Life Insurance Basics (2)

A _________ also includes a premium finance loan that is made on or before the date of issuance of the policy if the loan proceeds are not used solely to pay premiums for the policy, and/or if the owner receives a guarantee of the future life settlement value of the policy

life settlement contract

Costs associated with death (post mortem)

taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance

All life insurance policies fall into 2 categories:

temporary and permanent protection

Term life insurance (pure life insurance)

temporary life insurance provided for a specific period of time

The primary criteria an underwriter will use in assessing the desirability of a particular candidate for life insurance are

the applicant's health (current and past), occupation, lifestyle, and hobbies or habits

Field underwriter

the one who has solicited the potential insured

Owner

the owner of the life insurance policy who seeks to enter into a life settlement contract

A business can suffer a financial loss because of the premature death of a key employee. A business can lessen the risk of such a loss by the use of

key person insurance

Bequests

leaving funds to the insured's church, school, or a charity

Survivor protection

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

Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:

costs associated with death (post mortem), debt cancellation, emergency reserve funds, education funds, retirement fund, bequests

There are several types of buy-sell agreements that can be used for partnerships and corporations:

cross purchase, entity purchase, stock purchase, stock redemption

In-addition funding plans

designed to pay any amount in addition to the employee's qualified retirement plan

Nonparticipating policy

does not pay dividends to the policy owners

A person may create an estate through

earnings, savings and investments

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

Insurance companies have developed 2 basic approaches to help producers and buyer to determine the needed amount of protection:

human life value approach and needs approach

With a binding receipt, coverage begins

immediately for a specific length of time, until the policy is issued

Deferred compensation funding falls into two major classes:

in-addition funding plans, elective plans

Some factors considered by the needs approach are

income, debt, mortgage, expenses

Advertisement may not use terms such as:

investment, investment plan, profit, interest plan, savings, savings plan, etc

Life expectancy

a calculation based on the average number of months the insured is projected to live due to medical history and morality factors

Buy-sell agreement (business continuation agreement)

a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled

To be a life settlement provider or a life settlement broker you must have

a license

The Insurance Code prescribed a method for calculating

a life insurance surrender cost index

The needs approach

based on the predicted needs of a family after the premature death of the insured

A buyer's guide provides

basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance

Fixed life insurance

contracts that offer guaranteed minimum or fixed benefits that are stated in the contract

A licensed attorney, a certified public accountant or an accredited financial planner has the authority to

negotiate life settlement contracts without obtaining a license as a broker

The purpose of life insurance solicitation regulation is to

provide buyers with information which will improve their ability to select the most appropriate policy, improve their understanding of the basic features of the policy, and improve their ability to evaluate the relative costs of similar plans of life insurance

Life settlement

refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash

Life insurance may be used to accumulate

specific amounts of monies for specific needs with guarantees that the money will be available when needed

Replacing insurer

the company that issues the new policy

Existing insurer

the company whose policy is being replaced

Life settlement contract establishes the tern under which the life settlement provider will pay compensation to the policy owner, in return for the assignment, transfer, sale, or release of any portion of any of the following:

the death benefit, policy ownership, and beneficial interest, interest in a trust or any other entity that owns the policy

An individual's life value is calculated by looking at

the insured's wages, inflation, the number of year to retirement, and the time value of money

The owner may rescind a life settlement contract within _____ after the receipt of the life settlement proceeds

15 days

Life settlements are not allowed in the first ____ after insurance of a life insurance policy, although expectations may apply

2 years

Every insurer must maintain a copy of every printed, published or prepared advertisement at its home or principal office for

4 years

Underwriting

the risk selection and classification process

The application is

the starting point and basic source of information used by the company in the risk selection process

Replacing insured's salary or lost services

the surviving spouse who was the caregiver of the children may have to train to enter the job market

Social security income blackout

the time during which the surviving spouse and/or children do not receive any social security survivor benefits

Stock purchase

used by privately owned corporations when each stockholder buys a policy on each of the others

3 rating classifications for deciding if the applicant should pay a higher premium:

standard, substandard, preferred

Variable life insurance

contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance

If a person has been a life insurance producer for at least ______, he or she is deemed to have met the licensing requirements for life settlement brokers

1 year

Attending Physician's Statement (APS)

specific medical details from applicant's physicians

Medical Information Bureau (MIB)

a membership corporation owned by member insurance companies and is a non profit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals

Life settlement provider

a person who enters into a life settlement contracts with the owner

Life settlement broker

a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract

Illustration

a presentation or depiction that includes non guaranteed elements of a policy of individual or group life insurance over a period of years

Stranger-originated life insurance

a type of insurance that is initiated on behalf of a 3rd party that has no insurable interest in the life of the insured, for the primary purpose of affecting a life settlement contract

Policy summary

a written statement describing the features and elements of the policy being issued

Prior to entering a life settlement contract with a policy owner (whether the insured is terminally ill or chronically ill), a provider must obtain the following documents:

a written statement from a licensed attending physician that the owner is of a sound mind and the insured's consent to release of the insured's medical records to a provider or broker if the policy was issued less than 2 years prior to the date of the life settlement contract application

The purpose of the buyer's guide is to

allow the consumer to compare the costs of different policies

Executive bonuses

an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee

Split-dollar plan

an arrangement where the player and employee agree to purchase and fund life insurance on an employee

Solicitation of insurance

an attempt to persuade a person to buy an insurance policy and it can be done orally or in writing

The purchase of life insurance creates

an immediate estate

Life settlement broker's license must be renewed

annually

The regulation on life insurance solicitation does not apply to the sale of:

annuities, credit life and group life insurance, variable life insurance policies in which the death benefits and cash values vary according to the investments in a separate account, life insurance policies issued in connection with pension and welfare plans that are subject to ERISA

Business of life settlement

any activity relating to the solicitation and sale of a life settlement contract to a third party who has no insurable interest in the insured

Deferred compensation funding

any employer retirement, savings, or other deferred compensation plan that is not a qualified retirement plan

Participating (mutual) life insurance

any policy that distributes its dividends to policy owners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance

Replacement

any transaction in which new life insurance or a new annuity is purchased

With the key person insurance coverage, the key employee is ensured, and the business is all of the following:

applicant, policy owner, premium payer, beneficiary

Retirement fund

as a source of retirement income

In life insurance, insurable interest must exist between the policy owner and the insured

at the time of the application

Planning for survivor protection requires

careful examination of current assets and liabilities as well as determining what survivors' needs may be

State regulation requirements regarding illustrations:

must say "life insurance illustration", name of user, name and business address of agent, name age and gender of insured, underwriting or rating classification upon which the illustration is based, policy name and the company product name, initial death benefit, dividend option election or application of non guaranteed elements

Substandard (high exposure) risk

not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits

Qualified institutional buyer

one that ones and invests at least $100 million in securities and is allowed by the SEC to trade in unregistered securities

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

Education funds

paying for children's education expenses so they can remain in school, or for a serving spouse who may need additional education or training in order to re-enter the job market

Emergency reserve funds

paying for unexpected expenses following the death of insured, such as travel expenses and lodging for family members

Debt collection (as an alternative to Estate Liquidation)

paying off debts of the insured such as home mortgage, or auto loans (most lenders require a collateral assignment of life insurance as a condition for a loan)

Standard risks

people who are entitles to insurance protection without extra rating or special restriction

Elective plan

permit the employee to defer part of their salary or bonus as a tax-deferred savings

A valid insurable interest may exist between the policy owner and the insured when the policy is insuring any of the following

policy owner's own life, the life of a family member, or the life of a business partner, key employee or someone who has a financial obligation to the policy owner

A policy summary will include

premium, cash value, dividend, surrender value and death benefit figures for specific policy years

Premium receipt

premiums collected

Duties of the replacing producer

present to the applicant a notice regarding replacement that is signed by both the applicant and the producer, obtain a list of all existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all companies being replaced, leave the applicant with the original or a copy of written or printed communications used for presentation to applicant, submit to the replacing insurance company a copy of the replacement notice with the application

Guaranty Associations are formed to

protect policy owners, insureds, beneficiaries, and anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers

Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns

replacing insured's salary or lost services, social security income "blackout" period, liquidation vs. retention of capital

Duties of the replacing insurance company:

require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant and send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the applicant is received in the replacing insurance company's home or regional office

The 2 year probation may be waived in the following cases:

the owner or insured is terminally or chronically ill or physically or mentally disabled, the owner or insured disposes of ownership interests in a closely held corporation, death of a spouse, divorce, retirement from full time employment, the owner becomes bankrupt or insolvent, any other condition that the department of insurance determines to be extraordinary circumstances for the owner

Insurable interest

the policy owner must face the possibility of losing money or something of value in the event of loss

Liquidity

the policy's cash values can be borrowed against at any time and used for immediate needs

Liquidation vs. retention of capital

under the retention of capital approach, enough insurance is purchases so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset (such as a home)

It is an ___________ to make any statement that an insurer's policies are guaranteed by the existence of the Insurance Guaranty Association

unfair trade practice

Cross purchase

used in partnerships when each partner buys a policy on the other

Unconditional (binding) receipt

used most often with property and casualty insurance

Conditional receipt

used only when the applicant submits a prepaid application

Stock redemption

used when the corporation buys one policy on each shareholder

Entity purchase

used when the partnership buys the policies on the partners

The illustrations regulation does not apply to the following policies:

variable life insurance, individual and group annuity contracts, credit life insurance, life insurance policies with illustrated death benefit of less than $10,000

Permanent life insurance

various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is pain

Group life insurance

written as a master policy covering the lives of more than one individual covered under the single policy

Individual life insurance

written on a single life