life insurance basics
Multiple Employer trusts (MET)
A trust of two or more employers that buy group insurance for their employees. Contributions from the employers, employees or a combination of both are paid into the trust. The trust buys insurance for the benefit of the employees. The trust owns the policy.
In which of the following areas may a life insurance underwriter discriminate in determining policy eligibility and coverage limits?
Personal health history
Why are endowment contracts NOT considered life insurance?
They endow before age 120
irrevocable beneficiary
a beneficiary designation in a life insurance policy that the policy owner cannot change without the beneficiaries written consent.
ordinary life policies
a class of individual life insurance that offers individual coverage in a variety of term (temporary) or permanent plans, in any face amount
natural group
a collection of people that form a group simply because they work in the same place or happen to belong to a mutual organization. To be eligible for group coverage, the group must be a natural group.
spendthrift clause
a common clause in life insurance that states that creditors cannot claim any death proceeds from the policy before the proceeds are paid out to the beneficiary.
peril
a condition that involves danger or risk and is the cause of a loss
Trust
a legal entity established to own and hold property or assets for the benefit of another person or people
entire contract provision
a life and health policy provision that states that if any guarantees, promises, exclusions or anything else are not included in the policy (or in the application, if made a part of the policy) then they are not part of the contract
entire contract provisions
a life and health policy provision that states that if any guarantees, promises, exclusions or anything else are not included in the policy (or in the application, if made part of the policy) then they are not part of the contract
group life insurance
a life insurance policy that covers multiple non-related people
assignor
a person assigning rights in an insurance policy to another person.
group health insurance
a plan of insurance that an eligible group sponsor, such as an employer provides for its members. The plan sponsor owns the plan and pays its premiums. The individual group members are the insureds.
incontestablitiy clause
a provision in an insurance policy that states that after a policy has been in force for a set period, the insurer cannot contest a claim for any reason except for non-payment of premiums. Under most policies, that period is two years
premium tax
a tax levied on insurance companies on the receipt of premiums
limited payment whole life insurance
a whole life insurance policy under which a policy owner pays a higher premium than for an otherwise identical ordinary whole life policy in return for the right to pay premiums for a shorter period.
To reinstate a lapsed policy, the policy owner must provide:
a written request or application for reinstatement; proof of insurability; and payment of all back premiums plus interest.
title page
aka specifications page, identifies the insurance company and the policy owner.
facility of payment clause
allows the insurer to pay the death benefit to someone other than the beneficiary under certain conditions. This clause generally appears in group life or industrial policies
National Association of Insurance Commissioner's (NAIC)
an association of insurance commissioners in the various states. Actively proposes model laws that standardize policies and promote fair trade practices in the insurance industry.
universal life insurance
an extremely flexible life insurance policy in which the policy owner can, within certain limits increase premiums, reduce premiums or pay no premiums. Similarly the policy owner can increase the benefit paid at death (subject to evidence of insurability) or can decrease it. The three factors central to the policy are separate elements.
save age
backdating a policy by up to six months, which qualifies an applicant to have the policy issued at a younger age . Because the policy is issued at a younger age, the policyowner pays a lower premium
Which of the following types of life insurance is best suited for mortgage protection purposes? decreasing term insurance annually renewable term insurance level term insurance increasing term insurance
decreasing term insurance
primary beneficiary
first person or class of persons in line to receive the death benefits
binding receipt
guarantees coverage from the time the applicant completes the application (or the insured completes the medical exam)
common disaster provision
identifies how a life policy's proceeds will be paid if the insured and the primary beneficiary are killed or die in close time proximity. Assumes the insured dies before the beneficiary, so that proceeds are payable to the contingent beneficiary.
conversion privilege
in group insurance, the right of an insured to convert from group insurance to individual coverage without having to prove insurability. Also applies to a policy owners right in a convertible term insurance policy to exchange the term life insurance policy for a permanent life insurance policy
sponsor
in group life insurance, the sponsor is the policy owner and premium payor
exclusions
in life insurance, a risk that is excluded from coverage means that it is not covered; the policy's benefit will not be paid if death results from that risk
standard policy exclusions
in life insurance, such exclusions include war, aviation, hazardous occupations and hobbies and commission of a felony
In reviewing an application and its risks, the underwriter decides whether the policy will be
issued as requested and applied for; issued as a rated (substandard) policy; issued with a different amount of coverage; or declined.
credit life insurance
life insurance designed to cover the life of a borrower in the amount of his or her outstanding loan. If the borrower dies, then the policy pays the policy's death benefit to the creditor.
policy loan
loan of an insurance contracts cash values
absolute assignment
occurs when the policy owner permanently transfers all rights in the policy to an assignee.
As a legal contract, a life insurance policy requires three elements:
offer acceptance consideration
modified premium whole life insurance
policies with a lower premium in the early years of the policy, usually the first five years. At the end end of the inital period, the premium is increased and stays at that increased level for the life of the policy.
settlement option
provisions in a life insurance policy or annuity that provide the payee with various ways to receive periodic payments of benefits.
mortality factor
reflects the insureds risk of death
The basic purpose for the re-entry option with a renewable term life insurance policy is to let the policy owner
renew the policy at lower current rates, though evidence of insurability would be required.
expenses
represent the insurers costs of doing business (a charge)
backdating
the agreement to make a policy effective earlier than the application date of the policy
interest
the amount the insurer can expect to earn on invested premiums (a credit)
insuring clause
the basic agreement between the insured and the company. The clause states the company's promise to pay the policy's face amount (death benefit) to the named beneficiary if the insured dies.
living benefits
the funds from cash values that life insurance provides; these cash values are used during the insureds lifetime.
single premium life insurance
the most extreme form of limited pay life. The policy is paid with one premium at the time the policy is bought
annuitant
the person an annuity owner chooses to receive the periodic annuity payments when the contract annuitizies
assignee
the person to whom the policy owner assigns the rights in an insurance policy
free-look provision
the provision that gives the new policy owner a set period (usually 10 days) in which to review the policy and to decide whether to keep it. The period begins when the policy is delivered to the owner
viatical settlement
the sale of the rights and benefits in an existing life insurance policy to an investor, when a terminally ill person transfers ownership of a life insurance policy to another in return for payment of some amount less than the policy's death benefit.
assignment
the transfer of some or all of the owners legal rights or interest in an insurance policy to a third person; the transfer of the ownership rights in a life insurance policy from one person to another
death benefit
used to provide income to beneficiaries when insured dies
key employee life insurance
when a business applies for, owns, and is the beneficiary of the policy covering the life of a key employee.
collateral assignment
when a policy owner pledges his or her life insurance policy to secure a loan. The policy is the collateral
attending physicians statement APS
a document requested by an underwriter that includes specific details about any medical conditions found in the health section of a proposed insureds application for insurance, written by the propose insureds doctor.
maintenance fee
a fee charged by some variable life and health insurers that is added to the initial premium. The fee pays the costs of acquiring the new business and offsets costs such as commissions, administration set up and ongoing maintenance.
examples of groups that qualify for group insurance
employers labor unions trade and professional association groups
graded premium whole life insurance
has premiums that start very low (compared to straight whole life) they then increase annually for a long period and stay level for the rest of the life of the policy. `
All of the following must sign life insurance applications, EXCEPT: the insured (if not the applicant) the agent the applicant the beneficiary
the beneficiary
Endowment contracts issued today no longer qualify as life insurance (for tax purposes), but those issued before what date were grandfathered and still retain favorable life insurance taxation?
1986
permanent insurance
A class of life insurance, permanent insurance lasts for the insureds entire lifetime or until age 120.
How does a family income policy differ from a family maintenance policy?
A family income policy combines whole life insurance with decreasing term, while a family maintenance policy combines whole life and level term insurance.
Replacement is considered to have occurred if a life insurance policy is purchased and, in conjunction with that purchase, any of the following occur with an existing policy EXCEPT The existing policy is surrendered. The existing policy is amended with a reduction in benefits. The existing policy is converted to reduced paid-up insurance. The existing policy's beneficiary designation is changed.
The existing policy's beneficiary designation is changed.
In personal insurance, what is the disadvantage to third-party ownership?
The insured has no right to name the beneficiary.
irrevocable beneficiary
a beneficiary designation in a life insurance policy that the policy owner cannot change without the beneficiary's written consent
per capita
a beneficiary designation where proceeds of the policy are paid only to the beneficiaries who are alive and have been named in the policy. The share of a per capita beneficiary is not passed down to his or her children, instead the share is paid to the policy's other named beneficiaries.
revocable beneficiary
a beneficiary in a life insurance policy that has no rights in or to the policy during the insured's lifetime. The revocable beneficiary has only an expectancy to receive the death benefit without the beneficiary's permission
noncontributory plan
a category of group health insurance plan that does not require participants to make contributions to the premium for coverage.
specialized life insurance policies
a category of life insurance policy characterized not by the policies design or features but by the purpose for which these policies are written. This category of life insurance policy includes joint life insurance, survivorship policies, juvenile life insurance, and life insurance for family uses and needs
modified endowment contract (MEC)
a category of life insurance policy that fails to meet the 7-pay test imposed by the federal government. Because of that, a MEC loses some, but not all of the favorable tax treatment normally given to life insurance policies.
industrial life policy
a class of individual life insurance that offers individual coverage in small amounts usually around 1,000 to 2,000. Generally an insurance agent calls on the policyowner at home on a weekly basis to collect the premium.
home service insurance
a class of individual life insurance that offers individual coverage in small amounts usually around 1,000 to 2,000. generally an insurance agent calls on the policyowner at home on a weekly or monthly basis to collect the premium. AKA HOME SERVICE INSURANCE
permanent life insurance
a class of life insurance, lasts for the insureds entire lifetime or until age 120. As long as premiums are paid, the insurance stays in force and is guaranteed to pay its death benefit.
term insurance
a class of life insurance, term coverage is temporary, applying only for limited period. At the end of that period, the policy expires. The policy pays a death benefit only if the insured dies during the term. The term can be defined in years or by the age of the insured.
group coverage
a class of life or health insurance insurance policy where one policy covers several people
medical information bureau
a non-profit clearinghouse that holds a database of confidential medical information on applicants for life and health insurance
family protection policy
a policy in which the entire family receives life insurance coverage under a single policy.
load
a premium factor that represents the insurers expenses (and the profit the company wants to derive)
level premium payment
a premium payment plan in which the premium is set and remains fixed over the policy's term.
suicide provision
a provision in nearly all life insurance policies that denies paying the death benefit if during the first two years following the policy issue, the insured commits suicide
reinstatement provisions
a provision that lets the policy owner place a lapsed policy back in force within a certain period. Th period is typically 3 years
representation
a statement made at the time a contract is formed. This statement persuades a party to enter into the contract
indexed whole life insurance
a type of whole life policy that ties its death benefit and its premiums to a specified index, most commonly the consumer price index.
jumping juvenile life insurance
aka juvenile estate builder, a form of permanent coverage, typically issued in units of 1000 of death benefit. Because the insured is so young when the policy is issued, the premiums are relatively small. When the insured child reaches age 21, the death benefit jumps to 5000 per unit. However the premium does not change, nor is proof of insurability period.
stranger-owned life insurance, or STOLI. AKA investor-owned life insurance, or IOLI
an arrangement in which an investor or investor group convinces a consumer—usually someone between the ages of 65 and 80—to take out an insurance policy on his or her life in exchange for an eventual lump-sum payment.
natural person
an individual- a parent, spouse, or partner in a business relationship
automatic premium loan
an optional life insurance benefit whose purpose is to prevent a policy from lapsing if the policy owner fails to pay the premium
Contract modifications include:
beneficiary changes, if beneficiaries have not been named irrevocably; additional coverage; changes to the face amount (if the policy provides for this); changes in the manner in which the policy's death benefit is paid out; and changes in the mode of premium payment (from monthly to quarterly or annually, for example).
insurable interest
financial interest someone has in property or a persons life.
insurable interest
for a life insurance contract to be issued, the applicant must be expected to suffer a financial loss from the insureds death.
master policy
in a group life policy, the master policy indicates the sponsor as policy owner and premium payor
monthly income unit
in family income policies, monthly income as defined in terms of 10 dollars for every 1000 of whole life coverage.
labor union groups
in relation to group life insurance, labor unions can buy group policies to insure members of the union. The union owns the policy for the benefit of the members
common life insurance beneficiaries
individuals, businesses, trusts, estates, or charitable organizations.
cash value
investment part of the whole life insurance policy. Cash value is the money that builds within the policy over the policy's life.
ordinary life insurance
life insurance generally issued in face amounts greater than 25,000 (in some cases 1 million or more). Premiums are payable monthly, quarterly, semiannually, or annually. Ordinary insurance includes virtually every type of life insurance and annuity product covered in this course. Ordinary life insurance is especially popular with consumers today because of its many flexible options.
Amanda bought a $50,000 ten-year renewable term policy. The premiums she pays for the policy will be
more than for a $50,000 ten-year nonrenewable policy.
The first part of the application contains all the personal information about the applicant. Such personal information includes:
name address date of birth occupation beneficiary information other non-medical information the insurer may require
lump sum
payment of insurance policy proceeds in a single lump sum
whole life insurance
provides permanent insurance coverage for a persons lifetime. Provides guarantees for premiums, cash value and death benefits
Underwriters rely on many sources of information in deciding whether to accept, decline, or rate a risk, including:
the application the agent's report an attending physician's statement (APS) an inspection, credit, or consumer report the Medical Information Bureau (MIB) report a medical exam (including an electrocardiogram, or EKG; treadmill test; or other examination by a physician) Department of Motor Vehicle (DMV) report Hazardous activity questionnaires (concerning activities related to aviation; SCUBA diving; racing of autos
secondary beneficiary
the next person or class of persons in line after the primary beneficiary to receive the policy proceeds
grace period
the period after the premium due date during which a policy owner can pay the premium on an insurance policy before the policy lapses. grace periods are usually 31 days
net single premium
the theoretical single premium amount, minus (net of) the expense charge required to fund a fixed life insurance policy's face amount. Calculating the net single premium is the first step in calculating the premium actually paid by the policy owner.
Whole life insurance is distinguished by two features:
1. It provides guaranteed death benefit protection for the insured's whole life. No matter when the insured dies, the policy pays the face amount stated in the policy. Under most whole life policies, the covered lifespan extends to age 120. 2. It includes a guaranteed cash value that gradually builds inside the policy. The cash value forms part of the death benefit, but it is also accessible while the insured is alive. The cash value is covered more thoroughly later in this lesson.
The Fair Credit Reporting Act (FCRA) generally requires insurers that seek a credit report to notify the applicant of the request within
3 days of requesting the report.
single premium life insurance policy
most extreme form of limited pay life. The policy is paid with one premium at the time the policy is bought
premium receipt
the receipt an agent normally gives an applicant when the applicant submits an application for life insurance with the first premium payment. The receipt is designed to offer interim coverage while the application is being approved and the policy is being formally issued.
adverse selection
the tendency of those who most need insurance (most at risk) to buy insurance. Those who don' t have as much of a need for a particular type of insurance (least at risk) are less likely to buy it.
net single premium
the theoretical single premium account, minus (net of) the expense charge required to fund a fixed life insurance policy's face amount. Calculating the net single premium is the first set up in calculating the premium actually paid by the policy owner.
variable life insurance
a form of permanent whole life insurance in which premiums are placed in investment sub-accounts that the policy owner owns.
interest sensitive whole life insurance
a life insurance policy characterized by premium rates that can change over time in response to the insurers actual mortality, interest, and expense experience
term rider
can be added to any policy to increase the death benefit payable if the insured dies during the specified term. Term riders are pure death benefit- they have no cash value or other living benefits associated with them.
variable universal life insurance
combines the features of universal life insurance with the ability to allocate premiums to a separate account
second to die life insurance
commonly known as second to die policies. These policies are so called because they insure more than one person but pay the death benefit only when the second insurer dies.
In determining its load factors, insurers are generally guided by three objectives:
cover total operating costs provide a safety margin contribute to profits or surplus
All the following are federal laws or related rulings that have a direct impact on anti-money laundering requirements EXCEPT the: Fair Credit Reporting Act Bank Secrecy Act FinCEN final rules of 2005 USA PATRIOT Act
Fair Credit Reporting Act
Gina owns a $200,000 five-year renewable term insurance policy and wants to renew the policy at the end of the term. In this case, all the following statements are correct, EXCEPT: The premium for the renewal coverage will be higher than for the initial coverage. The insurer will base the premium for the renewal coverage on Gina's age at the time of renewal. Gina will be able to renew the policy any time up to age 65 or 70 (as defined in the policy). Gina must prove insurability before the insurer can renew the policy.
Gina must prove insurability before the insurer can renew the policy.
current assumption whole life (CAWL)
a life insurance policy characterized by premium rates that can change over time in response to the insurers actual mortality, interest, and expense experience.
family income policy
a life insurance policy that combines whole life insurance and decreasing term life insurance on a named insured. The person named is typically a family's main wage earner. The period for the payment of the term portion of the death benefit begins when the contract is issued.
gross annual premium
a premium that includes the loading costs
Insurers use inspection reports to verify the information applicants provide to agents and examiners. Who is most likely to be the subject of an inspection report?
applicants who ask for very high amounts of life insurance or business insurance
joint life insurance
permanent coverage that insures two persons under one policy. The policy pays the death benefit when the first insured dies
bring-back rule
when an insured transfers his or her life insurance policy to a third party and dies within three years after the transfer, at which time the policy death benefits are included in the insureds estate for tax purposes
per stirpes
a beneficiary designation where proceeds of a life insurance policy pass down to the beneficiary's children if the named beneficiary dies before the insured
contributory plan
a category of group health insurance plan that requires participants to make contributions to the premium for coverage
contingent beneficiary
the next person or class of persons in line after the primary beneficiary to receive the policy proceeds
grace period
the period after the premium due date during which a policy owner can pay the premium on an insurance policy before the policy lapses. usually 31 days
family maintenance policy
provides an income to surviving family members by combining whole life insurance with level term life insurance. The period for the payment of the term portion of the death benefit begins when the insured dies.
inspection report
provides details on an applicants finances, occupation, personal habits and lifestyles. Used by insurers to verify the information the applicant provides to agents and examiners
conditional receipt
provides for conditional coverage. the coverage begins on the date of application or the date of a medical exam if required, whichever is later. The receipt is made on the condition that underwriting determines the insured is insurable.
death benefit
the death benefit in a life insurance contract is generally used to provide income for beneficiaries when the insured dies. In this way, the death benefit replaces the deceased insured's future lost income.
net amount at risk
the difference between a life insurance policy's cash value and the policy's death benefit
straight whole life policy aka ordinary whole life policy
a whole life policy in which death benefits are level. Level premiums are paid until the insured dies or until he or she reaches age 120 whichever comes first.
subaccount
investment accounts into which VLI policy values are invested. unsecured and nonguaranteed
While all forms of whole life have these two guaranteed features, the various types of whole life differ in
the length of time over which premiums are paid and/or how the policy's cash values are invested and grown.
redetermination
the process insurers use to evaluate their actual experience and to apply the changes to their premium rates
The two most common cost comparison methods are
traditional net cost method and the interest-adjusted net cost method
Whole life insurance includes the following products:
traditional straight (ordinary) whole life limited payment life modified premium whole life graded premium whole life changing premium whole life indexed life variable life
mortality rates
used by insurers in pricing health insurance policies. They indicate the average number of persons within a very large group who can be expected to die in any given year.
absolute assignment
the complete transfer of all rights in an insurance policy to a third party, giving up control of all rights in an insurance policy
Policyowner rights in life insurance contracts include the right to
transfer policy ownership to another entity (without regard for insurable interest); assign (pledge) the policy's values as loan collateral; select and change modes of premium payment; select and change beneficiaries (as long as the existing designation is not irrevocable); terminate the policy and elect settlement and nonforfeiture options; receive cash values and/or dividends; and borrow against cash value.
indeterminate premium whole life insurance
a whole life policy issued with two premium rates. 1. a lower fixed rate, 2. a guaranteed maximum rate
The insurance company can require a medical exam or lab tests based on information found in the application. The insurance company may request a medical exam based on any of the following criteria, EXCEPT the age of the applicant. the type or amount of the proposed insurance the sex of the applicant. the health of the applicant.
the sex of the applicant
level premium
in life insurance policies, insureds pay the same level premium over the life of the policy. At any time the insured never pays more in premium than he or she paid in the early years of the policy, when he or she was young.
mortality
is the risk of death posed by the applicant. (a charge)
personal relationships automatically deemed to represent an insurable interest
Individuals have insurable interest in themselves. Spouses have insurable interest in each other. Parents have insurable interest in their children. Children have insurable interest in their parents or grandparents (or another on whom a child might be financially dependent).
Also called the net payment cost index, the interest-adjusted net cost method:
factors in the interest rate credited to the policy. Because it accounts for the time value of money, the interest-adjusted net cost method is more widely used today than the traditional net cost method. The simplified formula has five steps: 1. Total the premiums that are projected to be paid over a specified period of time (e.g., 10 years and 20 years) and apply an assumed interest rate of growth to those amounts (e.g., 3 percent or 4 percent). 2. Total the policy dividends (if applicable) that are projected to be paid over the study period and apply an assumed interest rate of growth to those amounts (e.g., 3 percent or 4 percent). It is assumed dividends are retained in the policy during the study period. 3. Subtract the projected cash value and accumulated dividends at the end of the study period. 4. Divide the net result in step 3 by the policy face amount (in terms of thousands). For example, if the policy has a $50,000 face amount, the net result would be divided by 50. 5. Divide the result in step 4 by the number of years under study. The end result is the interest-adjusted net cost of $1,000 of protection per year.
traditional net cost method, also called the surrender cost index method
identifies the cost of funding the pure insurance portion of a life policy over a specified study period (typically 10 or 20 years). In simplified form, the formula for calculating the traditional net cost has four steps: 1. Total the premiums that are projected to be paid over a specified period of time (e.g., 10 years and 20 years). 2. Subtract any anticipated policy dividends and the cash value at the end of this period. 3. Divide the net result in step 2 by the policy face amount (in terms of thousands). For example, if the policy has a $50,000 face amount, the net result would be divided by 50. 4. Divide the result in step 3 by the number of years under study (e.g., 10 or 20 years). The end result is the net cost of $1,000 of protection per year.
third party ownership
in a life insurance policy, when the insured and policy owner are not the same person. In third-party ownership situations, the insured (who is not the owner) has no rights in the policy. His or her role is simply that of the person whose death causes the death benefits to become payable. All rights in the policy are held by the policy owner, including the right to name the beneficiary. There must be an insurable interest between the applicant and the proposed insured for third-party ownership to be valid when a life insurance policy is issued. However, after a policy is issued a third-party ownership arrangement can be set up (by transferring ownership to another party) without regard for insurable interest. Third-party ownership of a life insurance policy plays a role in both personal and business life insurance situations.
When Tom, an agent for ABC Insurance, receives an approved policy, he MUST do all of the following, EXCEPT mail the policy to the applicant and offer to review it at the agent's office at a later date. verify that any requested backdating has been done. review it to make sure that it is what the applicant applied for and expected. verify that any applied-for benefit riders have been added.
mail the policy to the applicant and offer to review it at the agent's office at a later date.
Actuaries base life insurance premiums on three factors:
mortality, interest, and expenses
Who normally owns life insurance used to meet business insurance needs?
the business
single premium life insurance policy
the most extreme form of limited pay life. The policy is paid with one premium at the time the policy is bought.