PA Life - Basics

Viatical settlement providers must obtain these things before entering into a contract

- 1. A witness document containing: - viator consents to the contract - viator has a full and complete understanding of the contract and the benefits of the policy - viator entered into the contract freely and voluntarily - insured is terminally or chronically ill and was diagnosed after the life insurance policy was issued - viator is of sound mind and under no constraint or undue influence 2. A document giving the insured's consent to release of medical records to the viatical settlement provider, broker, and insurance company 3. A document giving the insured's consent to the tolling of the running of the policy's contestable period until after the insurer completes its good faith investigation, if the life policy is being viaticated within 2 years of the policy issue

Viatical provider/broker licensing must include the following, and renewal fees/terms

- Audited financial statement - not more than 1 year and 120 days old, and unaudited financial statement (as of the end of the most recent quarter) - Licenses may be renewed annually on the anniversary month // Providers fees are $300, brokers $100

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 - Send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the application is received in the replacing insurance company's home or regional office. A policy summary or ledger statement containing policy data on the proposed life insurance or annuity must be included.

Lump-sum needs

- costs associated with death (final medical expenses, funeral expenses, day-to-day family expenses) - debt cancellation (paying off debts like mortgage or auto loans) - emergency reserve funds (paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family - education funds (paying for kids' education) - retirement fund - bequests (leaving funds to church, school, charity)

Illustration advertisement rules

- distinguish between guaranteed and projected amounts - clearly state that an illustration is not a part of the contract - identify those values that are not guaranteed as such

Insurance advertising rules

- insurer must submit 3 copies of all advertisement to the department of insurance for approval - once a mail-order solicitation has been filed, it may be used for 2 years without additional filing - advertising material will remain filed for 4 years - if a testimonial refers to benefits received under contract, specific claim data should be retained by the insurer for 4 years or filing of next regular examination of that insurer, whichever is longer

Duties of replacing insurer

- present to applicant a Notice Regarding Replacement - obtain a list of all existing life insurance / annuity policies to be replaced - leave the applicant with the original or copy of written or printed communications used for presentation to the applicant - submit to the replacing insurance company a copy of the replacement notice with the application - producer must submit, to the insurance company, statement signed by applicant that insurance/annuity is involved in the transaction, and signed statement that producer knows replacement is involved in transaction

Duties of the existing insurer

- retain all replacement notifications for at least 5 years or until the next regular exam - send a letter notifying the policyowner of his or her right to receive information regarding the existing policy values. The information then must be provided within 5 business days of receipt of the request from the policyowner - upon receipt of a request to borrow, surrender, or withdraw any policy values, send a notice advising the policyowner that the release of policy values may affect the guaranteed and non-guaranteed elements, face amount, or surrender value

Replacement

A practice of terminating an existing policy or letting it lapse, and obtaining a new one. Producers and companies must take special underwriting measures to help policyowners make informed decisions - existing life insurance or annuity will be: lapsed/terminated/surrendered, reissued with any reduction in cash value, converted to reduced paid-up insurance/continued as extended term or reduced in value, amended so as to affect either a reduction in benefits, used in a financed purchase

Suitability

An insurance producer may not recommend the purchase, sale, or exchange of an insurance policy or annuity contract without the reasonable belief that the transaction is in the best interest of the insured.

Life settlement

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. NOT a viatical settlement. These people just don't need the policy anymore. Not because they're ill.

Primary criteria to assess life insurance candidate application

Applicant's health, occupation, lifestyle, and hobbies or habits

Viatical broker contacting insured

Broker or provider may contact to request health status no more often than every 3 months if life expectancy of more than 1 year, and no more than once per month if life expectancy under a year

Human life value approach (estimate)

Gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money. (Annual income multiplied by years til retirement.) ($40,000 x 25 = $1,000,000). Taking interest and inflation into consideration, insurance company determines amount of insurance to produce the same annual amount of income if insured dies.

Preferred risks

Individuals who meet certain requirements and qualify for lower premiums than the standard risk

Who is responsible for all advertisements?

Insurer

All business uses of life insurance

Key person, buy-sell funding (4x), executive bonus

Standard risks

Persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions.

Liquidity

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

Disclosure to customers

Provider/broker and viator must sign. Includes: - possible alternatives to contracts - proceeds taxation info - proceeds subject to creditor claims - effect on eligibility for medicaid - viator has 15 calendar days to rescind a settlement. if insured dies in this period, the contract is deemed rescinded - entering into a contract may cause other rights or benefits to be forfeited - funds will be sent to viator within 3 business days after provider acknowledges that ownership of policy or interest in certificate has been transferred and beneficiary designated - if provider transfers ownership or changes beneficiaries they must notify insured within 20 days of change

Buyer's guide

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

Estate creation

Purchase of life insurance creates an immediate estate. No other legal method to make an immediate estate at such a small cost.

Declined risks

Risks that the underwriters assess as not insurable (ex. no insurable interest, medically unacceptable, potential for loss is so great it doesn't meet definition of insurance, insurance prohibited by public policy / illegal)

Rating classifications

Standard, substandard, and preferred

Gross annual premium

The one year cost for mortality, plus the cost of operating the company (or expense loading). Loading includes commissions, taxes, advertising, and amount added to a pure or basic rate to provide for a profit margin to the insurer.

Insurable interest

The policyowner must face the possibility of losing money or something of value in the event of loss.

Underwriting

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

Terminally ill

a condition (illness or sickness) that can reasonably be expected to result in death within 24 months

Chronically ill

a 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

Viatical settlement broker

a licensed person that, for a fee, negotiates viatical settlement contracts between the viator and viatical settlement providers; represents the viator

Viatical settlement provider

a person (other than a viator) who enters into or effectuates a viatical settlement contract. Not the bank, financial entity, issuer of life insurance policy.

Minor

a person under legal age

Estate

a person's net worth

Policy summary

a written statement describing the features and elements of the policy being issued. includes agent name/address, full name and home office of insurer, generic name of basic policy and each rider. Includes premium, cash value, dividend, surrender value and death benefit figures for specific policy years. MUST be provided when the policy is delivered.

Solvency

ability to meet financial obligations (ex. insurance company that maintains enough assets to pay claims)

Fraudulent viatical settlement act

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: - present or prepare false information in support of or concerning a fact - destroy, remove, conceal or change assets or records of anyone engaged in business of viatical settlements with purpose of fraud - misrepresent or conceal financial condition of licensee or insurer - transact viatical settlements without a license or certificate of authority - file false information with or conceal info about a material fact from an insurance regulatory official - knowingly present or prepare a fraudulently obtained policy - embezzlement, theft, misappropriation or conversion of money, premiums of people in contract - attempt to commit any of this

Advertisements

advertising must be accurate, no misrepresentation (OBVIOUSLY).

Signatures required

agent and proposed insured must sign the app

Expense (premium determination)

aka loading charge, affects premium rates. Premiums must carry a share of operating costs, commissions paid to agents, payroll, rent, taxes.

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. Separate contract in which the insured sells to a third party at a discounted rate. - Insured = viators - Provider = person entering viatical settlement contract - Viatical producer = represents providers - Viatical broker = represents insureds

Business use of life insurance // Executive bonus

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 full rights to the policy. Its a bonus so its tax deductible to the business, and income taxable to the employee.

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. They're entitled to the beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of the policy in a contract.

Substandard (high exposure) risks

applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are also referred to as "rated" because they could be issued with the premium rated-up, resulting in a higher premium.

Needs approach

based on the predicted needs of a family after the premature death of the insured. Income, amount of debt, investments, other ongoing expenses.

Field underwriter

company's front line agent. Responsible for: - proper solicitation of applicants - helping prevent adverse selection - completing the application - obtaining required signatures - collecting initial premium and receipt - delivering policy

Traditional net cost method

compares the cash values available to buyers if they surrender the policy in 10 or 20 years. easiest cost comparison, but can be the most misleading when used to estimate costs. Use of this method is *ILLEGAL* in most U.S. jurisdictions.

Variable life insurance (class)

contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it.

Fixed life insurance (class)

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

Life insurance

coverage on human lives

Survivor protection

death of the primary wage-earner or the death of a nonearning spouse who cares for minor children can cause financial hardship. Life insurance provides funds for the survivors to maintain their life in the event of the insured's death.

Cash value

equity amount accumulated in permanent life insurance

Permanent life insurance (class)

general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid. This provides lifetime protection, and includes a savings element (or cash value)

Incomplete app

has to be returned to applicant. Insurer assumed to waive its right to an answer, insurer will not have the right to deny coverage based on any information that the unanswered question might have contained.

Net single premium

includes the mortality and interest components necessary to keep the policy in force until maturity (Mortality - Interest = Net Premium)

Interest (premium determination)

insurance companies invest the premiums in an effort to earn interest on these funds. Primary factor in lowering the premium rate

Agent's report

insurer may inquire whether the agent knows of any adverse information about the applicant, or ask the agent to express an opinion about applicant's character, financial standing, environment. Not a part of the contract, but a part of the app process.

Business use of life insurance // Buy-sell funding

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

Individual life insurance (class)

life insurance is written on a single life. The rate and coverage are based upon the underwriting of that individual.

Business use of life insurance // Key person

may be issued as term or permanent life to lessen the risk of financial loss due to death of important employee. - insured (key employee) - applicant, policyowner, premium payer, beneficiary (business) business cant use premium costs for tax deductions, but payout is usually tax-free. business can change beneficiary if they quit, given the newly insured is eligible

Interest-adjusted net cost method

method considers the time value of money (or investment return on premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. Two versions of interest-adjusted method are the surrender cost index and the net payment cost index.

Factors in premium determination

mortality, interest, expense

Premium concepts

net single premium, gross annual premium

Lump-sum

payment of the entire benefit in one sum

Classes of life insurance policies

permanent vs. term, participating vs. non-participating, fixed vs. variable, individual vs. group

Retention

planned assumption of risk, copayments, deductibles, self-insurance. acceptance of the responsibility for the loss.

Nonparticipating life insurance (class)

policy does not pay dividends to policyowners.

Participating life insurance (class)

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

Illustrations

presentation or depiction of nonguaranteed elements of a life insurance policy

Illustration

presentation that includes nonguaranteed elements of a policy of individual or group life insurance of a period of years.

Mortality (premium determination)

ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population

Liquidation

selling assets in order to raise capital

Application

starting point and basic source of information used by the company in the risk selection process. General info and Medical info

Term life insurance (class)

temporary life insurance provided for a specific amount of time, also known as pure life insurance.

Adverse selection

tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk

Death benefit

the amount paid upon the death of the insured in a life insurance policy

Replacing insurer

the company that issues the new policy

Existing insurer

the company whose policy is being replaced

Viator

the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement or contract (the people selling their life insurance early to the provider)

Asset protection

use of life insurance to guard one's wealth against creditor claims without engaging in practices that are ultimately illegal

Stock purchase (buy-sell)

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

Cross purchase (buy-sell)

used in partnerships when each partner buys a policy on the other (Partnership AB ($1m value) has two partners, they both (50% ownership) buy policies ($500k) on the other. Partner A dies, Partner B obtains 100% ownership of company and A's heirs receive $500k. - surviving partner will purchase business share of deceased or disabled partner according to conditions

Stock redemption (buy-sell)

used when the corporation buys one policy on each shareholder

Entity purchase (buy-sell)

used when the partnership buys the policies on the partners

Group life insurance (class)

written as a master policy covering the lives of more than one individual covered under the single policy. Individuals covered do not receive a policy but instead receive certificates of insurance. The rate and coverage are based upon group underwriting, with all individuals covered for the same amount and rate.