposed insured dies before the policy is issued, but while in possession of a conditional receipt, the company:

Will pay the policy proceeds only if it would have issued the policy to the proposed insured had he or she been living

The _________ settlement industry has increased awareness of STOLI/IOLI.

life

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. These reports have only one purpose: to provide information in order for the insurer to determine insurability. The result of the Medical Examination is the only report that might be copied and made part of the policy.

1/2 Human Life Value Approach

a measure of the projected earnings and services at risk in the event of premature death. determined by these factors: age/gender, occupation, annual wage and employment benefits, planned retirement age, personal and financial info on family members living at home. * this method takes inflation into considereation

In a replacement sale all of the following are producer responsibilities, except: A Reimburse the applicant for any surrender charges that may be incurred as a result of the transaction B Provide copies of the notice regarding replacement and any sales proposals to the applicant and replacing insurer C Complete a notice regarding replacement with applicant and producer signatures D Obtain information regarding the in force policies including name and policy numbers

a...Reimburse the applicant for any surrender charges that may be incurred as a result of the transaction

When will a policy go into affect?

after it has been delivered and the first premium has been paid unless the producer issued a receipt

Which of the following is used by an insurer to collect information from the applicant/insured for underwriting purposes?

an application

If a copy of the application, which led to a life insurance policy being issued, is attached to the policy: A It can be used by the insurance company later on if the insured wants to increase their coverage instead of using a new one B It is considered part of the entire contract C It is provided merely as a convenience to the policyowner so that they will have a record of the transaction D It is a way for the insurer and policyowner to evidence who the producer was at the time of application

b. it is considered part of the entire contract

By what means does the client acknowledge that an insurer may use services and information provided by third parties to gather information during the underwriting process?

by signing the application

In order to receive a stock dividend, the policyowner must own ____________.

common stock of the insurer

J buys a life insurance policy specifically intending for the death benefit to be used to cover estate taxes. What is the correct term for using life insurance in this way?

estate conservation

The portion of the premium that is based only on mortality rates and assumed interest is called the:

net premium

example of MIB and APS:

ex. The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will require additional information in the form of an Attending Physician Statement (APS) and/or possibly a medical examination. The underwriter may rate or deny the application based on additional information. The MIB report reveals past medical concerns and cannot be used as the only medical report for rating or denying an application.

Life insurance premiums are based on 3 things:

expected mortality interest expenses

Fixed

has a specified or "fixed amount" of coverage, benefits and premium. - no inflation protection (no riders) (can cause benefits to reduce) - guaranteed cash value growth

_______________ is the process of selection, classification and rating, and determining if someone is insurable.

home office underwriting

conditional receipt

if the client submits the application and premium together, the policy is affective the day the application of completion of medical exam (whichever one is later) Example: If a producer provides a conditional receipt at the time of application when the premium is paid, coverage will become effective as of the date of the application or date of requested medical exam as long as the policy is issued as applied for. If a loss occurs prior to the policy issuance, the insurer would have to prove they would not have issued the policy as requested to avoid paying a claim.

The Needs Analysis Approach always assumes the death of the insured to be:

immediate

errors and omissions

insurance covering the liability of a producer or agency, written with a deductible to control the number of claims that reduce frequency.

what happens when there are Changes in the Application?

insurer may require the applicant to initial the change or have the producer complete a new application.

Permanent

provides level premium and face value premiums higher than term when other factors equal protection til age 100 or until surrendered provides cash value accumulation

Estate Conservation

provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner preserving the insured's estate

Estate Creation

providing large sums of money for dependents and beneficiaries

Medical Examinations

requested by insurer after determining.... they are expense to the insurer

When the initial premium is not paid with the application...

some insurers require that the producer send a transmittal notice verifying the date he/she received the premium & get a statement of Good Health

There are 3 classifications of risks:

standard risks, preferred risks, substandard risks (high exposure)

__________ life insurance is when an insured is induced into purchasing life insurance with the sole intent of selling that policy once issued to third party investors for an amount less than the death benefit, but greater than its cash values.

stranger originated

If an insurer does not deliver the policy by reasonable means:

the burden of proof will be on the insurer to establish that the policy was delivered.

Which rating classification is typically used in the senior marketplace so that policies can be issued without a medical exam?

the lien plan

If the applicant is not in good health...

the policy should be returned to the insurer or the producer may deliver the policy only after the insurer grants permission.

What information must appear on the policy summary provided to a life insurance client?

the producer's name and address

Mortality

the rate developed from studying and interpreting statistics developed from the deaths of millions over long periods of time.

Attendint Physician Statement (APS)

used in cases in which the individual app reveal that more INFO is required. Applicant must sign a written release to enable a release the APS. The insurer pays for this.

(ILOI) Investor Originated Life Insurance:

- life insurance transaction which is initiated by investors purchases insurance on seniors - the policholder/investor is compensated by a 3rd party for purchasing the policy ** the insured is NOT responsible for the premiums

Premium determination... assumptions and calculations of premiums must be:

- paid in advance - invested and earn interest - then Claims will be paid by the end of a year

The Producer's responsibilities include:

-Completing a Notice Regarding Replacement which must be signed by the applicant and producer -Obtain information regarding any existing policies, -Providing copies of the Notice Regarding Replacement r

The Replacing Insurer's responsibilities include:

-Upon receiving proper notification with the new application, the replacing insurer must notify the existing insurer of the planned replacement -Maintaining copies of the information regarding replacement for a specified period of time

these risky hobbies are issued as one of 4 "rated policies":

1. Graded(Lien) Plan 2. rated-up age 3. flat rate 4. tabular rate

The two ways of determining the amount of personal life insurance needed are:

1. Human life value approach 2. Needs analysis

claims are filed due to client reports (complaints) and for a number of reasons. The two common complaints are:

1. Inadequacy - failing to obtain proper type 2. Negligence - quoting inflated info., misrepresenting, or neglecting. Producer may be considered guilty whether it was intentional or not

Buyer's Guide

A generic brochure developed by the NAIC to assist prospective buyers of life insurance. Descriptions of all basic types of life insurance, as well as comparative costs of each, are included.

Actuary

A person trained in the technical aspects of insurance and related fields, particularly in mathematics and probabilities. Determines the probability of loss and sets the premium rates for the insurer. In other words, they crunch the numbers.

Third-Party Ownership

A policy owned by a person other than the insured.

Nonmedical Application

A policy requested when the applicant's age, medical history or amount of coverage does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required.

Pre-need Plan

A type of coverage with a small face amount, typically purchased to pay the burial expenses of the insured.

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.

cash accumulation (living benefits)

An amount of cash accessible to the policyowner from within permanent life insurance policies.

Replacement

Any transaction in which a new life policy or annuity is to be purchased, and the producer knows, or should know, that existing contract(s) will be: -Lapsed, forfeited, surrendered or terminated -Reduced in value -Amended with a reduction in benefit or term -Reissued with a reduced cash value -Subjected to borrowing

Ordinary Life Insurance

Any type of life insurance that is not group, industrial or government insurance. **largest portion of life insurance

Which of the following statements correctly describes the difference between gross premium and net premium? A Gross premium is what the insured pays to the insurance company each month; Net premium is what the agent's commission is based on B Gross premium is the total amount paid for the policy. Net premium does not include the insurance company's cost of doing business, such as paying commissions and other expenses C Net premium is the total paid to the insurance company each month; Gross premium is described in terms of the number of dollars per $1000 a person pays for his/her insurance D The net premium is the cost per $1,000 of insurance, the gross premium excludes insurance company expenses

B -- Gross premium is the total amount paid for the policy. Net premium does not include the insurance company's cost of doing business, such as paying commissions and other expenses

Which of these modes would result in the insured paying the least amount per year for life insurance? A Monthly automatic bank draft B Annual C Quarterly D Semi-annual payroll deduction

B -- annual

An applicant for life insurance realizes several days after completing the application that she may have answered a medical question incorrectly. She should do which of the following? A Nothing. Answers in the application must only be true to the best of her knowledge at the time she submits the application B Wait to find out if she is approved for the insurance first, and then she can let the company know she may have made a mistake C Contact either her agent or the insurance company and make sure they have the correct information D Hope that nothing happens in the first year after the policy is issued, because after that it won't matter if the answer was or wasn't correct

C- Contact either her agent or the insurance company and make sure they have the correct information

tabular rate

Classified to the extent of impairment according to the tables used.

Which of the following is not true about life insurance applications? A Applications for life insurance are typically divided into two parts: General Information and Health History B The application may contain all the information underwriting needs to approve the insured C The application more fully identifies the insured D The application is confidential communication between the agent and the insurer

D - The application is confidential communication between the agent and the insurer

Information from a third party collected by the insurance company in the application for insurance and during underwriting of the policy may be subject to the jurisdiction of the:

Fair Credit Reporting Act

Test tip: know the different between Gross and Net Premium

Gross premiums include Operating Expenses (Load)

Insurance may refuse to issue a policy based on a positive ______ test result

HIV

example of Flat Rate:

If the standard premium is $25 annually for $1,000 of insurance, with a flat rate of $5/$1,000 added to the standard premium the new total premium per $1,000 is now $30. A student pilot or someone who has a hazardous hobby would be flat rated.

liquidity

Immediate funds available upon death to pay creditors, taxes and final expenses as well as cash values available for policy loans, withdrawals, and full surrenders.

Issue (Original) Age

Insured's age on the policy issue date.

Beneficiary

One or more "persons" named in the policy to receive the policy's benefits if the insured dies while the contract is in force.

Security

Peace of mind knowing that future insurability is not an issue and benefits will be in place so long as the required premiums are paid.

Survivor Protection

Providing funds for surviving spouses and dependents

Flashcard: Completing the Application

Required signatures Conditional receipt may be issued Formal request for the insurer to issue a policy

J is named in a policy as the individual who is entitled to receive the policy proceeds upon the death of T. Which of the following statements best applies to this scenario?

T is the insured in the policy and J is the named beneficiary

Net Premium

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.

conservation

The act of saving or keeping the existing policy and preventing it from being replaced.

Acceptance (Approval) Conditional Receipt

The coverage becomes effective at application approval. If the company doesn't approve the application, coverage was never in effect.

Expiration Date

The date in which insurance coverage ends.

Effective Date

The date when insurance coverage begins.

Policyowner

The individual who has the ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily. Any changes made to a policy must be approved by the policyowner in writing with his/her signature.

Policy Reserves

The net premiums paid plus interest earned; reflect possible contract obligations. A Reserve is an amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.

Policy Summary

The premiums (current and guaranteed) to be paid along with current and guaranteed interest rates The guaranteed and non-guaranteed cash value and if any, projected dividends. The summary is not required to show the time value of money. The surrender values and other guaranteed data pertaining to the policy that is being shown The producer's his/her name and address along with the address of the insurance company

Interest

The second factor used in calculating the premium is interest earnings. Companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of interest on these invested funds.

Expense

The third consideration is the expenses of operating the company. The company estimates such expenses as salaries, producers' compensation, rent, legal fees, postage, etc. The amount charged to cover each policy's share of expenses of operation is called the expense loading.

Rating applicants

Upon receipt of the information, underwriters analyze the info. 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.

A life insurance policy is being applied for on Z's life. In order for the contract to be valid, all of the following have an insurable interest and could be the owner of the policy, except:

Z's neighbor

mortality table

allows the insurer to rate policies using the law of large numbers. The higher the age group, the higher the mortality rate. The male segment of the population has a higher mortality rate than the female population. One could determine, using a mortality table, that older males should pay a higher rate than an older female. Younger adults should live longer than older adults, based on the mortality table statistics.

(STOLI) Stranger Originated Life Insurance:

an arrangement where a "stranger" purchases a policy on an insured for the sole purpose of selling the policy to an investor to profit the the insured dies. *outlawed in most states..violate insurable interest principal

The sources of underwriting include:

application, medical exams, an attending physician's exam, the medical information bureau, an inspection report, and the agent's report.

Life insurance Exemption from CreditorClaims/Probate

benefits payable to a beneficiary are exempt from the insured's creditors

Sales Presentation - Producers are required to provide all prospective buyers the following:

buyers guide and policy summary

Medical Info Bureau (MIB)

in addition to an APS, the underwriter will usually request a MIB report; MIB is a member-owned corporation; nonprofit trade organization, which receives adverse medical info from insurance companies and maintains confidential medical impairment info on individuals; systematic method for companies to compare the info they have collected on a potential insured with info other insurers may have discovered; can only be used as an aid in helping insurers know what areas of impairment they may need to investigate further; APPLICANT CAN'T BE REFUSED BASED SOLELY ON INFO DISCOVERED THROUGH MIB

*when does the Policy take effect?

on the effective date indicated on the policy (WILL ALWAYS BE THIS WAY)

Trial Application

one 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.

The Application consists of the following 2 parts:

part 1 - general selection (sex/gender/married/DOB) ***this is the most important part part 2 - medical section (med. background/history/causes of death)

Underwriting

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 sources of underwriting include the application, medical exams, an attending physician's exam, the medical information bureau, an inspection report, and the agent's report.

Policy Delivery

when the insurer determines that it is an acceptable risk, the insurer will send the policy to the producer for delivery to the insured. It is the producers responsibility to deliver and collect premiums (if not paid at time of application)