1. Life Insurance
expense factor
(sometimes called a load factor) is worked into the premium calculation. It reflects the costs (other than mortality) that the insurer expects to incur on the policy.
temporary insurance agreement
- An alternative to the binding receipt - common with life insurance - the proposed insured must be able to answer "no" to several medical history questions asking whether the proposed insured has: - been admitted to a hospital or had surgery performed or recommended within the previous six months - been treated for various named diseases or conditions, and/or - ever had a life insurance application modified, declined, or rated
life settlement agreement
- At the end of the two-year contestable period, the policyowner assigns the policy to the investor - The investor pays the insured a lump-sum payment and names itself as the new beneficiary - The lump-sum payment is generally more than the cash value and less than the policy face amount. - The investor pays the future premiums needed to keep the policy active while the insured is alive.
bring-back rule
- If an existing policy is transferred to a third-party owner after it is issued, it is important to do so at least three years before the insured's death - If the insured dies within three years after the transfer, then the policy death benefits are included in the insured's estate for tax purposes
level premium
- Once the policy is issued, premiums remain level for the duration of policy coverage - an important feature of permanent life insurance
Notice of Information Practices
- Producers are required to inform consumers about the practices their companies use during the review and underwriting process. - Information disclosure typically includes giving the applicant a "Notice of Information Practices" statement.
Changes to the Application
- The application must be completed in its entirety. - The application is a legal document (and part of the applicant's consideration), making accuracy 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. - Never "white out" and write over an incorrect entry.
stranger-owned life insurance (STOLI)/investor-owned life insurance (IOLI)
- an arrangement in which an investor or investor group convinces a consumer to purchase an insurance policy on his or her life in exchange for an eventual lump-sum payment when the policy is transferred to the investor - third-party ownership of life insurance has made it possible for a questionable investment practice to emerge - the investor pays for the policy while the insured owns it, usually through the policy's two-year contestable period
When a third-party arrangement is used for estate planning purposes, the owner of the life insurance policy is usually:
- an irrevocable life insurance trust (ILIT) created by the insured - an adult child of the insured
Application Procedures
- company's single most important source of information about the proposed insured. - It is filled out by the producer and the applicant.
National Do Not Call Registry
- contains telephone numbers that consumers have registered to limit the telemarketing calls they receive. - - The Federal Trade Commission (FTC), Federal Communications Commission (FCC), and state governments regulate and enforce the registry.
In determining its load factors, insurers are generally guided by three objectives:
- cover total operating costs (e.g., salaries, benefits, commissions, and field expenses) - provide a safety margin to account for higher than expected mortality losses - contribute to profits
Permanent life insurance
- designed to provide life insurance protection for the insured's entire life - There is no policy termination date. - If premiums are paid, the insurance stays in force, and (in most cases) is guaranteed to pay the policy face amount. - Common examples include whole life insurance, universal life insurance, and variable life insurance.
Ordinary life insurance
- generally issued in face amounts greater than $25,000 (in some cases, $1 million or more). Premiums are payable monthly, quarterly, semiannually, or annually. - includes virtually every type of life insurance and annuity product covered in this course aside from industrial life insurance.
Premium Receipts
- given only when the applicant submits the first premium payment with the application - they provide interim coverage while the application is being underwritten and before the policy is issued - if a premium deposit is not paid with the application, the policy's effective date is the date the policy is delivered and the initial premium paid.
binding receipt
- guarantees coverage from the time the applicant completes the application, even if the insured is later found to be uninsurable - That means coverage is guaranteed throughout the underwriting period, which can extend for several weeks, until the company rejects the application (or issues a different policy) - rarely permitted with life insurance
Industrial Life Insurance
- offers individual coverage in small face amounts, traditionally ranging from $1,000 to $25,000 or so. Modest premiums are paid frequently—weekly is common—and in many cases an insurance agent meets personally with the policyowner at home to collect the premium. - originally sold as "burial insurance." Today it is recognized as an important source of life insurance for consumers with relatively modest death benefit needs.
Group Insurance
- one master policy covers multiple people—from as few as ten to hundreds or more. The policy is owned by the organization that sponsors the coverage (most commonly an employer). - The covered individuals (called plan participants) are not policyowners nor are they parties to the contract. - Individual certificates of coverage are provided to each participant to show they are insured.
Variable Life Insurance
- premiums are invested in investment subaccounts selected by the policyowner and managed by the insurer. - The investment performance of these subaccounts is not guaranteed, and the death benefit and cash value will vary in response to the subaccounts' changing values. - The insurer guarantees a minimum death benefit, usually the face amount of the policy at issue, but that's it. The cash value is not guaranteed.
mortality factor
- reflects the insured's risk of death - It is drawn from mortality statistics compiled by the National Association of Insurance Commissioners (NAIC) into a set of rates called the Commissioners Standard Ordinary (CSO) table - Updated periodically, CSO tables essentially identify the chance of death at every age for men and women.
third-party ownership
- the insured and policyowner are different - there must be an insurable interest between the applicant and the proposed insured when a life insurance policy is first issued - after the policy is issued the need for insurable interest is no longer required, which means there are no restrictions on a policyowner setting up a third-party ownership arrangement by transferring ownership to another party.
cost index
- uses actual and future premiums and benefit amounts to compare the costs of similar policies. - complicated calculations, and most insurers give their producers the resources necessary to support cost comparison requests.
Determining the premium that is charged the policyowner involves two steps:
1. calculate the net premium 2. calculate the gross premium
Most insurers allow applicants to backdate a policy application by up to _____.
6 months
insurer's duties 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.
key employee life insurance
A typical business use of life insurance is known as key person
one important feature of life insurance that is the same with both term and permanent life:
All Life Insurance is noncancelable if premiums are paid on time. Insurers cannot cancel any life insurance policy for any reason other than nonpayment of premiums
Required Signatures on the Application
Every party to a life insurance policy must sign the application. It cannot be processed without all required signatures.
two types of permanent life insurance:
Fixed and Variable Life Insurance
Group vs. Individual Insurance
Group life insurance policies cover many people, while an individual policy typically covers one person
Insurable Interest and Life Insurance
Like every form of insurance, life insurance requires an insurable interest between owner and insured when the policy is applied for. But unlike all other forms of insurance, life insurance DOES NOT require the continuation of insurable interest after the policy has been issued.
Individual life insurance coverage can be classified as
Ordinary or Industrial (Home Service) Life Insurance
two classifications of life insurance
Participating and Nonparticipating Life Insurance
Individual Insurance
People who buy life insurance for personal protection do so with individual policies. An individual insurance policy covers one person (or two, in the case of joint life insurance)
Separate Accounts
Policyowners choose the subaccounts that best fit their objectives and risk profile; this account is separate from the insurer's general account
producer's responsibilities in a replacement
Producers are expected to determine the suitability of every insurance transaction, based on a careful analysis of the prospective customer's needs.
_______ is not illegal. Convincing a prospective customer to ______ an existing policy through any sort of misrepresentation is illegal.
Replacement/replace
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. Insurers are subject to HIPAA's privacy requirements because they collect and use this information from applicants and insureds.
Insurable Interest in Personal Relationships
The following types of personal relationships are automatically deemed to represent an insurable interest: - individuals in themselves - spouses in each other - parents in their children - children in their parents or grandparents (or someone else in the case of financial dependency)
In setting premiums for a new policy, when do actuaries assume those premiums will be paid?
They will be paid in full at the beginning of the policy year
premium payment modes
To accommodate that preference, insurers offer policyowners this; many consumers prefer to spread their premiums out and pay them more frequently than once a year
General Account
To support their long-term cash value and death benefit guarantees, insurers invest fixed life insurance premiums in conservative investment assets that are managed in this account owned by insurer
Third-Party Ownership in the Business Insurance Market
Upon the insured employee's death, the business receives the policy's death benefit. This benefit is intended to compensate the business for the untimely loss of its key employee.
Backdating the Application
With every year a person waits to buy life insurance, the premium gets a little bit higher. An applicant whose birthday recently passed may wish he or she could turn the clock back and apply at that earlier date when the premium was lower.
premium tax
a state tax levied on insurance companies when they receive premiums It is imposed by only a few states Most companies pass this tax on to their policyowners in some way, either directly or indirectly
Policies that use the flexible premium method include:
adjustable life insurance, universal life insurance, and variable universal life insurance.
For any insurance contract to be valid, there must be ______ between the applicant and person or property to be insured.
an insurable interest
When contemplating the purchase of a life insurance policy or _______, applicants may consider cancelling similar policies they already own
annuity
time limit for term life insurance
can be as short as one year, as long as 20 years (or more), or until the insured reaches a specified age, such as age 65. At the end of that term, the policy expires
calculating the gross premium
charged for the policy by adding the insurer's expense load to the net single premium or net level premium: - For single premium policies, this becomes the gross single premium. - For periodic premium policies, this becomes the gross annual (or gross level) premium.
participating whole life policy
commonly issued by mutual insurance companies, the policyowner is eligible for policy dividends declared by the insurance company.
Agent's Report
completed by the producer, which tells the underwriters what the producer knows about the applicant
two types of premium receipts:
conditional receipt binding receipt (and the closely related temporary insurance agreement)
Part 1 of Insurance Application
contains the applicant's personal information, including name, address, date of birth, occupation, and beneficiary information.
Part 2of Insurance Application
covers the applicant's medical history
maintenance fee
covers the costs of managing the complex investment element of the contract, charged by variable life insurers
In the personal insurance market, a common reason for third-party ownership of a life insurance policy is to prevent the policy's_____ from being included in the insured's estate.
death benefit
the cash value is an essential part of the ____
death benefit if the policyowner withdraws or borrows from the cash value, the death benefit is reduced by the withdrawn amount or outstanding loan balance (including accrued interest) at the time of the insured's death
An insurance company is developing a new product. Which of the following is the actuaries' most important responsibility?
determining the basic premium rates for the new product
common examples of a "natural group"
employers labor unions trade and professional association groups
how love is coverage under a temporary insurance agreement?
ends 90 days following the date of application
reasons an applicant buys a new life insurance policy or annuity:
existing life insurance policy or annuity is: - lapsed, surrendered, forfeited, terminated, or otherwise compromised - converted to reduced paid-up insurance - continued as extended term insurance - reduced in value using nonforfeiture benefits or other policy values - amended with a reduction in benefits or term of coverage - reissued with a reduced cash value
Insurable interest is the _____ a person has in another person or property.
financial interest
Unlike ____ products, ____ insurance contracts cannot guarantee future investment performance.
fixed life/variable
Under a____ plan, the policyowner can change the premium payment amount at will within a range set by the insure
flexible premium payment
As long as the insured's estate is not the policy beneficiary, death benefits under a third-party arrangement are not included in the insured's ____ and are not subject to federal estate taxes
gross estate
Generally, _____ insurance coverage is less expensive per person than is ______ coverage.
group/individual
cash value
grow over the life of the policy, eventually equaling the face amount at age 120 (age 95 in the case of universal life insurance) - The policyowner owns the amount and has access to it while the policy is in force, thus providing what is called a "living benefit."
To be properly registered to sell variable insurance contracts, agents must:
hold either a FINRA Series 6 or Series 7 registration, obtained by passing a FINRA exam
Field Underwriting
includes requesting information about prospective insureds and helping people fill out applications for coverage.
Insurable Interest in Business Relationships
insurable interest needs to exist only when the policy is issued --> a business can maintain an existing policy even if the insured employee leaves the business
Only the ______ can authorize the backdating of any policy application
insurer (not the producer!)
Because it accounts for the cash value and policy dividends, the _________ is most commonly used today to compare permanent life policies.
interest-adjusted net cost method
Nonparticipating Policies
issued by stock insurance companies, do not pay policy dividends. Stock company profits are distributed to their stockholders as stock dividends.
Traditional fixed permanent life insurance products can feature____ of cash value growth and a ____ because they are supported by the conservative assets in the insurer's general account.
long-term guarantees/ death benefit
additional required documents
medical history hobbies foreign travel business beneficiaries financial statements - Every form attached to an application must be signed and witnessed. In most cases the producer may act as witness.
four modes of premium payment
monthly quarterly semiannually annually
Actuaries calculate net life insurance premiums based on which of the following?
mortality and interest assumptions
insurable interest is ______ between the policyowner and the beneficiary. Applicants and policyowners may designate virtually any person or institution as the policy beneficiary.
never required
In third-party ownership situations, the insured (who is not the owner) has_______. All rights in the policy are held by the ____, including the right to name the beneficiary.
no rights in the policy/ policyowner
Since the STOLI investor has no interest in the continued life and well-being of the insured, and in fact profits only by the death of the insured, many state insurance regulators deem STOLI agreements to be ____.
nothing more than a wager on someone's life.
conditional receipt
provides coverage that conditionally begins when the application is signed and any required medical exams are completed. The receipt provides coverage on the condition that underwriting determines the insured to be insurable.
Term life insurance
provides temporary coverage (think: limited term)
Financial Industry Regulatory Authority (FINRA)
regulates agents who sell variable life products and regulates companies that sell investment products, including insurance companies that sell variable contracts.
Insurable interest
represents the financial impact that would be incurred by the loss of the insured person or property
Expense
represents the insurer's cost of doing business. It may include taxes and fees. It is a charge that is added to the net premium to produce the gross premium charged to the policyowner.
The Securities Exchange Commission (SEC)
responsible for regulating the securities that make up an insurer's separate account
what is another name for backdating?
saving age
traditional net cost method
shows the net amount to be paid for the pure insurance protection of both policies during the comparison period, without accounting for a policy's cash value and policy dividends.
interest-adjusted net cost method
shows the real cost of owning each policy during the comparison period by accounting for each policy's projected cash value and policy dividends.
what type of insurance coverage is provided under temporary insurance agreement?
term life insurance
Interest
the amount the insurer can expect to earn on invested premiums. It is a credit. The mortality charge minus the interest credit equals the net premium.
fixed life insurance
the insurer guarantees a specified death benefit and a minimum interest rate on the policy's cash value. The insurer assumes all risk for covering the policy's promised benefits.
calculating the net premium
the insurer's estimated cost to provide the policy's benefits without accounting for the insurer's expenses, using the factors of mortality and interest but excluding the expense load factor: - For single premium policies, this is called the net single premium. - For periodic premium policies, this is called the net level premium.
level premium payment plan
the premium is fixed and remains level over the policy's term; Policies that use the level premium method include whole life insurance and variable life insurance.
Mortality
the risk of death posed by the applicant. It is a charge.
two common cost indexes:
traditional net cost method and interest-adjusted net cost method
The investor pays for the policy while the insured owns it, usually through the policy's _______.
two-year contestable period.
Insurance Premiums
what the policyowner pays to maintain insurance protection. It reflects the risk that the insured represents to the insurer
interest factor
works as a credit; the higher the assumed interest rate, the lower the premium (and vice versa)