Producer Responsibilities

Duties of the Insurer in a Replacement

A replacing insurer is required to notify the insurer whose policy is about to be replaced about the pending transaction. This gives the existing insurer an opportunity to conserve (preserve) the policy. If the existing insurer requests them, the replacing insurer must provide copies of the policy cost comparison and proposals used in the transaction. The replacing insurer is required to maintain records of each replacement transaction for several years (usually three to five) or until the next regular examination by the insurance department. (The states specify the periods in which these duties must be fulfilled.)

USA PATRIOT Act and Anti-Money Laundering Activities

Money laundering has become a serious national security concern. In its simplest form, money laundering is the process of integrating illegally obtained money into the legal monetary system in a way that permanently hides its illicit origins. It is necessary from a criminal's perspective, because "dirty" money that is not "laundered" leaves an audit trail that is easy to trace. Money that has gone through a "wash cycle" appears legitimate and can be spent or invested freely.

on test

Policy replacement= itself is not illegal. Need to be in best interest in insurer -replacement= any time an existing policy- in any way- is diminished in its value. suspends or reduces original value of policy

Health insurance portablitly and accountability act of 1996 (HIPAA)

Privacy and security regulations that apply to entieties that have access to info about a person's heath. HIPAA is intended to affect the way individual and group health unsyrance plans are made available. HIPAA mainly ensures that those who have lost their jobs or want to change their health insurance carriers can continue their health benefits or carry them over to another job (called portabilty) HIPAA applies to group insurance plans that cover two or more people.

Replacement

When an applicant is considering purchasing a life insurance or annuity contract, the producer or direct response insurer must determine whether an existing contract will be replaced. Replacement occurs when an applicant is about to buy a new life insurance policy or annuity and, as a result of the purchase, an existing life insurance policy or annuity will be -lapsed, surrendered, forfeited, terminated, or otherwise compromised; -converted to reduced paid-up insurance; -continued as extended term insurance; -reduced in value by the use of nonforfeiture benefits or other policy values; -amended with a reduction in benefits or term of coverage; or -reissued with a reduced cash value. Sometimes replacement is in the best interest of the applicant, especially if the policy no longer meets the insured's needs. However, producers must be careful to avoid improper replacement and generating commissions on the sale of replacement policies when replacement is not in the applicant's best interest. Potential consequences of a life insurance policy replacement include: -The applicant must give new evidence of insurability. -The new policy may have terms that are less favorable to the insured than those of the existing policy. -The applicant will need to satisfy a new contestability period (usually two years from the effective date of coverage). -The new policy will usually not have current cash values. If a life insurance or annuity transaction will include replacement, the producer or insurer has a duty to inform the applicant of the real and potential consequences of replacing the policy. States regulate these disclosures in different ways, but all require the producer and insurer to act only in the best interests of the applicant. Both the producer and the applicant must sign a standard form indicating that the required disclosures have been made and that the applicant understands the consequences of the replacement.

Life Insurance Policy Cost Comparison Methods

When selecting the most suitable life insurance policy for their needs, applicants may ask their agent for help comparing the costs of two or more policies under consideration. Most insurers provide their producers resources to help with this request. The two most common cost comparison methods are the traditional net cost method and the interest-adjusted net cost method.

Conditional Receipt

-- this 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. A conditional receipt provides for conditional coverage that begins on the date of application or on 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. Coverage is then issued in the amount applied for. With this type of receipt, if the insured were to die after the date of the application (or medical exam), and if the insurer would have issued the policy, then the coverage takes effect as of the date of the application. A death benefit would be paid. If the applicant proves to be uninsurable (or insurable only as substandard) as of the date of application (or medical exam), then no coverage takes effect and the insurer would refund the premium payment. Insurers usually limit the amount of coverage provided under a conditional receipt, for example, $100,000. This amount may be less than the amount for which the applicant applied.

Producer Responsibilities

-Key responsibility= field underwriting; help prospective clients fill out application accurately and completely. if error you need to fix it and intial the change. -applicant must sign the application regardless if applicant is the insured -submit with first premium. contradictory receipt given to applicant so coverage begins immediately -if possible producers should deliver policies in person so they cna; --explain the parts of the policy --obtain additional forms or premium --discuss exclusion -explain substandard ratings, if applicable --can establish a good client relationship -fiduciary duty to clients= person holding funds or valuable property for the benefit of another person. A fiduciary is generally held to a higher standard of care with respect to the held property.

Binding Receipt

A binding receipt guarantees coverage from the time the applicant completes the application (or the insured completes the medical exam), even if the insured is later found to be uninsurable. That means coverage is guaranteed throughout the underwriting period, which can extend for a number of weeks, until the company rejects the application (or issues a different policy). Usually it is limited to a set period (such as 60 days) and to a set amount (such as $100,000). Though binding receipts are rarely permitted with life insurance, the closely related temporary insurance receipt (or agreement) may be offered by the insurer. -Temporary Insurance Receipt A related alternative to the binding receipt is the temporary insurance receipt. For the receipt to provide temporary coverage, the proposed insured does not need to be insurable for the coverage he or she applied for. Instead, the application generally asks three to six questions about the proposed insured's medical history. The applicant must answer all of these questions with a "no" for a temporary insurance receipt to be issued. The questions typically ask whether the proposed insured had -been admitted to a hospital or other facility or had surgery performed or recommended within the previous six months; -been treated for various named diseases or conditions; and -ever had an insurance application modified, declined, or rated. The insurance coverage provided under a temporary insurance receipt is a form of term life insurance. This temporary coverage normally ends at the end of the 90-day period following the date of application. The maximum amount of life insurance coverage provided by the conditional receipt or temporary insurance receipt varies by insurer. It may be as high as, but never more than, the amount of coverage being applied for. The maximum coverage limit generally declines as the proposed insured's age increases.

Consequences of Incomplete Applications

A survey by the Life Office Management Association showed that in almost two out of three cases, a life insurance policy was not issued because of the agent's failure to follow required procedures in completing the application. In many cases, the submitted application was simply incomplete. When completing an application for insurance, the agent must meet three important goals: 1. accuracy 2. thoroughness 3. clarity Because it is a legal document, the application must be completely clear, thorough, and accurate. On a more practical level, a clean, clear, and complete application stands a better chance of being underwritten more promptly. The goal of thoroughness, however, does not permit the producer to edit the applicant's entries on the application. The producer is expected only to record the applicant's answers to questions, not lead the applicant to answer questions in a certain way. For example, assume the applicant states that he or she felt dizzy three months ago. The producer is expected only to note that fact on the application. The producer may ask for details that will help explain the cause of the dizziness (perhaps the applicant had the flu then), but may not ask leading questions that might cause the applicant to decide against mentioning the dizzy spell. (For instance, asking "You've never experienced any fainting or dizzy spells, have you?") Clarity is important. If an applicant's answer to a question is unclear, or if an item was skipped (intentionally or not), the underwriter may return the application to the producer with instructions to obtain a clear and complete application. It is the insurer's prerogative to accept or reject an incomplete application. If the missing information is not critical to determining the applicant's insurability, the insurer may issue a policy that includes an amendment adding the missing information. The policyowner must sign the amendment when the policy is delivered. When a life insurance policy is issued subject to an amendment, coverage does not begin under the policy until the policy is delivered and the proposed insured signs the amendment to the application. This applies even if the new policyowner submitted the first premium along with the application.

The Money-Laundering Process

Money laundering involves a series of financial transactions that move cash or other assets from one location to another or from one form to another in such a way as to hide its origins and, in the end, to make the money appear legitimate. While there are countless variations on the theme, money laundering generally involves three stages: placement, layering, and integration. 1.Placement Placement brings the illicit cash into the legal financial system to obscure the start of an audit trail by avoiding financial accounts or products that record ownership. 2.Layering Cash or cash equivalents obtained in the placement stage are used to purchase a variety of financial instruments in the second stage of the money-laundering process, called layering. Cash equivalents include money orders and cashier's checks. This money is used as premiums and deposits for more sophisticated financial products that provide liquidity and, more important, distribute or disburse funds in a manner that appears fully legitimate. "Sophisticated financial products" include cash value life insurance and deferred annuity contracts. Depending on the level of the money-laundering operation, insurance policies purchased with tainted cash equivalents may be quickly surrendered or held for longer periods. Those that are held for longer periods frequently experience changes of ownership. With the audit trail further obscured, subsequent owners would be freer to exercise contract privileges involving withdrawals. 3. Integration The final stage in the money-laundering process is called integration. The cleansed money is circulated back into the hands of the criminal and ultimately into the financial system. It can be invested quietly or flashed around in public and, for any questions as to its source, there is a legitimate answer.

Duties of the Producer in a Replacement

Producers must determine whether or not the sale of a life insurance policy or annuity will replace an existing policy or annuity, and obtain a signed statement from the applicant in either case. This statement is sent with the application to the insurer. In cases where replacement is involved, the producer must also -list all existing life insurance policies that will be replaced; -give the applicant a comparison statement signed by the producer; and -give the applicant a "Notice to Applicants" Regarding Replacement of Life Insurance." Copies of all forms used in the transaction are to be left with the applicant.

quiz

Question 1 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's beneficiary designation is changed. The existing policy is converted to reduced paid-up insurance. The existing policy is amended with a reduction in benefits. As long as the existing policy remains fully intact, a replacement does not occur merely because the beneficiary designation is changed. Question 2 All the following are federal laws or related rulings that have a direct impact on anti-money laundering requirements EXCEPT the: Bank Secrecy Act FinCEN final rules of 2005 USA PATRIOT Act *Fair Credit Reporting Act The USA PATRIOT Act expands the AML directives of the Bank Secrecy Act, and FinCEN's final rules amended the USA PATRIOT Act to address the insurance company needs. The FCRA does not directly relate to money laundering. Question 3 Anne, a life insurance applicant, wants to change an answer that she gave on the application. She should do which one of the following? Erase the original entry and enter the correct information. Write over the incorrect entry with the correct information. Cover up the incorrect entry and enter the correct information. *Cross out and initial the incorrect entry, and enter the correct information next to it. If an applicant wants to change an answer that he or she has already written on the application, then the applicant should cross out and initial the incorrect entry. Question 4 Someone other than the insured often applies for and owns a life insurance policy. Which of the following can NOT be an applicant and owner? a spouse an employer an adult child of the insured *a minor child of the insured The applicant and owner cannot be a minor child. Question 1 By submitting an application without the first premium, Larry is doing which of the following? *inviting the insurer to make an offer showing confidence that the insurance company will issue the policy making an offer to the insurer suggesting that the insurer should not issue the policy for some reason When Larry submits an application without the first premium, he is inviting the insurer to make an offer. Question 2 The activities a producer performs to support the insurance company in learning all it can about the applicant when seeking applications for insurance is called Fiduciary process *Field underwriting Due diligence Agency development While producers do have a fiduciary responsibility to the insurer, this is not the answer. Question 3 The insurance coverage provided under a temporary insurance receipt is whatever type of life insurance was applied for. temporary whole life insurance. *temporary term insurance. not insurance coverage at all, but the insurer's general account assets. The insurance coverage provided under a temporary insurance receipt is a form of temporary term insurance. Question 4 In cases where an existing life insurance policy is going to be replaced by new life insurance policy, the producer must do all the following EXCEPT: list all existing life insurance policies that will be replaced. *require the applicant to sign a waiver exempting the producer from any liability associated with the replacement. give the applicant a "Notice to Applicants Regarding Replacement of Life Insurance." give the applicant a policy comparison statement signed by the producer. While there are several things a producer must do when a customer replaces a life insurance policy, requiring the customer to sign a waiver is not one of them.

Constructive vs. Legal Delivery

Technically, policy delivery occurs in one of two forms: constructive or legal. Constructive delivery occurs when the insurer mails the policy to the producer responsible for delivering the policy to the policyowner and has no conditions that must still be met. At this point, the insurer has issued the policy and has released it for delivery to the policyowner. The producer can mail or hand-deliver the policy. However, if any conditions are attached to delivery of the policy, then legal delivery is required. Legal delivery of a policy requires personal delivery to the client and an explanation. For example, the agent should explain any terms of the policy that were imposed during the underwriting process. Or, the agent should inform the owner of any additional premium charge that was not known at the time of application. If the initial premium was not paid at the time of application, and the policyowner accepts the new conditions, then the premium must be collected upon delivery of the policy.

Required Disclosures

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposed strict requirements on those who collect, transfer, and exchange health and medical information about consumers. The law particularly affects health care providers, who are required to protect the confidentiality of their patients' health and medical information. However, insurers are also subject to HIPAA's privacy requirements because they collect and use this information from applicants and insureds. For instance, insurers routinely require applicants to undergo medical examinations before underwriting a policy. Insurers must keep this information confidential to protect the applicant's privacy. They can share this information with other authorized parties, such as medical professionals, only if the applicant is first told about the insurer's practices with respect to this kind of information. The insurer has a duty to notify the applicant of his or her right to privacy and to give the applicant a chance to either consent to the disclosure or to refuse the sharing of this information with other parties. This is especially true when dealing with information about HIV tests and their results.

National Do Not Call Registry

The National Do Not Call Registry contains telephone numbers that consumers have registered to limit the telemarketing calls they receive. It applies to any campaign or program to sell or market goods or services through interstate commerce, including the sale and marketing of insurance products and services. When a consumer registers a telephone number, businesses have up to 31 days after the date of registration in which to stop calling that number. The Federal Trade Commission (FTC), Federal Communications Commission (FCC), and state governments regulate and enforce the provisions of the registry. While registering a telephone number in the registry is intended to limit the placement of telemarketing calls to that number, certain calls are still permitted. These include calls from businesses that have the consumer's express written permission. Also exempted are calls from businesses with whom the consumer has a business relationship. A consumer can begin a business relationship with an insurer by requesting information from the insurer or by submitting an application for insurance. The insurer can call the consumer for three months after the inquiry or application. If the consumer has an existing relationship with a business, the business can call for up to 18 months after the consumer's last purchase, delivery, or payment. The consumer can prevent further calls at any time by asking the business to stop. Businesses must check the registry every 31 days to remove from their call lists the telephone numbers of consumers who have been listed on the registry. Businesses that violate the prohibitions of the registry are subject to stiff penalties, including a fine of $16,000 per violation.

Traditional Net Cost Method

The 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. While this method is effective at comparing the cost of pure insurance protection between two or more different policies, it does not recognize the important role of interest in the ultimate funding of a policy. Since interest rates vary by insurer and are an important element in a life policy's ultimate cost, this method does not provide an accurate projection of a policy's true cost and its use is diminishing today

Changes in the Application

Care must be taken to make sure the application is completed in its entirety. Since the application is a legal document (and part of the applicant's consideration), accuracy is critically important. If the applicant needs to change a response on the application, he or she should cross out and initial the incorrect entry and then write the correct entry next to it. The incorrect entry may never be "whited out" and written over. A producer may not, under any circumstances, change an entry made by the applicant on the application. If the producer realizes the applicant made an error on an application, he or she must meet with the applicant to address the issue and make any necessary changes

USA PATRIOT Act

Created in the wake of September 11, 2001, the USA PATRIOT Act strengthens many arms of federal enforcement in the fight on terror. Among the various issues addressed in the act is money laundering. The USA PATRIOT Act requires that all financial institutions create, execute, and maintain anti-money laundering (AML) programs. In this manner, the Act expands the anti-money laundering directives of the Bank Secrecy Act. From the beginning, this requirement included insurance companies, but the nature and complexity of insurance products are such that additional guidelines were necessary to define how insurance companies were to comply and how their AML programs were to be designed. The Financial Crimes Enforcement Network (FinCEN, a division of the U.S. Department of the Treasury) has since published AML rules aimed specifically at insurance companies. FinCEN's rules adapted certain aspects and provisions of the PATRIOT Act to better suit the unique characteristics of the insurance business. These rules provided the direction insurance companies needed to establish and implement a formal AML program. Today, every insurance company that sells certain types of life insurance and annuity contracts has an active AML program. Producers are expected to learn and exercise their insurance companies' AML processes and procedures.

Policy Delivery

Except in the case of direct response companies, insurers typically send newly issued policies to the producer for delivery to the customer. Direct response insurers send policies directly to the policyowners. Delivering the policy is both an important responsibility and opportunity for the producer. It is the producer's responsibility to fully explain the policy to confirm it is what the customer wanted. And, it is an opportunity to reaffirm the customer's reasons for purchasing the policy (and thus reduce the likelihood of policy cancellation through "buyer's remorse").

Statement of Continued Good Health

If the initial premium is not paid with the application, then the applicant is required to sign a statement of continued good health when the policy is delivered. This assures the insurer that nothing has changed with the applicant's health that would alter the insurer's underwriting decision. If the applicant signs the statement knowing that, in fact, his or her health situation has changed since the application was submitted, the insurer has grounds to rescind the contract if this is discovered during the policy's contestability period. A statement of continued good health is not required if the initial premium accompanied the application.

Premium Not Submitted with Application

If the initial premium is not submitted with the application, there is no premium receipt and coverage will not become effective until the initial premium is eventually paid. Usually, this can be no later than when the policy is delivered. If the insurer issues a policy in response to an application, then the applicant is free to accept the offer or to reject it. Accepting delivery of the policy and paying the first premium is an acceptance of the insurer's offer. The effective date of the policy's coverage will be the date the applicant pays the first premium. Producers must collect all premiums that are due when the policy is delivered. When the first premium is paid at that time, insurers almost always require that the policyowner sign a statement that -the insured is alive and -the insured's health has not changed since submitting the application.

Backdating the Application

Insurers normally allow an applicant to backdate a policy by up to six months. This backdating qualifies the applicant to have the policy issued at a younger age. (Another name for this practice is to save age.) Because the policy is issued at a younger age, the policyowner pays a lower premium. Since coverage is made retroactive to the backdated date, premiums for the backdated period typically must be paid with the first premium payment. Producers are expected to be familiar with their companies' policies regarding backdating and are responsible for making sure it is handled properly. Only the company can authorize the backdating of policies. --backdating= agreement to make policy effective earlier than the application date. --Save age= Backdating a policy by up to 6 months, which qualifies an applicant to have the policy issued at a younger age. Because the policy is issued at a younger age, the policy owner pays a lower premium.

Solicitation and Sales Presentations

Producers have both express and implied authority to solicit insurance sales on behalf of the insurance companies they represent.

Application Procedures

The application for insurance is the insurer's single most important source of information about the proposed insured. It is filled out by the producer and the applicant. 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 The second part of the application covers the applicant's medical history. While the application is a key source of underwriting information, it also plays an important legal role. A life insurance policy is a contract, enforceable at law, between the policyowner and the insurer. The application is the basis of the applicant's offer, and a binding contract is formed on the basis of information provided on the application. Accordingly, the producer must do everything possible to make sure that the application is complete and accurate.

Field Underwriting

While insurers rely on their underwriters to determine if an applicant is insurable, the process of helping insurers judge an applicant's insurability actually begins with the producer. The activities a producer performs when seeking applications for insurance is called field underwriting. This includes requesting information about prospective insureds and helping people fill out applications for coverage. While doing these things, the producer is responsible for collecting the right data to help the insurer decide whether to accept the application. The producer is also responsible for disclosing information about the insurer's underwriting and policy issue practices --Activities that the agent or producer performs when seeking applicants for insurance. This includes requesting info about perspective insureds and helping people fill out applications for coverage.

Additional Required Documents

While the application is the starting point when it comes to underwriting information, it is not always the end. Depending on the situation, an insurer can require that the proposed insured complete additional questionnaires and forms. A common special form asks for details of the proposed insured's hobbies. Other special forms deal with the following information: -foreign travel -a business beneficiary -the proposed insured's medical history -a financial statement (for cases of very substantial amounts of life insurance) In each case, the form must be signed and witnessed. In most cases the producer may act as witness. The application cannot be processed without the required signatures.

Premium Receipts

--given after 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. Because it represents a key part of the applicant's consideration for the contract, the payment of the premium has a direct impact on when coverage becomes effective. If paid with the application, it is possible for coverage to commence when the application is signed. The details of this immediate coverage are spelled out in the premium receipt given by the producer. Premium receipts provide interim coverage while the application is being approved and before the policy is issued. Premium receipts are given only when the applicant submits the first premium payment with the application. If a life insurance policy is issued COD, no interim coverage is provided, and the policy's effective date is the date the underwriter at the home office approves the application for issue. In those cases, coverage does not commence until the policy is delivered and the initial premium paid. There are two common types of premium receipts: conditional and binding.

Key points

-The 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 -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. -If a life insurance or annuity transaction will include replacement, the producer or insurer has a duty to inform the applicant of the real and potential consequences of replacing the policy. -The activities a producer performs when seeking applications for insurance is called field underwriting. -The application for insurance is the insurer's single most important source of information about the proposed insured. -The application is the basis of the applicant's offer, and a binding contract is formed on the basis of information provided on the application. -There are two common types of premium receipts: conditional and binding. -The insurance coverage provided under a temporary insurance receipt is a form of term life insurance. -Every party to a life insurance policy must sign the application. Beneficiaries do not sign the application because they are not a party to the contract. -A producer may not under any circumstances, change an entry made by the applicant on the application. -It is the insurer's prerogative to accept or reject an incomplete application. -Money laundering is the process of integrating illegally obtained money into the legal monetary system in a way that permanently hides its illicit origins. -Transactions involving the purchase of permanent ("cash value") life insurance were found to be an important target of money laundering activity. -Money laundering generally involves three stages: placement, layering, and integration. Policy delivery occurs in one of two forms: constructive or legal.

Policy Review—Explaining Coverage to Clients

After receiving a policy from the insurer, the producer's first step is to review it to make sure it is what the applicant expected. This involves verifying that any applied-for benefit riders have been added, that any requested backdating has been done, and so on. Once assured the policy is accurate, the next step is to deliver it as soon as possible to the policyowner. While delivery by mail is permitted in most states, it is recommended that policies be delivered in person. Personally delivering the policy lets the agent review the terms of coverage with the new owner. The agent can also answer any questions the owner may have. At the same time, the agent can strengthen the relationship with the client.

Interest-Adjusted Net Cost Method

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 interest-adjusted net cost method is determined in the same manner as the traditional net cost method, except that the value of the premiums and dividends (if applicable) are accumulated at interest. The interest rate used in the calculation is the rate credited by the insurer to its cash values. 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). 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. Subtract the projected cash value and accumulated dividends at the end of the study period. 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. 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.

Required Signatures on the Application

Every party to a life insurance policy must sign the application. In the typical case where the owner and insured are the same, only that person's signature is required. In a third-party situation, where the owner and insured are two different people, both must sign. The insured's signature is required as evidence that the insured has granted permission to the applicant to purchase the coverage. Beneficiaries do not sign the application because they are not a party to the contract.

Delivery Receipt

However the policy is delivered, insurers require that the new policyowner sign a delivery receipt attesting to the fact that the policy was, in fact, received. Besides serving the practical purpose of assuring all parties that the policy is in the owner's hands, this receipt also starts the "free-look" period (typically ten days) during which the policyowner may review the policy and, if desired, return it for a full refund.

Notice of Information Practices

Producers do more than simply gather the information that insurers use to review and evaluate applications for insurance coverage. Producers also inform consumers about the practices that companies use during the review and underwriting processes. Typically, this process includes giving the applicant a "Notice of Information Practices" statement. It explains in writing that the insurer may seek information from sources other than the application to get details about the proposed insured. During this "information seeking," the insurer may share information about the applicant with other organizations. Some of the sources that insurance companies use for information about their applicants include investigative agencies, credit agencies, and the Medical Information Bureau. These are explained in more detail later in this course.

Effective Date of Coverage

The effective date of the policy's coverage is important for two reasons: 1. The effective date determines when coverage begins. 2. The effective date sets the date for annual premium payments. The effective coverage date can depend on when the applicant pays the first premium.

Premium Submitted with Application

When the initial premium is submitted with an application, the insured is entitled to a conditional receipt or a temporary insurance agreement. This receipt determines the date that coverage is effective. As long as the proposed insured is ultimately found to be insurable for the amount and under the terms of the policy as applied for, a conditional receipt makes coverage effective as of the date of the receipt or the date of a subsequent medical exam (if required). If the insured is not insurable for the coverage applied for, then the conditional receipt's coverage is not effective. Instead, the insurer may issue another policy at a new (higher) premium rate. If the applicant accepts the insurer's alternate policy, coverage becomes effective as of the date the applicant accepts the policy and submits the premium for it.

Money Laundering and Terrorist Financing

While federal agencies like the Treasury Department and the Federal Bureau of Investigation have investigated money laundering for decades, the issue grew to its current prominence following the terrorist attacks of September 11, 2001. Terrorist financing is drawn from a variety of sources, but attention tends to focus on money laundering for the simple fact that it produces the largest share of funds used in terrorist financing. The topic is included here because transactions involving the purchase of permanent ("cash value") life insurance were found to be an important target of money laundering activity.