Life Insurance Basics

Application

If agent feels there could be some misrepresentation, agent must inform - part 1: general information - part 2: medical info - part 3: agent's report

Premium collection

Clause normally provides that for life insurance policies, the premium payable in advance

Conditional receipts

Coverage will be effective either date of application or date of medical exam whichever is last

Education funds

Insurance proceeds may be used to pay for children's education expenses so that they can remain in school or sometimes a surviving spouse that has worked in the home caring for children will need to receive education or training in order to re-enter the job market.

Human Life Value Approach

This method requires the calculation of the probable future earnings of the insured using wages, inflation, the number of years to retirement, and the time value of money.

Permanent vs term

Whole life insurance (savings or cash elements ie permanent) can remain in effect for age 100 vs temporary life insurance provided for a specific time period (pure life insurance).

Policy Summary

Written statement describing the features and elements of a policy

Licensee Report

Agent's report, allows communication with underwriter

Interest

Since premiums are paid before claims are incurred, insurance companies invest the money in an effort to earn interest.

Attending Physician Statement

Smaller amounts may request only paramedical(/registered nurse) report

Replacing salary or lost services of the deceased

Unless funded by insurance, the surviving spouse who was the caregiver of the children may have to train to enter the job market. If they do work outside the home, expense for daycare needs to be considered.

Individual life insurance

Written on a single person, rates and coverage based upon that individual.

Mortality tables

indicate the # of individuals within a specified group of individuals

Premium payment mode

Higher Frequency = Higher Premium

3 Factors in Premium Determination

- Mortality - Interest - Expense

6 Personal Uses of Life Insurance

- Survivor Protection - Estate Creation - Cash Accumulation - Liquidity - Estate Conservation - Viatical Settlements

Types of Info Gathered

1. Debt 2. Income 3. Mortgage 4. Expenses

Delivery (constructive delivery)

All that is legally required (not to be actually delivery into customers hands)

3 different ways to premium

: mortality - interest = net premium : mortality - interest + expense (loading) = gross premium : net premium + expense (loading) = gross premium

Buy-Sell Funding

A _____-_____ agreement (also referred to as a business continuation agreement) is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.

Stock Redemption Plan

A type of Buy-Sell agreement, where the business owns the policies, pays the premiums, and is the beneficiary.

Policy review

Agent should explain the rating procedure to the client, especially if the policy is rated differently than applied for

Business Uses of Life Insurance

Business uses of life insurance are similar to the personal uses in that it creates an immediate payment upon the death of the insured. In addition to its use as an employee benefit, life and health insurance finds application in a variety of business uses. These include funding business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees.

Other Lump-Sum Needs and Objectives

Debt cancellation - Emergency Reserve Funds - Education Funds - Retirement Fund - Bequests -

Declined

Declined risks, not insurable

Ordinary life insurance

Differs from industrial in that - larger face amounts (<$1000) - premiums paid annually, semi, quarterly, or monthly - paid directly to company - physical exam maybe required

Effective date of coverage

Does not go into effect until the premium has been collected and the time of policy is delivered

Split Dollar Plans

Employer pays part of premiums and the employee pays the balance. At the employees death part of policy proceeds goes back to employer and the rest to beneficiary.

Debt cancellation

Insurance may be used to create a fund to pay off debts of the insured such as home mortgage, auto loans. Most lenders require a collateral assignment of life insurance as a condition for a loan.

Emergency reserve funds

Insurance proceeds may be used to assist in paying for sudden expenses following the death of the insured, such as travel expenses and lodging for family members coming from a distance.

Substandard

Poor high exposure risks, premium rated-up resulting in higher premiums

Investigative Consumer (Inspection)

Underwriter may order an inspection report from an independent investigating firm or credit agency which covers financial and moral info

Disclosure Authorization Notice

When insurers plan to seek and use info from investigators, they must first provide the applicant/Insured with a written ______.

Expense

the cost of operating the company (called loading)

Calculation of the Individual's Life Value

▪ Determine the insured's after-tax income from the present date until retirement ▪ Deduct the insured's annual expenses for food clothing medical and other expenses ▪ Calculate the number of years to retirement ▪ Estimate the effect inflation would have on income over the required number of years

Determining Lump-Sum Needs: Costs Associated with Death (Post Mortem)

- final medical expenses of the insured - funeral expenses - day to day expenses of maintaining the family including mortgage/rent - car payments - utilities - groceries - etc

6 distinct life insurance policies

- whole life, endowment, and term were traditional forms - universal, adjustable, and variable came about in 1970's

Industrial (Home Service)

- written on individual - written in small amounts (>$1,000) - premiums on weekly or monthly basis - collected at home of the insured - written non-medically though medical history is included

Standard

Joe blow run of the mill applicant

Backdating of policies

May not be dated more than 6 months; lowers the premium

Executive Bonus

The employer pays the premiums as an increase in salary making it tax deductible for the business. The employee gets full control of the life insurance policy but he now has an increase in pay so tax would be higher though he doesn't see it.

Estate Creation

When an insured purchases a life insurance policy he will have an estate of at least that amount the moment the first premium is paid. There is no other legal method whereby an immediate estate can be created at such a small cost.

Insurable Interest

The policyowner must face the possibility of losing money or something of value in the event of loss is called ____ _____. - must exist at the time of application - insuring his life; life of family member; or a business partner, key employee or someone who has a financial obligation to them

Group life insurance

Written as a master policy with all individuals covered at the same rate and amount. Coverage more than $50k is taxed to the EMPLOYEE. Group must exist for a reason other than purchasing group ins. Leave the group and get individual coverage without evidence of insurability.

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 their death.

Guaranty Association Disclosure

organization that protects policyholders and claimants in the case of an insurance company's impairment or insolvency. Insurance guarantee associations are legal entities whose members make guarantees and provide a mechanism to resolve claims.

Preferred

Superior physical condition means lower premiums

Unconditional (binding) receipt

Temporary insurance agreement; coverage begins immediately for a specific length of time even if the applicant is later found to be uninsurable

Key Person Insurance

The business owns, pays premiums, is the applicant, and beneficiary. The key business person must give permission. The business cannot take tax deductions for the expense of the premium; but if key business person dies the business gets paid tax free for getting a new key employee, additional costs, etc .

Survivor Protection

Planning for _____ _____ requires careful examination of current assets and liabilities as well as determining what survivors needs may be.

Premiums with application

Policy will not go into effect until the first premium is paid and the policy is delivered

Buyer's Guide

Provides basic information about life insurance policies that contains, and is limited to, language approved by the Commissioner or Director

Regulation of variable products

SEC, NASD, and Utah (dually regulated)

Liquidation vs Retention of Capital

Selling assets (____) is a method of raising capital. ____ is the retaining of assets. If the principal asset is the home, selling the home would require that the survivors then pay rent. Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without invading the principle.

Social Security income "blackout" period

Social security may be a source of income if there are children in the home under age 16. Day. Of time after the youngest child reaches age 16 and prior to the surviving spouse region age 60 is a blackout period in which Social Security benefits would not be paid to the surviving spouse. A dependent child could be eligible for benefits until age 18.

Classification of Risks

Standard, Substandard and Preferred

Statement of Good Health

Statement attesting to their continued good health when policy is delivered

Fixed/annuity vs variable/annuity

Offer guaranteed minimum (fixed benefits) vs Cash values accumulate based upon a specific portfolio of stocks w/o guarantees of performance

Cash Accumulation

One of the essential differences between life insurance and other types of insurance is that life insurance also performs the functions of ______ ______.

Approval conditional receipt

Only when application is approved but before the policy is delivered [type is rare]

Gross annual premium

1 year cost for mortality, plus expense loading. Loading includes commissions, taxes, advertising, and while not an expense, includes the amount added to a pure or basic rate for a profit margin to the insurer.

Change of Insured Provision

Owned by business to insure the life of key employee. Employee quits or terminated the business/owner can transfer the coverage to the replacement employee, subject to evidence of insurability.

Needs Approach

A method of calculating how much life insurance is required by an individual/family to cover their needs (i.e. expenses) always assume insured's death will occur immediately. These include things like funeral expenses, legal fees, estate and gift taxes, business buyout costs, probate fees, medical deductibles, emergency funds, mortgage expenses, rent, debt and loans, college, child care, private schooling and maintenance costs. 1. How much will be needed at death to meet obligations. 2. How much future income is needed to sustain the household.

Liquidity

In the event the insured dies the beneficiary of a permanent life insurance policy will be provided with immediate cash necessary to pay expenses associated with the death.

Estate Conservation

Life insurance proceeds may be used to pay state inheritance taxes and federal estate taxes so that it is not necessary to sell off assets from the estate to pay these costs.

Medical Information Bureau (MIB)

insurer can only use the information obtained through the MIB to conduct further investigation

Retirement fund

Cash values of a matured life insurance policy may be a source of retirement income.

Cross Purchase Plan

A type of Buy-Sell agreement, where the policies are owned by individual business partners who pay the premiums and are the beneficiaries.

Bequests

An insured may wish to leave funds to their church, school, or other organization at the time of their death.

Selection Criteria and Unfair Discrimination

Cannot unfairly discriminate by using factors such as race or color in their underwriting

Application

Main sources of underwriting info

Replacement

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

Illustration

Must distinguish between guaranteed and projected

Participating life insurance policy

Mutual (par): distributes dividends to policyholders; but not all mutual are participating.

Deferred Compensation Funding

Not a qualified retirement plan. It can be of two classes - Additional Funding Plans: paid in addition to employees qualified retirement plan - Elective: employee to defer part of salary /bonus as tax deferred savings

Underwriting

Process in which an insurance company determines whether or not a particular applicant is insurable, and if so, what premium to charge

Non-participating life insurance policy

Stock: does not pay to policyholders but to stockholders

Medical Exams and Lab Tests Including HIV

Insurers require HIV tests when an applicant is applying for $50k or more - obtain written consent - protocol of US Dept of Health - must disclose the test results - no physician, forward to state Dept of Health

Field Underwriter

Is the company's front line. - proper solicitation of applicants - completion of application - obtaining required signatures - collecting initial premium and issuing the receipt - delivering the policy

Life Insurance Policy Cost Comparison Methods

used to evaluate the cost of one life insurance policy in relation to another so that consumers can be better informed when shopping for the most competitively priced offering for their particular needs. Although the cost of life insurance depends largely upon an individual's specific circumstances and requirements, cost estimates are nonetheless useful so that the consumer has the opportunity to consider every factor when making a buying decision.