Part 2: Life Insurance Basics
PREMIUM CONCEPTS has two parts
Net Single Premium Gross Annual Premium
What are the two traditional methods of comparing costs of insurance?
Interest-Adjusted Net Cost Method Comparative Interest Rate Method
Who is the EXISTING INSURER?
It is the company whose policy is being replaced
What are emergency reserve funds?
Paying for children's education expenses so they can remain in school, or for a surviving spouse who my need additional education or training in order to re-enter the job market.
What does a viator usually receive?
They receive a percentage of the policy's face value from the person who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit.
True or False? 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.
True
Define "bequests"
leaving funds to insured's church, school, or charity
List other duties of the insurer that are also required to monitor each producer, and what they need to make available to the Department concerning the records regarding each producer:
-Life replacements, shown as a percentage of the producer's annual sales -Number of lapses of policies by the insurance producer, shown as a percentage of the producer's annual sales -Annuity contracts and replacements, shown as a percentage of the producer's annual sales -The number of unreported replacements (detected by the aforementioned monitoring system) -Replacements, indexed by the existing insurer and the replacing producer
As a field underwriter, the agent has many important responsibilities during the underwriting process and beyond, including the following:
-Proper solicitation of applicants -Helping prevent adverse selection -Completing the application -Obtaining the required signatures -Collecting the initial premium and issuing the receipt, if applicable -Delivering the Policy
What are the producer's responsibilities?
1. Solicitation and Sales Presentations 2. Underwriting: Field and Company 3. Premium Determination 4. Policy Issue and Delivery
What is the most common type of receipt?
A CONDITIONAL RECEIPT, which is used only when the applicant submits a prepaid application. The conditional receipt says that coverage will be effective either on the date of application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for. This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages.
What happens if the buyer's guide and disclosure document are not provided at the time of application?
A free-look period of at least 15 days applies.
Explain Estate Creation and Conservation
A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time.
What is a retirement fund?
A source of retirement income
Define process SOLICITATION OF INSURANCE
An attempt to persuade a person to buy an insurance policy - done orally or in writing. Includes providing information about available products, describing the policy benefits, making recommendations about a specific type of policy, and trying to secure a contract between the applicant and the insurance company.
The primary criteria an underwriter will use in assessing the desirability of a particular candidate for life insurance are as follows:
Applicant's Health - current and past Occupation Lifestyle Hobbies Habits The underwriter will use many different sources of information in determining the insurability of the individual risk.
Explain EFFECTIVE DATE OF COVERAGE
If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In this case, the policy does not go into effect until the premium has been collected. The agent may also be required to get a statement of good from the insured. This statement must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date.
What is this an example of? Assume that $500 Mortality cost minus $100 interest = a $400 Net Premium $400 Net Premium plus $200 Operating Cost = $600 Gross Premium
Net Premium and Gross Premium
Are STOLI's Stranger - Originated Life Insurance Legal?
No. They violate the principle of insurable interest.
TRUE OR FALSE If a policy is delivered by any other method, the insurer must establish a way to verify the policy delivery. A certificate of mailing is considered adequate proof of delivery.
TRUE
With "key person insurance", the key employee is insured, and the business takes on what title?
The business becomes the applicant, policy owner, premium payer, and beneficiary.
Explain the process of the DELIVERY RECEIPT
When an agent hand delivers an individual policy or annuity to the policyowner, the agent must obtain a signed delivery receipt. The receipt will be in duplicate and state the date the contract was received. The free-look period will take effect on the date the receipt was signed.
A prospective insured may be rated as one of the three classifications:
standard substandard preferred
Explain "Key Person" as it pertains to business life insurance
A business can suffer a financial loss because of the premature death of a key employee, or in other words someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.
Explain NOTICE OF INFORMATION PRACTICES
Agents are required to disclose to a prospect the facts about information collection practices, as well as the products they are proposing to sell.
Explain a DECLINED status
Applicants who are rejected are considered declined risks. Risks that the underwriters assess as not insurable are declined.
What are the sources of underwriting information and regulation?
Application Producer Report Attending Physician Statement Investigate Consumer Report (inspection) Medical Information Bureau (MIB) Medical Examinations and Lab Tests including HIV Use and Disclosure of Insurance Information
Describe the AGENT'S REPORT
As a field underwriter, the agent (or producer) can be considered the most important source of information available to the company underwriters. This report provides the agent's personal observations concerning the proposed insured. The agent's report does not become a part of the entire contract, although it is a part of the application process.
Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:
Costs Associated with Death (Post Mortem) Debt Cancellation (as an alternative to Estate Liquidation) Emergency Reserve Funds Education Funds Retirement Fund Bequests
The following are examples of underwriting practices in life and health insurance that would constitute unfair discrimination between individuals of the same class:
Discriminating in policy rates and benefits based solely on -Age or gender -Physical or mental impairment -Blindness or partial blindness -Genetic characteristics or genetic testing Investigating as part of the underwriting process a proposed insured's sexual orientation.
Define GROSS ANNUAL PREMIUM
Gross annual premium is the one year cost for mortality, plus the cost of operating the company (expense loading). Loading includes commissions, taxes, advertising, and while not an expense, includes the amount added to a pure or basic rate to provide for a profit margin to the insurer. Net Premium + Expense (loading) = Gross Premium
Define Premium Payment Mode
In regards to insurance premiums, mode refers to the frequency the policyowner pays the premium. An insurance policy's rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and the company will have the premium to invest for a full year before paying any claims. if the policyowner chooses to pay the premium more frequently than annually, there will be an additional charge because the company will have additional expenses in billing the premium. However, the premium may be paid annually, semi-annually, quarterly, or monthly. Higher Frequency = Higher Premium Monthly or Quarterly or Semi-Annual or Annual
Define a "buy-sell" agreement
It is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.
Explain HIV Test requirements as source of underwriting information and regulations
It is common among insurers to require an HIV test when an applicant is applying for a large amount of coverage, or for any increased and additional benefits. To ensure proper obtaining and handling results, and to protect the insureds' privacy, states have enacted the following laws and regulations for insurers requiring an applicant to submit to an HIV test: -The insurer must disclose the use of testing to the applicant, and obtain written consent from the applicant on the approved form. -The insurer must establish written policies and procedures for the internal dissemination of test results among its producers and employees to ensure confidentiality. -The test must be administered in a manner that meets the protocol of the US Department of Health and Human Service -The insurer must disclose the test results as authorized by the applicant in writing -If the applicant has not identified a physician to receive the test results, the positive test results and the identity of the applicant must be sent to the state Department of Health -The reporting of test results must include the name and address of the reporting company. NOTE: Requiring an HIV test is not considered unfair discrimination as long as the following conditions are met: -The testing is required for all individuals in the same class; -Proposed insured is not denied coverage on the basis of such testing alone (if not other conditions specified in the insurance Code apply) -The tests and testing procedures have been approved by the United States Food and Drug Administration (FDA) and otherwise comply with applicable state and federal laws. Insurers are permitted to ask a proposed insured whether he or she has tested positive on an AIDS - related test. If the insurer requests an applicant to take an HIV-related test, that insurer must receive the written consent of the applicant. The insurer must allow the applicant up to 10 days to decide whether or not to sign a consent form. This written consent form must specify a time period during which the release of information is effective. This period cannot exceed 180 days from the date of signing.
What does planning for survivor protection require?
It requires careful examination of current assets and liabilities as well as determining what survivor's needs may be.
Define LIFE INSURANCE SURRENDER COST INDEX
Life insurance Surrender Cost Index is an index that determines the policy's guaranteed cash accounting for the annual cash dividends at 5% interest.
What's EXPENSE
Like any other business, insurance companies have operating expenses, which need to be factored into the premiums the company collects from its insured.
Factors in Premium Determination What are three primary factors that are used in premium determination:
Mortality - rate of death within a specific group Interest Expense
Define Mortality
Mortality is the 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.
Are viatical settlements policy options?
No, they are not. They are separate contracts in which the insured sells the death benefit to a third party at discounted rate.
Share Part 2 - Medical Information Details
The application includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. If the amount of insurance is relatively small, the agent and the proposed insured will complete all of the medical information. That would be considered a non-medical application. For larger amounts, the insurer will usually require some sort of medical examination by a professional.
What is the LOADING CHARGE
The expense factor is also known as loading charge.
What are the duties of replacing insurer?
The insurer must notify any existing insurer affected by the replacement within 5 business days of the receipt of any possible replacement. The insurer must be able to provide the insured notice of the right to return the policy within 30 days of delivery for an unconditional, full refund (free-look provision)
Define NET SINGLE PREMIUM
The net single premium includes the mortality and interest components necessary to keep the policy in force until maturity. MORTALITY - INTEREST = PREMIUM
Define APPLICATION as a source of underwriting information and regulations
The person applying for insurance must submit an application to the insurer for approval for a policy to be issued. The application is one of the main sources of underwriting information for the company.
What happens if the full premium was submitted with the application and the policy was issued as requested?
The policy coverage would generally coincide with the date of application.
This is an example of what? If an agent collects the initial premium from an applicant and gives the applicant a conditional receipt, and the applicant dies the next day, the underwriting process will proceed as though the applicant were still alive. If the insurer ends up approving the coverage, then the applicant's beneficiary will receive the death benefit of the policy. If on the other hand, the insurer determines that, the applicant was not an acceptable risk and declines the coverage, the premium will be refunded to the beneficiary, and the insurer is not required to pay the death benefit.
The terms of a conditional receipt
A risk may be declined for one of the following reasons:
There is no insurable interest The applicant is medically unacceptable The potential for loss is so great it does not meet the definition of insurance; Insurance is prohibited by public policy or is illegal
What are "Viatical Settlements"?
They 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.
Share details about PART 1 of the Application
This is the general information portion of the application and includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. It will also inquire about the existing policies and if the proposed insurance will replace them. Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary.
Expound upon the APPLICATION
This is the start point and basic source of information used by the company in the risk selection process. Although applications are not uniform and may vary from one insurer to another, they all have the same basic components: Part 1 - General Information and Part 2 - Medical Information
What are some of the agent's responsibilities?
To make certain that the application is filled out completely, correctly, and to the best of the applicant's knowledge. The agent must probe beyond the stated questions in the application if he or she has any reason to believe the applicant is misrepresenting or concealing information, or does not understand the specific questions asked. Any information that is misleading, inaccurate or illegible may delay the issuance of the policy. If the agent feels that there could be some misrepresentation, he/she must inform the insurance company. Some insurers require that the applicant complete the application under the agent's watchful eye, while other insurers require that the agent complete the application in order to help avoid mistakes and unanswered questions.
True or False Premiums are paid in advance
True
What is the protocol for making changes on application or amendments?
When an answer to a question on the application needs to be corrected, agents have the option, depending on which insurer they represent, of correcting the information and having the applicant initial the change, or completing a new application. An agent should never erase or white out any information on an application for insurance.
Explain preferred risks
those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.
There are several important concepts you need to understand about viaticals. What are they?
-The 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 producers represent the insureds
What is the difference between participating -mutual- life insurance policy and nonparticipating policy?
A participating -mutual- life insurance policy refers to any policy that distributes its dividends to policy owners by cash payments, reduced premiums, units of paid insurance, a savings program, or by the purchase of term insurance. A nonparticipating policy does not pay dividends to the policy owners.
Define "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.
Define Stranger - Originated Life Insurance (STOLI)
Arrangement in which a person with no relationship to the insured purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies. They are purchased solely with the intent of selling them for life settlements.
Define "Liquidity" as it relates to insurance
As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner. That means the policy's cash values can be borrowed against at any time and used for immediate needs.
What is the age a minor must be to contract life and or disability insurance on their own lives, and the lives of their immediate family?
At least 15 years old
Describe the Duties of the Insurers
Insurer must maintain a system for supervision of insurance producers that ensures the following: -A method to inform producers of the requiremenenes of this section (including producers' training manuals) -A procedure to confirm that the aforementioned requirements have been met -A system to provide each producer with a statement of the insurer's position on the acceptability of replacements -A system to review the appropriateness of each replacement transaction; -A procedure to detect unreported replacements
Define Interest-adjusted Net Cost Method
Interest-adjusted net cost method considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. This means that each year premiums and dividends are figured, interest is taken into consideration. Two versions of the interest-adjusted method are the SURRENDER COST INDEX and THE NET PAYMENT COST INDEX.
What is Term Life Insurance?
Term life insurance is temporary life insurance provided for a specific period of time. It is also known as pure life insurance.
List the several types of buy-sell agreements:
The buy-sell agreements that can be used for partnerships and corporations include: 1. cross purchase 2. entity purchase 3. stock purchase 4. stock redemption
Describe the "human life value approach"
This approach 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.
Define the "needs approach" for selecting a life insurance policy value
This is 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 -including mortgage, investments, and other ongoing expenses.
Explain UNFAIR TRADE PRACTICE
To make any statement that an insurer's policies are guaranteed by the Insurance Guaranty Association.
Who is the REPLACING INSURER?
It is the company that issues the new policy.
What are the 2 basic approaches insurance companies have developed to help producers and buyers to determine the needed amount of protection:
1. Human Life Value Approach 2. Needs Approach
What is this an example of? Some life policies - those that provide permanent protection, such as whole life - accumulate cash value that is available to the policy owner during the policy term.
Cash Accumulation
Explain SYSTEM OF CONTROL elements
Every insurance company must establish and maintain a system of control over the content, form, and method of dissemination of all advertising of its policies. The insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.
Concerning a BUYER'S GUIDE, if the application is received in conjunction with a direct-mail solicitation what is required?
The buyer's guide and disclosure document should be provided within 5 business days of the application's receipt. The same applies to applications received through the internet.
List the Classes of Life Insurance Policies and Their Opposites (There are many types of life insurance products available for consumers. Although all life insurance products offer death protection, each type also includes its own unique features and benefits and is designed to serve different insured's needs).
1. Permanent vs Term Life Insurance 2. Participating vs. nonparticipating Life Insurance 3. Ordinary vs. industrial (Home Service) Life Insurance 4. Group vs Individual Life Insurance 5. Fixed vs. Variable Life Insurance
True or False In life insurance, insurable interest must exist between the policyowner and the insured at the time of application.
True
The state law prohibits certain acts and practices as they apply to advertising, promotion, solicitation, negotiation, or sale of insurance, including the following:
The use of the following and similar terms in a context that could mislead a purchaser that he/she will receive something other than a life insurance policy or a benefit not available in that policy: -investment/investment plan -founders plan -charter plan -expansion plan -profits -profit sharing Using words that could lead a reasonable person to believe that the purchase of the policy would be a stockholder of the company or investing in the company, if such is not true; Intentionally stating that a policyholder or stockholder will receive special benefits, priveleges, or rights that are not specifically stated in the policy or contract. Intentionally misleading a policyholder that the principal amounts payable under coupons represent anything other than benefits with the cost included in the total premium, or describing a premium payment as a deposit unless used with the word premium to show the payment's true purpose, or if such payment establishes a debtor-creditor relationship between the insurer and policyholder; and Falsely implying or stating that certain dividends are guaranteed or certain to occur or projecting future dividends not based on the actual scale being used by the company
Classification of Risks
Home Office underwriting department will look at the applicant's past medical history, present physical condition, occupation, habits and morals. If the applicant is acceptable, the underwriter must then determine the risk of rating classification to be used in deciding whether or not the applicant should pay a higher or lower premium.
Define MEDICAL INFORMATION BUREAU (MIB) as a source of underwriting information and regulations
In addition to an attending physician's report, the underwriter will usually request a Medical Information report. The MIB is a membership corporation owned by member insurance companies. It is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. It is a systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered. The MIB can be used only as an aid in helping insurers know what areas of impairment they might need to investigate further. An applicant cannot be refused simply because of some adverse information discovered through the MIB.
How is the amount of a person's life insurance determined?
Individuals seeking to buy life insurance may need assistance trying to establish how much coverage is appropriate, based on their ability to pay the premium, serve their needs, and protect their survivors.
Selection Criteria & Unfair Discrimination
Information the companies obtain relating risk facts aid the underwriters in determining the extent of the risks involved. In order to avoid adverse selection, the company will discriminate in favor of good risks and against poor risks. However, insurance companies cannot unfairly discriminate between individuals of the same class and equal life expectancy in the rates, benefits, or any terms and conditions of the contract.
Do lawful settlement contracts constitute STOLI's?
No, they do not. Life settlement transactions result from existing life insurance policies; STOLIs are initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in life of the insured at the time of policy origination.
Describe a POLICY REVIEW
Personal delivery of the policy allows the agent an opportunity to make sure that the insured understands all aspects of the contract. Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and explaining what effect they have on the contract. In addition, the agent should explain the rating procedure to the client, especially if the policy is rated differently than applied for. The agent should also explain any other choices and provisions available to the policyowner that may become active at this time.
What is INTEREST?
Since premiums are paid before claims are incurred, insurance companies invest the money in an effort to earn interest. The interest is primary factor in lowering the premium rate.
What is the policy on BACKDATING?
Sometimes it is possible to lower the premium rate by backdating (or antedating) an application for insurance. If the applicant chooses to do this, the policy may be backdated for no more than 6 months before the date of the application or the medical examination, whichever is later. All premiums must be paid from the effective date of the policy. The only allowable reason that an application may be backdated is to affect a lower premium.
Describe the LIFE INSURANCE POLICY COST COMPARISON METHODS
To help consumers make educated decisions on purchasing life insurance, the industry developed specific methods and indexes that measure and compare the actual policy costs. These comparisons are usually included in policy illustrations. Traditional methods of comparing costs are interest-adjusted net cost method and comparative interest rate method
Define INVESTIGATIVE CONSUMER REPORT (Inspection) as source of underwriting information and regulations
To supplement information on the application from an independent investigating firm or credit agency, which covers financial and moral information. They are general reports of the applicant's finances, character, work, hobbies, and habits. Companies that use inspection reports are subject to the rules and regulations outlined in the Fair Credit Reporting Act. In Arizona, insurers cannot prepare or request an investigative consumer report about an individual, unless the individual may request to receive a copy of the report.
True or False Insurable interest is not required of beneficiaries.
True Since the beneficiary's well-being is dependent upon the insured, and the beneficiary's life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased.
Define ATTENDING PHYSICIAN STATEMENT as source of underwriting information and regulations
When smaller amounts of insurance are requested and there is no prior medical history of concern, the home office underwriter may make an underwriting decision solely on the basis of the application. If, however, the underwriter sees answers to certain questions that could indicate greater risk, and the underwriter wants to obtain specific medical details, the underwriter will request a statement from the applicant's physician. This is called an Attending Physician's Statement (APS). The insurance company must pay for this information, but it is often less expensive than ordering an examination. The next step would be a paramedical exam (which often includes blood work and a urine sample). A paramedical exam is conducted by a registered nurse or a paramedic. Under certain circumstances the underwriter may require a full medical examination by a licensed physician for additional information. All these are at the insurer's expense. A full medical exam occurs routinely for applicants requesting higher amounts of coverage, or if the application raised additional questions concerning the health of prospective insured, or for applicants beyond a certain age. Each company establishes standard requirements, based on age and amount of coverage, and reserves the right to request additional information and testing, at their own expense.
What are the duties of a replacing producer?
1. Present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer. A copy must be left with the applicant. If the notice is presented electronically, the insurer must mail the applicant a copy of the notice 3 business days after the application is submitted to the insurer. 2. 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 3. Leave the applicant with the original or a copy of written or printed communications used for presentation to the applicant 4. Submit to the replacing insurance company a copy of the replacement notice with the application
True or False Once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.
True
What does the term "life settlement" refer to?
any financial transaction in which the life insurance policyowner sells a policy that is no longer needed to a third party for some form of compensation, usually cash. While viatical settlements are still used for persons who are terminally ill, most states regulate policies that are sold to a third party for compensation under the term Life Settlements.
Describe "liquidation vs. Retention of Capital"
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 jeopardizing the insured's principal asset - such as a home.
How is "ordinary life insurance" different than "industrial life insurance"?
It is also written on an individual basis; however, it differs from industrial life in the following areas: -Larger face amounts (at least $1,000) -Premiums can be paid annually, semi-annually, quarterly or monthly -Premiums are paid by the insured directly to the insurance company -A physical examination may be required to prove the applicant's insurability
Describe stipulations of SOLICITATION OF INSURANCE
Any sales presentations used by insurers or their agents in communication with public must be accurate and complete.
What is Permanent Life Insurance?
It is a 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. Permanent insurance provides lifetime protection, and includes a savings element (or cash value).
Industrial or Home service insurance is what?
It is a life insurance written on an individual bases.
How does "Cash Accumulation" play into life insurance?
Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed.
What are the 2 categories of all insurance regarding the length of coverage?
Temporary and Permanent Protection
What are the distinguishing features of "industrial or home service insurance"?
-Written in small amounts -usually with a face amount of less than $1,000 -Premiums are payable on a weekly or monthly basis -Premiums are collected by a representative of the the insurance company at the home of the insured -Policies are written as non-medical -no medical exam is required; however, medical history information is still collected
How do businesses use life insurance?
They use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured.
It is important to note that the Department considers the following acts deceptive:
-Using any term other than "life insurance" to describe a life policy -Implying that a policy was serviced by the insurer's investment department -Referring to premium payments as "deposits" -Providing inaccurate illustrations of future dividents -Describing life insurance policies as "loss proof", "depression proof", or in terms of "units of participation" -advertising producers to avoid disclosing that life insurance is the subject of applicable solicitations -Guaranteeing benefits following a lapse, without explaining non forfeiture benefits -Using dollar amounts without explanation -Stating that a company makes a profit from policy lapses or surrenders -Making comparisons to the past experiences of other life insurance companies as a means of projecting their own experience.
What is insurable interest?
This is in place to ensure that a person purchasing a life insurance policy is actually interested in the longevity rather than the death of the insured. Because of this, insurers take an aggressive legal stance against policies they suspect are involved in STOLI transactions.
Define Stock Redemption
Used when the corporation buys one policy on each shareholder
Insurable Interest
To purchase insurance, the policy owner must face the possibility of losing money or something of value in the event of loss.
Define Stock Purchase
Used by privately owned corporations when each stockholder buys a policy on each of the others
Define Entity Purchase
Used when the partnership buys the policies on the partners
Each producer who initiates the application must submit the following insurance company with or as part of each application:
1. A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction 2. A statement as to whether the producer knows replacement is or may be involved in the transaction
If an applicant has an existing policy or contract, the insurer must be able to produce the following for at least 5 years after the termination or expiration of the proposed policy or contract:
1. Copies of any sales materials 2. Illustrations related to the specific policy or contract purchased 3. Statements signed by both the producer and applicant regarding financing and replacement
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 consequently, the needs approach to life insurance will factor in the following concerns:
1. The replacing insured's salary or lost services 2. The social security income "blackout" period 3. The liquidation vs. retention of capital
Define GENERAL PROVISIONS
Advertising must be accurate and not misrepresent the facts. Advertising rules apply to any insurance advertisement intended for presentation, distribution, dissemination or other advertising use when used or made either directly or indirectly by or on behalf of the insurance company.
Concerning existing insurers, what will be considered violations of regulation?
-Any misleading information found in applicable sales material -When completing an application, failing to ask the applicant questions regarding replacement -The intentional incorrect recording of an answer -Advising an applicant to respond negatively to any question regarding replacement, in order to prevent notice the existing insurer -Advising an insured to write to the existing insurer personally, in an attempt to disguise the identity of the replacing insurer.
What is the Signature Requirement?
Both the agent and the proposed insured (usually the applicant) must sign the application. If the proposed insured and the policy owner are not the same person, such as a business purchasing insurance on an employee, then the policy owner must also sign the application. An exception to the proposed insured signing the application would be in the case of an adult, such as a parent or guardian, applying for insurance on a minor child.
How does one select and classify insurance risks?
In order to properly select and classify insurance risks, the insurer needs to obtain the applicants' background information and medical history. There are several sources of underwriting information that are available to the underwriters.
Define MEDICAL EXAMINATIONS AND LAB TESTS INCLUDING HIV as a source of underwriting information and regulations
Medical examinations, when required by the insurance company, are conducted by physicians or paramedics at the insurance company's expense. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent in recording medical information on the application. The medical exam requirement is more common with life insurance underwriting. If an insurer requests a medical examination, the insurer is responsible for the costs of the exam.
What are the duties of the existing insurer?
The existing insurer must be able to provide the Director with all notifications received by replacing insurers for at least 5 years. Within 5 business days of receiving a replacement notice, the existing insurer must send the insured a letter advising them of the right to receive information about the existing policy or contract values.
Define an executive bonus as it pertains to business insurance.
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 treated the premium payment as a bonus, that amount is tax deductible to the employer and taxable to the employee. It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit.
Let's assume that a 40 year old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. Out of his annual income, ($40,000 a year spent on family needs x 25 years to retirement). Based on this assumption, and taking interest and inflation into consideration, the insurance company will be determine the right amount of insurance to produce the same annual amount of income for the family if insured were to die.
The Human Life Value Approach
A valid insurable interest may exist between the policy owner and the insured when the policy is insuring any of the following:
1. Policy owner's own life 2. The life of a family member - a spouse or close blood relative 3. The life of a business partner, key employee, or someone who has a financial obligation to the policy owner -such as debtor to a creditor
What are some personal uses of Life Insurance?
1. Survivor Protection 2. Estate Creation and Conservation 3. Cash Accumulation 4. Liquidity 5. Viatical Settlements
The Life and Disability Insurance Guaranty Fund's assets will be maintained in 3 separate accounts (please list):
1. The disability insurance accounts 2. The life insurance account 3. The annuity account
What are the rules of the BUYER'S GUIDE in annuity contracts, if the application is not taken during a face-to-face meeting?
The insurer must send the applicant both the disclosure document and the buyer's guide no later than 15 days after the application is completed.
What are costs associated with Death or in other words - postmortem?
One should take into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance when considering the costs associated with Death - postmortem.
What are Mortality Tables
Used by insurers, indicate the number of individuals within a specified group of individuals (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age. In other words, these tables help the insures predict the expectation of life and the probability of death for a given group.
How is an agent the company's front line?
They are referred to as a field underwriter because the agent is usually the one who has solicited the potential insured.
Define PRODUCER REPORT as a source of underwriting information and regulations
The producer's (agent's) report allows the producer to communicate with the underwriter and provide information on the applicant that may assist in the underwriting process. It becomes part of the application.
What are the details of life settlement?
The seller or in other words, the policy owner could have a life expectancy of more than one year. Policy owners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy.
Explain "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. If the spouse works outside of the home, a new expense for day care must be considered.
Explain the difference between FIXED and VARIABLE insurance
Fixed life insurance or annuities are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract. Variable life insurance or annuities are 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.
What does REPLACEMENT mean?
It means any transaction in which new life insurance or a new annuity is purchased and, as a result, the existing life insurance or annuity has been or will be any of the following: -lapsed, forfeited, surrendered, or otherwise terminated -Reissued with any reduction in cash value -Converted to reduced paid-up insurance, continued as extended term insurance or otherwise reduced in value by the use of non-forfeiture benefits or other policy values -amended so as to affect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid -Pledged as collateral or subjected to borrowing, whether in a single loan or under a schedule of borrowing over a period of time for amounts in the aggregate exceeding 25% of the loan value set forth in the policy -Or Used in a financial purchase
How does the PREMIUM WITH THE APPLICATION work?
Most agents attempt to collect the initial premium and submit it along with the application to the insurer. In addition, collection of the initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued. Whenever the agent collects premiums, the agents must issue a premium receipt. The type of receipt issued will determine when coverage will be effective.
Expound upon PREMIUM DETERMINATION
Once the company determines that an applicant is insurable, they need to establish an appropriate policy premium. The premium will be used to cover the cost and expenses to keep the policy in force.
Explain the Policy Issue and Delivery
Once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured. Although personal delivery of the insurance policy is the best method of finalizing the insurance transaction, mailing the policy to the policy owner is considered legally delivered. However, it is advisable to obtain a signed delivery receipt.
Explain SUBSTANDARD (HIGH EXPOSURE) RISK
These 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.
Explain STANDARD RISKS
They are persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. They are the average risk.
Describe the unconditional (binding) receipt
This is the used most often with property and casualty insurance. With the binding receipt, coverage begins immediately for specific length of time, until the policy is issued. Binding receipts usually stipulate that coverage is effective from the date of the application for only a specified period of time, such as 30 or 60 days, or until the company either issues or declines coverage, whichever occurs first.
Explain FIELD UNDERWRITING
Underwriting is the risk selection and classification process. It involves a careful analysis of many different factors to determine the acceptability of applicants for insurance. In other words, underwriting is the process in which an insurance company determines whether or not a particular applicant is insurable, and if so, what premium to charge.
Explain USE AND DISCLOSURE OF INSURANCE INFORMATION as source of underwriting information and regulations
When insurers plan to seek and use information from investigators, they must first provide the applicant or insured with a written Disclosure Authorization Notice. The notice will state the insurer's practice regarding collection and use of personal information. The disclosure authorization must be written in plain language, and must be approved by the head of the Department of Insurance.
How long must insurers maintain a copy of each authorized form used (such as a policy summary) for?
At least 3 years
Explain the difference between "group" and "individual" life insurance.
Individual life insurance is written on a single life. The rate and coverage is based upon the underwriting of that individual. Group life insurance is 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 is based upon group underwriting, with all individuals covered the same amount and rate.
What is the purpose of a LIFE AND DISABILITY INSURANCE GUARANTY FUND?
The purpose of the Life and Disability Insurance Gauranty Fund established by the Insurance Department is to protect the interests of insureds and policyholders when insurers become insolvent, and to help detect and prevent insurance company impairments. All insurers must be members of the Fund as a condition of their authority to transact insurance in this state. This section of the law applies to life insurance policies, disability insurance policies, annuity contracts, and any contracts which are supplemental to such policies, when issued by any insurer authorized in Arizona to an resident. The fund is under the immediate supervision of the Director, and must be subject to the applicable provisions of the insurance laws of this state.
What is a POLICY SUMMARY?
It is a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent. The full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. A policy summary will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. The policy summary must be provided when the policy is delivered.
What happens in the event of death of a key employee?
The business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage.
Define Survivor Protection
The death of the primary wage-earner will usually stop the flow of income to a family. The death of the non-earning spouse who cares for minor children can also cause great financial hardship for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death.
Describe other forms of life insurance that can serve business owners and their survivors, and even protect the business itself.
These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees.
True or False A buyer's guide and a policy summary must be provided to all prospective purchasers before the initial premium is accepted. If a policy contains an unconditional refund offer, the buyer's guide and policy summary must be delivered with the policy or before the policy's actual delivery. The insurer must also provide a buyer's guide and a policy summary to any prospective customer upon request.
This is true.
Define cross purchase
Used in partnerships when each partner buys a policy on the other
What is debt cancellation - as an alternative to Estate Liquidation?
Debt Cancellation is paying off debts of the insured such as home mortgage, or auto loans. It is important to note that most lenders require a collateral assignment of life insurance as a condition for a loan.
What is this an example of? Partnership AB has two partners, A and B. The value of the business is $1,000,000. The partners each have an equal interest for $500,000 each. A buys a life policy on B for $500,000, and B buys a life policy on A for $500,000.
Define a "Cross-Purchase Buy-Sell Agreement"
Explain "an immediate estate"
Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases life insurance policy, he/she 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.
True or False If the application was made in connection with a direct-response solicitation, the insurer must require a statement, asking whether the application intends to replace an existing policy.
True
True or False No life or disability contract upon an individual can be made, unless at the time of application, this individual is of competent legal capacity.
True The following cases are exempt from this provision: -a spouse may procure insurance upon the other spouse; and -a person with an insurable interest in a minor, or anyone a minor is dependent upon, may also procure insurance.
How does the social security black-out period work with children/minors?
Unmarried children under the age of 18 or up to 19 if they are attending secondary school full time can also receive benefits. Technically, the social security check will be made payable to the surviving spouse until the youngest child is 16, and directly to the child between the ages of 16 and 18.
What is the most common use of life insurance by businesses?
It is used as an employee benefit which serves as a protection for employees and their beneficiaries.
Explain the Buyer's Guide and what it provides
It provides basic, generic information about life insurance polices that contains, and is limited to, language approved by the Department of Insurance. This document explains how a buyer can save money by comparing the costs of similar policies. Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium. If the policy contains an unconditional refund provision of 10 days (free-look period), a buyer's guide can be delivered with the policy.
Define COMPARATIVE INTEREST RATE METHOD
The Comparative Interest Rate Method - CIR - is the rate of return that must be earned on a "side fund" in a buy term to invest the difference plan so that the value of the side fund will be equal to the surrender value of the higher premium policy at a designated point in time.
Explain "social security income 'blackout' period"
the time during which the surviving spouse and/or children do not receive any social security survivor benefits. They begin when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60.
