PA Life, Accident, and Health Licensing Exam (Chapter 2: Life Insurance Basics)
group life insurance
is written as a master policy covering the lives of more than one individual under one single policy individuals covered do not receive a policy but instead receive certificates of insurance rate and coverage are based upon group underwriting, with all individuals covered for the same amount and rate
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 planning for survivor protection requires careful examination of current assets and liabilities as well as determining what survivors' needs may be
Key person insurance premiums are not
tax deductible, but the death benefit usually is the company must have consent of the key employee in order to purchase this type of policy
Business Uses of Life Insurance
1. Key Person 2. Buy-Sell Funding 3. Executive Compensation
Producer responsibilities
1. Solicitation and sales presentations 2. Underwriting: field and company 3. Premium Determination 4. Policy Issue and Delivery
Estate
a person's net worth
The insurer issues
a policy covering the insured
permanent life insurance
various types of whole life insurance that remains in effect to age 100 as long as premiums are paid includes the cash value element
Viatical settlement providers must obtain the following information before entering into a contract
1. a witness document which contains - viators consent - viator has a full and complete understanding of the contract and the benefits of the policy - viator entered into the contract freely and voluntarily - the insured is terminally or chronically ill and was diagnosed after the life insurance policy was issued - the viator is of sound mind and under no constraint or undue influence 2. A document giving the insured's consent to the release of medical records to the viatical settlement provider, broker, and insurance company 3. a document giving the insured's consent to the tolling og the running ogf the policy's contestable period until after the insurer compeltes its good faith investigation, if the life policy is being viaticated within 2 years of the policy issue
Determining amount of personal life insurance
Human life value approach Needs approach
Key Person
a business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills, or business contacts (businesses lessen this risk by the use of key person insurance)
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 by which
an immediate estate can be created at such a small cost
Solicitiation of insurance
and attempt to persuade a person to buy an insurance policy all things that attempt to secure a contract between the applicant and insurance company
Needs approach
based on the predicted needs of a family after the premature death of the insured Some of the factors considered by the needs approach are income, the amount of debt, investments, and other ongoing expenses
Nonparticipating policy
does not pay dividends to the policyowners
Cash Value
equity amount accumulated in permanent life insurance
terminally ill
means a condition that can reasonably be expected to result in death within 24 months
Valid insurable interest may exist between the policyowner and the insured when the policy is insuring any of the following:
policyowners life the life of a family memeber (spouse/blood relative) the life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as a debtor or creditor)
term life insurance is also known as
pure life insurance
Once an insurance policy has been issued
the insurer must pay the policy benefit, whether or not an insurable interest exists
With key person coverage
the key employee is the insured, and the business is the: -applicant -policyowner -premium payer -beneficiary
viator
the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract
In life insurance, insurable interest must exist between the policyowner and the insured at
the time of application
Estate Creation and Conservation
A person may create an estate through a variety of means but all take a significant amount of time The purchase of life insurance creates an immediate estate
The policy owner of the insurance contract pays
a premium to the insurer
Solvency
ability to meet financial obligations (insurance company maintains enough assets to pay claims)
Viatical Settlements
allow someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds now these are not policy options but rather a separate contract in which the insured sells the DB to a third party at a discounted rate Insureds are referred to as viators viatical settlement provider means a person, other than a viator, that enters into a viatical settlement contract viatical producers represent the providers viatical brokers represent the insureds viators usually receive a percentage of the policy's face value from the provider the provider continues to maintain premium payments and will eventually collect the entire death benefit
viatical settlement purchaser
anyone who gives a sum of money as consideration for a life insurance policy or interest in the death benefits of a life insurance policy also means a person who own, acquires, or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which is or will be the subject of a viatical settlement contract does not include - a viatical settlement licensee -an accredited investor, qualified institutional buyer, or qualified purchaser who purchases a viaticated policy from a viatical settlement provider - financing entity -special purpose entity -related provider trust
Most common use of Life insurance by businesses
as an employee benefit but can also be used to fund business continuation agreements, compensate executives, and protecting the business against financial loss resulting from the death or disability of key employees
Estate creation is especially important for young families that are getting started and have not yet had time to accumulate
assets
No insurable interest required for
beneficiaries
chronically ill
condition in which a person is unable to perform at least 2 activities of daily living or that requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment
variable life insurance or annuities
contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance variable annuites keep pace with inflation, and are determined by the value of securities backing it
Executive compensation
executive bonus is 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 the employee owns the policy and therefore has all control Since the employer tresated the premium payment as a bonus, that amount is tax deductible to the employer and income taxable to the employee
Life insurance protects against
financial loss associated with an insured's death, and pays a death benefit to beneficiaries upon the death of the insured
stock purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Cross Purchase
used in partnerships when each partner buys a policy on the other
stock redemption
used when the corporation buys one policy on each other
entity purchase
used when the partnership buys the policies on the partners
Contacts with the insured
viatical broker or provider may contact an insured to reequest information regarding the insured's health status cannot occur more than once every 3 months if the insured has a life expectancy of more than one year and no more than once per month if the insured has a life expectancy of one year or less
All viatical applications will be approved or disapproved by the department within
90 days of their receipt
participating life insurance is
a mutual life insurance policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insruance, a savings program, or by the purchase of term insurance
Human life value
gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the TVM
Fixed life insurance or annuites
offer guaranteed minimum or fixed benefits that are stated in the contract
Illustrations
presentation or depiction of nonguaranteed elements of a life insurance policy
Life settlements
refers to any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for some form of compensation, usually cash
Viator has 15 calendar days to rescind a viatical settlement, if they die in that period the settlement contract is deemed
rescidned
Liquidation
selling assets in order to raise capital
Insurable interest
something of value that, if lost, would cause you financial harm (Policyowner must have insurable interest in order to purchase insurance)
If the viatical settlement provider transfers ownership or changes the beneficiary of the insurance policy, that provider must inform the insured within
20 days of the change
Asset protection
is the use of life insurance to guard one's wealth against creditor claims without engaging in practices that are ultimately illegal, such as concealment or fraudulent transfer insurance contract is between the policyowner and the insurer. when the insured dies, the contractual arrangement is between the insurer and the beneficiary and the proceeds of the life insurance belong to the beneficiary and the creditors have no right to that money
both providers and brokers must present to the department new or revised information about changed in officers
10% or more stockholders, partners, directors, members, or designated employees within 30 days of that change
Funds will be sent to the viator within
3 business days after the viatical settlement provider acknowledges that the ownership of the policy or interest in the certificate has been transferred and the benficiary has been designated
Fraudulent Viatical Settlement Act
An act or omission committed knowingly or with intent to defraud for the purpose of depriving another of property or for monetary gain by a person who commits or permits employees or agents to do any of the following: - Present or prepare false information in support of or concerning a fact material to one of the following, with knowledge that such will be presented to others ...... -Destroy, remove, conceal, or change assets or records of anyone engaged in the business of viatical settlements with the purpose of furthering or hiding fraud -misrepresent or conceal the financial condition of a licensee or insurer
Licensing for viatical settlement providers/brokers
Apply to the department with - an audited financial statement (not more than 1 year and 120 days old) - an unaudited financial statement (as of the end of the most recent quarter) Licenses may be renewed annually, on the anniversary month, by filing the proper renewal forms and paying the renewal fee fees due at initial and renewal application include: $300 for providers $100 for brokers
Buy-sell funding
a buy-sell agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled (also called business continuation agreement)
viatical settlement provider
a person (other than the viator) who enters into or effectuates a viatical settlement contract (does not include a bank, financing entity, or the issuer of a life insurance policy providing accelerated benefits
viatical settlement broker
licensed person that, for a fee, negotiates viatical settlement contracts between the viator and viatical settlement providers (represents the viator)
Insurer pays
the death benefit to the beneficiaries upon the insured's death
Within 20 days of completing the viatical contract
the viatical settlement provider must give written notice to the insurer that issued the insurance policy that the policy has or will become a viaticated policy
Determining Lump-sum needs
Insurance proceeds may be need for a variety of expenses including - death costs (final expenses, funeral, day to day expenses family maintenence) - debt cancellation (as an alternative to estate liquidation) paying off debts - emergency reserve funds - education funds - retirement fund - bequests (leaving money to the insured's church, school or charity)
Personal uses of life insurance
Survivor protection estate creation and conservation liquidity asset protection
Exceptions to asset protection life insurance
1. if the insured has filed a petition of bankruptcy within 2 years, the proceeds and cash value are only exempt under certain circumstances 2. the amount of premiums paid with intent to defraud creditors is not exempt 3. A creditor possessing a valid assignment from the policyowner may recover the amount secured by the assignment with interest from either the cash surrender value or the proceeds of the life insurance policy
Liquidity
As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner The policy's cash values can be borrowed against at any time and used for immediate needs
Types of buy-sell agreements used by partnerships and corporations
Cross purchase entity purchase stock purchase stock redemption