Basic Principles of Insurance

Joint survivor or last survivor life policies

policy cover the lives of two individuals and saves on premium costs by averaging the ages of the two insureds. These policies only pay the death benefit upon death of the LAST INSURED PERSON.

Policy Loan Provision

policy loans do not require credit checks, proof of income, or other things commonly associated with taking out a loan. Remember, you're essentially getting the policy proceeds advanced and using the cash value as collateral. if the policy contains an irrevocable beneficiary, the policy owner must secure permission from the irrevocable beneficiary in order to borrow against the cash value. The maximum loan value of a whole life policy is generally its cash value less any projected interest. if the policy owner later chooses to surrender the policy for cash, the cash value available to the policy owner is reduced by the amount of any outstanding loan plus interest. Other surrender options (i.e., extended term or reduced paid-up) would also take any outstanding policy loans into account when determining the term period or reduced face value, Policy owners are required to pay interest on these loans to offset the interest the insurance company misses by not having the funds invested.

Nonforfeiture Cash Values

policy owner must have access to any cash value accumulation should they stop paying the policy. prior to the execution of any nonforfeiture option, the cash value is reduced by any loans that have been taken out. Insurers are typically required to make cash surrender values available for ordinary whole life insurance after the first three policy years. once a policy is surrendered, it cannot be reinstated . there are 3 Nonforfeiture Cash Value options: -Cash Surrender Option: Policy owners may request an immediate cash payment of their cash values when their policies are surrendered. Any outstanding policy loans or debts reduce the amount of cash value the policy owner receives. Some policies require a penalty to be paid if a policy is surrendered in its early years. These surrender charges are deducted from the cash value when the policy is discontinued. Surrender charges may also be referred to as a "rear- end load." If the amount received in a cash surrender is greater than the total of premiums paid minus dividends paid, the excess is taxable as ordinary income. A partial surrender can allow the policy owner to withdraw the policy's cash value interest-free. -Reduced Paid-up Option: the policy owner uses the policy's cash value as the premium for a single-premium whole life policy at a lesser face amount than the original policy. When this option is exercised, the paid-up policy is the same kind as the original, but for a lesser amount of coverage. Once the paid-up policy has been issued, the new face value remains the same for the life of the policy. Additionally, like all whole life policies, the new policy will also build cash value. The insured's current attained age is used for premium calculation, but proof of insurability is not required since the benefit is being reduced. When an insured selects this option, they have recognized the need for some type of permanent life insurance but no longer wish to continue premium payments. Therefore, this is the option that provides the policyholder/insured with life insurance coverage for the greatest length of time (i.e., permanent whole life protection). -Extended Term option: surrender the policy and exchange the cash value for a paid up level term insurance policy. Unless a policy loan is present at the time of surrender, the coverage amount of the new paid-up extended-term life policy will be identical to the face amount of the surrendered whole life policy. The extended term insurance option provides the insured with the most life insurance protection in the event of a voluntary policy surrender or nonpayment of premium (i.e., greatest face amount). It would also provide an insured with the greatest amount of coverage in the event of non-payment of premium (i.e., as long as the cash value is present).

Spendthrift Clause:

prevents creditors from obtaining any portion of policy proceeds upon an insured's death. Additionally, the clause can be selected by the policyowner to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time. This provision protects a beneficiary from creditors with regard to life insurance proceeds. When the death benefit is left with the insurer, no creditors can attach a lien of any kind to the proceeds. The spendthrift clause also protects a beneficiary by minimizing or restricting the use of proceeds as long as the insurer holds them. Only after proceeds have been distributed can the beneficiary assign or transfer the benefits to a creditor. Additionally, under the spendthrift clause, a beneficiary cannot take the present value of future payments in a lump sum (commuting) or use future payments as collateral for a loan (encumbering). The spendthrift clause is most often used to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time. Outside of preventing distribution directly to the insured's creditors, this clause does not have any effect if the beneficiary receives the proceeds as one lump sum payment. Additionally, once the beneficiary receives the payment, creditors may be able to take steps to collect on money owed.

Waiver of Premium Rider

prevents the policy from lapsing when the insured becomes totally disabled. If an insured becomes totally disabled for six consecutive months, the insurer promises to waive any future premium payments until they return to work. if the policy is participating, the policy owner will continue to receive any owed dividend payments while the premiums are being waived. Very few companies include this rider standard. Adding the waiver of premium rider to a policy requires an additional charge added to the policy's premium since the rider provides additional protection to the policy owner and additional risk to the insurance company. Typically, the rider falls off once the insured reaches a specified age, most often 60-65. Once the rider falls off, the premiums for the policy will be reduced by any additional amount required for the rider. for the premiums to be waived under this rider, the insured typically must be under the care of a physician and be totally disabled as defined by the policy. Some insurers may also describe the disability requirement as "total and permanent." The insured does not need to be hospitalized or collecting social security to receive a waiver of premium benefits. Any premiums paid within the initial six months of the disability will be refunded to the policy owner from the first day of disability. The waiver of premium rider waives the required premium payments to keep the policy in force; it does not provide any income, nor does it modify in any way the coverage provided under the policy.

Premium Mode:

refers to the policy feature that permits the policyowner to select the timing (frequency) of premium payments. This is sometimes referred to as the Mode of Premium provision. Insurance policy rates are based on the assumption that the premium will be paid annually at the beginning of the policy year. the higher the frequency of payments, the more the policy will cost the insured in total.

variable life insurance policies

require a producer to have proper FINRA and National Association of Securities Dealers (NASD) securities registration prior to selling any variable policy contract, whether it be life insurance or an annuity, as they include regulated securities. These policies are also known as interest sensitive policies. The policies usually have a fixed level premium, but the cash value and death benefits of a Variable Life policy can fluctuate according to the performance of its underlying investment portfolio. A typical Variable Life Policy investment account grows through mutual funds, stocks, and bonds. This includes Variable Life, Universal Variable life, Variable Whole Life, and Variable Annuity. If a policyowner or applicant was looking for a policy to offset inflation, they would want to look into a variable policy. Since the policyowner is assuming all of the investment risk and the rate of return is not guaranteed, a person must have proper FINRA securities registration in addition to an insurance license to sell any variable contracts. By placing their policy values into separate accounts, policyowners can participate DIRECTLY in the account's investment performance, which will earn a variable (as opposed to a fixed) return. Insurer transfers the investment risk to the policyowner, so variable insurance products are considered SECURITIES CONTRACTS as well as insurance contracts. So, They are regulated by insurance regulation and the (SEC) To sell variable insurance products, you must have FINRA license and also NASD

403(b) Plan

retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers.

Life insurance policy exclusions

right to deny a death claim if death is caused by: war, aviation (flying your own plane), hazardous occupation or hobbies, felony, illegal occupation, drugs, suicide within 2 years, etc. most insurers forgo the exclusion and instead offer the coverage if an extra premium is collected (rate-up). If a specific cause of loss is excluded in the policy, it is excluded forever. If a cause of loss is not excluded in the policy, the cause of loss is covered forever.

Re-entry term insurance (revertible term)

some term policies include a re-entry feature which states that the premium can change at a renewal based on insurability. So to maintain the lowest premium rate (or discount from standard) the insured may have to prove insurability again upon renewal. If the insured fails the medical exam, coverage may be maintained but at a higher premium rate

Viatical Settlement

someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit.

Reinsurers and Retention LImits

specialized branch of insurance industry because they insure insurers. Reinsurance=when an insurance company transfers a portion of assumed risk to another insurer to limits the loss any one insurer would face should a very large claim become payable. Also for favorable underwriting (take liability)

Representations

statements made by the applicant that they consider to be true and accurate to the best of the applicant's belief. A representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty. A false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk is considered a material misrepresentation

Suicide Clause

states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid. the insurer will deny the claim and refund all premiums paid up to that point (without interest) to the beneficiary.

Annual renewable term (ART) or yearly renewable term (YRT)

term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability. Most basic form of insurance, this policy provides you with 2 sets of premium rates: current or scheduled premium and a guaranteed maximum premium

Reinsurance

the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage

Policy Proceeds

the amount actually paid as a death, surrender, or maturity benefit. -In the case of a death benefit, it includes the face value plus any earned dividends less any outstanding loans and interest. -If surrender benefit, the amount includes any cash value, minus surrender charges, and outstanding loans and interest. -If maturity, the benefit amount includes the cash value less any outstanding loans and interest.

Divisible Surplus

the amount of earnings paid to policyowners as dividends. (after insurance company sets aside funds required to cover reserves, operating expenses and general business purposes)

Deductible

the amount you pay for covered health care services before you insurance plan starts to pay for it. High deductible health plans usually carry lower premiums but require more out of pocket spending before insurance starts paying for care

consideration

the applicant/insured's consideration is the premiums paid ad the representation (statements) he or she makes on the application. The insurer's consideration is the promise to pay legitimate claims for coverage provided during the policy period. The consideration clause also contains info such as the schedule and amount of premium payments. Consideration (completed application in premium payments) is given by the applicant in exchange for the insurer's promise to pay benefits

Utmost Good Faith

the belief that both the policyowner and the insurer must know all material facts and relevant information, and as such, they will provide each other with all material facts and relevant information

Interest Factor

the calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums.

Excess Interest Provision

the cash value will increase faster than the guaranteed rate if the insurer earns a greater return than the guaranteed rate.

Underwriting Department

the department within an insurance company responsible for reviewing applications, approving or declining applications and assigning risk classifications, conducting investigations to gain information about applicants.

Cash value

the equity amount of "savings" accumulation in a whole life policy. When premium for coverage is paid, a portion is used to pay for death protection or the "term" insurance cost. After the contract has been in effect for some time (2 or 3 yrs) another portion of the premium is deposited into the policy's cash value. This begins to accumulate equity and there is also a guaranteed fixed interest rate for more growth. In early years, more the the premium money goes towards providing the insurance protection but as cash value grows larger, it begins to offset the death benefit so the amount of funds needed to purchase actual insurance protection decreases. Total cash value at age 100= the premiums paid plus the interest

Full and accurate disclosure

the ethical agent makes it a practice to inform clients about all aspects of the products recommended, benefits and limitations. Never hide or disguise the product's nature or purpose or company being represented.

insurable interest

the financial, economic and emotional impact associated with a person experiencing a specified loss. A person has an insurable interest in a loss if they have more to gain by not suffering the loss. The person acquiring the contract (applicant) must be subject to loss upon the death, illness, or disability of the person being insured. For a life and health insurance contract, insurable interest is only required at the time of application, it does not have to continue throughout the duration of the policy, nor does it have to exist at the time of claim.

Insurer

the insurance company

Insured

the insured is the customer receiving insurance protection under an insurance policy

Direct selling method

the insurer deals directly with consumers by selling its policies through vending machines, advertisements or salaried sales representatives. No agent or broker is involved.

Estoppel

the legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn (a person appears to be an employee and then agency backs out of liability when risk occurs) Broken Promise One party makes a false representation (agent who states that the insured is fully covered) another party relies on that statement (the insured) the insured then experiences financial harm (and the insurer attempts to deny the claim) If these 3 elements are present, the insurer will be "estopped" or prevented from denying the claim.

Mortality Rate

the measure of the number of deaths (in general, or due to a specific cause) in some population, scaled to the size of that population, per unit time. The mortality factor has the GREATEST effect on premium calculations or rate-making since it can vary greatly based on personal characteristics of an individual to be insured. Mortality factor is determined from a mortality table which provides an indication of the "probability of death" of an individual at a particular age. In order for a mortality table to be accurate, it must be based upon a large cross-section of individuals and time. Actuaries use this information to determine mortality data that will influence premiums.

Gross (Annual) Premium:

the net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends

Consideration

the part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments. Applicants provide the insurer with a completed application and initial premium as consideration for insurance.

Underwriter

the person who identifies, assesses, examines and classifies the amount of risk represented by an applicant (proposed insured) to determine if coverage should be provided and if so, at what cost (premium). An underwriter approves or declines insurance applications and determines the cost to providing insurance.

Revocable Beneficiary

the policyholder reserves the right to change the beneficiary designation without the beneficiary's consent

Variable universal Whole life (VUL)

the policyowner controls the investment of cash values and selects the timing and amount of premium payments. This policy gives owner the best of Variable life and Universal life. If a policy owner was looking for a policy that allowed them to control how much and when premium was due, what investment accounts were used for funding, and where the returns from those investment accounts went, they would be looking for a Variable Universal Life Policy. The policy owner can control timing and amount of premium payments, as well as the investment of cash values with this policy. It is an insurance and investment product with a flexible or variable premium.

Net retention (net line)

the portion of the risk that the ceding insurer retains

Fiduciary

the responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients. A fiduciary is in a position of trust with regards to the funds of their clients and insurer.

Subrogation

the right for an insurer to pursue a third party that caused an insurance loss to the insured. Your insurer can try to recover costs from the person responsible for your injury or property damage

Renewable term

the term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. If you renew, the premium price will go up, this cycle continues until you are too old to renew or it's too expensive.(step up premium) the advantage=even if you are uninsurable due to health, you are still insured ALL TERM insurance has a final termination date where you can no longer renew it. The option to renew MUST be included in the contract when the policy is purchased.

Tertiary Beneficiary:

the third beneficiary in line to receive death benefit proceeds. The tertiary beneficiary will only receive the death benefit if both the primary and contingent beneficiaries die before the insured.

Insurance

the transfer of risk through the pooling or accumulation of funds

cancellation

the voluntary act of terminating an insurance contract

Waiver

the voluntary giving up of a legal given right.

Types of agents: captive or career agents

these agents works for only one insurance company and sells only that company's insurance policies

Unfair trade practices act

this act gives officers the authority to seek a court injunction to restrain insurers from using any methods believed to be unfair. Advertising code specifies certain words or phrases that are considered misleading and cannot be used in advertising of any kind. made by the NAIC

Types of agents: independent agents

this agent works for himself and sells the insurance products of many companies. The agent may represent as many insurers as will appoint him

Unilateral

this contract mean only one party, the insurer, makes any kind of enforceable promise. Insurers promise to pay benefits upon the occurrence of a specific event, such as death or disability.

Actuarial Department

this department calculates policy rates, reserves, and dividends, and makes other applicable statistical studies and reports focusing on morbidity and mortality tables

Claims Department

this department is responsible for processing, investigating and paying claims for losses incurred by insureds.

Life insurance surrender cost index (for comparison)

this index uses a calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period. The surrender cost index is important to the consumer who places a high priority upon the growth of cash value in the policy. It aids in cost comparisons if the policyowner plans to surrender the policy for its cash value in ten or twenty years.

universal life death benefit options

this insurance offers two death benefit options;' option A: death benefit=cash values +the remaining pure insurance (decreasing term + increasing cash values)This level death benefit is composed of the increasing cash values and the remaining pure insurance (decreasing term) if the growing cash value-to-total death benefit ratio exceeds a certain % fixed by federal law, an additional amount of pure insurance called the corridor is added to maintain the minimum death benefit requirement Option B: death benefit=face amount (pure insurance) + the cash values (level term + increasing cash values) To comply with the Tax Code's definition of life insurance, the cash values cannot be disproportionately larger than the term insurance portion

Increasing term Insurance

this is term life insurance that provides an increasing face amount (death benefit) over time based on specific amounts or a percentage of the original face amount. May also be tied to a cost of living index such as the CPI. This insurance is usually purchased as part of a package or as cost of living riding to a policy

Face Amount Plus Cash Value

this policy is a contract that promises to pay the face amount plus the cash value upon death of the insured, this is not a common policy.aa

Automatic Premiums (or policy) loan provision

this provision offers another way for the policy owner to avoid or guard against the unintentional lapse of their policy, as long as there is sufficient cash value present in the policy. This provision, if elected, provides a means by which the policy will pay for itself if the owner inadvertently forgets to pay the premium within the grace period. this provision, if included in a whole life policy, will make sure that coverage continues beyond the grace period by preventing a premium default. The automatic premium loan provision is NOT automatically included in a policy and must be elected by the policy owner, typically at the time of application. The automatic premium loan provision prevents a policy from lapsing due to nonpayment of premium as long as there is enough equity in the policy to pay the overdue premium.

Fixed Period Or Period Certain Option:

this settlement option pays the death benefit proceeds in equal installments over a set period of years. The dollar amount of each installment depends upon the total number of installments.

Decreasing term insurance

this term life insurance provides an annually decreasing face amount (benefit amounts) over time with level premiums. Usually used for mortgage protection. This life policy's death benefit adjusts periodically (according to schedule) Usually written for mortgage or other debt that decreases over time until it is paid off or if the insured dies. Ex)15 yr decreasing term policy could protect a 15 yr mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to match. after mortgage is paid off, the insurance policy will expire Ex) a 20 year, 50k decreasing term policy will pay a death benefit of 50k in the beginning of policy term, and the amount gradually declines over the 20 year term and reaches 0$ at the end of the term.

Interim insurance

type of convertible term insurance written on a person wanting protection immediately but not able to afford permanent protection immediately. It provides interim (in the meantime) coverage between now and the eventual conversion to permanent protection. Written to automatically convert to permanent at some point within the first year, insurability is guaranteed, the premium for temporary protection is based on the original application age and the premium permanent protection is based on the age at the time permanent protection begins (the attained age)

Mortgage Redemption Insurance

type of decreasing term life insurance, it provides policyholders a way to have their mortgages paid off if they die before it is fully paid. Face value decreases as the balance remaining on the mortgage decreases

Non-medical life insurance

typically does not require a medical exam and tends to be more expensive than medically underwritten policies. The insurer will average out everyone's risk and charge accordingly. Although insurers typically will not require a medical exam, they will still inquire about the applicant's medical history and lifestyle.

Waiver of Cost of Insurance Rider (waiver of monthly deductions)

typically reserved for universal whole life policies. Premiums for a universal whole life policy can fluctuate. For this reason, insurers usually only offer to waive the monthly cost of the insurance, not the total premium the insured was paying. In this case, the cash value will remain level and continue to collect interest, but it will not grow to the extent it would have had the full premiums been paid. a company may write the rider to waive the guaranteed minimum annual premium instead of the monthly cost of insurance. In this case, the policy's cash value will grow by the amount of the additional premium payment minus the actual cost of insurance. The cash value will also continue to collect interest.

Non-admitted Insurer

unauthorized insurer who has not received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state

Waivers for impairment

when an insurance company does not cover a loss due to a specific condition the insured has, this is usually called an impairment rider. If the insured's condition improves, the company may be willing to remove the waiver.

front end load

when the policy is initially issued

Juvenile insurance

written on the lives of children who are within specified age limits and generally under parental control. Any ORDINARY life insurance policy that insures the life of a minor, they do not require the minor's consent. This is known as 3rd party ownership

►Affordable Care Act (ACA)

"Exchanges" are created by the Affordable Care Act (ACA) health reform bill to help individuals and small businesses purchase health insurance coverage. The purposes of the exchange include: • Reduce the number of uninsured in the state • Facilitate the purchase and sale of qualified health plans in the individual market • Assist qualified employers in the state in enrolling their employees in qualified health plans • Assists individuals in accessing public programs, premium tax credits, and cost-sharing reductions Under the Affordable Care Act (ACA), the health insurance exchange will perform all of the following roles: • Certify health plans as qualified, based on pre-determined criteria • Utilize individual, unique formats for presenting health benefit plan options • Verify and resolve inconsistent information provided to the exchange by applicants Essential health benefits Beginning January 1, 2014, the exchange shall allow any qualified plans that meet the minimum standards established by the exchange to be offered in the exchange. All plans must include the following: Ambulatory patient services • Emergency services • Hospitalization • Maternity and newborn care • Mental illness, chemical dependency and substance use disorder services, including behavioral health treatment • Prescription drugs • Rehabilitative services and devices • Laboratory services • Preventative and wellness services and chronic disease management • Pediatric services, including oral and vision care Metal levels There are four tiers of "qualifying health plans" you or your employer can purchase on the exchange. They range from lower quality, but more affordable "Bronze plans", to "Silver plans", to a more expensive plan with better coverage called a "Gold plan". There is also a "Platinum plan" which is the highest quality and cost plan. Lower premium plans will have higher deductibles, less benefits, and larger out of pocket costs. The actuarial level is calculated as the percentage of total average cost for covered benefits that a plan will cover. • Bronze Plans: 60% actuarial level of coverage provided • Silver Plans: 70% actuarial level of coverage provided • Gold Plans: 80% actuarial level of coverage provided • Platinum Plans: 90% actuarial level of coverage provided Preexisting conditions Health plans cannot limit or deny benefits or deny coverage for a child younger than age 19 because of preexisting conditions. This applies to both group and individual policies Lifetime and annual limits The ACA prohibits health plans from putting lifetime dollar limits on most benefits that are received by an insured. • For plans starting on or after September 23, 2012, but not before January 1, 2014, the annual dollar limit is $2 million. After January 1, 2014, there are no annual dollar limits. • Plans are allowed to put an annual dollar limit on health care services that are not considered essential. Grandfathered Plans Grandfathered plans are plans that were purchased before March 23, 2010. These plans do not have to follow the ACA's rules and regulations or offer the same benefits, rights, and protections as new plans. An exception to this is:• A grandfathered plan cannot impose lifetime limits on how much health care coverage people may receive. Other ACA requirements • Any legal resident, except those incarcerated, can purchase a plan through the Marketplace • As defined by the Affordable Care Act, the MAXIMUM amount an individual can contribute to a Flexible Savings Account is $2,500. • Under the Affordable Care Act (ACA), parents can insure their dependent adult children up to their 26th birthday, even if they are married or not living with their parents. • Low-income individuals and families whose incomes are between 100% and 400% of the federal poverty level will receive federal subsidies on a sliding scale if they purchase insurance via an exchange • Beginning January 1, 2014, the Patient Protection and Affordable Care Act (ACA) will require adjusted community rating in the small group market. Small group health plans will be allowed to vary rates only based on whether the policy covers an individual or family, geographic area, age, and tobacco use. • If an insurer fails to adhere to the Affordable Care Act requirements related to internal appeals, the internal appeal may be deemed exhausted for purposes of submitting an external review.• According to the Affordable Care Act, if a large employer does NOT provide health insurance and owes an employer mandate penalty, the annual penalty is calculated by multiplying $2,000 by the number of full time employees minus 30.

► Classification of Applicants

--Once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the applicant possess to the insurer. This evaluation is known as risk classification. In a few cases, an applicant represents a risk so great that the applicant is considered uninsurable, and the application will be rejected. However, the majority of insurance applicants fall within an insurer's underwriting guidelines and accordingly will be classified as a preferred risk, standard risk, or substandard risk. Uninsurable Risk Uninsurable applicants are usually rejected and denied coverage. Preferred Risk Many insurers reward good risks by assigning them to a preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking. --Preferred risks generally receive lower rates than standard risks Standard Risk Standard risk is the term used for individuals who fit the insurer's guidelines for policy issue without special restrictions or additional rating. These individuals meet the same conditions as the tabular risks on which the insurer's premium rates are based. Substandard Risk A substandard risk is one below the insurer's standard or average risk guidelines. An individual can be rated as substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an increase in their policy premium or a coverage exclusion.

►DENTAL•

-A pre-treatment estimate of the cost of dental services may be required whenever the patient requires dental treatment • Comprehensive dental plans usually provide routine dental care services without deductibles or coinsurance to encourage preventative care (such as teeth cleanings, fluoride treatments etc) • Indemnity plans pay benefits based on a predetermined, fixed rate set for the services provided, regardless of the actual expenses incurred • Prosthodontics dental procedures involve the treatment of missing or deficient teeth using biocompatible substitutes such as bridgework or dentures • To prevent adverse selection in a group dental expense plan, the plan may require any of the following: probationary periods, waiting periods, or evidence of insurability • Periodontal treatment is treatment for gum disease, often performed by gum and implant specialist or periodontist • Periodontal cleaning involves a special cleaning often referred to as a "deep cleaning" to remove plaque and tarter deposits on the tooth and root surfaces

► Accidental Death and Dismemberment Insurance

-Another major type of health insurance coverage is accidental death and dismemberment (AD&D) insurance. It pays benefits in the event of a fatal accident or if dismemberment results from an accidental injury. Although the circumstances under which benefits are paid are somewhat limited, it is a widely used form of insurance protection and often is attached as a rider on a basic life or health insurance policy. AD&D policies are widely used in group insurance plans as well. -Now, we will examine the typical features of and benefits provided by AD&D policies and some of the other more specific forms of AD&D policies. NATURE OF AD&D POLICIES -Accidental death and dismemberment insurance is the primary form of pure accident coverage. As such, it serves a somewhat limited purpose: it provides a stated lump-sum benefit in the event of accidental death or in the event of loss of body members due to accidental injury. This latter includes loss of hands or feet or the loss of sight in one or both eyes. ("Loss of body member" is typically defined as actual severance from the body, though it may include loss of use, depending on the policy.) Separate benefits for hospital, surgical, and other medical expenses are generally not included in AD&D policies, although some may pay a medical reimbursement benefit up to a stated amount. AD&D Benefits AD&D policy pays a specified benefit to the insured in the event of accidental death or dismemberment due to accidental injury only, it is necessary for the policy to make distinctions between these two contingencies and to define the benefits accordingly. Consequently, AD&D policies make benefits payable in two forms of payment. -Principal Sum. The principal sum under an AD&D policy is the amount payable for a death benefit as a result of an accident. It is the amount of insurance purchased- $10,000, $25,000, $50,000, $100,000, or more. The principal sum represents the maximum amount the policy will pay. -Capital Sum. Another form of payment payable under an AD&D policy is the amount payable for the accidental loss of sight or accidental dismemberment, or the capital sum. It is a specified amount, usually expressed as a percentage of the principal sum, which varies according to the severity of the injury. For example, the benefit for the loss of one foot or one hand is typically 50% of the principal sum. The benefit for the loss of one arm or one leg is usually two-thirds of the principal sum. The most extreme losses (such as both feet or sight in both eyes) generally qualify for payment of the full benefit, which is 100% of the principal sum. --Let's say, for example, Kevin has an accidental death and dismemberment policy that pays $50,000 for accidental loss of life and the same for accidental loss of two limbs or the sight in both eyes. Thus, $50,000 is the policy's principal sum. The same policy pays $25,000 for accidental loss of sight of one eye or dismemberment of one limb. Therefore, $25,000 is the policy's capital sum. Some AD&D policies provide for payment of multiple indemnity (double, triple, or even quadruple) the principal sum if the insured dies under specified circumstances. A double payment is referred to as double indemnity. If three times the principal sum is payable, it is called triple indemnity. However, do not let these terms confuse you. AD&D policies, because they pay a stated benefit, are valued contracts. They are not contracts of indemnity. -The same beneficiary designations are available for the policyholder as found in a life insurance plan Accidental Means versus Accidental Results As we learned in the last chapter, an insurance policy that provides benefits in the event of an injury due to an accident must define "accident." -In all cases, an accident is "external and violent," but accidental death and dismemberment policies (like disability income policies) make a distinction between injuries due to accidental means and those due to accidental results (or it's sometimes referred to as "accidental bodily injury"). -By way of a review, policies that base their benefit payments on accidental means require that both the cause and the result of an accident must be unintentional. Policies that use the less restrictive accidental results (or "accidental bodily injury") definition stipulate that only the injury resulting from an accident must be unintentional. If Ted, the insured under an AD&D policy, intentionally jumps from the roof of his house after fixing his antenna (instead of climbing down the ladder) and so severely injures his leg that it must be amputated, he would be paid the appropriate percentage of the capital sum only if his policy used the "results" definition. If his policy used the "means" definition, no benefit would be payable because Ted intentionally performed the action (i.e., the jump) that resulted in the injury. -As noted in the discussion of disability income policies, most states require that policies that provide any form of accident benefit, as do AD&D policies, base the definition of "accident" on the results definition, not the means definition. Accidental Death Time Limits Most policies include a restriction that the insured must die within 90 days of the accident in order for the additional death benefit to be paid. However, some states may allow the payment of the death benefit even after the 90-day period has elapsed if the insured suffered from total and continuous disability between the time of the accident and death. Other Forms of AD&D -Accidental death and dismemberment coverage is made available in a variety of ways. It can be purchased by individuals as a single policy or it may be a part of an individual disability income policy. Quite typically, however, it is an aspect of a group insurance plan (either group life or group health) or it may in and of itself constitute a group plan. Usually, AD&D benefits are payable whether the injury resulted on or off the job. -By their very nature, AD&D policies are somewhat narrow, providing benefits only in the event of death or dismemberment due to an accident. There is another type of AD&D coverage, even more narrow in scope, which provides protection against accidental death or dismemberment only in the event of certain specified accidents. These are limited risk policies and special risk policies.

►Limited Insurance Policy Types

-As noted previously, limited risk policies set forth a specific risk, such as accidental death and dismemberment contracts that provide benefits when covered losses result from an accidental bodily injury. Various types of health insurance are provided by limited benefit contracts or voluntary benefit plans which generally provide limited coverage amounts or address a specific set of perils, losses, or circumstances. An example of a limited policy is specified disease insurance, which covers such things as out-of-pocket payments, non-covered medical expenses, and incidental costs. -Since limited insurance policies restrict coverage to specific perils or limited amounts of coverage, state insurance departments require these policies to provide policyholders with a "Notice to Insured." This notice states that the contract is a Limited Benefit Policy. -Limited benefit policies can be described as (1) policies that provided benefits for expenses incurred for an accidental injury only (2) policies that pay fixed dollar amounts for specified diseases or other specified impairments (3) policies that provide benefits for specified limited services (4) indemnity policies and other policies that pay a fixed dollar amount per day, (excluding long-term care policies). -At this point, it's important to make the distinction between limited risk and special risk policies. A special risk policy covers unusual hazards that are typically not covered under ordinary accident and health insurance. For example, an actress who insures her legs for $1 million or a test pilot who flies an experimental airplane and obtains a policy covering his life while flying that plane are both purchasing special risk policies. On the other hand, a traveler who purchases an accident policy at the airport to provide coverage while she's a passenger on a commercial airline flight is purchasing a limited risk policy. -The following limited insurance policy types each address a specific set of perils, losses, or circumstances: Specified (Dread) Disease Dread disease policies provide limited benefits for a specific disease, such as cancer or heart disease. Policy benefits are a scheduled, fixed-dollar amount for specified perils or medical procedures, such as hospital confinement or chemotherapy. Critical Illness (Specified Conditions) -Critical illness contracts pay a lump sum to the insured upon the diagnosis and survival of a critical illness. Carriers actually pay these benefits directly to the insured. Insureds can use the benefits to cover non-medical expenses that often accompany such events, or they can fill gaps in their medical insurance coverage. -Covered conditions typically include heart attacks, strokes, organ transplants, and end-stage renal failure. Policies may cover other conditions (e.g., Alzheimer's disease) and conditions that result in the permanent loss of a person's eyesight. Some policies require the insured to survive the illness for a specific period (e.g., 30 days). Hospital Indemnity (Income) Hospital indemnity insurance provides a flow of income from the first day that the insured is confined to a hospital to the last day. While the insured is confined to a hospital, these policies pay a specified amount on a daily, weekly, or monthly basis directly to the insured (not the hospital). Under this type of policy, payment is unrelated to the medical expense incurred and is instead only based on the number of days confined in a hospital. Benefit limits, pre-existing conditions, and elimination periods may be applied, depending on the policy. Prescription Drugs -Prescription drug policies cover the cost of prescription drugs that are not dispensed in a hospital or extended care facility. Each has a formulary or list of specific medications that they cover. These lists divide drugs by price class as well as purpose. Typical pharmaceutical classes include generic, brand name, and specialty medications. With the exception of injectable insulin for diabetics, these plans don't typically cover non-prescription drugs. -In addition, this plan doesn't cover devices or appliances, hypodermic needles, or charges to administer drugs. These plans often include medications that are used to treat sexual dysfunction or infertility unless they're required by state law to do so. Most prescription drug policy plans have a co-payment requirement when a prescription is being filled. Hearing Aid Coverage Some private health care plans cover the costs of audiological tests, hearing aid evaluation, and partial or full coverage for hearing aids. Vision Care -Vision care coverage generally pays for reasonable and customary charges that are incurred during eye exams by ophthalmologists and optometrists. Expenses for the fitting, other corrective items, or the cost of contact lenses or eyeglasses are often partially covered. Many plans place limits on the coverage, such as new eyeglass frames once every two years. -Vision care coverage plans typically exclude safety lenses, prescription sunglasses, plastic lenses, upgrades of frames, benefits for necessary eye surgery, or the treatment for eye diseases. However, a medical expense plan covers the latter two exclusions. Lastly, depending on the plan, coverage for LASIK surgery is customarily excluded.

LAWS AND REGULATIONS IN NC

-As the chief officer of the Insurance Department, the Commissioner of Insurance enforces all state laws governing insurance companies and makes relevant rules and regulations. The Commissioner is elected to office for a 4-year term. The Commissioner's powers and duties include: ---Enforcing and carrying out all the provisions of the General Statutes; ---Adopting rules and regulations to enforce provisions of the General Statutes; ---Adopting rules on solicitation of proxies, including financial reporting of equity securities of any domestic stock insurance company; ---Approving forms used by companies, associations, orders, or bureaus; ---Receiving and thoroughly examining all financial records; ---Reporting in detail to the Attorney General any violation of insurance laws; Instituting civil actions for regulatory breaches and initiating the process for prosecuting criminal offenses; ---Providing synopses of insurance contract provisions when requested; and ---Compiling lists of rates charged by insurers and their coverage explanations and making those lists available to the public. EXAMINATIONS, HEARINGS, AND INVESTIGATIONS All examinations, hearings, and investigations may be conducted by the Commissioner personally or by one or more deputies, investigators, actuaries, examiners, or employees designated by the Commissioner. The person or entity being examined is responsible for any expenses incurred during the examination. The Commissioner may bring a civil action to collect these examination expenses if they are not paid. If the Commissioner or one of their investigators finds evidence to charge someone with a criminal violation of the insurance laws, they may issue an arrest warrant for the person. Notice and Hearing The Commissioner may call and hold hearings for any purpose deemed necessary. At least ten (10) days' written notice must be given to all persons affected by the hearing. The notice must include the time and place of the hearing as well as the subject of inquiry and the specific charges, if any. INVESTIGATION OF CHARGES -The Commissioner must investigate any complaint filed by a citizen of North Carolina. -If the Commissioner finds substantial evidence that the complaint is justified, the company under investigation will be held liable for investigation-related expenses in addition to any penalties imposed for violations. If the company refuses or neglects to pay, the Commissioner is authorized to bring a civil action to collect these expenses. RESTRAINING ORDERS AND CRIMINAL CONVICTIONS Whenever it appears to the Commissioner that someone has violated the law or threatens to do so, they may request a restraining order and injunction to prevent the violation. A person's license is automatically suspended if convicted of a criminal offense. Conviction includes an adjudication of guilt, a plea of guilty, and a plea of nolo contendere. LICENSE SURRENDERS When a licensee is accused of misconduct that could potentially result in a license suspension or revocation, the licensee may instead voluntarily surrender their license for a period established and approved by the Commissioner. A person or entity who surrenders a license may not apply for licensure during the period of license surrender. CIVIL PENALTIES OR RESTITUTION -If the Commissioner holds a hearing which finds a person has violated an insurance law, the Commissioner may order the payment of a monetary penalty, restitution, or both. These penalties are in addition to or instead of suspending or revoking the person's license or certification. Each day a violation occurs constitutes a separate violation. -Monetary penalties (civil fines) will be between one-hundred dollars ($100) and one-thousand dollars ($1,000). These civil penalties are in addition to any other fines for criminal violations. The Commissioner remits penalty proceeds to the Civil Penalty and Forfeiture Fund. -Any restitution paid to someone harmed by a violation of the insurance law should equal the amount needed to make that person financially whole. COURT REVIEW OF ORDERS AND DECISIONS -An aggrieved party may request a review by the Superior Court of Wake County within thirty (30) days of receiving an order or decision made, issued, or executed by the Commissioner. This option does not apply when the Commissioner issues an order or decision -Addressing an impairment of capital, surplus, or admitted assets of an insurer; -That the premium rates charged or filed on all or any class of risks are excessive, inadequate, unreasonable, unfairly discriminatory, or are otherwise not in the public interest; or -That a classification assignment is unwarranted, unreasonable, improper, unfairly discriminatory, or not in the public interest. RECORD REQUIREMENTS AND INSPECTION -The Commissioner may conduct a financial examination of any insurance company as often as they deem appropriate. At a minimum, the Commissioner must examine each insurer at least once every five (5) years. -All companies, agents, and brokers doing business in North Carolina must maintain a complete and correct record of their insurance transactions. Records must include the number, date, term, amount insured, premiums, and the persons to whom each policy or certificate was issued. This requirement applies to both new contracts and renewals. Every insurance agent/broker MUST maintain all records, books, and documents for insurance transactions for a period at least five (5) years. -Information from these records must be furnished to the Commissioner on demand and the original document must be open to the inspection of the Commissioner. -Anyone who violates these rules is guilty of a misdemeanor and may have their license suspended or revoked for up to six (6) months for their first offense and up to one (1) year for their second offense. FRAUDULENT CLAIMS -Anyone who knowingly makes (or conspires to make) statements that contain false or misleading information that is material to an insurance claim is guilty of a Class H felony, assuming their intent is to injure, defraud, or deceive an insurer or insurance claimant. -The law considers each claim to be a separate count. Upon conviction, if the court imposes probation, the court may order the defendant to pay restitution as a condition of probation, including reasonable costs and attorneys' fees incurred by the victim. EMBEZZLEMENT -If any insurance agent, broker, or administrator embezzles or fraudulently uses or withholds any money received in the course of business, that individual can be charged with a felony. -REPORT TO COMMISSIONER Whenever an insurer, employee, representative, or licensee has reason to believe that fraud or embezzlement is occurring, they must notify the Commissioner and provide a complete statement of the relevant facts and circumstances. The Commissioner may suspend, revoke, or refuse to renew the license of any licensee who willfully fails to report such information. This same requirement applies when one perceives that an insurer is financially impaired. IMMUNITY (Ref: G.S. 8-2-160) During a fraud investigation, the Commissioner may request documents from a person concerning the transaction that is suspected to be fraudulent. The person must provide the requested documents and is not subject to liability or slander unless the person acted maliciously. FALSE STATEMENTS PENALTIES (Ref: G.S. 58-2-180) A licensee or person who willingly misstates information on any financial document or statement is guilty of perjury and a Class I felony. The entity they represent is subject to a fine between $2,000 and $10,000. COMPLAINT RECORDS (REF: 11 NCAC, CHAPTER 19, SECTION .0103) Each insurer or its agents must maintain a log of all written complaints for at least five (5) years. The log must include the following information: Department file number; Name of insured; Nature of the complaint; Department subject to the complaint; Policy or claim number of the insured; and The disposition of the complaint. GENERAL REGULATIONS FOR INSURANCE ETHICAL STANDARDS (Ref: 11 NCAC, Chapter 4, Section .0423) When conducting insurance business, agents, limited representatives, brokers, adjusters, appraisers, and other insurer representatives must: Act fairly and honestly; Identify themselves and their occupation; Provide their national producer numbers; and Provide the insurance department's website, address, and phone number for license verification when requested. Claims management staff, agents, limited representatives, brokers, adjusters, appraisers, and other insurer representatives are prohibited from doing the following: Accepting any gratuity or other forms of remuneration (referrals) from any service provider for recommending that provider to claimants; Purchasing salvage from a claimant; Intimidating or discouraging any claimant from seeking legal advice or counsel; or Causing any undue delay in the settlement of a property damage claim. DISCRIMINATORY PRACTICES PROHIBITED (Ref: G.S. 58-3-25, 58-3-120, and 58-33-80) Insurers may not discriminate between individuals of the same class in the premium amount, rates charged, benefits payable, or other policy terms or conditions. Insurers may not discriminate based on an individual's race, color, national or ethnic origin. Insurers may not discriminate in favor of any person. Insurers may not discriminate due to blindness, partial blindness, deafness, or partial deafness. Insurers covering private passenger automobiles or motorcycles may not discriminate (directly or indirectly) based upon the age or sex of the persons insured. MEANING OF TERMS "ACCIDENT", "ACCIDENTAL INJURY", AND "ACCIDENTAL MEANS" (Ref: G.S. 58-3-30) Accident, accidental injury, and accidental means must be defined to imply results language. Results language defines an injury (result) as accidental even if the action that caused the injury (the means) was done voluntarily as long as the result was unintentional. Such definitions cannot include words that establish an accidental means test, which would require the cause to be accidental as well as the result. PROOF OF LOSS FORMS REQUIRED TO BE FURNISHED (Ref: G.S. 58-3-40) If an insurer requires written proof of loss, it must provide proof of loss claim forms within fifteen (15) days after receiving notice that a loss has occurred. If the insurer does not provide proof of loss forms within fifteen (15) days, the claimant may provide written proof of loss in any way they like as long as they include the occurrence, character, and extent of the claimed loss. FORCED/REQUIRED INSURANCE (Ref: G.S. 58-3-135) A lender cannot require anyone to purchase insurance from them or from an affiliate as a condition of approving, refinancing, or renewing a loan. The law forbids such requirements as part of the terms of any loan. TEMPORARY CONTRACTS OF INSURANCE (BINDERS) AS EVIDENCE (Ref: G.S. 58-3-140) Lenders must accept a binder or temporary insurance contract as valid evidence of insurance if the binder meets the following criteria: It includes:The name and address of the insured;The name and address of the mortgagee;A description of the insured collateral;A provision that it may not be cancelled within a term of the binder except upon ten (10) days' written notice to the mortgagee; andThe amount of insurance bound. It is accompanied by a receipt showing that one (1) year of premium has been paid; and The agent binding the policy has used their best efforts to have the insurance company issue the policy. A lender may still refuse to accept a binder or disapprove a specific insurer or agent if they can prove that the refusal or disapproval is reasonable under the circumstances. PAYMENT OF PREMIUMS BY CREDIT CARD (Ref: G.S. 58-3-145) An insurer or agent may accept premium payments by credit card as long as the payment option is available to all existing clients and the insurer pays all applicable credit card processing fees. ACTING WITHOUT A LICENSE OR VIOLATING INSURANCE LAW (Ref: G.S. 58-3-130; 58-33-120) A licensee who advertises or markets themselves as something they are not has engaged in impersonation (e.g., a producer who markets themselves under a name or trade name other than the one appearing on their official license). Anyone without a license who is found guilty of acting as or impersonating a principal, agent, broker, adjuster, etc., is guilty of a Class 1 misdemeanor. The same applies to anyone violating an insurance law for which punishment is not specified. FINANCIAL PLANNER/CONSULTANT Life insurance agents may not use terms such as financial planner or financial consultant to imply that they are generally engaged in an advisory business where their compensation is unrelated to sales. These terms are only allowed to be used if they are a true description of the agent's business.

► Basic Medical Expense Policies

-Basic medical expense is also known as Regular Medical Expense or Physician's Nonsurgical Expense. -Basic medical expense covers convalescent care, nursing home, private duty nursing, home health care, hospice care, outpatient treatment, dental and vision. -Basic medical expense insurance is sometimes called "first dollar insurance". Unlike major medical expense insurance, it provides benefits up front without having to satisfy a deductible. -Basic medical expense policies classify their coverages according to general categories of medical care: hospital expense, surgical expense, and physicians' (nonsurgical) expense. -Basic medical expense provides benefits for a maximum number of visits and dollar amount per visit and a maximum period of coverage. -Basic medical expense insurance typically has lower benefit limits than major medical insurance. -The benefits provided by basic medical expense insurance are lower than the actual expenses incurred. -A particular fee charged by a physician or other health professional is called a usual, customary, and reasonable expense.

Dividend Options

-Cash: if the policy owner is entitled to a $50 dividend, he or she may request that the insurer send payment directly to them. Again, insurance dividends received are tax-exempt. -Reduced, reduction, or suspension of premiums: If the policy owner's annual premium is $250 and they learn that they are entitled to a $50 dividend, they may choose to inform the insurer to retain the dividend and subtract that amount from the upcoming premium. The policy owner then pays $200 for the year's premium. This dividend option assists the policy owner, whose primary objective is to conserve cash since the policy owner does not have to remit the entire annual premium. The premium reduction option is the dividend option utilized by the policy owner when the policy owner wishes to minimize their current outlay of funds. -Paid-up permanent additions: Often referred to simply as paid-up additions or PUA, the policy owner may elect to use the $50 dividend to purchase additional permanent whole life insurance. The amount that can be purchased will be based upon two criteria: (1) the current age of the insured; and (2) the amount of the dividend. the dividend is being spent on purchasing a small face amount of single premium life insurance. This paid-up addition has its own cash value. If this option is used, it increases the total death coverage to its greatest amount possible. -One-year term insurance: The $50 dividend can be used to simply purchase any type of term insurance that the insurer offers. The one-year term option is the dividend option that provides the policy owner with a different type of life insurance (i.e., term life insurance) than that provided by the primary policy (i.e., whole life) paying the dividend. This option may be used to purchase as much term insurance as possible up to the base policy's cash value.The one-year term insurance dividend option requires a specific application and issue of a separate rider. Accumulate at interest: The policy owner, under this option, informs the insurer to retain the $50 dividend in a designated account. When this occurs, the insurer must pay interest on the dividend(s) it holds. While the dividend is tax-exempt or not taxable, any interest earned on dividends when left with the insurer is taxable as ordinary income in the year the interest is credited, whether or not the policy owner actually receives it.

► Surgical Expense Policies

-Commonly written in conjunction with hospital expense policies and medical expense policies -These policies pay for the costs of surgeons' services, whether the surgery is performed in or out of the hospital -Coverage includes surgeon's fees, anesthesiologist, and the operating room Surgical Expense Policies Approaches There are three different approaches used by insurers in providing surgical expense coverage and determining the benefits payable. These are: the surgical schedule approach, nonscheduled Plans (reasonable and customary approach), and the relative value scale approach. -Under the surgical schedule approach, (also known as Scheduled Plans) every surgical procedure is assigned a dollar amount by the insurer. -The relative value approach is similar to the surgical schedule method. The difference is that instead of a flat dollar amount being assigned to every surgical procedure, a specified set of units is assigned. The policy will carry a stated dollar-per-units amount (known as the conversion factor) to determine the benefit. -Nonscheduled plans pay benefits on usual, customary, and reasonable approach (UCR). Under (UCR) the surgical expense is compared to what is deemed reasonable and customary for the geographical part of the country where the surgery was performed. The usual, customary, and reasonable approach is the maximum amount an insurer will consider eligible for reimbursement under a health insurance plan. ---Nonscheduled plans are more common under comprehensive and major medical policies Physician Expense policies -Often referred to as Basic Physician Nonsurgical Expense Coverage because it provides coverage for nonsurgical services a physician provides -Basic medical expense coverage can be purchased to cover emergency accident benefits, maternity benefits, mental and nervous disorders, hospice care, critical care, home health care, outpatient care, and nurses' expenses -Regardless of what type of plan or coverage is purchased, these policies usually offer only limited benefits that are subject to time limitations Physician Assistants No agency, institution or physician providing a service for which payment or reimbursement is required to be made under a policy governed by State law shall be denied such payment or reimbursement on account of the fact that such services were rendered through a physician assistant.

► Hospital Expense Policies

-Cover hospital room and board, miscellaneous hospital expenses (such as lab and x-ray charges), medicines, intensive care, use of operating room, and supplies. -These expenses are covered while the insured is confined in a hospital -Hospital room and board benefits cover expenses for occupancy of the room and bed, general nursing care, food and beverages, and personal hygiene items. -Hospital room and board benefit expenses may be paid either on indemnity (dollar amount) basis or on a reimbursement (expenses-incurred) basis. -Under indemnity basis, there is no deductible and the limits on room and board are set at a specified dollar amount per day up to a maximum number of days. For example, if the hospital expense benefit was $200 per day and the hospital actually charged $400 per day, the insured would be responsible for the additional $200 per day. -Under reimbursement basis, there is no deductible and the limits on room and board are paid for the actual charges or a percentage of the actual charges up to a maximum number of days. -Hospital expense policies pay double for intensive care under hospital room and board benefit expenses. For example, if the hospital room and board benefit was $200 per day, the plan will pay double the amount or $400 per day for intensive care. -Miscellaneous hospital expenses pay for multiple the limit of the hospital room and board benefits. For example, a policy may pay 20 times a benefit covered under hospital room and board.

► PURPOSE OF DISABILITY INCOME INSURANCE

-Disability insurance is also called living death -The financial impact of total disability may be worse than the financial impact of death -The insuring agreement of a disability income is designed to provide an individual with a specified income benefit in the event of a disabling accident or sickness or both -Disability income policies are available as individual plans and group plans --Disability insurance also serve a very important function for businesses and business owners and provide benefits for nonoccupational illnesses and injuries. The most common type of individual disability income policy is the guaranteed renewable policy, which typically adjusts the premium on an annual basis and provide benefits for nonoccupational illnesses and injuries. Disability Defined -With one exception (partial disability), an insured must be totally disabled before benefits under a disability income policy are payable -What constitutes total disability varies from policy to policy, the insured must meet the definition set forth in the policy -In disability income insurance, the definition of total disability often considers the insured's education, training, and experience -Most insurers today cover an insured on own occupation or any occupation basis -A permanent disability is one that reduces or eliminates the insured's ability to work for the rest of the insured's life without expectation of recovery -The Americans with Disabilities Act (ADA) considers major life activities to include, but are not limited to, caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, and working Own Occupation The own occupation (own-occ) definition of total disability requires that the insured is unable to perform the insured's current occupation as a result of an accident or sickness. -From a policyowner's point of view, an own occupation disability income policy is more advantageous because it is less restrictive than the any occupation definition. However, it is more expensive and difficult to qualify for -Most long term disability group policies provide benefits under an own occupation clause for the first two to five years of disability, and thereafter, provide benefits under an any occupation clause Any Occupation Any Combination or also known as Combination Definitions, requires the insured to be unable to perform any occupation for which he is reasonably suited by reason of education, training, or experience in order to qualify for disability income benefits. Occupational versus Nonoccupational coverage Disability income policies that do not cover losses arising out of the hazardous occupation of the insured are called nonoccupational policies. Also, such policies do not provide coverage if the insured will also collect from Workers' Compensation or other social insurance plans. Presumptive Disability This provision specifies certain conditions that automatically qualify the insured for the full benefit because the severity of the conditions presumes the insured is totally disabled even if he is able to work Presumptive disabilities include total blindness, total deafness, loss of speech, and loss of two or more limbs At-Work Benefits Insurers first offered at-work benefits to encourage beneficiaries to return to work. By paying a portion of the total disability benefit to those who ease back into the workforce, insurers made the return to work more manageable while potentially decreasing the amount paid out in benefits. Over time, at-work benefits have become an integral part of disability insurance policies. Partial Disability -Partial disability is the inability of the insured to perform one or more important duties of the job or the inability to work at that job on a full-time basis, either of which results in a decrease in income -Partial disability applies to accident and illness disability -Partial disability covers disabilities resulting from one accident -This benefit is intended to encourage disabled insureds to get back to work, even on a part-time basis, without fear that they will lose all their disability income benefits -Normally, partial disability benefits are payable only if the policyowner has first been totally disabled -An insured will collect 50% of the monthly income benefit while partially disabled for 3 months or a maximum of six months -The amount of benefit payable when a policy covers partial disabilities depends on whether the policy stipulates a flat amount or a residual amount Injury or Accident versus Sickness Disability -Disability policies provide benefits if the insured has suffered a disability caused by an accident or an illness. An accident is a fortuitous event that is unexpected and unintended and results in an injury. This is generally referred to as accidental bodily injury. This may be contrasted with accidental means, a more restrictive definition of an accident, which indicates that the cause and result must be accidental or a coverage will not be provided. On the other hand, if an insured contracts a sickness or illness, there will be coverage unless the illness is restricted by a pre-existing condition or other policy limitations. --Policies that use the accidental means provision require that the cause of the injury must have been unexpected and accidental -Policies that use the accidental bodily injury provision ( sometimes called the results provision) require that the result of the injury has to be unexpected and accidental For example, Bob took an intentional dive off a high, rocky ledge into a lake. He struck his head on some rocks and ended up partially paralyzed. If his policy has an accidental means provision, the benefits would probably not be payable because the cause of his injury (the dive) was intentional. However, if his policy has an accidental bodily injury (or results) provision, benefits would be payable because the result of the accident (his injury) was unintentional and accidental. -Today, most disability income policies use the accidental bodily injury, which is far less restrictive than the accidental means provision -There are other cases, where an individual could become severely ill because of an accident. This is known as combined accident and sickness disability. This would leave the insured totally disabled due to both the accident and the illness. In this situation, the insured will only collect loss of income due to either the accident or the sickness. Remember, collecting two or more benefits is a prohibited act. Delayed Disability In some cases, total disability does not occur immediately after an accident, but develops some time later. Most policies allow a certain amount of time during which total disability may result from an accident and the insured will still be eligible for benefits. The amount of time allowed for a delayed disability may be 20, 30, 60, or 90 days etc., Recurrent Disability It is not unusual for a person who experienced a total disability to recover then months later undergo a recurrence of the same disability. Most policies provide for recurrent disabilities by specifying a period of time during which the recurrence of a disability is considered a continuation of the prior disability; normally this period is 90 days or six months, depending on the policy. If the disability occur within the specified period, the insurer will pay benefits without a new elimination period. However, if the recurrence takes place after that period, it is considered a new disability and will be subject to a new elimination period before benefits are again payable. Nondisabling Injury Frequently, a person covered by disability income policy will suffer an injury that does not qualify for income benefits. Many such policies include a provision for a medical expense benefit that pays the actual cost of medical treatment for nondisabling injuries that result from an accident or sickness. For benefits to be paid, the insured must provide a proof of treatment. Confining Versus Non-Confining Disability Some disability policies pay benefits according to whether or not the insured is confined when disabled. Confined disability requires the insured to stay indoor. In contrast, nonconfined disability means the insured is not required to stay indoor; for example, the insured's physician suggests the insured take walks while recuperating from an accident.

►TAX TREATMENT OF HEALTH INSURANCE PREMIUMS AND BENEFITS

-Employer-paid premiums for health insurance are not included as part of an individual's taxable income. These premiums also are not tax deductible for the individual, however they may be tax deductible for the employer. -Typically any portion of group health insurance paid for by an employee is taken out of your paycheck before your income taxes are calculated. Since these premiums are paid with pre-tax dollars, they're already income-tax-free, meaning you can't claim them as a tax deduction. -Usually you cannot deduct the premiums paid on an individual health insurance policy. However, if your medical expenses including premiums paid exceed 10% of your adjusted gross income in any tax year, you may be able to take a deduction on the amount exceeding 10%. -With both individual and employer-sponsored group health insurance, you generally aren't taxed on the health insurance benefits you receive. This includes reimbursements for medical care. -Premiums paid for personal disability income insurance are not deductible by the individual insured, but the disability benefits are tax-free to the recipient -When a group disability income insurance plan is paid for entirely by the employer and benefits are paid directly to individual employees who qualify, the premiums are deductible by the employer. The benefits, in turn, are taxable to the recipient -If an employee contributes to any portion of the premium, the benefit will be received tax-free in proportion to the premium contributed

NATURE OF GROUP HEALTH INSURANCE

-Group health insurance, like individual health insurance, can be tailored to meet the employer's needs. By its very nature, however, group insurance has several features that set it apart from individual plans, including the nature of the contract, the cost of the plan, the form of premium payments, and eligibility requirements. In this chapter, we will examine the characteristics of this type of insurance protection and review the favorable tax treatment given to group plans. -Like group life, group health is a plan of insurance that an employer (or other eligible group sponsors) provides for its employees. The contract for coverage (also known as Certificate of Coverage) is between the insurance company and the employer. A master policy is issued to the employer (master policyowner). The individual insureds covered by the policy are not given separate policies. Instead, they receive certificates of insurance and an outline or booklet that describes their benefits, list of beneficiaries, and the insured's name. Generally speaking, the benefits provided under a group health plan are more extensive than those provided under an individual health plan. Group health plans typically have higher benefit maximums and lower deductibles. The limited period of time during which all members may sign up for a group plan is called the enrollment period. A new employee must sign an enrollment card during the open enrollment period. --The period of time during which a new employee is ineligible for group Health insurance coverage is called the probationary or waiting period Characteristics of Group Health Insurance The characteristics of group health insurance are similar to those of group life. These include eligibility standards for groups and for individuals within the groups, method of premium payments (contributory versus noncontributory), lower cost, predetermined benefits, underwriting practices, conversion privileges, and preexisting conditions provisions. Let's briefly review each. Administrative Capability To be eligible to participate in group healthcare plans, an employer must demonstrate that it is administratively capable of providing the contribution it promises and can properly manage the healthcare programs. Eligible Groups -To qualify for group health coverage, the group must be a natural group. This means that it must have been formed for some reason other than to obtain insurance. Qualifying groups include employers, labor unions, trade associations (associations in the same industry), creditor-debtor groups, multiple employer trusts (employers in the same industry), lodges, and the like. -"Negotiated trusteeships", sometimes referred to as Taft-Hartley Trusts, are formed as a result of collective bargaining of benefits between a union of employees and their employer. Employers are prohibited from paying funds directly to a labor union for the purpose of providing group health insurance to its members. Therefore, payments by an employer may be made to a trust fund created to pay for the member's group health insurance. -State laws specify the minimum number of persons to be covered under a group policy. One state may stipulate 15 persons as a minimum number, while another state may require a minimum of 10. Ten lives is the most typical minimum requirement. Temporary employees are typically not eligible for coverage in a group health policy. Group Coverage Provision Group coverage provisions are designed to describe eligibility, eligibility period, minimum number of employee participation, benefits, limitations, qualifications, and master policyowner responsibilities. --An employer may differentiate the benefits under a group policy for certain employee groups, as long as, the benefits are fair to the insurance company. For example, an employer may offer more benefits to employees who have reached a certain position or salary levels. ----The employee may not discriminate against individuals within a specific group Predetermined Benefits Another characteristic of group health plans is that the benefits provided to individual insureds are predetermined by the employer in conjunction with the insurer's benefit schedules and coverage limits. For example, group disability benefits are tied to a position or earnings schedule, as are accidental death and dismemberment benefits. Individual Eligibility Like group life, group health plans commonly impose a set of eligibility requirements that must be met before an individual member is eligible to participate in the group plan. It is common to find the following requirements: ---Minimum of one to three months employment service, full-time employment status, and working people age 65 or over generally must be offered the same health benefits offered to younger employees Eligibility Period If coverage is not elected within 30 or 31 days, future coverage will be be selected on individual basis rather than group basis and coverage will only be available after a physical examination is done. ---Eligibility period helps reduce adverse selection Contributory Versus Noncontributory Group health plans may be contributory or noncontributory. If the employer pays the entire premium, the plan is noncontributory. If the employees share a portion of the premium, it is contributory. Most noncontributory group health plans require 100% participation by eligible members, whereas contributory group health plans often require participation by 75% of eligible members. The reason for these minimum participation requirements is to protect the insurer against adverse selection and tokeep administrative expenses in line with coverage units. If the participation percentage for contributory and noncontributory plans drop, coverage may be terminated. Lower Cost Benefit for benefit, the cost of insuring an individual under a group health plan is less than the cost of insurance under an individual plan. This is because the administrative and selling expenses involved with group plans are far less. Some of the factors that help determine group health insurance premiums are: the size of the group, the claims experience with previous insurers, and the ages of group members. Premium Rating Group health plans rating factors are: -Average age of the group; the higher the average age the higher the premiums -Waiting period for disability benefits; the shorter the waiting period the higher the premiums -Disability benefits indemnity period; the higher the indemnity period the higher the premiums -Occupation; the more hazardous the employee's occupation the higher the premiums ►Small employer medical plans Availability of coverage This provision authorizes insurers to issue group health insurance policies to small employers (2-50 employees) to cover their employees. Small Employer group health plans -Small employers that employ less than 20 employees for each working day across each of 20 or more calendar weeks in the current year or preceding year can use Medicare as a primary payer for claims. -Employers that employ 20 or more employees for each working day across each of 20 or more calendar weeks in the current year or preceding year use Medicare as a secondary payer for claims. Funding of Group Insurance During the past decade employers have considered benefit funding methods as an alternative to the conventional or traditional fully insured group health insurance policy. The traditional form of group insurance is characterized by an employer paying premiums and an insurer paying claims. The reason why employers have been looking for alternatives to the traditional group plan is to reduce the cost of health insurance coverage and improve cash flow. Since the cost of medical care has increased during the past twenty years, the cost to provide adequate coverage for employees has increased as well Modified fully insured plans: There are several types of alternative funding methods that are regarded as modifications of traditionally fully insured plans since an insurer has the ultimate responsibility for paying all benefits promised under the contract. Generally, most insurers permit only medium and large employers to use these modifications. Some of the more common types of modified fully insured plans include but are not limited to: ---Premium-delay arrangements: allows the employer to defer the payment of premiums beyond the normal 30-day grace period. Most of these arrangements lengthen this grace period to 60 or 90 days. ---Reserve reduction arrangements the employer is permitted to retain an amount of the annual premium that is equal to the claim reserve. ---Retrospective premium arrangement: Under this plan, the insurer agrees to collect a provisional premium but may collect additional premium or make a premium refund at the end of the year based on the actual incurred losses. ---Shared funding arrangement: This allows the employer to self-fund health care expenses up to a certain limit. The employer can select a deductible and pay covered expenses for any individual incurring claims up to that maximum, at which point the insurer assumes the risk. ---Minimum premium arrangement: This plan allows the employer to self-insure the normal and expected claims up to a given amount and the insurer funds only the excess amounts. ---501(c)(9) TRUST: This is a funding vehicle for the employee benefits that are offered to members. Contributions made to the trust are tax-deductible as if they were paid to an insurer as a premium. The trust must provide eligible benefits only and its sole purpose must be to provide benefits to its members or their beneficiaries. Finally, the trust must be controlled by:(1) its membership; (2) an independent trustee such as a bank; or (3) some other fiduciary on behalf of the members. ---Self-funding arrangement: Large employers may elect to fully self-fund a plan. Characteristically, in a fully self-insured plan, the employer is responsible for paying claims, administering the plan and bearing the risk that actual claims will exceed those expected. The major problem with self-funding medical expense coverage is the severity of claims. Small and medium size employers will shy away from self-funding although many small employers will self-fund basic medical expense benefits and insure major medical benefits with an insurer. Larger employers with thousands of employees are more apt to engage in self-funding. ---ASO contracts: known as an Administration Services Only (ASO) contract, this plan stipulates that the employer purchases specific administrative services from an insurer or from an independent third-party administrators (TPA). These services usually include the administration of claims but could also include prescription drug cards, COBRA administration and employee communications. -------Self-funded plans commonly use the services of an insurance company to act as a third-party administrator of the plan. Insurers may provide such services without responsibility for claims payment under an Administrative Services Only (ASO) contract. Conversion Privilege -Group health plans that provide medical expense coverage universally contain a conversion privilege for individual insureds. This allows them to convert their group certificate to an individual medical expense policy with the same insurer, if and when they leave their employment. Insurers are permitted to evaluate the individual and charge the appropriate premium, be it a standard rate or substandard rate. However, an individual cannot be denied coverage even if he/she has become uninsurable. The employee must make application for a converted policy within a given period of time (usually 31 days) depending on the state. During this time, the individual remains insured under the group plan whether or not a conversion ultimately takes place. Conversion privileges generally are reserved for those who were active in the group plan during the preceding three months. -The conversion privilege is available to terminated employees. Termination of employment includes an employee who is laid-off or who leaves a job voluntarily, but not those who are fired "for cause." Excess Benefits A converted group health plan may not include benefits in excess to those benefits offered under the converted health plan. ---If health benefits are too high over-utilization of the plan may result Other Coverages The insurer may refuse to renew a converted policy due overinsurance, fraud or material misrepresentation or if the insured is covered under Medicare.

Principles and Characteristics of Group Life Insurance

-Group insurance is a way to provide life insurance, health insurance, or both kinds of coverage for a number of people under one contract. Typically, group insurance is provided by an employer for its employees; however, it is available to other kinds of groups as well, as we will see. most often written as an annually renewable term policy. unlike an individual insurance policy, the insured is almost never the policy owner of group life insurance. -The employer generally plays the role of the policy owner. The employer or group providing the group life coverage pays all or a portion of the premium and is the policyholder. The employer or plan sponsor receives the master policy. In contrast, the covered employees or plan participants receive a certificate of coverage or a booklet that describes the benefits, the coverage provided, and how long the insurance coverage will last. The covered employee or plan participant is also known as the certificate holder.

NONQUALIFIED RETIREMENT PLANS

-If a plan does not meet the specific requirements set forth by the federal government, it is termed a nonqualified plan and, thus, is not eligible for favorable tax treatment. For example, Bill, age 42, decides he wants to start a retirement fund. He opens a new savings account at his local bank, deposits $150 a month in that account, and vows not to touch that money until he reaches age 65. Although his intentions are good, they will not serve to "qualify" his plan. The income he deposits and the interest he earns are still taxable every year. -Employers generally provide nonqualified retirement plans to highly paid or key employees, or directors and officers of a firm. The contributions to such plans are not tax-deductible since the employer is legally discriminating in favor of higher-paid employees. In other words, the employer makes no effort to satisfy the qualification requirements under the Internal Revenue Code (i.e., IRC) or ERISA for tax-favored treatment of qualified plan costs or benefits. Providing this type of additional compensation to an employee allows the firm to attract and retain key employees' services. Common types of nonqualified plans include nonqualified deferred compensation plans, supplemental executive retirement plans, and incentive compensation plans. For instance, in a nonqualified deferred compensation plan, compensation for an employee's services is postponed until retirement. Generally, the employee will not pay taxes on the deferred amounts until they are received. The employer cannot deduct the deferred payments until they are actually received by the employee, usually at retirement. Nonqualified plans may be funded or unfunded. A funded plan is one where the employer maintains assets in some sort of trust or escrow account as security for the promise of future benefit payments. An unfunded plan exists when no actual funds or assets have been designated to fund the plan. Therefore, the employee is relying on the unsecured promise of the employer.

Taxation of Medical Expense Insurance

-Incurred medical expenses that are reimbursed by insurance may not be deducted from an individual's federal income tax -Incurred medical expenses that are not reimbursed by insurance may only be deducted to the extent they exceed 7.5% of the insured's adjusted gross income -Tax-qualified long-term care premiums are considered a medical expense. If a taxpayer's medical expenses exceed 7.5% of their adjusted gross income, long-term care premiums are tax deductible. -Benefits received by an insured under a medical expense policy are not included in gross income because they are paid to offset losses incurred -For self-employed individuals (Sole Proprietors) , 100% of their health insurance premium is tax deductible -For Partnerships and LLCs, the benefits are tax-deductible to partnerships (paid by partnership) and LLC

INDIVIDUAL USES FOR LIFE INSURANCE

-Life insurance provides for the immediate creation of funds payable to a beneficiary when an insured person dies. We all purchase life insurance for a variety of reasons including but not limited to: (1) for final expenses; (2) estate protection and conservation; (3) funds for survivor protection and security (monthly income); (4) education expenses; (5) to provide funds to pay off a debt (house); (6) to supplement retirement income; (7) charitable contributions; (8) disability, illness, and emergency funds; and (9) to accumulate cash and for liquidity purposes. These personal uses of life insurance are similar to and related to the costs associated with death that were previously reviewed. Therefore, life insurance is used for survivor protection, estate creation, cash accumulation, liquidity, and estate conservation (to pay off estate taxes that are incurred). A life insurance producer should consider all of these uses when working with a client. -A life insurance policy is a piece of property, just like a house. Therefore, this property's value must be included in the owner's estate at death and may be estate taxable. The most significant advantage of life insurance as a property is that it creates an immediate estate when an insured dies. -A life insurance policy is a piece of property just like a home. Therefore, the value of this piece of property must be included in the owner's estate at death and may be estate taxable. The biggest advantage of life insurance as property is that when an insured dies, the policy creates an immediate estate.

► Taxation of Government Health Plans

-Medicare Part A (Hospital insurance) is primarily funded by social security payroll taxes -Social Security benefits are income-tax free. However, if the beneficiary files an individual tax return and his annual income is greater than $25,000, then benefits are subject to federal income tax. Joint filers will pay federal income tax on their Social Security benefits if their income is greater than $32,000. -Employers are entitled to take a tax deduction for premium contributions they make under Social Security disability benefits; however, employee taxes are paid with after-tax dollars for Social Security

DETERMINING THE PROPER AMOUNT OF LIFE INSURANCE

-Planning for the income needs of survivors is extremely important. The planning process involves: (1) information gathering including personal information (i.e., ages, health history) and financial information such as wages, personal assets, investments and earnings, pension plans and savings; (2) identifying and prioritizing the client's objectives; (3) analyzing the client's current financial condition; (4) developing and implementing a plan; and (5) periodically reviewing the plan. -Life insurance proceeds will often be used to replace the salary or the lost services of the deceased. The producer must also help the proposed insured and family determine the proper amount of life insurance when considering what amount of capital should be retained or available at death and if these available funds will be sufficient to protect against a forced liquidation of property. -Traditionally two primary approaches can be used to determine how much life insurance an individual or family needs; The Human Life Value Approach and The Needs Approach. Either of these approaches may be utilized successfully, although the human life value approach does not consider those who receive a financial benefit from the individual's continued life. Human Life Value Approach The human life value approach is a capitalized value of an individual's net future earnings. In other words, it looks at the potential lost earnings of a person as a measure of how much insurance to purchase. A person's future earning capacity ends abruptly when they die prematurely. Therefore, to determine how much life insurance is needed to protect this individual's dependents, we may multiply the projected earned income per year by the number of years until retirement. Generally, the present value of the individual's projected earnings minus expenses (i.e., income taxes and cost of living) are multiplied by the years until retirement age. This formula provides an approximate coverage amount that is needed. Therefore, determining the value of an individual's earning potential over a period of time is known as the human life value approach. ---The Human Life Value Approach calculates the amount of money a person is expected to earn over his lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on an individual's life. Needs Approach -The needs approach is used when the amount of life insurance needed is based upon the individual's (or family's) financial goals and objectives. Therefore, education fund goals, emergency funds, bequests, charitable gifting, or retirement income goals of a spouse will influence the amount of coverage needed. This formula suggests that all family members' ages, wages, and health history need to be reviewed. -Purchasing life insurance as a charitable gift also has its tax advantages. For instance, if the owner of a life insurance policy transfers all or a part of an existing whole life policy to a charitable organization, he or she will receive an income tax deduction based on the cash value of the policy at the time of the transfer. Additionally, if a new policy is purchased and the charity is named owner and beneficiary, the purchaser's future premium payments are tax-deductible (i.e., tax-deductible gift). -The needs approach will focus on determining lump sum needs and will utilize all the costs associated with death (i.e., postmortem costs) plus financial objectives to arrive at a person's or family's total capital needs. Then, the liquid assets of the person are calculated. Liquid assets include savings, pension or profit-sharing benefits, life insurance proceeds, Social Security retirement income, interest from bonds, dividends from mutual funds or stocks, rental income, and any other income the person is entitled to. It is especially important to consider Social Security since no retirement income is provided to survivors during the so-called "blackout period." The blackout period is the period of time from the insured's death until the surviving spouse is permitted to receive retirement income benefits. However, benefits are provided for other dependents (i.e., children) during the blackout period until the youngest child reaches age eighteen (18). By subtracting liquid assets from total capital needs, the individual will arrive at the approximate amount of life insurance "needed." Other Approaches -The "multiple earnings method" selects a number of years to replace the insureds annual salary. For example, five times a person's annual salary. -The "interest-only method" determines how much insurance is needed to maintain after-tax family consumption levels if the insurer holds the principle for future payments. -The "single needs method" identifies the amount of insurance needed based upon a specific need (i.e., loan or debt, education fund, death taxes, etc.). -The "capital needs analysis" determines the immediate cash needs of an individual or family, such as ----final expenses, medical expenses associated with death, probate costs, cost of living expenses, debt elimination, an emergency fund, education funds; ----Federal and state death taxes, which must be paid within six months of the death; and ----continuing income needs (i.e., readjustment income, dependence period income, life income for a survivor, and retirement income). -The "seat of the pants" method arbitrarily selects the amount of insurance necessary.

CHARACTERISTICS OF SOCIAL SECURITY

-Social insurance is provided by Social Security, also referred to as OASDHI. This is the Old Age Survivors Disability Health Insurance program. The social security program was signed into law in 1935 by President Roosevelt as part of the Social Security Act. Social Security is "funded" by payroll taxes collected from employees, employers, and those who are self-employed. Social Security provides several benefits to those who are eligible, including but not limited to retirement income, disability income, a lump sum death benefit, and survivor benefits. -It is a common misconception of many Americans that Social Security will fulfill all their financial needs. The Social Security system delivers a basic protection level to most working Americans against the financial problems brought on by death, disability, and aging. Social Security augments but does not replace a sound personal insurance plan. -The misunderstanding has resulted in many Americans discovering, often too late, they were inadequately covered when they needed life insurance, disability income, or retirement income. Purpose The Old Age and Survivors Disability Health Insurance (OASDHI) system is commonly referred to as Social Security. Social Security was established during the Great Depression to assist the masses of people who could not afford to sustain their way of life because of unemployment, disability, illness, old age, or death. Calculating Social Security Benefits -A person must be insured under the Social Security program in order for a survivor, disability, or retirement benefits to pay. Social Security benefits are based on how long a covered worker has worked throughout his life. -The amount of Social Security benefits a person receives is based on the individual's average indexed monthly earnings (AIME) during their working years. Average indexed monthly earnings are used to account for inflation and bring past earnings up to current economic standards. -The primary insurance amount (PIA) determines the full amount of retirement benefits for an eligible person at age 65. If a worker retires early, for example, at age 62, his retirement benefits will be 80% of his PIA and will remain lower for the covered worker's life. -Primary Insurance Amount (PIA) As mentioned earlier, benefits payable by Social Security are based upon what an individual worker has contributed to the program. In other words, this is the average indexed monthly earnings (i.e., average income over one's working lifetime). This is known as the worker's primary insurance amount. Coverage and Eligibility Social Security offers coverage to virtually every American who is employed or self-employed, with a few exceptions. Those not offered coverage include: --Most federal employees hired before 1984 who are covered by Civil Service Retirement or another similar plan. --Approximately 25% of state and local government employees who are covered by a state pension program and elect not to participate in the Social Security Program. --Railroad workers covered under a separate federal program called the Railroad Retirement System. Those who are actively contributing to the Social Security program through FICA taxes are considered covered. Coverage does NOT guarantee benefit eligibility. Each Social Security benefit has eligibility requirements that must be met prior to receiving the benefit.

PENSION PROTECTION ACT

-The Pension Protection Act of 2006 embodied America's pension laws' most sweeping reform in over 30 years. It improves the pension system and increases opportunities to fund retirement plans. -The Act encourages workers to increase their contributions to employer-sponsored retirement plans and helps them manage their investments. For example, automatic enrollment is a means of increasing participation in 401(k) plans, especially among young workers entering the workforce. The Act also provides for automatic deferrals into investment funds and automatic annual increases in employees' salary deferral rates beginning in 2008. Since 2007, plan sponsors can offer fund-specific investment advice to participants through their retirement plan providers or other fiduciary advisers. Counseling in person is also allowed under strict guidelines.

► DISABILITY INCOME BENEFITS

-The benefits paid under a disability income policy are in the form of monthly income payments -Insurers typically place a ceiling on the amount of disability income protection they will issue on any one applicant, based on the insured's income at the time of purchase -As compared to the insured's previous earnings, the benefits provided under disability income insurance should be somewhat less to avoid over-insurance -Insurers use two methods to determine the amount of benefits payable under their disability income policies: percent-of-earnings approach and the flat amount method -The first method is called the percent-of-earnings approach, which determines the benefit amount by using a percentage of the insured's pre-disability earnings and takes into account other sources of disability income -The second method used to establish disability benefits is the flat amount method. Under this approach, the policy specifies a flat income benefit amount that will be paid if the insured becomes totally disabled. Normally, this amount is payable regardless of any other income benefits the insured may receive. Flat Amount Benefit -A flat amount benefit is a set amount stated in the policy -This amount is usually 50% of the full disability benefit For example, let's assume Helen, who has a disability income policy with an own-occupation definition, is severely injured after falling down a flight of stairs. She is unable to work for four months during which time her disability income policy pays a full benefit. After four months she is able to return to work, but only on a part-time basis earning substantially less than she did before her injury. If her policy did not contain a partial disability provision, her benefits would cease entirely because she does not meet the definition of totally disabled any longer. However, if her policy provides for partial disability benefits to be paid as a flat amount, she will be able to work on a part-time basis and continue to receive half of her disability benefits. Residual Disability Amount Benefit -A residual amount benefit is based on the proportion of income actually lost due to the partial disability, taking into account the fact that the insured is able to work and earn some income -Partial and residual disability riders may not be added to the same policy -The benefit is usually determined by multiplying the percentage of lost income by the stated monthly benefit for total disability For example, if the insured suffered a 40% loss of income because of the partial disability, the residual benefit payable would be 40% of the benefit that the policy would provide for total disability Rehabilitation Benefit Because of disability, insureds may not be able to return to their normal occupation, but still be able to work at some kind of job. The rehabilitation benefit facilitates vocational training to prepare insureds for a new occupation. Under the rehabilitation benefit in a disability income policy, the insurer will pay the approved cost of a rehabilitation program, as long as, the insured remain totally disabled and active in the program. Disability Benefits in a Life Insurance Contract Many insurers offer a waiver of premium rider that also includes a disability income benefit. Most riders provide a benefit of one-percent of the face amount of the policy which is payable if the insured is totally disabled. Loss of Earning Test The loss of earnings test is used to determine whether an income loss has occurred. This test examines active income, including: ----Wages ----Salary ----Commissions ----Fees or compensation for services Earned income does NOT include: ----Rental income from real estate ----Interest on savings ----Investment dividends -If the insured's earnings diminish after a disabling accident or illness occurs, the contract considers the insured to be disabled. -Pure Loss of Income (Income Replacement Contracts): Typically, a person's actively earned income (as described above) must decrease by at least 20% to qualify for any type of disability benefit. If a policy defines disability purely as a loss of income, it's referred to as an "income replacement contract."

The amount of a policy's cash value depends on

-The face amount of the policy- the larger the face amount of the policy, the larger the cash values -The duration and amount of the premium payments- the shorter the premium-payment period, the quicker the cash values grow. The higher the premium amount, the quicker the cash values grow -How long has the policy been in force?- the longer a policy has been in force, the greater the build up in cash values.

Retirement: QUALIFIED PLANS

-There are many kinds of retirement plans, each designed to fulfill specific needs. The products and contracts they offer provide ideal funding or financing vehicles for both individual plans and employer-sponsored plans. Broadly speaking, retirement plans can be divided into two categories: qualified plans and nonqualified plans. Qualified plans are those that meet federal requirements and receive favorable tax treatment. -Employer contributions to a qualified retirement plan are considered a deductible business expense, which lowers the business's income taxes. Employer contributions to a qualified plan are not currently taxable to the employee in the years they are contributed. However, they are taxable when paid-out as a benefit (typically when the employee is retired and in a lower tax bracket). -Contributions to an individual qualified plan, such as an individual retirement account or annuity (IRA), are deductible from income under certain conditions. -The earnings of a qualified plan are exempt from income taxation until taken out. Alienation of Benefits Alienation of benefits involves the assignment of a pension or retirement plan participant's benefits to another person. It is permitted only under exceptional circumstances per IRS rules, such as certain participant loans and certain domestic relations orders. Characteristics of Qualified Employer Plans An employer retirement plan is one that a business makes available to its employees. Typically, the employer makes all or a portion of the contributions on behalf of its employees and is able to deduct these contributions as ordinary and necessary business expenses. The employees are not taxed on the contributions made on their behalf, nor are they taxed on the benefit fund accruing to them until it is actually paid out. By the same token, an individual employee's contributions to a qualified employer retirement plan are not included in the individual's ordinary income and therefore are not taxable. Employee Retirement Income Security Act of 1974 -Many of the basic concepts associated with qualified employer plans can be traced to the Employee Retirement Income Security Act of 1974, commonly called ERISA. The purpose of ERISA is to protect the rights of workers covered under an employer-sponsored plan. -ERISA imposes several requirements that retirement plans must follow to obtain IRS approval as a qualified plan, eligible for favorable tax treatment. This law sets forth standards for participation, coverage, vesting, funding, and contributions. -ERISA also regulates group health insurance in the area of disclosure and reporting. Before the passage of ERISA, workers had few guarantees to assure them that they would receive the pension benefit they thought they had earned. An unfortunate but common plight was the worker who had devoted many years to one employer only to be terminated within a few years of retirement and not be entitled to a pension benefit.

Main components of the rule are that financial institutions must

-notify consumers about their privacy policies -provide consumers with the opportunity to prohibit the sharing of their protected financial information with non-affiliated third parties. -Obtain affirmative consent from consumers before sharing protected health information with any other parties, affiliates and non affiliates.

Producer responsiblities

-solicit new business for company they represent by assisting clients in process of acquiring products from application to policy deliver, being extremely knowledgeable about all company products and services -Keep current customers satisfied and actively seek referrals for new business -assist in the claims process -producer must be aware of company underwriting guidelines to minimize wasting the underwriter's valuable time and skills on poorly matched products and customers and to assist the underwriter in any way to facilitate the application process.

CAWL policies characteristics

-the use of an accumulation account which is made up of the premium, less expense and mortality charges, and credited with interest based on current rates -Minimum guaranteed cash value and rate of return -Maximum annual premium -Use of a surrender charge, fixed at issue, which is deducted from the accumulation account to derive the policy's surrender value. -Use of a fixed death benefit and maximum premium level at time of issue LOW PREMIUM TYPE: this includes an indeterminate premiums that is initially low, and it contains a redetermination provision which states that after a specified period , the insurance company can re-figure the premium HIGH PREMIUM TYPE: the initial premium is relatively high and it possesses an optional pay-up or vanishing premium provision, the provision states that the policyowner may cease paying premiums once the policy's values are sufficient to pay-up the contract

1035 Contract Exchange:

1035 Contract Exchange applies to annuities. If an annuity is exchanged for another annuity, a "gain" (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows you, as a policyholder, to transfer funds from a life insurance, endowment, or annuity to a new policy, without having to pay taxes.

Broker

A Broker represents themselves and the insured (the client or customer).

►Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to individuals who are enrolled in a high-deductible health plan. The funds contributed to an account are not subject to federal income tax at the time of deposit and roll over and accumulate year to year if not spent. HSAs are owned by the individual and are an alternate tax-deductible source of funds used to pay for qualified medical expenses at any time without federal tax liability or penalty. -Distributions other than for qualified medical expenses are subject to income tax and a penalty of 20% -Health Savings Accounts (HSAs) are designed to help individuals save for qualified health expenses that they, their spouse, or their dependents incur -HSAs contributions are tax deductible. An individual who is covered by a high-deductible health plan can make a tax-deductible contribution to an HSA and use it to pay for out- of-pocket medical expenses -The contribution amounts can change each year. In 2022, the maximum contribution is $3,650 for an individual and $7,300 for a family. Individuals who are 55 to 65 years of age can make an additional catch-up contribution of $1,000. -The minimum deductible allowed is $1,400 for individual coverage and $2,800 for a family. -The maximum out-of-pocket cost allowed is $7,050 for an individual plan and $14,100 for plans that cover families. -To be eligible for a Health Savings Account, an individual must be covered by a high-deductible health plan, must not be covered by other health insurance (does not apply to accident insurance, disability, dental care, vision care, long-term care), must not be eligible for Medicare, and can't be claimed as a dependent on someone else's tax return. HSA's also require enrollment in a health plan that limits out of pocket expenses

Certificate of Insurance

A certificate of insurance is a document issued by an insurance company/broker that is used to verify the existence of insurance coverage under specific conditions granted to listed INDIVIDUALS. With group insurance, the group (typically employer) is the policy owner and maintains a MASTER POLICY. The insureds (typically employees) receive a certificate of insurance instead of a policy.

Class Designation

A class designation is a beneficiary group designation (for example, all of my children), opposed to specifying one or more beneficiaries by name

Reinsurer

A company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to do

Face amount plus cash value policy

A contract that promises to pay at the insured's death the face amount of the policy plus a sum equal to the policy's cash value.

Contributory Plan:

A contributory plan is a group insurance plan issued to an employer under which both the employer and employees contribute to the cost of the plan. Generally, 75% of the eligible employees must be insured in most states. The employees must contribute to the cost of the plan (premium payments).

Independent Agency System

A creation of the property and casualty industry, and this system does not tie a sales staff or agency to any one particular insurance company. Instead, independent agents represent any number of insurance companies through contractual agreements. They are compensated on a commission or fee basis for the business they produce. Also known as the American agency system.

QUALIFIED DEFINED CONTRIBUTION PLANS

A defined contribution plan's provisions address the current amounts going into the plan and identify the participant's vested (nonforfeitable) account. These predetermined amounts contributed to the participant's account accumulate to a future point (i.e., retirement). The final amount available to a participant depends on the total contribution amount, plus interest and dividends. *There are three primary types of defined contribution plans: profit-sharing plans, stock bonus plans, and money purchase plans.* Profit-Sharing Plans Profit-sharing plans are established and maintained by an employer and allow employees to participate in the company's profits. They set aside a portion of the firm's net income for distributions to employees who qualify under the plan. Since contributions are tied to the company's profits, it is unnecessary that the employer contributes every year or that the amount of contribution is the same. However, the IRS states that to qualify for favorable tax treatment, the plan must be maintained with "recurring and substantial" contributions. The IRS also states that withdrawals of funds from a profit-sharing plan may be subject to a 10% tax penalty in addition to income taxes if they are made before the age of 59 1/2. Stock Bonus Plans A stock bonus plan is similar to a profit-sharing plan, except that the employer's contributions do not depend on profits. Benefits are distributed in the form of company stock. Money Purchase Plans Money purchase plans provide for fixed contributions with future benefits to be determined. Money purchase plans most truly represent a defined contribution plan. A money purchase plan must meet the following three requirements: ----Contributions and earnings must be allocated to participants in accordance with a definite formula. ----Distributions can be made only in accordance with amounts credited to participants. ----Plan assets must be valued at least once a year, with participants' accounts being adjusted accordingly. Employee Stock Ownership Plans Employee Stock Ownership Plans, or ESOP's, are employee-owner programs that provide a company's workforce with an ownership interest in the company. Shares are allocated to employees and may be held in an ESOP trust until they retire or leave the company.

Insurer Classification According To Domicile

A domestic insurer has its principal or home office in the state where it is authorized. In other words, an insurance company authorized (admitted to transact insurance business) in the state where it is chartered or incorporated is classified as a domestic insurer only in that state. A foreign insurer is authorized in one state, but its charter or principal office is in another State. An alien insurer is an insurer authorized in any state within the U.S., but its principal office is located outside this country.

Risk Retention Group

A group-owned liability insurer which assumes and spreada product liability and other forms of commercial liability risks among its members

► Health Maintenance Organizations (HMO)

A health maintenance organization, or HMO, is another type of organization offering comprehensive prepaid health care services to its subscribing members. An HMO can be established on a for-profit organization basis or for a not-for-profit organization basis. Regardless of its establishment basis, HMOs are distinguished by the fact that they not only finance health care coverages for their subscribers on a prepayment basis, but they organize and deliver the health services, as well at their own local medical facility. HMOs are sponsored by different groups, such as employers, physicians, hospitals, labor unions, government entities, medical schools and/or associations, Blue Cross/Blue Shield, consumer groups or insurance companies. -If an HMO is established on a not-for-profit basis, then it is mainly operated by salaried employees of the HMO (Consumer cooperative). -If an HMO is established on a for-profit basis, then it is mainly operated a group of physicians (producer cooperative). Characteristics of Health Maintenance Organizations (HMO) -HMOs are known for stressing preventive care. -HMOs may be self-contained or self-funded based on dues or fees from their subscribers. They may also contract for excess insurance or administrative services provided by insurance companies. -HMO's often require subscribers to select a primary care physician, which is a doctor who provides general medical care for a particular member and controls all referrals for specialized care, and in some cases, hospital care. This is known as the gatekeeper system. ---If a need for emergency health services arises for an enrollee of a HMO using a gatekeeper system, the enrollee should proceed directly to the nearest emergency room and notifies the primary care physician as soon as possible. ---Primary Care Physician (PCP) Referral is a special kind of pre-approval that individual health plan members —primarily those with HMOs and POS plans— must obtain from their chosen primary care physician before seeing a specialist or another doctor within the same network. -Subscribers pay a fixed periodic fee to the HMO as opposed to paying for services only when needed and are provided with a broad range of health services, from routine doctor visits to emergency and hospital care. This is also known as service incurred plan. ---Co-payment requirements can be found in the certificate of coverage in the policy. Health Maintenance Organizations (HMO) Structures An HMO has different models to structure its services for its subscribers, which are group model, staff model, network model, individual practice association (IPA) model, open panel and closed panel models. -Group model, also known as medical group model or group practice model, offers a variety of medical services to subscribers. Under this model, the HMO pays a capitation or a predetermined price for the group and the group pays the physicians for the services they provide. -Under a staff model medical care is rendered by physicians and hospitals who participate in the HMO (employed by the HMO). -The network model is similar to the group model. However, it involves more than one group of physicians. The payment given to a physician under a network model is based on a capitation fee. -HMOs may also function on an individual or independent practice association (IPA) basis, which is characterized by a network of physicians who work out of their own facilities and participate in the HMO on a part-time basis. This is also known as an open panel network. This offers insureds the maximum freedom to choose physicians. ---Network of physicians who wish to participate in an HMO must agree to all its requirements -If the HMO is represented by a group of physicians who are salaried employees and work out of the HMO's facility, then they are called a closed panel network. ---For non-emergency situations in a closed network plan, a subscriber may be required to pay up to 100% of the billed amount if a health provider is chosen outside of the network. Health Maintenance Organizations (HMO) Coverages -Hospital (hospitalization, in-hospital lab work and X-rays, inpatient laboratory services, and inpatient mental health care). -Surgical and medical treatment. -Outpatient medical services. -Diagnostic services. -Therapeutic services. Health Maintenance Organizations (HMO) Additional Coverages -With HMO prescription drug plans, drugs are usually dispensed through participating pharmacies. ---An in-house pharmacy is typically available to enrollees in a staff model. -Vision and dental care. -Home health care. -Long-term Care. -Substance abuse. -Nursing services. Other Characteristics of Health Maintenance Organization (HMO) -HMOs are regulated at the state level, as well as, by the federal government. -Subscribers must have a 24-hour a week access to the HMO. This includes referrals, medical consultation, and authorizations. -HMOs must provide an open enrollment for 30 days. ---The open enrollment is an opportunity for the HMO to advertise its plans for the public ---The open enrollment allows current subscribers to either continue in the HMO or choose a different provider ---The open enrollment allows non-subscribers to join an HMO ---An HMO may not deny an applicant for pre-existing health conditions. However, some state laws make an exception to this rule for chronic diseases -HMOs must handle and resolve all coverage and care complaints by subscribers. -Other prohibited practices include canceling or nonrenewing coverage due to current health status and implying that HMOs provide commercial insurance. Health Maintenance Organization Federal Requirements Employers who offer health benefits may also be eligible to offer its employees enrollment in an HMO. The following are the requirements and guidelines that must be met in order for employers to be eligible to offer an HMO: --Employer has at least 25 employees. --Employers must contribute to the plan. --An employer HMO Plan must not charge more than a commercial insurance plan. --An employer HMO plan must stress preventive care. --An employer HMO Plan must maintain minimum reserves. --Employer HMO premiums must be based on community rating basis.

Level Term Rider

A level term rider adds an additional fixed, level death benefit for a predetermined amount of time at a predetermined cost to the existing face value a permanent policy. For example, Richard has been issued a $50,000 whole life insurance policy with a $100,000 10-year term rider. If Richard dies in five years (or any point in the next ten years), his beneficiary will receive $150,000 ($50,000 for the whole life + $100,000 for the term rider). If Richard dies in 15 years (or any point after the 10-year term), his beneficiary will only receive the $50,000 face value of the whole life insurance.

Noncontributory Plan

A noncontributory plan is an employee benefit plan under which the employer bears the full cost of the employees' benefits; in most states, the plan must cover 100% of eligible employees. The employees do not contribute to the cost of the plan. The most significant benefit of a noncontributory insurance plan is that it helps the insurer avoid adverse selection. With a noncontributory group insurance plan, the employees or plan participants do NOT contribute to the premium payments.

Non participating policy

A nonparticipating insurance policy, typically issued by stock companies, do not allow policyowners to participate in dividends or electing the board of directors

Current Assumption Whole Life (CAWL) or Interest-Sensitive Whole Life or Excess Interest Whole life

A nontraditional life policy that is characterized by premiums that vary to reflect the insurer's changing assumptions with regard to its death, investment and expense factors. However, interest sensitive products also provide cash values that may be greater than guaranteed levels if a company's underlying death, investment and expense assumptions are MORE favorable than expected, so policyowners will have two options: lower premiums or higher cash values. If Underlying assumptions are LESS favorable than anticipate, then there will be either a higher premium, or reduction in the policy's face amount. An interest sensitive life insurance policy owner may be able to withdraw the policy's cash value interest free, this is called the Partial Surrender provision.

Grace period

A primary purpose of the grace period, as well as the reinstatement and automatic premium loan provision, is to keep a life insurance policy in force even when a premium payment is late. Keeping the policy in force prevents the life insurance company from requiring the insured to provide insurability again or charging a higher rate for the insured's increased age. Period= 30 to 31 day or to 4 weeks

Self Insurers

A self insurer establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company

Agent versus Solicitor Authority

A solicitor has the authority to seek insurance applicants for the company but does NOT have any authority to bind coverage on behalf of a company to a customer. An agent authority has the ability to bind coverage between a customer and the company.

Valued contract

A valued contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts are valued contracts.

ADDITIONAL ANNUITY CHARACTERISTICS AND ASPECTS

ACCUMULATION PERIOD During the pay-in (accumulation) phase, the insurer is obligated to return all (or a portion) of the annuity's value if the contract owner dies. This value will be equal to the amount of any contributions (minus withdrawals or other expenses), plus interest. Although the contract doesn't identify the proceeds available at death as a death benefit, the owner must name a beneficiary who's entitled to proceeds if the owner dies during the accumulation period. Again, the amount or appreciation earned during the accumulation phase is tax-deferred. However, additional surrender charges may also be assessed at withdrawal. The accumulation period will cease when any of the following occur: -The contract owner dies -The annuity or "pay-out" phase begins -The policy is surrendered. This period will not cease if a premium payment has not been made. ANNUITY PERIOD The annuity period, which may also be referred to as "annuitization," is the period that begins when the contract owner gives up the right to the funds in the contract and, in return, receives a promise of monthly income. PARTIES OF ANNUITIES The parties involved in an annuity contract include the insurer, the contract/policy owner, the annuitant, and the beneficiary. --The insurer is the party (insurance company) issuing the annuity. --The contract owner purchases and pays for the annuity, can surrender the annuity and execute nonforfeiture options, and has the right to name a beneficiary who will have access to the funds in the event of the owner's death prior to annuitization (i.e., the annuity or pay-out phase). --The annuitant is the individual (natural person) who receives the benefits or payments from the annuity. --The beneficiary is the recipient of the annuity assets in the event the annuitant dies during the accumulation period, or a balance of annuity benefit needs to be paid out. SURRENDER CHARGES Surrender charges—also referred to as back-end loads—are assessed if the contract owner cancels an annuity. A surrender charge (i.e., penalty) is assessed whenever a cash withdrawal is made in excess of a specified percentage (e.g., 10%), in any policy year. If the total annuity is surrendered, the surrender charges are subtracted from the annuity value. However, for any withdrawals of less than the specified percentage, no surrender charge is assessed. The surrender charge will generally decrease each year. For example, an insurer may assess a surrender charge of 8% if any withdrawals in excess of 10% of the account balance are taken in the first year. This penalty will decrease by 1% per year for the next eight years. In year nine, there will be no surrender charge for excess withdrawals. In other words, after this time period expires, the insurer effects a waiver of surrender charges. NON-FORFEITURE VALUES Annuity contracts also identify the non-forfeiture value of a fund. This represents the value of the fund less any surrender charges if the funds are being withdrawn. As is the case for certain types of qualified retirement plans that are available today, funds may be withdrawn without surrender charges being assessed if the owner dies, becomes disabled, or requires specific types of extended medical care in a skilled nursing or extended care facility. Surrender charges are designed to make moving money out of an annuity less attractive to the contract owner. Surrender charges that are assessed by an insurer are different from the 10% federal tax penalty that's assessed for a premature withdrawal. Therefore, a withdrawal from an annuity may be subject to both a surrender charge and a tax penalty. [EXAM TIP: Before annuitization, the non-forfeiture value of an annuity equals all premiums paid, plus interest, minus any withdrawals and surrender charges. If the annuitant dies before the annuity period start date, the beneficiary receives the premiums paid plus interest earned.] FLEXIBLE PREMIUM DEFERRED ANNUITY (FPDA) Today, the most popular annuity product being sold is the flexible premium deferred annuity. An FPDA provides for flexible payments and allows for the future supply of income to an annuitant. Any interest earned is tax-deferred. This type of annuity has virtually replaced the annual premium retirement annuity contract, which has a fixed schedule of annual premiums (including bundled premiums) and high expenses. Today's FPDAs have little or no front-end loads due to the tremendous competition between insurers. However, many FPDAs do assess back-end or surrender charges. SINGLE PREMIUM ANNUITY Single premium annuity types may provide either immediate income (SPIA) or deferred income (SPDA). Single premium immediate income annuities are paid for with a lump-sum payment, with income then beginning 30 days later. Single premium deferred annuities are paid for with a lump-sum, with income being paid in the future. At times, SPDAs include a bailout provision which allows the owner to withdraw funds without a penalty if the interest rate falls below a specified rate. ANNUAL PREMIUM RETIREMENT ANNUITIES An annual premium retirement annuity is a vehicle that provides tax-deferred income to the owner. Although the amounts deposited into the account are not tax-deductible (i.e., the premiums are paid after-tax), the income earned on the annual premium paid into the contract will not be taxed until it's removed from the account. In other words, the interest or earnings paid on the principal is tax-deferred. As described earlier, these older types of contracts were characterized by high loads. FIXED AND VARIABLE ANNUITIES The following is a review of details regarding fixed and variable annuities. A fixed annuity pays a guaranteed, predetermined, or level benefit payment amount during the annuity phase. Premiums are placed in the insurer's general account with other non-variable product premiums. These premiums are invested in fixed-rate products (e.g., CDs, money market, etc.) to provide a "fixed" return based on interest rate guarantees. These contracts include minimum interest rate guarantees and may pay higher rates based on current economic market conditions. For a variable annuity, premiums are placed in a separate account. These funds are invested in securities, such as equities (i.e., common stock or preferred stock) or debt securities (i.e., bonds). This type of annuity provides the potential for increasing income if the securities perform well. To solicit a variable product, a person must obtain a life insurance license and a FINRA securities registration (i.e., Series 6 or Series 7). LONG-TERM CARE RIDERS Long-term care riders may be attached to an annuity or a life insurance policy and they allow for the payment of a percentage of the death benefit if an individual requires long-term care but is not terminally ill. GUARANTEED MINIMUM WITHDRAWAL BENEFIT (GMWB) A guaranteed minimum withdrawal benefit is a rider that may be included in an annuity contract. The GMWB guarantees the policy holder a steady stream of retirement income regardless of market volatility. During market downturns, the annuitant can withdraw a maximum percentage of his entire investment in the annuity. Annual maximum percentages that are available for withdrawal vary with contracts, but are generally between 5% and 10% of the initial investment amount until the depletion of the total initial investment is reached. During the withdrawal period, the annuitant may continue to receive income. GUARANTEED MINIMUM INCOME BENEFIT (GMIB) This feature assures a guaranteed amount of income after the assets of the contract are annuitized, regardless of investment performance. The guaranteed amount of income is the higher of (1) the account value at annuitization that's applied to the current annuity purchase rates, or (2) the GMIB benefit base. (The GMIB benefit base is the equivalent of net premiums paid in and compounded at an annual fixed rate, which is then applied to the current annuity purchase rates that are in force at annuitization.) The account must be annuitized for this benefit to be triggered, regardless of the fees that have been paid by the owner to fund the benefit. Regardless of how the market performs while the annuity contract is in force, this feature offers a guaranteed amount of income. GUARANTEED MINIMUM ACCUMULATION BENEFIT (GMAB) The GMAB is a feature which guarantees that the premiums paid into the contract by the owner will have a minimum accumulation value after a multi-year waiting period. The net premiums are typically multiplied by a value of one to three to determine this minimum. The contract doesn't need to be annuitized for this benefit to be triggered.

CLASSIFICATION BASED ON PREMIUM PAYMENTS

ANNUITY PREMIUMS Annuities possess their own mortality tables, which are different from those used for life insurance. Items that are taken into consideration include the interest rate paid, the amount of total contributions or accumulations, and the settlement option selected. An annuitant's occupation or hobbies don't influence an annuity since they will not affect the liquidation of funds. Annuities may be funded with either a single premium or periodic premiums. There are two classifications of periodic premium plans. SINGLE PREMIUM ANNUITIES Single premium annuities are characterized by a lump-sum (single) payment. In other words, the annuity is entirely funded with one premium payment. Monthly income payments that are made to the annuitant may begin immediately (i.e., 30 days following the single premium) or may begin at some point in the future (i.e., deferred). When an annuity is funded with a single, lump-sum payment, the principal is created immediately. Generally, this type of annuity doesn't permit the contract holder to make any additional deposits into the contract. This means that the contract is fully funded with one lump-sum payment. PERIODIC PREMIUM ANNUITIES Periodic premium annuities are characterized by multiple premium payments over a set period of time. Periodic premium annuities are broken into two classifications, level premium and flexible premium. -A level premium annuity is characterized by level or constant annual payments to fund the annuity. For example, a 35-year-old purchases a level premium annuity with an annual premium of $1,200. The contract owner will pay that level amount each year until retirement at age 65. At that time, he will begin to receive monthly income payments. This type of annuity is also referred to as an annual premium annuity. -A flexible premium annuity is characterized by periodic premiums that may be in variable amounts each year. In this case, the contract owner will contribute an amount with which he's comfortable each year. These premiums are paid until the contract owner wants to begin receiving income after retirement. As long as a minimum payment is made, the contract owner is permitted to determine the amount he can afford to contribute each year. The future income benefit will be based on the total amount of funds saved once the plan is annuitized (i.e., when income payments begin). The accumulation period is that time during which funds are being paid into the annuity. The payout or annuity period refers to the point at which the annuity ceases to be an accumulation vehicle and begins to generate benefit payments on a regular basis.

Agents represent who?

Agents represent the insurer

Alien Insurer

Alien Insurer in the US is an insurer who principal office and domiciled (permanent) location is outside the country AND they are formed under the laws of a different nation

► OTHER GROUP HEALTH INSURANCE COVERAGES

All of the types of health insurance coverages discussed in this text (medical expense, disability income, and accidental death and dismemberment) are available for group plans. ---Group health insurance contracts providing coverage for employees in more than one state are usually controlled by the laws of the state where the master contract is issued. -Some of these specified coverages, such as vision and dental care, are available only on a group basis. A group basic medical expense plan can combine two or more of these coverages or it may consist of only one type of coverage, such as hospital expense only. ---Working people age 65 or over generally must be offered the same accident and health benefits offered to younger employees Dental Coverage -Dental care coverage is an indemnity coverage plan generally written on a group basis, on a stand-alone basis or covered under a medical expense plan and is subject to a deductible, called an integrated deductible. Dental plans may be either scheduled or nonscheduled. -Scheduled plans are also known as basic plans. Generally, they do not contain a deductible or coinsurance amounts and provide first-dollar coverage. On the other hand, nonscheduled plans are also known as comprehensive plans and are the most common type of dental plan. These plans pay benefits on a usual, customary and reasonable basis (UCR). In addition, nonscheduled plans include deductibles and coinsurance unlike a scheduled plan. ---A nonscheuled plan is also known as usual, customary and reasonable plan or usual and prevailing plan -Dental plans are designed to cover diagnostic and preventive services. Dental preventive services are available through comprehensive dental plans. This type of plan encourage preventive dental care by offering routine dental services, such as annual checkups and teeth cleaning without having to meet a deductible or coinsurance. Examples of diagnostic services include: -Oral surgery - This includes coverage for tooth extraction and additional surgical treatment of injuries, diseases or jaw defects. -Endodontics — Root canals or treatment for diseases of the dental pulp within teeth. Orthodontics — This pays benefits for corrective teeth devices such as braces and retainers. Resorative - These include fillings, crowns and other procedures that restore the natural function of teeth. prosthodontics - This benefit provides for the replacement of missing teeth or artificial devices such as bridgework or dentures. Periodontics - This involves care due to gum disease of the surrounding and supporting tissues of the teeth. Pediatric dentistry - This involves preventive and restorative services for children and adolescents. Oral pathology - This involves tissue biopsy for treatment of oral diseases, such as oral cancer. ---Many standard plans include coverage for routine care and other benefits may be added for an additional premium. Generally, the coinsurance amounts are 80% for basic services and 50% for major services and the policy usually includes deductibles. Although some policies will cover routine cleaning and visitations, exams, x-rays, protective fluoride treatment, preventive care, and local anesthetics at 100%, dental insurance plans generally limit the number of such services each year. Dental plans may also include limitations on benefits such as a calendar year maximum of $2,500 or a lifetime maximum coverage limit of $2,000 for orthodontics. Most dental plans also require a review of suggested treatment to ensure that it is reasonable and necessary. This is referred to as the predetermination of benefits requirement, pre-certification or prior authorization. If services are not pre-certified, coverage is still provided. However, the dentist and the insured will not know the exact benefits to be paid. -All dental plans include limitations, exclusions and predetermination of benefits, which are all listed under a closed list. A closed list will define all covered procedures and services. If a service is not listed under a closed list, then it is not covered. Other common exclusions involve: -Cosmetic procedures unless due to an accident, -Services furnished by governmental agencies, -Treatment provided that would be covered by Workers' Compensation, -Duplicate dentures or the replacement of lost or stolen dentures, -Oral hygiene instructions or like training, -Exotic procedures, such as splinting and restoring occlusion, -Replacement of prosthetic appliances, such as retainers is excluded for 5 years after the benefits are paid. -Dental plans may also include limitations on benefits for dental emergency services offered outside the network area. Because of the nature of dental plans mentioned above, no matter what type of dental plan is involved the insurer continues to be wary of adverse selection. Therefore, in some cases, insurers impose more stringent underwriting process for dental plans to minimize adverse selection. For example, some insurers limit or reduce benefits or exclude them for a specific period following late enrollments. Other insurers include longer than usual probationary periods, offer low coinsurance for optional benefits or gradually increase coinsurance every year. Other insurers may also include a prior approval for high cost treatments.

GENERAL LICENSE REQUIREMENTS (Ref: G.S. 58-33-26)

An agent or broker may be licensed for the following kinds of insurance: Accident and health or sickness insurance: Insurance coverage for sickness, bodily injury, or accidental death and may include benefits for disability income; Casualty insurance: Casualty insurance provides coverage against legal liability, including liability for causing death, injury, or disability, or damage to real or personal property; Limited line insurance: Limited lines of insurance cover narrowly defined risks. The Commissioner may issue representative licenses without examination to individuals selling limited lines insurance under the qualifications and application procedures specified in the administrative rules; Life Insurance: This insurance covers human lives and includes benefits in the event of death or dismemberment by accident and benefits for disability income; Medicare supplements and long-term care insurance: An agent licensed for Accident and Health or Sickness may also apply for a license to sell Medicare Supplement and Long-Term Care Insurance license; Personal lines: The term personal lines refers to those property and casualty insurance coverages sold to individuals and families for noncommercial purposes; Property insurance: Property insurance indemnifies an insured for direct and indirect or consequential losses caused by damage to the insured's property; and Variable products: Variable forms of life insurance and annuities provide death benefits and living benefits linked to investment markets, requiring the insured to assume a degree of market risk. Licensed agents wishing to sell these products must satisfy the FINRA requirements of the Secretary of State of North Carolina. Business Entities A business entity that sells, solicits, or negotiates insurance must be licensed. Every individual associated with a licensed business entity that personally engages in selling, soliciting, or negotiating insurance policies must also qualify as an individual licensee. A business entity license expires on March 31 of each year unless the business entity pays the renewal fee. Each licensed business entity must designate a licensed individual producer to be responsible for the business entity's compliance with the state's insurance laws, administrative rules, and orders of the Commissioner. This individual is known as the Designated Responsible Licensed Person (DRLP). Business entities must provide the Commissioner with the following: The name and address of the licensed agent designated to be responsible for the business entity's compliance with insurance laws; Proof that each officer, director, partner, or employee who acts as an agent is licensed correctly; and A list of officers, directors, partners, and employees, even if they do not hold a current insurance agent license. License Exclusions The following individuals are not required to obtain insurance producer licenses: Officers, directors, or employees of an insurer or insurance producer, provided the so not receive any commission for the sale of insurance policies, and:Their activities are executive, administrative, managerial, or clerical and are only indirectly related to the sale, solicitation, or negotiation of insurance; orTheir functions relate to underwriting, loss control, inspection, or the processing, adjusting, investigating, or settling of a claim on a contract of insurance; orThey act as special agents or agency supervisors and only assist producers with technical advice. This assistance must not include participation in the sale, solicitation, or negotiation of insurance. A person who secures and furnishes information for the purposes of:group insurance, group annuities, group or blanket accident and health insurance;enrolling individuals under group plans;issuing certificates under plans or otherwise assisting in administering plans; oror performing administrative services related to mass-marketed property and casualty insurance where no commission is paid to the person for the service An organization and those individuals associated with it, to the extent they engage in the administration or operation of an employee benefits program for their own group and are not in any manner compensated; Employees of insurers (or organizations employed by insurers) who inspect, rate, or classify risks or supervise the training of insurance producers and who are not individually engaged in the sale, solicitation, or negotiation of insurance; Salaried full-time employees who counsel or advise their employer relative to their employer's insurance interests provided that employee does not sell or solicit insurance or receive a commission; or Licensed (authorized or admitted) insurers who do business without the involvement of a licensed agent, such as (direct marketing insurers). Education and Training Candidates must complete at least twenty (20) hours of pre-licensing instruction for each major license (Life, Health, Property, Casualty) they wish to obtain. (For example, to be eligible for both a property and a casualty licensee, the candidate must complete forty [40] total hours of pre-licensing instruction. Candidates must complete ten (10) hours of pre-licensing instruction for a Medicare Supplement and long-term care insurance license. Examination After completing and filing one's application with the Commissioner, each applicant seeking a license as an agent or an adjuster must pass an examination that demonstrates the applicant's competence to be licensed. The Commissioner may exempt an applicant who has obtained the designation of Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Life Underwriter Training Council Fellow (LUTCF), Chartered Property and Casualty Underwriter (CPCU), or Fellow of Life Management Institute (FLMI) from the license examination requirement. The Commissioner may require any licensed agent, adjuster, or motor vehicle damage appraiser to take and successfully pass an examination as a condition for continuing or renewing a license if the licensee has been found guilty of any violation of North Carolina insurance law. Anyone who fails to appear for a scheduled examination, or fails to pass it, must reapply for another test and remit all required fees and forms before being rescheduled. Fingerprinting The Commissioner requires fingerprinting within thirty (30) days of applying for a resident insurance license. Additional Requirements for Brokers Bond Before the Commissioner issues a broker license, the applicant must file a surety bond with the Commissioner for at least $15,000. The broker must maintain this bond as long as their license remains in effect. The bond must be in favor of the State of North Carolina for the use of aggrieved parties. Agent's License An applicant for a broker license must hold a valid agent's license at the time of application and for as long as the broker's license remains in force. Suspension or revocation of the agent's license will immediately trigger the revocation of a broker's license. A broker's license may only allow an individual to transact the types of insurance authorized by their agent's license. Renewal A broker's license must be renewed annually by April 1st. Denial of License If the Commissioner refuses to issue a license for any reason (a license may be suspended, revoked, or denied), the applicant will be notified in writing. Within thirty (30) days after service of the notification, the applicant may make a written appeal to the Commissioner for a review. The Commissioner must complete the review without undue delay and promptly notify the applicant in writing as to the outcome. If the applicant still disagrees with the result, they may appeal and ask for a hearing within thirty (30) days. Resident An individual may qualify for a North Carolina resident insurance license only if they reside in North Carolina. APPLICATION (Ref: G.S. 58-33-31) Applicants for resident insurance producer licenses apply to the Commissioner on the Uniform Application and declare under penalty of license denial, suspension, or revocation that the statements made in the application are true, correct, and complete to the best of the individual's knowledge and belief. Before approving the application, the Commissioner must find that the individual: Is at least 18 years of age; Has not committed any acts that are grounds for probation, suspension, nonrenewal, or revocation; Has satisfied any applicable requirements; Has paid the applicable fees; and Has successfully passed any examinations. NONRESIDENT LICENSES (Ref: G.S. 58-33-32) An individual may qualify for a North Carolina nonresident insurance producer license if: They hold a comparable resident insurance license issued by another state or territory of the United States; and Their state or territory issues nonresident insurance licenses to North Carolina residents on the same basis (this is known as a reciprocal agreement). To apply, nonresidents must: Submit an application form; Provide proof of a resident license in good standing; and Pay the appropriate licensing fees. Nonresident agent applicants are not required to take the North Carolina state licensing exam, but they must not have committed any act for which the license could be denied, suspended, or revoked. If a nonresident licensee fails to maintain their home state insurance license in good standing, that licensee's North Carolina license will automatically lapse thirty (30) days after their home state license terminates. Process Against Nonresident Licensees Nonresident agents or brokers must appoint the Commissioner as their attorney of process to receive service of legal process documents that may be issued against them. Countersignature and Related Laws (Ref: G.S. 58-33-60) In insurance, a countersignature requirement is when an insurer requires that non-resident producers obtain the signature of a resident producer for any policy sold in a particular state. Under North Carolina law, insurers cannot require that non-resident agents or brokers obtain countersignatures from resident producers as a requirement for placing policies in North Carolina. NOTICES; LOSS OF RESIDENCY; DUPLICATE LICENSES (Ref: G.S. 58-33-50) Any licensee who ceases to maintain their residency in North Carolina must deliver their insurance license or licenses to the Commissioner by personal delivery or by mail within thirty (30) days after terminating residency. NEW RESIDENTS (REF: G.S. 58-33-32) Licensed agents moving to North Carolina from another state have ninety (90) days from the date they cancel their previous license to apply for a North Carolina resident license. After ninety (90) days have passed, the applicant will be required to complete pre-license education and pass the North Carolina state licensing exam. TEMPORARY LICENSE (Ref: G.S. 58-33-66) The Commissioner may issue a temporary insurance agent license for a maximum of one-hundred eighty (180) days without requiring an examination if they deem it necessary to service the insurance business of: A deceased or disabled agent; or An agent that enters active duty in the United States military. The Commissioner may issue this temporary license to the following individuals: The spouse or court-appointed personal representative or guardian of a licensed producer who dies or becomes mentally or physically disabled. The temporary license is intended to provide adequate time for the transfer of an insurance business; To a member or employee of a business entity licensed as an insurance producer upon the death or disability of an individual designated in the business entity application or the license; and To the designee of a licensed insurance producer entering active service in the Armed Forces of the United States. LICENSE FEES (Ref: G.S. 58-33-125) The required application fees for an insurance license vary and are as follows: Adjuster $75.00; Adjuster crop-hail only $20.00; Agent license (paid by the license for each line of authority) $50.00; Agent appointment cancellation (paid by the insurer) $10.00; Agent appointment, individual (paid annually) $10.00; Agent, overseas military $20.00; Broker (resident or nonresident) $50.00; Business entity $100.00; Limited representative $20.00; Limited representative cancellation (paid by the insurer) $10.00; Motor vehicle damage appraiser $75.00; Surplus lines licensee, corporate $100.00; and Surplus lines licensee, individual $50.00. APPOINTMENT OF AGENTS (Ref: G.S. 58-33-40) An individual cannot act as an agent for an insurer or transact insurance business unless they are appointed as a representative of that insurer. Any insurer authorized to transact business in North Carolina may appoint any individual with a valid agent's license to be its agent. To do so, the appointing insurer must file a notice of appointment with the Commissioner within fifteen (15) days after the individual submits their first insurance application. The insurer is also responsible for paying the agent's appointment renewal fee. Unless an appointment is canceled by the insurer it will continue in effect for as long as the appointed agent is properly licensed, and the appointing insurer is authorized to transact business in North Carolina. Notification to Commissioner of Termination (Ref: G.S. 58-33-56) An insurer that terminates an agent appointment must notify the Commissioner within thirty (30) days of the date of termination. Within fifteen (15) days of such notice, the insurer must also mail a copy of the notice to the terminated agent. The terminated agent will then have thirty (30) days to submit written comments to the Commissioner regarding their termination. Information regarding the investigation of a producer is confidential by law and privileged. It is neither subject to subpoena nor discovery in a civil action other than a proceeding involving the Commissioner. SUSPENSION, PROBATION, REVOCATION, OR NONRENEWAL OF LICENSES (Ref: G.S. 58-33-46) The Commissioner must give written notice to an agent before holding a hearing that may lead to the suspension or revocation of the agent's license. The Commissioner may place on probation, suspend, revoke, refuse to renew, or deny a license to any person who has: Provided incorrect, misleading, incomplete, or untrue information in the license application; Violated any insurance law, administrative rule, subpoena, or Commissioner's order promulgated by this or any other state; Violated any FINRA rule; Attempted to obtain a license through fraud or misrepresentation; Intentionally misrepresented the terms of an insurance contract; Been convicted of a felony or a misdemeanor involving dishonesty, a breach of trust, or moral turpitude; Committed any insurance unfair trade practice; Used fraudulent, coercive, or dishonest practices or demonstrated incompetence, untrustworthiness, or financial irresponsibility in this or any other state; Had an insurance license denied, suspended, or revoked by another state; Forged a name to an insurance document or application; Cheated on an insurance license examination; Knowingly accepted insurance business from an unlicensed individual; Failed to comply with a court order imposing child support; Failed to pay state income tax; or Willfully failed to provide notification of bankruptcy or insolvency within three (3) business days after the commencement of the proceeding. If the Commissioner suspends, revokes, or refuses to grant a license, any appointments held by the individual are also revoked. REFERRAL OF BUSINESS TO REPAIR SOURCE; PROHIBITIONS (Ref: G.S. 58-33-76) No one working on behalf of an insurance company or licensee may recommend using a particular service or source to repair property damage without clearly informing the claimant that they are under no obligation to use the recommended repair service. Neither may they accept any gratuity or other form of remuneration from a repair service for recommending that repair service to a claimant.

Aleatory

An aleatory contract presents the potential for an unequal exchange of value or consideration between both parties. Aleatory contracts are conditioned upon the occurrence of an event.

USES OF ANNUITIES

An annuity is a type of insurance contract that may be used for any reason in which the accumulation of cash is the goal, but it's primarily used to provide income at retirement. By definition, annuities provide a structured and systematic way to liquidate principal. While life insurance is intended to create an estate, annuities are intended to liquidate an estate. This section will examine some of the common uses of annuities. INDIVIDUAL USES -Again, an annuity is an insurance product that offers the annuitant with tax-deferred growth. Contract owners may elect to receive a lump-sum payout (i.e., settlement) when the annuity phase begins. However, receiving a lump-sum settlement can lead to significant tax liability for the recipient. -By design, an annuity will liquidate principal in a structured, systematic way which guarantees that it will last a lifetime. Since they may be used to fund individual retirement accounts (IRAs), they're also referred to individual retirement annuities. Annuities may also fund non-qualified retirement plans; however, such plans don't receive the same tax-advantaged treatment as a qualified plan. Some annuities are used to provide funds for a child's education or to possibly pay out lottery winnings. -Keep in mind, for most individuals, the primary use of an annuity is to set aside funds for retirement while receiving tax-deferred growth. QUALIFIED ANNUITY PLANS Although retirement plans will be covered in detail in a later chapter, the following information describes annuities related to retirement plans. As mentioned above, annuities may be used to fund qualified retirement plans on either an individual or group basis. In some cases, the plans receive tax deferral and tax deductions. Such plans include Keogh plans, simplified employee pensions (SEPs), 401(k) plans, pension plans, and profit-sharing plans. Pension and profit-sharing plans may be established as either defined contribution or defined benefit. A defined contribution plan specifies the amount that each employee will contribute to the plan, while a defined benefit plan specifies the benefit amount the (retired) employee will receive in the future. Ultimately, annuities may be used for employees in a group or on an individual basis. During the accumulation (pay-in) phase, a qualified deferred annuity may be used to fund an IRA and continued contributions are permitted within the maximum limits that are set by the IRS. Any IRA funds that have been annuitized will no longer permit contributions.

Increasing Term Rider

An increasing term rider will allow for an increasing amount of coverage each year. Increasing term riders provide an additional term insurance face amount at death equal to either all premiums paid or the amount of cash value. Increasing term riders may also be referred to as increasing benefit riders, and always increase the cost of the insurance policy. Return of Premium Rider: a type of increasing term insurance added to a whole life policy. When the insured dies, the beneficiary receives the face amount plus an additional (term insurance) death benefit equal to the cumulative total of all premiums paid during the life of the policy. Insurers may also offer a return of premium (ROP) term life insurance policy, which returns 100% of the premiums paid in over the life of the policy to the policy owner if the insured is still alive at the end of the policy term. Any return of premium is received tax-free. Some policies may allow for premiums to be returned on a sliding scale if the return of premium term life policy is surrendered. If the insured dies during the term, the beneficiary will receive the policy's face value only, without any premium return. For example, at age 70, an insurer may return all premiums paid over the life of the policy back to a living insured if they carry such rider. Return of Cash Value Rider: provides an increasing amount of term insurance that equals the cash value as it accumulates in a whole life policy. This rider allows the cash value to be paid in addition to the face amount. The rider provides an additional term insurance benefit=cash value amount at the time of death.

Indemnity contract

An indemnity contract pays an amount equal to the loss. contracts attempt to return the insured to their original financial position. Can also be called a reimbursement contract.

Completing the Application

An insurance company will return the application to the agent if the agent submits an incomplete application. All of the applicant's replies to specific questions on the application regarding health history are representations. REPRESENTATIONS are statements an applicant makes as being substantially true to the best of the applicant's knowledge and belief, but which are not warranted to be exact in every detail. If an applicant makes any statements that are GUARANTEED to be true, he or she has made a warranty. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void. Therefore, the statements made by an applicant which are recorded on the application are considered to be representations and not warranties. Application signatures: Each application requires the signatures of the proposed adult insured, the policyowner (if different from the insured), and the agent who solicits the application. The applicant's signature is required on a life insurance application to represent that the application's statements are true to the best of the applicant's knowledge. By reading and signing the insurance application, the applicant should realize that any false statements on an insurance application could lead to loss of coverage. Minor Applicants and Proposed Insureds n most states, anyone under the age of eighteen is considered a minor. This principle usually also applies in regard to contracts, and as such, minors can usually void any contracts signed before they are eighteen years of age. Life insurance, however, is an EXCEPTION to this standard. Concerning life insurance contracts, most states consider anyone under the age of fifteen to be a minor. Typically, proposed insureds who are age fifteen or older (sixteen in Indiana) can sign and enter into a contract for life insurance. In reality, many companies still require a parent or guardian's signature if the proposed insured is under the age of eighteen.

Insurer Classification According To Authorization

An insurer that is admitted or authorized to transact insurance business in a particular state is referred to as an authorized insurer in that state.

Reserves

An insurer's reserve is the money set aside (required by the state's insurance laws) to pay future claims.

CLASSIFICATION ACCORDING TO WHEN BENEFITS BEGIN

Annuities may be described according to when the payout or distribution phase commences. In other words, they may be characterized as either immediate or deferred annuities. IMMEDIATE ANNUITY -This class of annuity is designed to generate an income stream to the annuitant soon after it's purchased. The first installment payment to an annuitant will typically begin 30 days after the annuity is funded or purchased. An insurer will only accept a lump-sum premium for this type of plan. This means that there's no accumulation period since only a single payment is made. No income will be paid to the annuitant until the lump-sum has been provided to the insurer. The income payments that are made to the annuitant consist of both principal and interest. In addition, the first payment from a single premium immediate annuity must be made within 12 months of the contract date. -As with any annuity, the period during which the annuity generates income for the annuitant will depend on (1) the total amount contributed to the account; and (2) the settlement or distribution option selected by the owner. The longer the period of desired income payments to the annuitant and the more guarantees provided (e.g., period certain), the lower the amount of each installment. The income from the annuity may either be a fixed dollar amount each month or a variable sum. An immediate annuity is best suited for a person who needs "immediate" income (i.e., a person who's totally disabled or who's ready to retire). DEFERRED ANNUITY This class of annuity may be funded with any type of premium payment plan (single or deferred/flexible). However, this classification is different from the immediate annuity because it includes an accumulation period. This means that there's a lengthy period between the time of the contract's purchase and when the income or annuity phase begins. A deferred annuity is useful for those any person who wants to defer income until the future (e.g., retirement). Contributions may accumulate over time, and every year the insurer credits the funds with a specific rate of interest, which is tax-deferred. When the owner decides to receive cash from the fund in the future, she has three options: --A lump-sum distribution, of which the interest portion that's credited is taxable --Systematic or periodic withdrawals --Convert the fund to the annuity phase and begin to receive an income stream per month. ex) a new physician is just beginning her practice and wants to set aside funds for the future. However, if her current expenses are high, she may choose to achieve this objective by purchasing a flexible premium deferred annuity. A deferred annuity emphasizes the safety of principal, asset accumulation, and tax deferral of interest.

► Preferred Provider Organizations

Another type of health insurance provider is the preferred provider organization, or PPO. A preferred provider organization is a collection of health care providers such as physicians, hospitals, and clinics who offer their services to certain groups at prearranged discount prices. In return, the group refers its members to the preferred providers for health care services. Groups that contract with PPOs are often commercial insurance companies, HMO, Blue Cross/Blue Shield, employers, or trade unions. -Unlike HMOs, preferred provider organizations usually operate on a fee-for-service basis (where the cost of each service is scheduled), not on a prepaid basis. -Members of the PPO select from among the preferred providers for needed services. -In-network PPO providers offer members better coverage of incurred expenses. -In contrast to HMOs, PPO's provide a wider choice of physicians. -If service is obtained outside the PPO, benefits are reduced and costs are increased. ---However, if a need for emergency health services arises for an enrollee of a PPO, the enrollee should proceed directly to the nearest emergency room and treatment will be paid in full. ------PPOs treat non-preferred provider emergency services the same way as PPO preferred services. -PPO's have agreed to offer their services to the group where patient fees are discounted. In return, the group refers its members to the PPO and the providers broaden their patient base. -Preferred provider plans can include dental care. In-network and out-of-network provider access An in-network provider is a doctor or hospital that has signed an agreement with an insurance company, agreeing to accept the insurer's discounted rates. An out-of-network provider doesn't have any contract or agreement with your insurance company (in some cases, they'll be in-network with other insurance plans, even though they're out-of-network with your insurance). Managed Care Systems When an HMO and a PPO are mixed together they are known as managed care systems.

Modification Provision

Any changes made must be in writing and attached to the policy. Only an officer of the insurer or authorized home office personnel possess the authority to make any

Classifications of Applicants

Applicant Ratings Once all the information about a given applicant has been reviewed, the underwriter seeks to classify the applicant's risk to the insurer. This evaluation is known as risk classification. In a few cases, an applicant represents a risk so significant that the applicant is considered uninsurable, and the application will be rejected. Preferred Risk: Many insurers reward good (low) risks by assigning them to preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than average mortality or morbidity experience. Some of the characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking. Standard Risk: Standard risk is the term used for individuals who fit the insurer's guidelines for issuing the policy without special restrictions or an additional rating. These individuals meet the same conditions as the tabular risks on which the insurer's premium rates are based. Substandard Risk A substandard risk is one below the insurer's standard or average risk guidelines. An individual can be rated as substandard for many reasons: poor health, a dangerous occupation, or attributes and habits that could be hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an increase in their policy premium. Unfair Discrimination No insurer is permitted to engage in any unfair discrimination regarding applicants for life insurance. Sexual orientation, religious preference, or geographical location are prohibited life insurance underwriting factors because they are unfairly discriminatory.

Persistency

As it pertains to insurance, persistency is the percentage of policies an insurer has in force after a specified period of time. Persistency is negatively impacted by policies replaced by other insurers, canceled by the policy owner, or laps due to nonpayment. Companies with higher persistency are more stable and profitable than those with lower persistency. Generally speaking, companies aim for 80% persistency after three-years and 60% after five years. Meaning, 60% of the policies written five years ago should still be active.

ANNUITIES AND TAXATION

As mentioned earlier, contributions (i.e., premiums) to a qualified individual (or employer-sponsored) annuity are generally tax-deductible. However, contributions to or premiums paid for a non-qualified individual annuity are not tax-deductible. Annuity benefit payments are a combination of the return of principal along with growth (interest, dividends, and capital gains). Since the earnings (i.e., accumulations) in annuities are tax-deferred, the IRS will tax the amount withdrawn above the amount invested as ordinary income (subject to the highest tax rates) However, the portion of the benefit payments that represent a return of principal (i.e., the contributions made by the annuitant) is not taxed. In other words, the result is a tax-free return of the annuitant's investment and the taxing of the growth. THE EXCLUSION RATIO -Although a detailed discussion of how to compute the taxable portion of an annuity payment is beyond the scope of this text, the basics are not difficult to understand. A simple formula—referred to as the exclusion ratio—is used to determine the annual annuity income that's exempt from federal income taxes. The formula is: the total investment in the contract divided by the expected return. -Although a detailed discussion of how to compute the taxable portion of an annuity payment is beyond the scope of this text, the basics are not difficult to understand. A simple formula—referred to as the exclusion ratio—is used to determine the annual annuity income that's exempt from federal income taxes. The formula is: the total investment in the contract divided by the expected return. -The owner's investment (cost basis) in the contract is the amount of money that's been paid into the annuity (the premium). The expected return is the annual guaranteed benefit that the annuitant receives multiplied by the number of years of the annuitant's life expectancy. The resulting ratio is applied to the benefit payments, thereby allowing the annuitant to exclude from income a like-percentage from income tax. -For example, if $100,000 is invested into an annuity, the expected return each year is $7,500 and the life expectancy is 20 years. The total expected return is $150,000 ($7,500 x 20) and, therefore, the exclusion ratio is 66.66% or rounded up to 67% ($100,000 ÷ $150,000). Since the payment each year is $7,500, 67% of that amount ($5,025 in this case) is excluded from taxes and the remaining $2,475 ($7,500 - $5,025) is taxable. EARLY / PARTIAL WITHDRAWAL / CASH SURRENDER -Deferred annuities accumulate interest earnings on a tax-deferred basis. Although no taxes are imposed on the annuity during the accumulation phase, taxes are imposed when the contract begins to pay its benefits. To discourage the use of deferred annuities as short-term investments, the Internal Revenue Code imposes a penalty (as well as taxes) on early withdrawals and loans from annuities. -Prematurely withdrawn amounts are generally taxed on a Last-In, First-Out (LIFO) basis which means that accumulations or interest earned is considered withdrawn first when distributions are made. The exception to this rule is that annuities purchased before August 14, 1982, are taxed on a First-In, First-Out (FIFO) bases, which means that the premium paid is considered withdrawn first. These taxes are in addition to, not inclusive of, the federal age-based tax penalty. -For withdrawals from a deferred annuity that are taken prior to the age of 59 1/2, a 10% penalty tax is imposed on the amount withdrawn. Withdrawals that are taken after the age of 59 1/2 are not subject to the 10% penalty tax, but they are still taxable as ordinary income. -Penalties are not assessed on premature distributions if (1) the owner becomes disabled; (2) the owner has reached age 59½ (3) the owner has died; (4) an immediate annuity was purchased; or (5) funds are received under a qualified pension plan. -Like early withdrawals, partial withdrawals (i.e., loans) and cash surrenders are treated first as earned income and are therefore taxable as ordinary income. Only after all of the earnings have been taxed are withdrawals considered a return of principal. -While partial withdrawals from a life insurance policy are taxed taxed on a FIRST-IN, FIRST-OUT (FIFO) bases, partial withdrawls from annuities are taxed on a LAST-IN, FIRST-OUT (LIFO). DISTRIBUTIONS AT DEATH If the owner dies during the accumulation phase and prior to the annuity phase, the beneficiary will receive the greater of the accumulated value of the annuity or the amount of contribution (i.e., premium payments). Any amount received in excess of premiums paid is taxable as ordinary income to the recipient (i.e., beneficiary). Therefore, whatever gain is realized will be taxable. If the beneficiary chooses to minimize this taxation, he or she may select a life income or installment option. However, this option must be selected within 60 days of the annuitant's death. The amount paid to the beneficiary when the policy- owner dies is the amount accumulated (i.e., contributions plus interest). The death benefit paid by life insurance is the face amount no matter how few premiums have been paid. Since an annuity is a piece of property, if the policyowner/annuitant dies during the accumulation period, its proceeds are generally includible in the deceased's estate. Any unpaid annuity benefits following the death of the annuitant are paid to the beneficiary and are taxable. 1035 CONTRACT EXCHANGES -The concept of Section 1035 exchanges was covered when the tax implications related to insurance policies were described. Section 1035 of the Internal Revenue Code also allows for the tax-free exchanges of other types of financial products, including annuity contracts. Remember, no gain will be recognized (and therefore no gain will be taxed) if an annuity contract is exchanged for another annuity contract. The same applies when a life insurance or endowment policy is exchanged for an annuity contract. However, under Section 1035, an annuity contract cannot be exchanged on a tax-free basis for a life insurance contract. -This regulation allows the contract owner to move the cash value from one contract to another without incurring current tax implications. As long as the transfer is transacted within (i.e., intra-company) or between insurance companies and the policy owner receives no money, the exchange is permitted (without tax ramifications). Theoretically, this means that the cost basis remains the same. The result is that taxes are not avoided; instead, they're postponed to a later date. CORPORATE-OWNED ANNUITIES -Current tax law states that if a corporation owns an annuity, it must name a natural person as an annuitant. If a non-natural entity is named an annuitant (e.g., the company itself), then the interest earned is taxable as ordinary income in the year in which it's credited. In some cases, if a natural person is named as the annuitant, the interest credited to the annuity each year may be tax-deferred. At times, this natural person is referred to as a measurable life. -There's an exception to this non-natural person rule. If the annuity is held by a trust, corporation, or another non-natural person as an agent for a natural person, the interest earned continues to be tax-deferred. Other exceptions to this rule include, but are not limited to: ---An annuity contract that's acquired by a person's estate following the death of that person ---An annuity contract that's held under a qualified retirement plan (e.g., a TSA) or an IRA, or ---A contract which is an immediate annuity purchased with a single premium, with periodic payments to commence within one year -Corporate-owned life insurance is generally treated as a deductible business expense and the proceeds are paid on a tax-free basis up to a certain level ($50,000). If more than this amount is provided to an employee, the excess premium that's used for the purchase must be reported by the employee as taxable income. An annuity could also be owned by a non-living entity (e.g., a trust) and the tax considerations will be based on whether it's qualified or non-qualified. Additionally, an annuity can be owned by a 501(c) non-profit entity, as long as there is a named annuitant.

► Agent Responsibility

As noted earlier, an agent plays an important role in underwriting. Any producer is required to act in a fiduciary capacity when collecting premiums or dealing with the public. This means that all producers possess a fiduciary responsibility when engaging in insurance transactions. A producer who has made an unintentional error or honest mistake has committed a tort known as an error and omission. Therefore, it recommended for insurers to purchase Errors and Omissions (E&O) insurance to cover the malpractice or negligence of producers. -As a field underwriter, the agent initiates the process and is responsible for many important tasks: proper solicitation, completing the application thoroughly and accurately, obtaining appropriate signatures, collecting the initial premium, and issuing a receipt. Each of these tasks is vitally important to the underwriting process and policy issue. Proper Solicitation -As a representative of the insurer, an agent has the duty and responsibility to solicit good business. This means that an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the insurance-buying public to observe the highest professional standards when conducting insurance business. -As in many states, an agent is required to deliver to the applicant a Buyer's Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicant's initial premium. Typically, the buyer's guide is a generic publication that explains life and health insurance in a way that average consumers can understand. It speaks of the concept in general terms and does not address the specific product or policy being considered. The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the policy, and each rider. It includes information about premiums, dividends, benefit amounts, and insurance cost indexes of the specific policy being considered. Explaining the Policy and Ratings to Clients -Most applicants will not remember everything they should about their policies after they have signed the application. This is another reason agents should deliver policies in person. Only by personally delivering a policy does the agent have a timely opportunity to review the contract and its provisions, exclusions, endorsements and riders. In fact, some states and most insurers insist that policies be delivered in person for this very reason. -The agent's review is especially important, for it helps to reinforce the sale and prevent a potential lapse. It can also lead to future sales by building the client's trust and confidence in the agent's abilities. -Agents sometimes may have a chance to prepare applicants in advance when it appears that policies may be rated as substandard, which normally requires an extra premium. In addition, during this process an agent has the chance to inform clients that they may be able to add riders and endorsements to their policy to expand their coverage. A rider is an additional attachment to a policy that broadens benefits for an additional premium. An endorsement, on the other hand, is typed onto the standard policy. Explaining the policy and how it meets the policyowner's specific objectives helps avert misunderstandings, policy returns, and potential lapses. Obtaining a Statement of Insured's Good Health In some instances, the initial premium will not be paid until the agent delivers the policy. In such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health. The agent then submits the premium with the signed statement to the insurance company. Because there can be no contract until the premium is paid, the company has a right to know that the policyowner has remained in reasonably good health from the time the policyowner signed the application until receiving the policy. In other words, the company has the right to know if the policyowner represents the same risk to the company as when the application was first signed. Policy Replacement It is very rare for health insurance policies to be replaced by new ones. However, in some certain circumstances insureds may want to replace an old health policy with a new one to meet their current health needs. It is important for the agent during this process to throughly explain several key points when replacing a policy, such as: ---The underwriting process may be stricter to issue a new policy ---Pre-existing conditions may limit benefits and coverage that was available under the old policy ---There may be new benefit and coverage limitations and exclusion An agent who fails to deliver the information above to the insured is creating and E&O liability. Changes in the Application The application for insurance must be completed accurately, honestly, and thoroughly, and it must be signed by the insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. The company may also cancel the policy, depending on the errors made, but only before the incontestable period begins.

Blanket Health Policies

Blanket health policies are issued to cover a group who may be exposed to the same risks, but the composition of the group (the individuals within the group) are continually changing. A blanket health plan may be issued to an airline or a bus company to cover its passengers or to a school to cover its students. No certificates of coverage are issued in a blanket health plan, as compared to group insurance.

Broker versus Agents

Brokers represent many different insurers' products, while an agent represents a particular company's products. IN A SALES TRANSACTION, agents represent the insurer and brokers represent the applicant (buyer)IN A DISPUTE between insurer and beneficiary/insured, the agent or broker represents the insurer, NOT the insured/beneficiary. A broker solicits and accepts insurance applications and then places the coverage with an insurer.

Brokers represent who?

Brokers represent the buyer

BUSINESS USES OF LIFE INSURANCE

Business Uses of Policy Loans Policy loans can be used for many business needs, such as funding buy-sell agreements, deferred compensation for key employees, or split-dollar arrangements. Key Employee Life Insurance The principal reason that key employee insurance was developed is to compensate a business for the loss of earnings (or increase in expenses) due to a key employee's death (or disability). This type of plan is also referred to as key person insurance. Purpose: --------A firm is sometimes dependent upon a key person whose management skill, technical knowledge, and experience make them an invaluable asset of the business. In a sense, the company is dependent on this key person for its success. The proceeds of a life insurance policy covering a key employee will provide the business with the necessary funds to find and train a new employee and continue the business without further interruption. Key employee insurance covers an employee and not the business owner. Third-Party Ownership: --------Key employee insurance is a common illustration of third-party ownership. The business possesses an economic and financial interest in its key employee. Therefore, insurable interest is present in such a relationship. The business's potential economic loss can be protected against a key employee's death if the business is made the beneficiary of the life insurance policy. Therefore, the policy will indemnify the business for financial loss due to the covered key employee's death. The business will be indemnified for its loss of the key manager, director, or officer, and policy proceeds will help it continue while a replacement is sought. The employer or business is the policy owner, and the employee is the insured. This situation involves third-party ownership. Since the employer is the policyholder, it possesses all ownership rights, including the right to name the beneficiary. Ownership: -------The corporation, firm, partnership, or sole proprietorship will be the applicant, policy owner, premium payor, and the beneficiary (i.e., third-party ownership). Therefore, the business possesses the owner's rights under the policy, such as naming or changing the beneficiary, borrowing from the cash value, receiving dividends, or assigning benefits. Whole life or universal life contracts are commonly used to fund a key employee life insurance plan. Term life insurance may be used for short term needs. As "Tax Facts" states, premiums paid by a business for key employee life insurance are generally not tax-deductible. In addition, none of the death benefit paid is taxable when a key employee dies. The death proceeds will not be included in the deceased employee's estate as long as they have no ownership incidents in the contract. Remember that a Key Employee or Key Person life insurance plan does not provide life insurance coverage on the employer's life. It covers the key person's life and indemnifies the employer (i.e., the business) if the key employee dies. Business Continuation Plans Sole proprietorships, corporations, or partnerships are faced with the challenge of business stability and continuation following the death of one or more of its owners or partners. The deceased individual's surviving family also holds a personal and economic interest in the business and, more specifically, the deceased's share of the firm. The business partners wish to make sure that the deceased partner's survivors will receive funds equal to their financial interest in the firm if one of them dies. Therefore, partners or members of a corporation, or a sole proprietor and a key employee will enter into a formal business continuation agreement known as a buy-sell agreement. Buy-sell agreements can be funded for use in a sole proprietorship, partnership, or closely-held corporation. Buy-Sell Agreement^^ A buy-sell agreement is a legal agreement that provides for: (1) an orderly continuation or transfer of the business; and (2) an amount of money to be paid to the deceased's survivors. Funds to be paid to the surviving family may come from life insurance. Life insurance may be purchased to fund a buy-sell agreement. Buy-Sell Funding for Sole Proprietors There is a two-step business continuation plan to keep the business running after the proprietor's death, whereby the employee takes over management of the business. Buy-Sell Plan: an attorney drafts a buy-sell plan stating the employee's agreement to purchase the proprietor's estate and sell the business at a price that has been agreed upon beforehand. Insurance Policy: the employee purchases a life insurance policy on the life of the proprietor. The employee is the policyowner, beneficiary, and pays the premiums. Upon the proprietor's death, the funds from the policy are used to buy the business. Buy-Sell Funding for Partnerships -In a partnership, the law states that any change in its membership will cause its dissolution. Therefore, if a partner dies, the partnership ends. The remaining partners must now wind up the business and pay the deceased partner's estate an amount equal to the deceased's fair share of the business's liquidated value. If a forced sale results where assets are sold for less than they are worth, this fair share of the business may be less than anticipated. Therefore, life insurance, which funds the buy-sell agreement, will help maintain the business's value. A buy-sell agreement used in a partnership binds the surviving partners to purchase the deceased partner's partnership interest at a prearranged price identified in the agreement. The agreement obligates the deceased partner's estate to sell its interest to the surviving partner(s). This agreement permits the surviving partners, officers, or stockholders to maintain control of the business. This agreement, supported by life insurance, is designed to protect the business or firm. -There are two types of partnership buy-sell agreements. An entity plan specifies that the partnership is obligated to buy out the deceased partner's ownership interest. In other words, the agreement made is between the partnership and each of the partners. Therefore, if the partnership consists of four partners, the partnership will purchase, own, and pay for a life insurance policy covering each of the four partners. In other words, four policies will be purchased to fund the agreement. Policy proceeds will be paid to the partnership, which will then be used to purchase the deceased partner's interest. A cross-purchase plan specifies that the agreement will exist between the partners themselves and not between the partnership and the partners as in the entity plan. For example, if the partnership consists of four partners, each partner will purchase, own, and pay for a policy covering each of the other partners. In this case, there would be a total of twelve policies. Buy-Sell Funding for Close Corporations -Unlike a partnership, a close corporation (i.e., an incorporated family business) is legally separate from its owners. It exists after one or more owners dies. Buy-sell agreements used for corporations may also be funded by life insurance. An entity plan funded by life insurance used for a corporation is known as a stock redemption plan. The corporation is bound to purchase the stock of the deceased stockholder at a prearranged price. If funded by life insurance, the corporation buys a policy on each of the stockholder's lives. -A cross-purchase plan financed by life policies involves each stockholder buying policies on each of the other stockholders. Both corporation plans function similarly to agreements available to partners and partnerships. An estate comprised mostly of stock that possesses potential estate tax problems (i.e., forced sale) may utilize a 303 redemption funded by life insurance. The stock's value must represent at least 35% of the deceased's adjusted gross estate to qualify for this type of plan. -Small corporations often purchase life insurance on the lives of significant stockholders to fund a buy-sell agreement.

3 systems that support the sale of insurance through agents and brokers

Career agency system Personal producing general agency system independent agency system

QUALIFIED SALARY REDUCTION PLANS

Cash or Deferred Arrangements (401(k) Plans) Another form of qualified employer retirement plan is known as the 401(k) plan. Employees can elect to reduce their current salaries by deferring amounts into a retirement plan. These plans are called cash or a salary deferral option because employees cannot be forced to participate. They may currently take their income as cash or defer a portion of it until retirement with favorable tax advantages. The amounts deferred are not included in the employees' gross income, and earnings credited to the deferrals grow tax-free until distribution. Typically, 401(k) plans include matching employer contributions. The maximum annual pretax contribution limit is $19,500. Tax-Sheltered Annuities (403(b) Plans) -Another type of employer retirement plan is the tax-sheltered annuity, or 403(b). A tax-sheltered annuity is a unique tax-favored retirement plan available only to specific groups of employees. Tax-sheltered annuities may be established for the employees of specified nonprofit charitable, educational, religious, and other 501(c) (3) organizations, including teachers in public school systems. Such plans generally are not available to other kinds of employees. -Funds are contributed by the employer or by the employees (usually through payroll deductions) to tax-sheltered annuities and are thus excluded from the employees' current taxable income. IRC Section 457 Deferred Compensation Plans -Deferred compensation plans for employees of state and local governments and nonprofit organizations became popular in the 1970s. Congress enacted Internal Revenue Code Section 457 to allow participants in such plans to defer compensation without current taxation as long as certain conditions are met. -If a plan is eligible under Section 457, the amounts deferred will not be included in gross income until they are actually received or made available. Life insurance and annuities are authorized investments for these plans. The annual amounts an employee may defer under a Section 457 plan are similar to those available for 401(k) plans. Before 1962, many small business owners found that their employees could participate in and benefit from a qualified retirement plan, but the owners themselves could not. Self-employed individuals were in the same predicament. The reason was that qualified plans had to benefit employees. Because business owners were considered employers, they were excluded from participating in a qualified plan. The Self-Employed Individuals Retirement Act, signed into law in 1962, rectified this situation by treating small business owners and self-employed individuals as employees. This law enabled them to participate in a qualified plan if they chose to do so, just like their employees. The result was the Keogh (or HR-10) retirement plan.

► OTHER DISABILITY INCOME POLICY PROVISIONS AND RIDERS

Change of Occupation Provision Under the change of occupation provision, if an individual covered under a disability income policy is injured while engaged in an occupation that is more hazardous than the occupation stated in the policy, the result will be the benefit level is reduced. If the insured is engaged in a less hazardous occupation than what was originally stated in the policy, the benefits will likely be increased. Return of Premium Provision This rider provides a refund provision for an insured. It actually offers a refund of a percentage of all premiums paid during a specific period as long as, according to the insurer, there has been favorable claim experience. These riders may provide refunds at age 65 or every five or ten years after the policy is issued, depending upon the insurer. Cash Surrender Value Rider A cash surrender value rider is also available from some insurers. This rider returns all premiums to the policyowner at age 65, less any benefits received over the life of the contract if no claims have been made. (you eventually get your money back)

► Types of Receipts and Policy Delivery

Conditional Receipts The most common type of premium receipt is the conditional receipt. A conditional receipt indicates that certain conditions must be met in order for the insurance coverage to go into effect. The conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam. If the applicant proves to be uninsurable as of the date of application or of the medical exam, no coverage takes effect and the premium is refunded. Applicants who pay a premium deposit with the application are entitled to a premium receipt. It is the type of receipt given that determines exactly when and under what conditions an applicant's coverage begins. The two major types of receipts are conditional receipts and binding receipts. Binding Receipts -Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application. Since the underwriting process can often take several weeks or longer, this can place the company at considerable risk. Accordingly, binding receipts are often reserved only for a company's most experienced agents. Like the conditional receipt, a binding receipt typically stipulates a maximum amount that would be payable during the special protection period. -After the underwriting is complete and the company has decided to issue the policy, other offices in the company assume the responsibility for issuing the policy. Once issued, the insurance contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent directly to the policyowner since, as an important legal document, it should be explained by the sales agent to the policyowner. Constructive Delivery From a legal standpoint, policy delivery may be accomplished without physically delivering the policy into the policyowner's possession. Constructive delivery is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent. Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy. However, if the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery.

INITIAL PREMIUM AND RECEIPTS

Conditional Receipts: Conditional receipts are also referred to as a temporary receipt. The most common type of premium receipt used today is a conditional receipt. The conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam. However, if the applicant proves to be uninsurable as of the date of application or date of the medical exam, no coverage takes effect, and the premium is refunded. If applicant dies between the date they completed the application or medical exam and the date the insurer approves the application, the coverage is retroactively effective, as long as the applicant proves to be insurable. Insurability Type Conditional Receipt: the insurer has made an offer conditional upon the proposed insured's insurability, and the applicant accepts the conditional offer by paying the premium. Therefore, coverage becomes effective as of the date of the application or the date of the medical exam (if one is requested) as long as the proposed insured is found to be insurable. Policy delivery is not necessary for coverage to be provided. For example, suppose Ed signs an application for coverage on August 2nd and takes a required medical exam on August 4th. In that case, protection begins on August 4th because the medical exam was required for coverage to be provided. If Ed dies before the application is underwritten, the insurer must still proceed with the underwriting phase and determine insurability according to its usual underwriting standards. If the application is approved, the claim will be paid even after the insured dies because insurance was in effect. However, if it turns out that Ed did not meet the insurer's approval guidelines, the application would be declined. In this situation, the death benefit would not be paid. However, the initial premiums are refunded to the policyowner or beneficiary. Approval Type Conditional Receipt: The language in an approval type conditional receipt is far more restrictive. Coverage is in force only after the insurer has approved the application. Therefore, approval type conditional receipts only provide coverage between the date the insurance policy is approved or issued, and the date the insurance policy is delivered to the insured. The legal system strongly opposes approval type conditional receipts due to their extremely restrictive nature. As such, approval type conditional receipts are rarely used today. Binding Receipts: referred to as an unconditional receipt, coverage is guaranteed under a binding receipt until the insurer formally rejects the application. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application. Therefore, the insurer must pay the claim if the applicant dies before the insurance company formally approves or rejects the insurance application. Since the underwriting process can often take several weeks or longer, this can place the company at considerable risk. Accordingly, binding receipts are often reserved only for a company's most experienced agents. Temporary Insurance Agreement: Similar to the binding receipt, this type extends coverage immediately. Coverage remains in effect during the entire underwriting period. If the insured dies during the underwriting period, the claim will be paid. The insurer has the right to cancel coverage if the application is ultimately denied by underwriting. However, claims incurred during the underwriting period will be paid in line with the terms of the receipt, regardless of if the application is approved. Inspection Receipt: While not ideal, a proposed insured may want to sift through a policy before purchasing it. In this situation, the policyowner does not pay the initial premium when the application is completed and, therefore, does not receive a premium receipt. In this situation, the policyowner signs an inspection receipt when the policy is received, examines the policy, and then pays the first full premium. The free-look period required by all states makes the inspection receipt relatively obsolete (out of date) in the modern insurance industry. exam tip- Inspection receipts are not technically premium receipts since their specific purpose is to delay premium payment. If you see a reference to "premium receipt," you can automatically rule out inspection receipts.

Family Maintenance policy

Consists of both WHOLE LIFE and LEVEL TERM insurance. providing income for a specific period beginning on the date of death of the insured. pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period. This policy provides income for a specific period starting at the death of the insured. Beneficiary receives a lump sum at the end of the income period

► Alternative Methods of Health Insurance

Consumer Cooperative Consumer Cooperative is either an incorporated organization or an unincorporated organization. Unincorporated organization are managed by an attorney-in-fact and all members insure one another. This organization attempts to secure additional subscribers for the organization. They will collect premiums from members, administer the plan and adjust losses. An example of consumer cooperative is Blue Cross/ Blue Shield. Self-Insurance -Group health coverage can be either self-insured ("self-funded") or fully insured. Under self-insured plans,the employer funds and pays for member claims and benefits. The employer can therefore offer specific benefits that are best suited to employees' needs. This grants the employer more control over costs and flexibility over benefits. -Under a partially self-insured plan, an employer may share the risk of covering claims by buying stop-loss insurance coverage from an insurance company. The employer still remains liable for funding claims under the plan. Stop- loss policies are most effective for large employers that face the risk of significant losses. Multiple Employer Trusts (MET) A method of marketing group benefits to employers who have a small number of employees is the multiple employer trust (MET). They are usually in the same industry group. -METs can provide a single type of insurance (e.g., health insurance) or a wide range of coverages (e.g., life, medical expense, and disability income insurance) -An employer who wants to get coverage for employees from a MET must first become a member of the trust by subscribing to it. -A MET may either provide benefits on a self-funded basis or fund benefits with a contract purchased from an insurance company. -In the latter case, the trust (rather than the subscribing employers) is the master insurance contract holder. -A MET is sometimes insured and administered by a third-party, which includes duties such as insuring the plan, underwriting, and claims administration. -Participants are issued a joinder agreement (document which an individual is admitted as a member and bound to the terms of membership). -The employer's premium payments are directed into a trust from which the plan's benefits and claims are paid. These trusts are also called 501(c)(9) trusts after the relevant section of the Internal Revenue Code. -Premiums are based on claim experiences -Self-insured plans are common to multiple employer trusts (METs) or multiple employer welfare arrangements (MEWAs). They are also common in cases where the insured group is small, with relatively healthy members and few claims. Multiple Employer Welfare Arrangements (MEWA) A multiple employer welfare arrangement (MEWA) is a type of MET which consists of small employers who have joined to provide affordable health benefits for their employees, often on a self-insured basis. --They are tax-exempt entities --Employees covered by a MEWA are required by law to have an employment related common bond

Additional Features of Group Term Life Insurance

Conversion to Individual Policy All group policies contain a conversion privilege. A covered employee has the option of converting his or her group term life coverage to his or her own individual plan upon termination from the company. Termination of employment includes an employee who is laid-off or who leaves a job voluntarily. In most cases, when an employee is leaving an employer, they may take advantage of the conversion privilege. However, most insurers only allow the terminated employee to convert the group coverage to an individual whole life policy. Conversion Period The period of time during which the terminated employee may convert to an individual plan of insurance without proof of insurability is within 31 days after termination. If death occurs during the conversion period (31 days after termination), even if the employee does not plan to convert to an individual policy, the death claim will be paid by the group policy. An individual is covered under the group policy during the conversion period No medical exam or other proof of insurability is required to convert coverage to an individual policy. In other words, an insured employee may exercise the conversion privilege regardless of his or her insurability. If a member's coverage is terminated, the member and their dependents may convert their group coverage to individual permanent (whole life) coverage without having to show proof of insurability. If conversion occurs, the premium is based on the insured's (employee/dependent) current or attained age. Group Policy Termination If the master policy is terminated, each individual member who has been insured for at least five years is permitted to convert to an individual policy, providing coverage up to the face value of the group policy. Incident of Ownership - Beneficiary Selection: While the employer is the contract owner in a group life policy, they retain all rights of ownership except the right to name or change the beneficiary. Therefore, the covered employee or "certificate holder" possesses an "incident of ownership" in the group plan. Therefore, it is the "certificate holder" (insured employee) who names the beneficiary, not the policy owner (employer). The employee may name the employer as a beneficiary of the group life policy only if the employer has an insurable interest in the employee. For example, an employer may have an insurable interest in a key executive with 20-years of experience. However, the employer probably does not have an insurable interest part-time clerk. In addition, in recent years, many insurers have been permitted by modifications of State laws to include an assignment provision in group life policies. Of course, any assignment must be in writing and be filed with the insurer.

Joint Life policy

Covers the lives of 2 individuals and save on premium cost by averaging the ages of the two insureds. Joint life policies pay the face amount after the first person covered on the policy dies. This is a policy that promises to pay the face amount of the death of the first of 2 lives. Ex) b and m have a joint life policy and B dies, m would receive the entire benefit and would NO LONGER be insured. BUT, the survivors have the option of purchasing a single individual policy without evidence of insurability. The premium for the joint life policy is LESS than the premium for separate, multiple policies. (Buy in bulk deal)

Credit Policies

Credit Policies are designed to help the insured pay off a loan in the event they are disabled due to an accident or sickness or in the event they die. If the insured becomes disabled, the policy provides for monthly benefit payments equal to the monthly loan payments due. If the insured dies, the policy will pay a lump sum to the creditor to pay off the loan. Credit policies typically cannot exceed the amount of the loan, as that is the limit of the creditor's insurable interest in the insured(s).

Credit policies (Term life insurance policy)

Credit policies are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and decreasing insurance amount matched to the declining loan balance. Since Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. beneficiary is usually the lender. The creditor cannot require this mortgage insurance to be purchased from the company granting the loan

Licensing

DEFINITIONS (Ref: G.S. 58-33-10) As used in this section of the insurance code, the following definitions apply: Agent An agent is an individual who in any manner sells, solicits, or negotiates insurance on behalf of insurance companies for compensation. Under North Carolina law, an individual agent is considered to represent the insurance company, meaning that the insurer the agent works for is considered liable and responsible for the agent's actions. An unlicensed person who solicits or negotiates a policy of insurance on behalf of an insurer will be considered an agent of that insurer under the law and becomes liable for all the duties, requirements, liabilities, and penalties that all agents are subject to. Adjuster An adjuster is an individual who, for salary, fee, commission, or other compensation, investigates or reports to his principal relative to claims arising under insurance contracts other than life or annuity. Broker A broker is a licensed producer who obtains insurance for a consumer from an insurer with whom the producer has no agent appointment. The broker usually acts through an agent of the insurer in question. Business Entity A business entity is a corporation, association, partnership, limited liability company, limited liability partnership, or other legal entity. "Business entity" does not mean a sole proprietorship. FINRA FINRA is the Financial Industry Regulatory Authority or any successor entity. Home State Home state means the state or territory of the United States in which an insurance producer is both licensed and maintains either his primary residence or principal place of business. Insurance Producer A producer is someone holding the required license to sell, solicit, or negotiate insurance. The terms "insurance producer" and "producer" refer to agents, brokers, and limited representatives. Limited Representative A limited representative is a person or entity holding both a limited representative license and an insurer's appointment to solicit or negotiate contracts for credit insurance, travel accident and baggage insurance, motor club, and dental services. Limited representatives may also sell any other limited line of insurance the Commissioner deems simple enough for someone to sell competently without meeting the requirements mandated for attaining a producer's license. Such limited representatives are still subject to all the duties, responsibilities, liabilities, prohibitions, and penalties as producers. Negotiate The term negotiate refers to the act of conferring with or offering advice directly to an insurance purchaser or prospective purchaser concerning any of the substantive benefits, terms, or conditions of the contract. It can apply to the activities of both brokers and agents. Sell The term sell means to exchange an insurance contract for money or its equivalent on behalf of an insurance company. Solicit The term solicit refers to the act of attempting to sell insurance. It includes the act of asking or urging a person to apply for a particular kind of insurance from a specific company. RESTRICTED LICENSE (Ref: G.S. 58-33-15) The Commissioner may issue an annually renewable, restricted license that is valid for representing an insurer in a foreign country or on a U.S. military base. CAR RENTAL COMPANY LICENSES (Ref: G.S. 58-33-17) The Commissioner may issue a limited license to a rental car company to sell certain insurance coverages associated with the rental of vehicles. REPRESENTATION (Ref: G.S. 58-33-20) Agents and limited representatives who solicit or negotiate insurance applications of any kind represent the insurer and not the insured in any controversy between insureds or beneficiaries and their insurers. This provision does not affect the apparent authority of an agent. Brokers who solicit insurance applications represent insureds or their beneficiaries rather than their insurers in any controversy between the parties. If an insurer sends an issued policy to a broker for delivery to an insured, the law deems the insurer to be authorizing that broker to receive any premium upon policy delivery.

TYPES OF OASDHI BENEFITS

Death/Survivor's Benefits -Social Security Survivors benefits or death benefits pay a lump-sum death benefit and, in some cases, monthly income to survivors of deceased covered workers. -The program provides for a lump sum death benefit to be paid to the eligible spouse and, in some cases, the children when a fully or currently insured worker dies. The lump sum death benefit is $255 and has been capped at that amount for over 60 years. -In addition to the lump sum death benefit, Social Security provides a survivor monthly life income equal to the deceased spouse's PIA at death. A surviving spouse of a fully insured deceased worker without dependent children is eligible for Social Security survivor benefits as early as age 60. However, benefits are reduced if taken prior to age 65. Survivor benefits are also available to: ---A spouse of any age who is caring for children under age 16, or over age 15 and disabled. ---Unmarried children under age 18, or 19 if still in high school. ---Children at any age if disabled before age 22 and remain disabled. A Social Security benefit of 75% of the Primary Insurance Amount (PIA) is given to an underage child of a deceased worker. ---Parents, beginning at age 62, of a deceased, fully insured worker, if the child provided at least 50% of the parent's support at the time of death. A Social Security benefit of 75% of the Primary Insurance Amount (PIA) is given to each eligible parent. If only one parent is eligible, the benefit is increased to 82.5% of the worker's PIA. Blackout Period -The blackout period is the period of time from the insured's death until the surviving spouse is permitted to receive retirement income benefits. However, benefits are provided for other dependents (i.e., children) during the blackout period until the youngest child reaches age eighteen (18). -The "blackout period" begins when Social Security survivorship benefits cease. This is when the youngest child turns 16 years old, or immediately if no children. The "blackout period" ends when the surviving spouse turns at least 60 years old. Benefits are paid to the children of a deceased worker during the blackout period until the youngest child reaches age eighteen (18). Maximum Family Benefit There is a limitation when several family members are eligible for Social Security benefits. Similar to the Primary Insurance Amount, a maximum family benefit is established by Social Security for every level of average earnings. Retirement Benefits Retirement benefits pay covered retired workers, their spouses, and other eligible dependents a monthly retirement income. Workers who are age 65 or older and fully insured are entitled to monthly retirement income for the remainder of their lives. The retirement income paid to the person who retires at age 65 is based upon the primary insurance amount (PIA). The retirement income paid by Social Security begins on the first day of the month in which an eligible individual reaches age 65 (or other qualifying age). However, retirement income is not paid automatically when a retiree reaches age 65. The recipient must complete an application and submit it if he or she wishes to receive a monthly income. All other OASDHI / Social Security benefits are based on this amount. Recipients may receive retirement income at age 62 if desired but at a reduced amount. Full Retirement Age (FRA) -If a covered worker retires at the full (normal) retirement age, they will receive 100% of the PIA, starting on the first day of the month in which they reach full retirement age. However, if a covered worker retires early at the age of 62, the maximum Social Security benefit is 80% of the PIA. This reduction remains all through retirement. Likewise, if a covered worker chooses to delay benefits beyond reaching full retirement age (up to age 70), they will experience a slight benefit increase. -Full retirement age (FRA), also called normal retirement age (NRA), is the age at which retirement benefits are equal to the covered worker's PIA. While age 65 is typically thought of as full (normal) retirement age, full retirement age is determined by the covered worker's birth year. Age 65 is the full retirement age for covered retired workers born prior to 1938. Since 1938, the full retirement age gradually increases by a few months for every birth year until it reaches 67 for people born in 1960 and later.

► Comprehensive Major Medical Benefits Policy Features

Deductible A deductible is a stated initial dollar amount that the individual insured is required to pay before insurance benefits are paid. Deductibles are used primarily to help control the cost of premiums and reduce overutilization of medical services. The term "deductible" is used most frequently with major medical insurance policies. Listed below are different types of deductibles: Flat deductible A stated dollar amount that applies to a covered loss (e.g. $500). This deductible is applied per occurrence, per insured individual. Sometimes referred to as an "initial deductible". Corridor deductible When a major medical policy is supplementing basic coverage (that contains no deductible), the corridor deductible is not applied until the basic coverage has been exhausted. Integrated Deductible Used when a major medical plan is supplementing basic coverages. For example, if the major medical has a $500 deductible and the insured has basic coverage of $500 or more, then, in the event of a claim, the amount paid by the basic coverage satisfies the major medical deductible. However, if the basic plan does not cover the entire deductible amount of the major plan, the insured is required to make up the difference. Per-Cause Deductible In a per-cause deductible, the insured must satisfy a deductible for each accident or illness. All-Cause Deductible Also known as cumulative or calendar year deductible. In an all-cause deductible, the insured has to meet the deductible amount only once during the benefit period. -This policy includes a carryover feature that allows an insured to defer current health charges to the following year's deductible instead of the current year's deductible. The major medical deductible carryover period normally applies to expenses incurred during the last three months of the plan year. Common Accident or Sickness Deductible Some major medical plans include a common accident or sickness provision which states that only one deductible (usually equal to the individual deductible amount) need to be satisfied when two or more insureds from the same family are injured in the same accident or suffer concurrently from the same illness. Family Maximum Deductible A family maximum deductible waives the deductible for all family members after some of them have satisfied individual deductibles within the same year. Once the family deductible is satisfied, future covered medical expenses of all family members are paid just as if each member of the family had satisfied his or her individual deductible. Coinsurance -Coinsurance (also referred to as "percentage participation") is another characteristic of major medical insurance plans. The purpose of coinsurance is to reduce the overutilization of major medical insurance (i.e., unnecessary care) by introducing economic consideration into the decision to access valuable medical services. -Coinsurance is a type of cost-sharing that defines the percentage of covered expenses shared by the insured compared to the amount paid by the insurer. After an insured satisfies their deductible, the insurance company pays a percentage of the additional expenses, while the insured pays the remainder. Coinsurance provisions are effective throughout the duration of a policy and are described as insurer cost / insured cost. For example, an 80/20 coinsurance means the insurer pays 80% of any covered expense (after the insured pays the deductible), and the insured is responsible for the remaining 20% (in addition to the deductible). -Most major medical plans (other than HMOs, which limit out-of-network services to emergency care) pay a high percentage (70-90%) of covered claims in-network and at least 60% for out-of-network services. While coinsurance amounts vary from plan to plan, the insurer must pay at least 50% or more of the covered expenses for the plan to qualify as "insurance" rather than being considered a "discount plan." Let's look at how the math works using a common exam question scenario. --Assume that an insured was covered by a policy with a $500 deductible and a coinsurance clause of 80/20. They were hospitalized for 3 days and incurred medical expenses of $1,500. How much is the insured responsible for? How much is the insurer responsible for? First of all, the insured is responsible for the initial $500 deductible. This leaves $1,000 of remaining expenses. With an 80/20 coinsurance clause, the insurer is responsible for 80% of the $1,000 (i.e., their coinsurance amount is $800). The insured must pay 20% of the $1,000. So, their coinsurance amount is $200. Therefore, the insured is responsible for $700 ($500 deductible plus $200 coinsurance), and the insurer is responsible for $800. Stop - Loss Limit/ Maximum Benefit -Stop - Loss provision is a feature designed to limit the amount of an insured's out-of-pocket medical expenses. -Often, the stop-loss will state that after the insured has paid a specific amount toward his covered expense, the insurer, will pay 100% of the remaining expenses. -Maximum Benefits pay up to the maximum limit of the policy

Rating services

Determine the insurer's financial strength (solvency) and stability of the insurance company. AM Best, Fitch Ratings, Standard & Poor's and Moody's all determine a company's financial strength, evaluated by looking at the companies reserves and liquidity

Life insurance death benefits; benefit distribution

Distribution by Descent: -Per capita: (by the person or by the head) Evenly distributes benefits among all named living beneficiaries, typically the surviving children. -Per Stirpes: (meaning by the bloodline) Distributions are made according to the family line, branch, or root. In the event that a beneficiary dies before the insured, and no changes are made to the policy, benefits from that policy will be paid to that beneficiary's heirs. Distribution by Order of Succession -Primary Beneficiary: the first or principal person in line to receive income tax-free policy proceeds. A policy owner may designate multiple primary beneficiaries and choose different or equal amounts for each beneficiary (or example, 50% to my son Tom, 25% to my grandson Joe, and 25% to my granddaughter Mary. If one of the primary beneficiaries dies prior to the insured, the face amount is paid to the surviving primary beneficiary(s). Unless specifically requested as part of the contract (per stirpes) or required by law, the estate or heirs of a deceased beneficiary will not receive any payment in this case. -Secondary or Contingent Beneficiary: The secondary or contingent beneficiary is the second individual(s) in line to receive the death benefit. They receive the death benefit only if the (or all) primary beneficiary has died prior to the insured. The primary beneficiary must predecease the insured in order for this secondary beneficiary to receive any proceeds. -Tertiary Beneficiary: A tertiary beneficiary is third in line to receive policy proceeds when the insured dies if they survived the primary and contingent beneficiaries. Technically speaking, the policyowner may continue the succession by listing a fourth in line, fifth in line, etc. There is not a limit to the depth of the succession. Distribution to an estate: The policy proceeds will be paid to the estate of the insured if none of the listed beneficiaries are still alive at the time of the insured's death. Benefits paid to an estate are subject to possible federal and state death taxes as well as probate fees prior to being passed on to anyone else. Additionally, creditors may have a right to funds in an estate and, therefore, a right to the proceeds of a life insurance policy paid to an estate. Distribution to a Minor: A life insurance company typically will NOT pay policy proceeds directly to a minor beneficiary. a guardian or trustee will typically need to be appointed. In some cases, the insurance company may hold the proceeds, paying interest on them until the beneficiary reaches legal age. Distribution to a Trust: Trusts may be named as the beneficiary of a life insurance policy and manage the proceeds upon the insured's death. Naming a trust as beneficiary is the most advantageous designation to use when a policy owner wishes to leave policy proceeds to a "minor" child. In this case, a trustee will manage the trust for the benefit of the child or children. Trust administration fees may reduce policy proceeds. -Testamentary trusts are created at the insured's death according to a will. -Inter Vivos trusts or living trusts are created during the life of the insured. Facility of Payment: The facility of payment provision permits an insurer to pay a portion (or all) of the policy proceeds to ANY individual who appears to be equitably entitled. Such payment may be provided to a party who paid for the medical or final expenses of the deceased insured. Usually, the facility of payment provision comes into play when a death claim is not filed within two months following the death of the insured. Additionally, this provision may be triggered to assist a guardian when a minor is listed as the beneficiary.

LIFE INSURANCE PREMIUMS Premium Collection and Reserves

Earned vs Unearned Premium: Earned premium is the amount an insurer is entitled to since it provided coverage for a specific period of time. Unearned premium is an amount of premium for which the policyholder has made payment to the insurance company, but coverage has not yet been provided. Unearned premium typically becomes earned premium as an insurance contract progresses, but also would be the amount returned to an insured by the insurer upon policy cancellation. The earned and unearned premiums make up the insurer's total premium. Reserves: funds (required by law) to be set aside by an insurer to pay current and future claims. Sometimes called unpaid claim reserves, this is a fixed liability of an insurer. These liabilities represent the amount that is expected to be needed to pay future benefits under a policy based on the CSO mortality table and assumed rate designated by the state's commissioner or state insurance law.. The reserves are funded through future premium payments from policyowners, and the interest (investment return) earned on those premiums. the insurance commissioner can specify the two main factors an insurer uses in determining reserves: the CSO mortality table and maximum assumed interest rate.

EDUCATION SAVINGS PLANS

Education IRAs Education IRAs (also referred to as Coverdell Education Savings Accounts) are also available where an investor can make nondeductible contributions of up to $2,000 per child under age eighteen. The funds saved can be used for primary and secondary school expenses (i.e., tuition, books) in addition to higher education fees (i.e., college). Any funds leftover (i.e., if a child does not attend college) may be rolled over into another Education IRA before age 30. Section 529 Plans -The Economic Growth and Tax Relief Act of 2001 created the qualified 529 savings plan. Section 529 plans are state-operated investment plans that give families a federal tax-free method to save money for college and other qualified, post-secondary higher education expenses (i.e., vocational school, graduate school, or trade school). There are two types of 529 plans. A college savings plan allows parents to use their plan funds for college expenses at any college. A prepaid tuition plan allows parents to "lock-in" future tuition at in-state public colleges at current prices. The following are some 529 plan facts: --Like a Roth IRA, earnings from a 529 plan are exempt from federal taxes as are any withdrawals as long as they go toward paying college costs. Some States waive State taxes for residents while others allow deductions on contributions. Qualified expenses include but are not limited to tuition, room and board, books, and supplies. --There is no direct limitation on the amount of money that can be contributed to a 529 plan. However, a 529 plan contribution is considered a gift and is therefore subject to gift taxes and the rules regarding estate taxes and the estate tax exclusion. Each person may contribute up to $14,000 without triggering gift taxes ($70,000 allowed for five years). If funds are withdrawn for purposes other than education (i.e., unqualified distributions), the earnings are subject to a 10% penalty and federal income tax. States may assess their own penalties. Grandparents can use this plan to make gifts to grandchildren. The amounts contributed by grandparents are excluded from their estate. --The owner of a plan may switch investment options within the same plan once per year. A rollover is permitted from one 529 plan into another once per year as well. Savings are treated as a parental asset when aid is determined. Still, only 5.6% or less of the account's value is factored into calculating the expected family contribution (EFC) for each academic year. The account holder controls the money for the account's life, even after the beneficiary reaches age 18. Beneficiaries may also be changed at any time.

► OTHER DISABILITY INCOME BENEFITS AND RIDERS

Elective Indemnity Some short-term disability income policies provide for an optional lump sum payment rather than receiving a periodic payment for certain named injuries, such as sprains. The insured may sometimes select this elective indemnity option when applying for the policy. Additional Monthly Benefit (AMB) Insurers offer short-term riders to provide additional benefits during the first six - to twelve months of a disability claim known as Additional Monthly Benefit Rider. The additional benefits during the early months of disability might be used to supplement disability benefits provided by an employer, or they may be used to help pay other expenses that might be incurred when an insured is initially disabled. Hospital Confinement Rider The Hospital Confinement Rider waives the elimination period while the insured is confined to a hospital. Generally benefits are payable from the first day of confinement for periods of up to six months or 12 months, depending on the policy. Credit Disability Credit disability can be purchased to help make loan payments if the insured were to ever become disabled. The credit disability benefits would pay the monthly payment. Waiver of Premium Rider A waiver of premium rider generally is included with guaranteed renewable and noncancellable. It exempts the policyowner from paying the policy's premiums during periods of total disability. To qualify for the exemption, the insured must experience total disability for more than a specified period, commonly three or six months. Once the insured is qualified premiums are waived beginning at the date of disability. Keep in mind, the waiver of premium generally does not extend past the insured's age 60 or 65. Social Security Rider This rider provides for the payment of additional income when the insured is eligible for social insurance benefits, but those benefits have not yet begun, have been denied, or have begun in an amount less than the benefit amount of the rider. Social Security benefits are subject to federal income tax if the beneficiary files an individual tax return and his annual income is greater than $25,000. Joint filers will pay federal income tax on their Social Security benefits if their income is greater than $32,000. Lifetime Extension Rider The lifetime extension rider extends the benefit period beyond age 65. If the insured is totally disabled as a result of an injury or illness that occurs before age 65, benefits will continue throughout the insureds' lifetime, as long as, they remain totally disabled. However, the insurer may specify that the injury or illness must begin prior to a certain age (e.g. age 50) in order for the insured to receive full benefits. If the disability begins after the specified age, an insured would receive a reduced benefit until age 65, at which time the benefits would cease. The amount of reduced benefit would be based on the insureds' age at the time of disability. Cost-of-Living Adjustment (COLA) Rider The cost-of-living adjustment (COLA) rider provides for indexing the monthly or weekly benefit payable under a disability policy to changes in the Consumer Price Index (CPI). Typically, the benefit amount is adjusted on each disability anniversary date to reflect changes in the CPI. Guaranteed Insurability Rider This option guarantees the insured the right to periodically increase the amount of benefits payable under the policy without evidence of insurability. This may also be referred to as the future increase or future income option.

► Factors in Premium Computation

Eligible Expenses Every business has expenses that must be paid and the insurance business is no different. Each health insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries, agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other administrative expenses. Interest Just as with life insurance, interest is a major element in establishing health insurance premiums. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners. Benefits The number and kinds of benefits provided by a policy affect the premium rate. The greater the benefits, the higher the premium. To state it another way,the greater the risk to the company, the higher the premium. Claims Experience -Before realistic premium rates can be established for health insurance, the insurer must know what can be expected as to the dollar amount of the future claims. The most practical way to estimate the cost of future claims is to rely on claims tables based on past claims experience. Experience tables have been constructed for hospital expenses based on the amounts paid out in the past for the same types of expenses. Experience tables have also been developed for surgical benefits, covering various kinds of surgery based on past experience. -When determining the appropriate coverage and final premium rate for group health insurance, the insurer's underwriters will use the group's experience rating. An experience rating system is used to estimate how much a specific group will have to spend on medical care. Community Rating This concept requires health insurance providers to offer health insurance policies within a given geographical area at the same price to all individual or group plans without medical underwriting, regardless of their health status. Morbidity Whereas mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, morbidity rates show the expected incidence of sickness or disability within a given group during a given period of time. Age and Sex of the Insured As discussed earlier, experience has shown that health insurance claims costs tend to increase as the age of the insured increases. Occupation and Hobbies Some types of work are more hazardous than others, the premium rates for a person's health insurance policy may be affected by occupation. The same holds true for any dangerous hobbies in which the insured may participate.

►NORTH CAROLINA HEALTH LAWS

Entire Contract A provision that the policy including the endorsements and the attached papers shall constitute the entire contract between the parties. Free Look A policyowner has 10 days to return an Accident/Health insurance policy and receive a full refund on premiums.The free-look provision of any health policy begins the date the policy is delivered to the insured. Grace Period The grace period for health and accident insurance is required to be no less than 7 days for weekly premium policies, 10 for monthly premium policies, and 31 for all other policies. If premium is paid within the grace period, coverage shall remain in effect. Notice of Lapse An insurance company must provide a notice to the insured 15 days before a policy will be cancelled or lapsed due to nonpayment. Contestability Period (Time Limit on Certain Defenses) EXCEPT for fraud, the time after issuance of a policy during which an insurance company may contest a health insurance claim due to the statements on an application is 2 years from the date of issue. Policy forms If an insurer has been notified by the Commissioner of Insurance that an individual Health Policy form does not comply with the state's laws, the insurer may not issue the form in connection with any new application. Claim forms An insurance company will send forms for filing proof of loss to a claimant within 15 days after company receives notice of a claim. Notice of claim Written notice of claim for injury or for sickness must be given to the insurer within 20 days after the date of occurrence. Proof of loss Written proof of loss must be furnished to the insurer within 180 days after the date of such loss. Time Payment of Claims Indemnity claims will be paid immediately upon receipt of written proof of loss. Disability claims will be paid no less frequently than monthly. Reinstatement If a health policy is reinstated after it had lapsed for nonpayment, there is a waiting period of 10 days before a claim covering sickness will be covered. Injuries sustained from an accident, however, will be covered immediately. Legal Action There is a waiting period of 60 days to file a lawsuit after a claim for loss has been filed by the insured. No lawsuit may be filed after 3 years has passed from when the claim was submitted. Rate Increases An insurer must provide written notice to individual accident and health policyowners at least 30 days before the effective date of a rate increase. Definition of Small Employer A small employer is defined as one that employs between 2-50 employees. Definition of "employee" The term "employee", for group health insurance purposes, is defined as a nonseasonal person who works on a full-time basis with a normal work week of 30 or more hours and is otherwise eligible for coverage. Employee eligibility Employees shall be added to the master group coverage no later than 90 days after their first day of employment. Group rates Approved premium rates for group health insurance shall be guaranteed by the insurer for an initial period of no less than 12 months. Group Health Certificate In North Carolina, a group health certificate of insurance must contain a summary of policy features and benefits. Pre-Existing Conditions/Group Coverage Pre-existing conditions are health issues that existed, were treated, or diagnosed within 6 months prior to employment. An enrollee for a health benefit plan may be excluded for up to 12 months (18 months for late enrollees). A late enrollee is an individual who elects coverage after the initial eligibility period. Pre-Existing Conditions, Replacement Policies When replacing an individual health policy in North Carolina, the required replacement notice to the applicant must include notice that pre-existing conditions may not be covered. If a group health policy in North Carolina is replaced with another group policy within 15 days it must cover all eligible persons under the discontinued plan. An individual's waiting period for pre-existing conditions is reduced when he or she has "creditable coverage." Creditable coverage is previous coverage under another group or individual health plan when there has not been a break in coverage of 63 days. The 63-day period begins when the individual's previous coverage ended. It ends when coverage under your plan begins, or, if earlier, when your group's waiting period for eligibility begins. Industrial Health Insurance Industrial health insurance is a form of health insurance that: • Have a minimum grace period of 4 weeks for additional death benefit premium • Have a maximum of 2 years incontestability provision of the death benefit • Have a noncancellable death benefit unless due to nonpayment of premium Handicapped Dependents Handicapped children are not subject to an age limitation and are covered until they become self-supportive. Newborn Child Coverage All individual and group health plans which provide coverage to family members of the insured must provide coverage for the insured's newborn child at the moment of birth. If a premium is required to continue the newborn's coverage, it must be paid within the first 31 days to continue coverage. Coverage includes injury and sickness, including medical care for diagnosed congenital defects and birth abnormalities. Coverage of Adopted and Foster Children All individual and group health plans must provide coverage to the insured's adopted and foster children on the same basis as other dependents. Relation of Earnings to Income Disability payments shall not exceed the average monthly earnings of the insured at the time disability begins or for the two years prior to the disability. Medical Examinations and Lab Tests Including HIV For underwriting an individual policy, insurers may require proposed insureds to undergo an HIV test, but only in conjunction with other medical tests. The basis for requiring an HIV test cannot be the proposed insured's sexual orientation. The insurer must obtain written consent from the proposed insured in order to conduct the HIV test. Genetic Screening Information It is illegal for insurers to use the results of a proposed insured's genetic screening to: underwrite a policy; determine whether to issue an insurance policy or to cancel; refuse to issue or renew, or limit benefits of a policy. Continuation of Coverage • Continuation of group health coverage is only available to those employees who were covered under a group plan for a minimum period of three months prior to the date of termination.• Continuation of coverage of a group Hospital, Surgical, and Major Medical Policy must include hospital expenses• The eligible employee can elect continuation of coverage for at least 60 days and up to 18 months after termination, as long as the premiums are paid by the employee. No more than 102% of the full group rate will be charged to that employee• Continuation payments need to start being paid by the employee within 31 days of termination to be eligible for continuation coverage• Continuation coverage is not required to include dental, vision, or prescription drug benefits. Conversion of coverage • An employee whose insurance under a group plan that has been terminated can convert to an individual plan with the same insurer without evidence of insurability -Employee must have been covered under the group plan for a period of at least 3 months • Application for a conversion policy and first premium payment must be made within 31 days after termination of insurance • The converted policy will not exclude, as a pre-existing condition, any condition covered by the group policy Article inapplicable to Certain Plans Group Health Insurance Continuation and Conversion Privileges do not apply to hospital, surgical or major medical plans offered by employers on a self-insured basis. Insurer Grievance Process North Carolina insurance law provides standards for the establishment and maintenance of procedures by insurers to assure that covered persons have the opportunity for appropriate resolutions of their grievances. • Insurer must maintain grievance records for three years OB-GYN Coverage Each health plan will allow female participants 13 and older access to the services of an obstetrician- gynecologist. Minimum Maternity Benefits Any individual and group policy that provide for maternity benefits, must provide coverage for a minimum of 48 hours of inpatient care after a normal delivery and a minimum of 96 hours of inpatient care after a cesarean section for a mother and her newborn infant. Pap Smears Any individual or group health insurance policy must provide coverage for annual gynecological exams, mammograms, and routine pap smears (cervical cancer testing). Mammograms Any insurer offering insurance in North Carolina must provide coverage for breast cancer screening mammography. Coverage is as follows: • One baseline mammogram for women between ages 35-39• One mammogram every 2 years between ages 40-49, or more frequently if recommended by her physician • One mammogram a year for women age 50 and older Any policy that provides coverage for a mastectomy must also provide coverage for reconstructive breast surgery following the mastectomy. PSA Testing Every accident and health insurance policy will provide coverage for prostate-specific antigen (PSA) tests for the presence of prostate cancer. Chemical Dependency Coverage for chemical dependency will be in included in all group health plans ($8,000 minimum benefit for the year; $16,000 for lifetime of contract) Other Mandatory Benefits and Provisions No insurer licensed in this State shall refuse to issue or deliver any policy due to the fact that a person possesses sickle cell trait or hemoglobin C trait nor may charge a higher premium for such reasons, as well. In addition, policies issued in this State providing medical expense benefits must also include coverage for the treatment of diabetes. Pharmacy of Choice It is illegal to prohibit an insured or beneficiary from selecting a pharmacy of his or her choice in North Carolina. Nurse Services No agency, institution or physician providing a service for which payment or reimbursement is required to be made under a policy governed by State law shall be denied such payment or reimbursement on account of the fact that such services were rendered through a registered nurse acting under authority of regulations adopted by the North Carolina Medical Board. Unpaid Premiums Upon the payment of a claim under this policy, any premium then due and unpaid or covered by any note or written order may be deducted from such payment. Readjustment of Premium As long as it is based on 12 months experience, a Group Health Policy can provide for readjustment of the premium rate once every 6 months after the first year. Conformity with State Statutes Any provision of this policy which is in conflict of the state in which the insured resides on the date of issue is understood to be amended to conform to the statutes of that state. Physical Exams and Autopsies The insurer has the right to examine the insured during the claim process and to make an autopsy when death is involved and where it is not forbidden by law. Genetic Testing Discrimination based on genetic information is prohibited. Cancellation by the Insured If an insured changes occupation to a less hazardous one than stated in the policy, the insured can, upon written request, either: • Cancel policy and receive a refund of the unearned premium • Reduce the premium accordingly and refund prorated unearned premium from the date of change Intoxicants and Narcotics The insurer shall not be liable for any loss sustained or contracted in consequence of the insured's being intoxicated or under the influence of narcotics unless administered on the advice of a physician. Illegal Occupation The insurer shall not be liable for any loss to which a contributing cause was the insured's commission of or attempt to commit a felony or to which a contributing cause was the insured's being engaged in an illegal occupation.

Consideration Clause

Exchange of value. The policy owner provides truthful statements and a premium "in consideration" of the insurer's promise to pay the death benefit if the insured dies while the policy is in force. If it is not complete, the the contract is void (not valid contract)

►Health and Accident Federal and Civil Acts

Federal Health Care Reform (Patient Protection and Affordable Care Act) The PPACA makes it mandatory for health insurance carriers to provide a summary of benefits, coverage explanation, definitions, format required, pre-existing conditions, dependent continuation, and emergency care coverages. ELIGIBILITY To be eligible to enroll in health coverage through the Marketplace, individuals: -To be eligible to enroll in health coverage through the Marketplace, individuals: -Must live in the United States. -Must be a United States citizen, national, or noncitizen who is lawfully present in the U.S. -Must not be currently incarcerated. -Must not have coverage through Medicare. DEPENDENT COVERAGE Dependents of an insured are eligible for coverage under an individual or group plan. For example, let's assume that a covered employee was previously without dependents and therefore had no dependent coverage. In that case, any new dependents due to marriage, birth, or adoption are eligible for coverage as of the date they became dependents. The following individuals are considered eligible dependents: -A spouse who's not legally separated -Unmarried or married dependent offspring up to age 26, which includes all natural-born, adopted, and stepchildren Therefore, coverage for children under a parent's individual or group policy may extend through age 26 or unless the child qualifies as a disabled dependent. Note, as outlined previously, COBRA permits a child who "ages out" of a group health plan to continue coverage under the group plan for up to 36 months. ESSENTIAL HEALTH BENEFITS The ACA defines a variety of services to be "essential health benefits" Medical expense policies must offer the following list of 10 coverages with no lifetime or annual cap, which the ACA designates as qualifying major medical coverage: -Ambulatory Patient Services: Ambulatory patient service is healthcare that an insured receives without being admitted to a hospital. Some examples include visiting a walk-in clinic, physician's office, or same-day surgery center. -Emergency Services: Emergency service is healthcare that an insured receives for conditions that, if not immediately treated, could lead to severe disability or death. -Hospitalization Coverage: Hospitalization coverage is healthcare that an insured receives as an inpatient in a hospital, such as room and board, nursing care, physician's expenses, diagnostic testing, and drugs that are administered during the hospital stay. -Pregnancy, Maternity, and Newborn Care: Maternity care and newborn care describe the ongoing care an insured woman receives during her pregnancy and during and after labor. It also provides care for newly born children. -Mental Health and Substance Use Disorder Services: Mental health and substance use disorder services describe the care that an insured receives for behavioral health treatment. It includes the evaluation, diagnosis, and treatment of mental health and substance abuse issues. -Prescription Drugs: The prescription drug benefit covers drugs that are prescribed by a doctor to treat an acute illness (e.g., an infection) or an ongoing condition (e.g., high blood pressure.) -Rehabilitative and Habilitative Services and Devices: Rehabilitative and habilitative services and devices refer to services and devices that help an insured who suffers from injuries, disabilities, or chronic conditions to gain or recover her mental and physical skills. -Laboratory Services: Laboratory services include the testing of blood, tissues, and other substances that are derived from a patient to help a doctor diagnose a medical condition and monitor the effectiveness of treatment. Preventive and Wellness Services and Chronic Disease Management: Preventive or wellness services include routine physicals, screening, and immunizations. Chronic disease management is an integrated approach to managing an ongoing condition, such as asthma or diabetes. Pediatric Services: Pediatric services are the care that an insured child receives. Treatment by a participating physician who specializes in pediatrics as the child's primary care health care professional is available, including oral (dental) and vision care. Since "vision" is not defined in the statute, the American Academy of Pediatrics (AAP) and the American Association for Pediatric Ophthalmology developed evidence-based recommendations. Accordingly, the essential children's vision benefit begins with regular eye screenings within the medical home and covers a comprehensive eye exam. It also includes refraction for children or adolescents who fail a screening, have an unfavorable risk assessment, report a visual problem, or cannot complete a screening. ----While limited pediatric dental and vision benefits are mandatory, adult dental and vision coverages are optional and usually require an additional premium. LEVELS OF COVERAGE (METALLIC PLANS) Tiered Plans: The ACA requires health insurers to offer individual health insurance plans within health insurance exchanges that conform to the distinct levels of coverage that are created by the ACA. These levels are defined as four "metal tiers." Each of the four metal tiers corresponds to: -The percentage (or actuarial value) of expected "essential health benefits" that will be paid by the insurer -The percentage of benefits expected to be paid by the insured through its deductibles, co-payments, and out-of-pocket limits ----The overall benefit to be shared is based on a government calculation of what it believes the average annual cost of essential benefits to be per person or family. The four metal tiers and their level of coverage are as follows: Bronze Plan: This plan must have an actuarial value of 60%. Individuals who purchase bronze level coverage should expect to pay 40% of their covered costs through deductibles, co-pays, and other cost-sharing features (i.e., this is referred to as a 60 / 40 plan). Silver Plan: This plan must have an actuarial value of 70%. Individuals who purchase silver level coverage should expect to pay 30% of their covered costs through deductibles, co-pays, and other cost-sharing features (i.e., this is referred to as a 70 / 30 plan). Gold Plan: This plan must have an actuarial value of 80%. Individuals who purchase gold level coverage should expect to pay 20% of their covered costs through deductibles, co-pays, and other cost-sharing features (i.e., this is referred to as an 80 / 20 plan). Platinum Plan: This plan must have an actuarial value of 90%. Individuals who purchase platinum level coverage should expect to pay 10% of their covered costs through deductibles, co-pays, and other cost-sharing features (i.e., this is referred to as a 90 / 10 plan.) Pregnancy Discrimination Act The Pregnancy Discrimination Act of 1978 is an amendment to the Civil Rights Act of 1964 designed to "prohibit sex discrimination on the basis of pregnancy". The Pregnancy Discrimination Act requires that employers treat pregnancy in the same manner as a disability for any other medical reason. All of the following guidelines apply: -When medical benefits are offered, pregnancy must be covered the same as other illnesses -Pregnancy must be treated the same as any other type of disability for purposes of sick-leave plans -Complications arising from abortion are covered ONLY if the life of the woman is endangered Age Discrimination in Employment Act (ADEA) The ADEA applies to employers with twenty or more employees and affects employees age 40 and older. This Act stipulates that, with some exceptions, compulsory retirement is not allowed. Therefore, employee benefits must continue for older workers, although reductions in benefits are allowed. However, if an employee age 65 or older continues to work, they must still be offered coverage under the group plan even though the cost may be greater than those for younger employees. The ADEA also applies to group disability and group medical expense coverage. The Americans With Disabilities Act (ADA) The ADA affords similar protections against discrimination to Americans with disabilities as the Civil Rights Act of 1964, which made discrimination based on race, religion, sex, national origin and other characteristics illegal. The determination of whether any particular condition is considered a disability is made on a case by case basis. However, the law specifically forbids exclusions for AIDS, deafness, cancer, muscular dystrophy, and kidney disease.

Parties Involved in Underwriting

Field underwriter: A producer/agent performs the initial underwriting done by an insurer. the producer determines which risks are desirable and submits those to the underwriting department for approval. may solicit appointments, complete applications, collect premiums, and submit applications to the home office underwriter. The producer does not issue the policy. responsible for providing any required disclosure of information practices to an applicant, such as a notice regarding replacement, a life insurance buyer's guide, an outline of coverage, or a policy summary. 1st step in the underwriting process. The PROPOSED INSURED is the person who is obtaining the insurance, the life (person) who is to be insured, if approved. The POLICYOWNER is the person who, if the insured is approved, will retain all rights and options of the policy. The policyowner also usually serves as the PAYOR, the person who is ultimately responsible for ensuring the premiums are paid when due. The UNDERWRITER is the person who reviews the insurance application, examines any additional information about the applicant, and classifies the degree of risk posed by a proposed insured to determine if coverage should be offered, and if so, at what premium rate. *Typically, the policyowner, payor, applicant, and proposed insured are all the same person. Assume that this is the case unless an exam question outlines explicitly that this is not the situation.*

► Flexible Savings Accounts

Flexible Savings Accounts (sometimes called Flexible Spending Accounts) are tax-advantaged accounts that can be set up through a cafeteria plan of an employer, and comes with annual contribution limits set by the IRS, which adjusts each calendar year. An FSA allows an employee to set aside a portion of earnings to pay for qualified medical expenses (such as prescription medication) as established in the cafeteria plan.

TAXATION OF GROUP LIFE INSURANCE

For a group life insurance plan to receive favorable tax treatment, there are specific requirements in place. These requirements ensure that the average employee is not discriminated against in favor of higher-level employees. Determining Eligibility A group life insurance plan must benefit at least 70% of all employees. Furthermore, at least 85% of all participating employees must not be key employees. Premiums For Group Life Insurance Premiums paid by the employee for their group life insurance are not tax-deductible. Premiums paid by employers for group life insurance are tax-deductible as a legitimate business expense as long as specific requirements are satisfied. However, a sole proprietor or partner may not deduct premiums for group life covering his own life since he is not considered to be an employee. The cost of the first $50,000 of group term life is tax-exempt to an employee. The cost of coverage amounts above $50,000 may be taxable (as ordinary income) to the employee. Most employers will establish benefit schedules according to the following: -Earnings -Employment position -Flat benefit Proceeds For Group Life Insurance Proceeds from a group life policy are tax-free if taken in a lump-sum. Proceeds taken in installments will be subject to taxes on the interest portion of the installments. Retire Lives Reserve and Qualified Plans -Retired Lives Reserve (RLR) is a group life insurance product with the objective of providing continuing life insurance protection beyond retirement. RLR provides annual renewable term insurance and a reserve account that accumulates funds before retirement, which will be used to pay premiums on the term insurance after a person's retirement. Under this plan, an employer can make a tax-deductible contribution to the fund (i.e., reserve account) on behalf of employees, and the contributions are not tax-deductible to employees. A life insurance company or trust can administer this fund or reserve account. -A qualified retirement plan may purchase life insurance to provide death benefits under very limited circumstances. The plan document must authorize such a purchase, but the decision to buy a policy may be made by either the plan administrator (employer) or the participant. In a defined contribution plan, the policy is part of the participant's account. In a defined benefit plan, the death benefit is part of the definite determinable benefit provided to the participant by the plan. Most importantly, the purchase of life insurance must be incidental to the primary purpose of providing retirement benefits under the plan.

Purpose and function of annuities

For tax purposes, annuities are classified as either qualified or non-qualified. With a non-qualified annuity, the contributions are made in after-tax dollars. The contract owner receives the tax deferral of income and growth earned, but there's no tax deduction of premiums (or yearly tax savings through a salary reduction). Annuities that are purchased outside of qualified pension plans don't receive tax-favored treatment of premium payments. In other words, premiums are not tax-deductible. Non-qualified annuities may be purchased by any individual or entity, but again, the premium payments or contributions are not tax-deductible. A qualified annuity is one that's purchased as part of a tax-qualified retirement plan. If the premium paid for a qualified annuity is in the form of a contribution by an employer to a qualified retirement plan, the premium is tax-deductible. Some qualified annuities also permit employees to fund the plan through a salary reduction (e.g., a tax-sheltered annuity or TSA). In this case, the plan is funded with pre-tax dollars, which lowers the employee's yearly taxable income. An important note is that, regardless of whether the annuity is qualified or non-qualified, accumulations (i.e., interest earned) are tax-deferred. A significant reason for a person to purchase an annuity is to provide income at retirement. An annuity does this by guaranteeing income to the recipient. As examined later, an annuity protects an individual against outliving her income. Only a life insurer can guarantee income for the life of an annuitant. An annuity is attractive to investors since insurers generally pay higher interest rates than other traditional savings vehicles (e.g., certificates of deposit or money market funds). If a contract owner withdraws funds prior to a stated period, withdrawal penalties may be assessed. However, if the contract owner dies or becomes disabled, funds may be withdrawn without penalty. The parties involved in an annuity contract include the insurer, the contract/policy owner, the annuitant, and the beneficiary. The contract owner has the right to name a beneficiary who will have access to the funds in the event of the owner's death prior to annuitization (i.e., the annuity or pay-out phase). An annuity possesses some insurance aspects in that a mortality factor is used to determine periodic payments, but it's not the same mortality factor that's used in term or whole life insurance. In addition, as described previously, a beneficiary must be named in the event that the contract owner dies prior to the annuity phase. If no beneficiary is listed on an annuity contract and the owner dies before annuitization (payout), the proceeds are paid to the owner's estate. Annuities can be classified in several categories, including: (1) based on how the premiums are paid, (2) based on when benefits begin, (3) based on the source of income, (4) based on the disposition of proceeds, and (5) based on the number of lives covered.

Franchise Insurance

Franchise Insurance is a life or health insurance plan for covering groups of persons with individual policies uniform in provisions, although perhaps different in benefits. Solicitation usually takes place in an employer's business with the employer's consent. Franchise insurance is generally written for groups too small to qualify for regular group coverage. May be called wholesale insurance when the policy is life insurance.

►RENEWABILITY PROVISIONS

Generally speaking, the more favorable the renewability provision is to the insured policyholder, the higher the premium. Cancellable Policies -Coverage under a cancelable health insurance policy may be terminated by either the insured or the insurer -The renewability provision in a cancellable policy allows the insurer to cancel or terminate the policy at anytime, but must return unearned premium -An insurer must give a written notice of cancellation to the insured Optionally Renewable Policies The renewability provision in an optionally renewable policy gives the insurer the option to renew the policy or terminate the policy on a date specified in the contract. Conditionally Renewable Policies A conditionally renewable policy allows an insurer to terminate the coverage but only in the event of one or more conditions stated in the contract. --Typically, related to the insured reaching a certain age or losing gainful employment. ---A conditionally renewable policy can increase premiums at time of renewal Guaranteed Renewable Policies Also known as noncancellable policies . The renewal provision in a guaranteed renewable policy specifies that the policy must be renewed, as long as, premiums are paid until the insured reaches a specified age. ----Guaranteed renewable policies normally have increasing premiums on the basis of an entire classification, not on individual classification basis. ex) health policy that must be renewed by the insurer and premiums can only be increased if applied to the entire class of insureds. Nonrenewable Policies Nonrenewable policies are normally associated with short-term health insurance. These are policies that are for established policy lengths of a year or less and are considered temporary. Noncancellable Policies -A noncancellable policy cannot be cancelled (unless due nonpayment of premium) nor can its premium rates be increased under any circumstances -Noncancellable provisions are most commonly found in disability income policies. They are rarely used in medical expense policies -Noncancellable policies may not be changed in anyway by the insurer up to a specified age, so long as the premiums are paid -Noncancellable policies have higher premiums -The policy is renewable up to a specified age which is generally the standard retirement age of 65, after that the insurer may cancel or nonrenew the policy -If an insured purchases a noncancellable policy at age 54, then the policy term must be for minimum 5 years

Health Insurance Portability and Accountability Act (HIPAA)

HIPAA provides the ability to transfer and continue health insurance coverage for millions of American workers and their families when they change or lose their jobs. The HIPAA Privacy Rule provides federal protection for an individual's health information and gives patients an array of rights with respect to that individually identifiable health information. In addition, HIPAA Security Rule provides technical safeguards to assure the confidentiality, integrity, and availability of electronic protected health information. HIPAA requirements -HIPPA requires employers with 20 or more employees to allow former employees to continue benefits under the employer's group health insurance. It states that group health coverage must not use health status, medical condition and history, genetic information, disability and claims experience as criteria for coverage. It also limits the ability of a new employer plan to exclude coverage for preexisting conditions -HIPAA imposes requirements on health care providers with respect to disclosure of protected health information. Notice of information practices must be given to a policyholder at least every three years -When an insured individual leaves an employer and immediately begins working for a new company that offers group health insurance, the individual is eligible for coverage upon hire -HIPAA states that a group health policy renewal can be denied when participation or contribution rules have been violated -HIPAA provides that the 10% excise tax for early withdrawal from IRAs will not apply to the extent a withdrawal is used for medical expenses that exceed 10% of the individual's adjusted gross income as of 2019. -HIPAA states that multiple-employer plans and multiple-employer welfare arrangements must be guaranteed renewable unless for fraud or intentional misrepresentation -HIPAA rules apply to all types of group health plans EXCEPT disability income plans Pre-existing conditions -HIPAA has changed the rules governing preexisting conditions for all group health plans (excluding disability income). HIPAA portability rules allow individuals who change from one group medical plan to another to reduce or eliminate any pre-existing conditions excluded under the new plan. The individual is therefore eligible for coverage upon hire. -Pre-existing conditions, under HIPAA, are defined as health issues that existed, were treated, or diagnosed within 6 months prior to employment. An enrollee's pre-existing conditions for a health benefit plan may be excluded for up to 12 months (18 months for late enrollees). A late enrollee is an individual who elects coverage after the initial eligibility period. -In relation to group health insurance, portability means transferring from one health plan to another. This usually happens due to job change or your employer changing insurance companies. Creditable coverage Under HIPAA, an individual's waiting period for pre-existing conditions is reduced when he or she has creditable coverage. Creditable coverage is previous coverage under another group or individual health plan when there has not been a break in coverage of 63 days. The 63-day period begins when the individual's previous coverage ended. It ends when coverage under your plan begins, or, if earlier, when your group's waiting period for eligibility begins.

Service Providers: Health Maintenance Organization (HMO)

HMOs offer a wide range of healthcare services to member subscribers. For a fixed periodic premium paid in advance of any treatment, subscribers are entitled to services of specific physicians and hospitals contracted to work with the HMO. Unlike commercial insurers, HMS provide financing for health care + the health care itself. HMOs are known for stressing preventive health care and early treatment programs

► Health Reimbursement Arrangements

Health Reimbursement Arrangements are employer-funded, tax-advantaged health benefit plans that reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. Unused amounts may be carried forward for reimbursement in future years. --Reimbursements may be tax-free if the employee paid for qualified medical expenses or a qualified medical plan --Health Reimbursement Arrangements must be established by the employer

► Commercial Insurance Providers

Health insurance may be written by a number of commercial insurers or also known as Traditional Insurers. The list includes life insurance companies, casualty insurance companies, and monoline companies which specialize in one or more types of medical expense and disability income insurance. -Under commercial insurers' plans, consumers receive health care from medical professionals and medical expenses are covered by the insurance company. -Commercial insurance companies function on the reimbursement approach for covered medical expenditures. -The right of assignment built into most commercial health policies lets policyowners assign benefit payments from the insurer directly to the health care provider, thus relieving the policyowner of first having to pay the medical care provider.

► Other Types of Medical Expense Coverage

Hospital Indemnity Policies -Pays a specified amount on a daily, weekly or monthly basis to the insured not the hospital while the insured is confined to a hospital. -Hospital indemnity policies provide a flow of income from the first day the insured is confined to a hospital to the last day -Payment under this type of policy is unrelated to the medical expense incurred, but based only on the number of days confined in a hospital -Benefit limits, pre-existing conditions, and elimination periods may be applied, depending on the policy Limited Benefit Policies -There are a variety of health insurance policies providing limited coverage for specific accidents or sickness. These contracts must specify the type of accident or sickness covered, limited perils and amounts of coverage. An example of a limited policy is the Travel Accident Insurance, which provides benefits for accidental injury while traveling, usually on a common carrier. Another example, is a Specified disease insurance, which covers such things as out-of-pocket payments, non-covered medical expenses, and incidental costs. --A 'Notice to Insured' must be provided to the insured that it is a Limited Benefit Policy. --Benefits may be paid on a reimbursement or indemnity basis. Prescription Drug Policies Covers the cost of drugs required to be dispensed by a physician's prescription and not those dispensed in a hospital or extended care facility. Normally, drugs for which a prescription is not required are not covered with the exception of injectable insulin for diabetics. In addition, this plan does not cover devices or appliances, hypodermic needles or charges to administer drugs. Also, drugs used for the treatment of sexual dysfunction or infertility are generally not covered, unless required by state law. Most of prescription drug policy plans have a copayment requirement when a prescription is being filled Limited Risk (Dread Disease) Policies -Provide limited benefits for a specific disease such as cancer or heart disease. Benefits are usually paid as a scheduled, fixed-dollar amount for specified perils or medical procedures, such as hospital confinement or chemotherapy. Emergency First- Aid Provide coverage for emergency treatment expenses for the insured. Mental Infirmity Provide coverage for mental infirmity for a specified dollar amount or a percentage of the benefit. Usually, the benefit amount for mental infirmity is less than the benefit amount for physical infirmity. Critical Illness Policies Also known as Specified Disease Plans, pays a lump sum to the insured upon the diagnosis (and survival) of a critical illness. The insured, however, must survive the illness for a certain period of time (e.g. 30 days).

CLASSIFICATION ACCORDING TO THE NUMBER OF LIVES

INDIVIDUAL OR SINGLE LIFE ANNUITY An individual or single life annuity is the most common form of an annuity. It is are pure life annuity, covering one life, with no survivorship (beneficiary). It provides income to the recipient, once it commences, for life with no refund paid to the annuitant's family upon his or her death. This settlement option possesses the most significant amount of risk to the annuitant as well since there is no survivorship (i.e., no refund). The purpose of a straight life annuity is to protect against outliving one's income. JOINT LIFE ANNUITY A joint life annuity is a type of multiple life contract that's designed to pay benefits to two or more annuitants at the same time. However, all benefits will end once the first annuitant dies. In this manner, it's similar to a joint life insurance policy. JOINT LIFE AND SURVIVOR ANNUITY A joint and survivor annuity is another form of a multiple life contract. With this type of annuity, the benefits are paid throughout the lifetime of one or more annuitants. Therefore, payments continue until the last annuitant dies. In other words, joint and survivor annuities guarantees income payments for the duration of two lives.

Reinstatement Provision

If a policy lapses because premiums are not paid, many life contracts allow reinstatement as long as it is requested within a specific amount of time after the policy lapse. the insurer will require proof of insurability or good health. All back premiums (plus interest) owed must be paid to the insurer before reinstatement is granted. If the insurer does not accept or reject the reinstatement within 45 days, coverage will be automatically reinstated as if it had never lapsed. the most crucial advantage to the reinstatement of an insurance policy is that the premium of the policy will continue to be based on the insured's age at the time of the initial application. Whenever a policy is reinstated, a new 2-year contestable period goes into effect for the statements made on the reinstatement application.

Misstatement of Age or Sex Provision

If the insured's age or sex is misstated in an application for insurance, the benefit payable usually is adjusted to what the premiums paid should have purchased. Typically, such adjustments are made either in the premium charged, the amount of insurance protection, or during payment of a death claim. If the error in age is discovered after the death of an insured, the insurer may pay out less than the face amount of the policy.

Jumping Juvenile Insurance (Estate builder)

In addition to purchasing insurance on a child for burial expenses, insurance may also be purchased to protect the child's insurability. Some parents purchase these plans to begin a savings plan for their child. The face amount of this policy can be as low as $1,000 to start. The coverage amount "jumps up" (typically 5 times the initial amount) when the child reaches the age of majority or a specified age (i.e., age 21). This benefit increase comes without any evidence of insurability and no premium increase. In addition to being called a jumping juvenile policy, some insurers also refer to the plan as a junior estate builder.

Qualified Defined Benefit Plans

In contrast to a defined contribution plan that sets up predetermined contributions, a defined benefit plan establishes a definite future benefit, predetermined by a specific formula. When the term pension is used, the reference typically refers to a defined benefit plan. Usually, the benefits are tied to the employee's years of service, amount of compensation, or both. For example, a defined benefit plan may provide for a retirement benefit equal to 2% of the employee's highest consecutive five-year earnings, multiplied by the number of years of service. Or the benefit may be defined as simply as $100 a month for life. To qualify for federal tax purposes, a defined benefit plan must meet the following basic requirements: ---The plan must provide for definite determinable benefits, either by a formula specified in the plan or by actuarial computation. ---The plan must provide for systematic payment of benefits to employees over a period of years (usually for life) after retirement. Thus, the plan must detail the conditions under which benefits are payable and the options under which benefits are paid. ---The plan must provide retirement benefits primarily. The IRS will allow provisions for death or disability benefits, but these benefits must be incidental to retirement. -The maximum annual benefit an employee may receive in any one year is limited to an amount set by the tax law. -The appropriate choice of a qualified corporate retirement plan (defined contribution or defined benefit) requires an understanding of each plan's operation and characteristics as they relate to the employer's objectives.

►NORTH CAROLINA LIFE LAWS

Incontestability After a policy has been in force for two years, the insurance company cannot contest the validity of the policy for any reason other than failure to pay the premiums. Suicide An insurer may exclude liability for paying a death claim in a life insurance policy if the insured commits suicide within two years of policy issue. The insurer will return the premiums if the insured commits suicide within that period Policy Summary and Buyer's Guide An agent who sells an individual life insurance policy in North Carolina must deliver to the policyowner a Policy Summary and Buyer's Guide. Disclosure Any information required to be disclosed by the insurer cannot be minimized or intermingled within the text of advertisement so as to be confusing or misleading. Also, advertisements may not omit information or use statements, references, or illustrations that will mislead or deceive prospective purchasers. Grace Period Life insurance policies must provide a grace period of 31 days after the due date. If the insured dies during the grace period, the insurance company may deduct any premium due from the death benefit. Minors Minors in North Carolina age 15 and up can enter into life insurance contracts and have all the rights that come with ownership. Illustrations Illustrations are charts, graphs, and numerical data that depict the non-guaranteed elements of a policy over time.Non-guaranteed elements are premiums, benefits, values, credits, or charges under a policy of life insurance that are not guaranteed or not determined when the policy is issued. A life insurance illustration showing future premiums being paid out of nonguaranteed values must disclose that the policyowner may need to resume premium payments, depending on actual results. Exemption from Creditors Proceeds from a life insurance policy are protected from any claims by a creditor of the insured as long as there is a named beneficiary. Interest Payments on Death Benefits Upon the death of the insured, payments made after 30 days from the receipt of satisfactory proof of loss must receive the insurer's current interest rate, computed from the date of death. Policy Loan Interest Rate• The maximum fixed interest rate charged by insurers is 8% in North Carolina • An insurance policy has the right to defer granting a policy loan for a maximum of 6 months after receiving a request for the loan Replacement Replacement is strictly regulated and requires full disclosure by both the agent and the replacing insurance company. Replacement regulations exists to assure that purchasers receive specified information and it also reduces the opportunity for misrepresentation. Policy replacement is defined as a transaction in which a new policy or contract is to be purchased, and the agent is aware that an existing policy or contract has been, or will be: • Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated • Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values• Modified to cause a reduction in benefits or length of policy term • Subjected to loans exceeding 25% of the cash value • Reissued with a reduction in cash value• Used in a financed purchase Note: Credit Life is exempt from the rules governing Life Insurance and Annuity Replacements. Duties of the Replacing Agent • Present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the agent. A copy must be left with the applicant.• 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.• Leave the applicant with the original or a copy of written or printed communications used for presentation to the applicant.• Submit to the replacing insurance company a copy of the Replacement Notice with the application. Duties of the Replacing Insurance Company • Require from the agent a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant. • Send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the application is received in the replacing insurance company's home or regional office. A policy summary or ledger statement containing policy data on the proposed life insurance or annuity must be included. Conservation An agent's attempt to stop the replacement of an existing life insurance policy or annuity is known as conservation. Group Life Insurance • The employees eligible for group insurance under the policy shall be all of the employees of the employer. • In the event of a termination of a group life plan or termination of a covered employee, a person covered by a group policy has the right to convert such coverage to an individual policy within the conversion period (31 days) without proving insurability. If this right is exercised, the employee is responsible for the payment of premium. • There are no restrictions regarding the assignment of coverage under a group life insurance policy Tontine Policies A tontine is a system for raising capital in which individuals pay into a common pool of money and then receive a dividend based on their share and the performance of investments made with the pooled money. The principal invested in the tontine is never paid back to the investor; rather the investor receives dividends until his or her death. If a "shareholder" dies, his or her shares are divided up among the surviving investors. These policies are prohibited in North Carolina. Industrial Life Industrial life insurance is a form of life insurance that: • Do not exceed a face amount of $1,000 • Have premiums that are payable monthly or more frequently (weekly, bi-weekly) • Have the words "Industrial Policy" printed upon the policy. Viatical Settlements A viatical settlement contract is an agreement under which the owner of a life insurance policy sells the policy to another person in exchange for a bargained-for payment, which is generally less than the expected death benefit under the policy.• The viator is considered to be an individual suffering from a terminal illness or severe chronic illness who sells his/her life insurance policy to a viatical settlement provider.• The viatical settlement provider becomes the policyowner and assumes responsibility for paying premiums. When the insured dies, the provider receives the death benefits.• Proceeds of the viatical settlement contract could be subject to the claims of creditors.• Viatical settlement brokers are insurance agents licensed to solicit viatical settlement agreements between providers and policyowners (viators), charging a fee for their services. • An agent must obtain a license to transact viatical settlements in North Carolina. Insurable Interest• Insurable interest exists on the lives of those individuals who wish to sell (upon their death) their shares of stock or ownership shares in a company to those individual(s) contracted to buy these shares. • Employers have insurable interest in the lives of their employees. An employer may insure the life of an employee as long as the proposed insured provides prior written consent. • A married person has insurable interest in the life of his or her spouse, even in the absence of an economic interest. Reinstatement Unless a policy has been surrendered for its cash value, a policy can be reinstated within 5 years after the date of premium default. The requirements of reinstatement include: • Written application • Payment of any past due premiums or indebtedness to the insurer • Evidence of insurability Contestability After Reinstatement A reinstated life insurance policy or annuity may be contested by the insurance company on account of fraud or misrepresentation under the same conditions with respect to contestability after original insurance. Notice of Premium Default A life insurance company cannot declare a policy lapsed or forfeited within one year after default in premium payment, unless it has mailed a notice indicating the amount of premium due. This requirement only applies to policies with an annual premium schedule, and not to policies that are payable monthly (or shorter intervals), or to group insurance and term insurance contracts for one year or less. A policy may not be lapsed or forfeited within 30 days after the notice has been sent. • Policies that don't have a grace period, the notice must be sent at least 15 days, but no more than 45 days, prior to the due date. For policies with a grace period, the notice must be sent at least 5 days, but no more than 45 days, prior to the due date. Prearranged Funeral Contracts A prearranged funeral contract is a life insurance policy in which the purpose is to fund a funeral for an insured. These polices may be individual or group coverage. Before accepting the initial premium, the agent must make these disclosures: • The relationship between the prearrangement and the life insurance policy • The fact that the life insurance policy will be funding the prearrangement • The nature of the relationship of everyone involved

Uses of Health Insurance

Individuals need to have a comprehensive health insurance plan in place to insure against the financial consequences of illness or disability. Similarly, health insurance also is necessary to protect a business against the risks it faces, including losses due to a key employee's death or disability. Businesses also commonly offer health insurance as part of an employee benefits program. Medical Expense Insurance Needs -While it is difficult to measure the importance of one type of insurance over another, it is fair to presume that a health insurance program must begin with an adequate amount of medical expense insurance. Without proper protection devoted to these potential costs, even the most basic medical care can quickly exhaust an individual's savings. A catastrophic claim can spell financial disaster. -At one time, most medical policies were the basic medical expense type. Today, it is more common to find most Americans covered under some form of a major medical policy or a service plan such as an HMO. If the policyowner can afford the cost, an ideal policy is a combination plan in which a basic plan is enhanced by a supplementary major medical plan. Under this approach, the insured obtains the "first dollar" benefits of the basic plan and also has the expansive protection offered by the major medical plan. Most policyowners are concerned with the cost of their health insurance and find that some financial sacrifice may be required. For example, an individual major medical plan with a $100 individual deductible is going to cost more than a comparable plan with a $500 deductible. A plan with an 80/20 coinsurance provision will cost more than a comparable plan with a 75/25coinsurance provision. The question the policyowner must answer is, "Am I willing to assume more of the cost risk of possible future claims in exchange for the definite cost savings offered by a plan with a higher deductible or coinsurance limit?" Disability Income Insurance Needs -The importance of protecting one's earnings is sometimes overlooked in the insurance needs analysis process - a regrettable fact for the many people who become disabled every year. Any sound financial planning for an individual and family should include disability income protection. Those who do not purchase disability income protection, whether from an individual policy or a group plan, are utilizing self-insurance as the alternative. Moreover, Americans too often assume that Social Security will provide the income necessary to survive if disability strikes. This is an unfortunate assumption. Not only is the definition of "disabled" to qualify for Social Security benefits extremely narrow, but there is no assurance that the benefits will meet the disabled person's needs. Social Security disability income should only be viewed as a possible source of income to augment a personal plan. Whether the personal plan is based on a group or individual policy, it should be regarded as the primary source of income if earnings are lost due to disability. -Policyowners can control the premium cost of a disability income plan by electing a longer elimination period than might otherwise be desired. The length of the benefit period also has a direct impact on the premium. Because of the favorable tax treatment given to individually funded disability income policies, a plan that provides about 60% of pre-disability gross earnings can be considered sufficient. This is because disability income benefits are income tax-free if the individual insured paid the premiums. An individual who earns $3,000 a month may only take home $2,000 after taxes. Consequently, a disability plan that provides a monthly tax-free benefit of $1,800 would likely be sufficient. However, if an insured has a substantial amount of additional income, then a federal income tax will be imposed on some of the benefits received. -To discourage malingering and false claims for disability, an insurer sets limits on the amount of benefits an insured can collect from two disability policies with the same insurer. In the case of group disability income plans, the group member has little choice as to the level of benefits provided. The plan document must have a schedule of benefits that identifies what the participant will receive if disabled. If both parents in a family are actively employed, then disability income must be considered for each. If each parent's income is indispensable for the financial support of the family, then it is safe to assume that the loss of either income would present a financial problem. Group Versus Individual Coverage More Americans are protected under a group medical expense policy than an individual policy. The benefit to the group member (even assuming the plan is contributory) is the significantly less out-of-pocket cost than a comparable individual plan. The group plan participant can take comfort in knowing that even if he should terminate employment, continued coverage is guaranteed through the conversion privilege built into every group health policy. As we have learned, a group health plan can consist of medical insurance, disability income insurance, accidental death and dismemberment insurance-alone or in any combination. It is not uncommon to find all of these coverages included in a single group insurance plan. An employer is responsible for choosing which benefits are available for employees, applying for coverage, providing the underwriter with any necessary information, and paying premiums under a group plan. Benefit provisions may also be available to differentiate a group plan for a certain group of employees. For example, an employer can give more benefits for older employees. By providing its employees with a plan for health insurance, an employer derives a number of benefits: ---The plan contributes to employee morale and productivity. ---The plan enables the employer to provide a needed benefit that employees would otherwise have to pay for with personal after-tax dollars (this helps hold down demands for wage increases). ---The plan places the employer in a competitive position for hiring and retaining employees. ---The employer can obtain a tax deduction for the cost of contributing to the plan. ---The plan enhances the employer's image in both public and employee relations. Cafeteria Plans -Many times, employer-provided health insurance benefits are part of a cafeteria plan. As its name implies, cafeteria plans are benefit arrangements in which employees can pick and choose from a menu of benefits, thus tailoring their benefits package to their specific needs. -Employees can select the benefits they value or need and forgo those of lesser importance to them. The employer allocates a certain amount of money to each employee to "buy" the benefits they desire. If the cost of the benefits exceeds the allocation, the employee may contribute the balance on a pretax basis (contribution is not subjected to any taxes) Without a Section 125 Plan in place, the contribution would be considered taxable income to the employee. Taxation of cafeteria plans is regulated by Section 125 of the Internal Revenue Code, thus sometimes cafeteria plans are referred to as a Section 125 plan. ---An S-Corp owner with a greater than 2% share is INELIGIBLE to participate in a Section 125 Plan. The types of flexible benefits usually available under a cafeteria plan include medical coverage, accidental death and dismemberment insurance, short-term and long-term disability, life insurance, and dependent care. Some plans provide for "choices within the choices": an employee may have the option of selecting from various levels of medical plans or choosing from among a variety of HMOs. -Rarely is an entire group rejected on the basis of one bad risk, unless the group is very small. The underwriter reviews a number of factors to determine whether or not the group should be accepted. In spite of the many differences between types of groups, there are certain general groups of underwriting considerations. General Groups of Underwriting Considerations General groups of underwriting considerations are applicable to all or most types of groups, such as::: -Reason for the group's existence (purchasing group insurance must be incidental to the group's formation, not the reason for it) -Stability of the group (underwriters want to see a group of stable workers without an excessive amount of "turnover") -Persistency of the group (groups that change insurers every year do not represent a good risk) -Method of determining benefits (it must be by a schedule or method that prevents individual selection of benefits) -How eligibility is determined (insurers want to see a sickness-related probationary period, for example, to reduce adverse selection) -Source of premium payments, whether contributory or noncontributory (noncontributory plans are preferred because they require 100% participation, which helps spread the risk and reduces adverse selection) -Prior claims experience of the group Size and composition of the group Industry or business with which the group is associated (hazardous industries are typified by higher-than-standard mortality and morbidity rates)

Fraud

Insurance contracts are unique when fraud occurs, and the insurer only has a limited period of time (2 years from the date of issue) to challenge the validity of a contract, after that period, the insurer cannot contest the policy or deny benefits based on material misrepresentations, concealment, or fraud

Social Insurance programs

Insurance provided by federal and state governments, ranging from different programs. They can write insurance to cover perils (extreme danger) that are not insurable by commercial insurers (i.e war, flood nuclear reaction) or write regular insurance risks thus competing with the commercial marketplace (i.e Social insurance such as Workers Comp)

MORE CHARACTERISTICS OF SOCIAL SECURITY

Insured Status Social Security establishes benefit eligibility based on an "insured" status. There are two types of insured statuses that qualify individuals for Social Security benefits: fully insured and currently insured. Most Social Security benefits are paid to fully insured individuals. Fully Insured and Currently Insured -A worker is considered to be fully insured if they have earned the required number of quarters of coverage. A worker with 40 quarters of coverage (i.e., ten years of employment) is considered to be fully insured. A fully insured worker is entitled to retirement benefits, and survivors are eligible for retirement benefits when the worker dies. -Fully insured status alone does not provide for disability benefits. This benefit is provided if a worker is fully insured and meets the definition of disability. In this case, a worker must have 40 quarters of coverage and 20 of the 40 quarters must be earned immediately preceding the disabling event. Therefore, under this classification, the worker is entitled to retirement benefits, disability benefits, and survivors are eligible for retirement benefits when the worker dies. A worker is currently insured if he or she has earned at least six quarters of coverage in the 13 quarters immediately preceding death or disability. This status provides for survivor benefits only. It does not provide for disability or retirement benefits. -To obtain a fully insured status, a covered worker must accrue a total of 40 quarters of credit, which is about ten years of work. To be considered currently insured and eligible for limited survivor benefits, a worker must have earned six credits during the last 13-quarter period. Funding Social Security Benefits -Funding for Social Security and all its social insurance counterparts (i.e., Medicare, Medicaid) is accomplished through the Federal Insurance Contributions Act (FICA) payroll taxes. Social Security payroll taxes are collected from employers (7.65%), employees (7.65%), and the self-employed (15.3%). Therefore, employers, employees, and self-employed (i.e., sole proprietor) fund social insurance programs. -FICA tax is applied to an employee's income up to a certain income amount. This amount is called the taxable wage base. There is a maximum amount of earnings that can be subject to Social Security tax each year. This amount is indexed each year to the national average wage index. This maximum applies to employers, employees, and self-employed individuals. Medicare Part A taxes are not subject to a maximum taxable wage cap. Taxation of Social Security Benefits Social Security benefits are subject to federal income tax if the beneficiary files an individual tax return, and his annual income is greater than $25,000. Joint filers will pay federal income tax on their Social Security benefits if their income is greater than $32,000.

NEWER TYPES OF ANNUITIES

Insurers also offer equity-indexed annuities and market value adjusted annuities. An equity-indexed annuity (EIA) is a fixed (non-variable) annuity that offers a rate of interest that's linked to (but the funds are not directly invested in) a stock market-related index (e.g., the Standard & Poor's 500 Index). This form of annuity may also be referred to as simply an indexed annuity. Index annuities provide the contract owner with the safety of principal (since the principal is guaranteed), and a guaranteed minimum return (e.g., 3%) since a high percentage of the contract owner's premium is invested in high-grade government bonds. This provides a downside guarantee if the market performs poorly. In other words, this type of contract allows the owner to participate in market gains without assuming the risk of a market decline. An EIA also provides the opportunity for appreciation (i.e., upside potential) in the stock market. Generally, the contract owner is obligated to remain in the contract for a minimum period (e.g., three years) and will receive a return of a percentage of the appreciation (e.g., 10%) in the selected equity index over that period. This "percentage of the appreciation" may also be referred to as the participation rate. A market value-adjusted annuity (MVA)—also referred to as a modified guaranteed annuity—shifts some (but not all) of the investment risk from the insurer to the contract owner since the annuity account value will fluctuate with the changes in market interest rates. In other words, it's a type of single premium-deferred annuity that allows contract owners to lock in a guaranteed interest rate over a specified maturity period of typically two to 10 years. An MVA functions in a manner that's similar to a bond in times of fluctuating interest rate (i.e., when interest rates fall, bond prices rise, etc.). MVAs generally provide higher interest rates than traditional annuities and also possess lower reserve requirements and pass on more risk to the contract owner. When surrendered, there will generally be both a market value adjustment and a surrender penalty assessed to the owner.

SUITABILITY IN ANNUITY INVESTMENTS

Insurers and insurance producers must have reasonable standards for determining whether an agent's recommended transactions meet the consumers' insurance needs and financial objectives. A producer cannot recommend the purchase, sale, or exchange of any annuity contract unless the producer has reasonable grounds to believe that the transaction or recommendation is NOT unsuitable for the person to whom it's recommended. Suitability is based on the producer conducting a reasonable inquiry regarding the applicant's insurance objectives, current financial situation, insurance needs, and risk tolerance. Suitability information is considered information that's reasonably appropriate to determine the suitability of a recommendation and includes: -The age of applicant and spouse -Annual household income -Financial situation and needs, including the financial resources used for the funding of the annuity -Financial experience of the person -Financial objectives of the prospective purchaser -The intended use of the annuity -Financial time horizon, and -Any existing assets, including investment and life insurance holdings of the prospective buyer The producer should also take into consideration the liquidity needs of the consumer, his liquid net worth, the risk tolerance of the individual, and tax status information of the consumer (e.g., his tax bracket).

► Other Major Medical Features and Concepts

Internal Limits Also known as Inside Limits . Certain types of expenses may have limits placed on the dollar amount of certain services or on the type of service provided. For example, the policy will only pay for a semi-private room, not for a private room; or it will pay only medical expenses that are usual and customary; or it will pay lifetime alcohol or drug rehab expenses only up to $10,000, or for 75 days, etc. Benefit Period Benefit periods either begin immediately when the accident or illness occurs or when the insured meets the deductible. --Benefits period varies from policy to policy. For example, some benefit periods extend up to 2 years while others end each year. Restoration of Used Benefits Major medical policies that have a lifetime maximum benefit or a per year maximum will always have the possibility that the limit could be exhausted. This provision allows the maximum benefit to be restored after a specific amount of the benefit is used or after the plan has been in effect for a specified period of time. --The amount of coverage restored is usually a percentage of the used benefit.

Insurance Agent Errors and Omissions Professional Liability Insurance E&O

Just as doctors should have malpractice insurance to protect against legal liability arising, insurance agents needs errors and omissions professional liability insurance.

QUALIFIED PLANS FOR SMALL EMPLOYERS

Keogh Plans (HR-10) -A Keogh plan is a qualified retirement plan designed for unincorporated businesses (self-employed) that allow the business owner (or partner in a business) to participate as an employee only if the business employees are included. These plans may be set up as either defined contribution or defined benefit plans. -In the first years following the Keogh bill's enactment, there was a great deal of disparity between Keogh plans' rules and those for corporate plans. However, various laws have eliminated most of the rules unique to Keogh plans, thereby establishing parity between qualified corporate employer retirement plans and noncorporate plans. ----Keogh plans are subject to the same maximum contribution limits and benefit limits as qualified corporate plans. ----Keogh plans must comply with the same participation and coverage requirements as qualified corporate plans. ----Keogh plans are subject to the same nondiscrimination rules as qualified corporate plans; Keogh plans have a maximum contribution of$57,000. Simplified Employee Pensions (SEPs) -Another type of qualified plan suited for the small employer is the simplified employee pension (SEP) plan. Due to the many administrative burdens and the costs involved with establishing a qualified defined contribution or defined benefit plan, as well as maintaining compliance with ERISA, many small businesses have been reluctant to set up retirement plans for their employees. -SEPs were introduced in 1978 specifically for small businesses to overcome these cost, compliance, and administrative hurdles. Basically, SEP's are arrangements where an employee (including a self-employed individual) establishes and maintains an individual retirement account (IRA) to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much more considerable amount that can be contributed each year to a SEP. In accordance with the rules that govern other qualified plans, SEPs must not discriminate in favor of highly compensated employees in regard to contributions or participation. Salary Reduction SEP Plans A variation of the SEP plan is the salary reduction SEP (SARSEP). SARSEPs incorporate a deferral/salary reduction approach in that the employee can elect to have employer contributions directed into the SEP or paid out as taxable cash compensation. The limit on the elective deferral to a SARSEP is the same as a 401(k). SARSEPs are reserved for small employers (those with 25 or fewer employees) and had to be established before 1997. As a result of tax legislation, no new SARSEPs can be established. However, plans that were already in place at the end of 1996 may continue to operate and accept new employee participants. SIMPLE Plans -The same legislation that did away with SARSEPs also created a new form of qualified employer retirement plan (or SIMPLE). These arrangements allow eligible employers to set up tax-favored retirement savings plans for their employees without having to address many of the usual (and burdensome) qualification requirements. SIMPLE plans are available to small businesses (including tax-exempt and government entities) that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year. To establish a SIMPLE plan, the employer must not have a qualified plan in place. SIMPLE plans may be structured as an IRA or as a 401(k) cash or deferral arrangement. In addition, the employer will not be eligible for participation in a Simple Plan if he or she already maintains another employer-sponsored plan to which contributions were made (or where benefits have already accrued). -All contributions to a SIMPLE IRA or SIMPLE 401(k) plan are nonforfeitable, and the employee is immediately and fully vested. Taxation of contributions and their earnings is deferred until funds are withdrawn or distributed. Catch-Up Contributions Both SARSEP and SIMPLE plans allow participants who are at least 50 years old by the end of the plan year to make additional "catch-up" contributions. In much the same way that it encourages businesses to establish retirement plans for their employees, the federal tax law provides incentives for individuals to save for their retirement by allowing certain kinds of plans to receive favorable tax treatment. Individual retirement accounts (IRAs) are the most notable of these plans. Available IRAs include the traditional tax-deductible IRA, the traditional non-tax-deductible IRA, as well as the Roth IRA. The Roth IRA was created by the Taxpayer Relief Act of 1997. Roth IRA's require nondeductible contributions but offers tax-free earnings and withdrawals.

Joint life and survivor policies (survivorship life insurance policy)

Last survivor policy is a variation of the joint life policy (also known as second to die policy) this plan also covers two lives, but the benefit is paid upon the death of the last surviving insured. This policy is known as "survivorship life insurance policy" and normally will cover two lives. Joint life policy, the premium for a survivorship is lower than the combined premium for separate life insurance policies on two individuals. These insurance policies are useful for estate planning because they can provide money to pay taxes on assets.

1945: The MacCarran-Ferguson Act

Law made it clear that the states' continued regulation of insurance was in the public's best interest. The act led each state to revise its insurance laws to conform to federal laws. Insurance industry today is consider to be state regulated. Anyone who violates this act faces a fine of 10k or up to one year in jail.

Other Forms of Group Life Insurance

Life Insurance for Members of the armed Forces and Federal Employees: The Federal Government provides life insurance coverage for those in the armed services and other federal employees. Servicemembers' Group Life Insurance (SGLI): Servicemembers' Group Life Insurance (SGLI) is provided up to $400,000 (in $50,000 increments) for full-time members of the armed services. The coverage provided is group term life insurance, and all active members are covered unless they choose otherwise. Family Servicemembers' Group Life Insurance Coverage (FSGLI): Family Servicemembers' Group Life Insurance Coverage (FSGLI) is a component of the Servicemembers' Group Life Insurance (SGLI) program. FSGLI provides coverage for spouses and children of Servicemembers insured under SGLI. Non-military spouses are covered automatically for $100,000 or the amount of the member's coverage, whichever is less. Premiums for spouse coverage are based on the spouse's age and amount of coverage. Dependent children are covered for $10,000 each at no cost to the member. Veterans' Group Life Insurance & Federal (VGLI): Veterans' Group Life Insurance (VGLI) provides for the conversion of Servicemembers' Group Life Insurance (SGLI) coverage to a renewable term policy of insurance protection after a servicemember's separation from service. Servicemembers and their spouse may be able to convert their SGLI or VGLI to permanent insurance through a commercial insurer without proving insurability. Federal Employees Group Life Insurance (FEGLI): Federal Employees Group Life Insurance (FEGLI) provides group term life insurance for all other federal employees or civil service workers. Franchise Life Insurance: Franchise life insurance is used when participants are employees of a common employer (i.e., the employer may operate several companies) or are members of a common association or society. The employer/association/society is a sponsor of the plan and may or may not contribute to the premium payments. Unlike the employer's group plan, each individual is issued an individual policy. These individual policies will remain in force as long as premiums are paid, and the employee/member maintains their relationship with the sponsor. These are used by small groups who individually do not meet the state's minimum numbers required by law. Group Credit Life: These are set-up by banks, finance companies, etc., to provide that if the insured dies before a loan is repaid, the policy benefits will be used to settle the loan balance. Premiums for group credit life insurance are based on claims experience and expense factors, not necessarily the borrower's age. The premiums are usually paid by the insured. A decreasing term policy is commonly used. Blanket Life Insurance Covers groups of people that are exposed to the same hazard, such as passengers on an airplane. No one is named on the policy, and certificates of coverage are not given out. Individuals are only covered for the specified common hazard.

Life Income option

Life income: liquidates policy proceeds (i.e., principal) and interest with regard to life contingencies. Installment payments are guaranteed for as long as the recipient lives. Therefore, the life income option provides the beneficiary with an income that they cannot outlive. The amount of each installment is based on the recipient's life expectancy and the amount of principal. Several options: -Single, pure, or straight life income option: Under the single, pure, or straight life income option, like a straight life annuity, monthly installments are paid to the beneficiary for as long as they live. In other words, income payments end upon the death of the recipient (i.e., the beneficiary). No refund or any other payments are made once the beneficiary dies. This option potentially provides the most significant amount of income per $1,000 of proceeds. However, as mentioned previously, it also possesses the most significant amount of risk since there is no survivorship. -Refund life income option: The refund life income option, also known as the joint life option, guarantees the return of an amount equal to the principal less any payments already made. In other words, it provides a minimum guaranteed return. Once the primary beneficiary dies, their survivors may receive the refund on an installment basis or in a lump sum, which is referred to as a cash refund. The former is also known as the installment refund. -Life income option with a period certain: The life income option with a period certain pays a monthly income for as long as the beneficiary lives. However, should the beneficiary die before a predetermined number of years have elapsed, the insurer will continue monthly payments to a second beneficiary for the remainder of the designated period certain (i.e., for a specified period such as ten years). For example, let's say the settlement option is designed as life income for 20 years with period certain. If the primary beneficiary dies after 15 years, the insurer will continue monthly payments to the second beneficiary for the remaining five years. -Joint and survivor option: The joint and survivor option guarantees that benefits will be paid on a life-long basis to two or more people. This option may include a period certain with a reduction in benefits after the death of the first beneficiary. The amount payable is based on the ages of both beneficiaries.

Stranger-(investor) Originated Life Insurance (STOLI)

Life insurance arrangement in which an investor with no relationship to the insured persuades typically seniors to take out new life insurance, naming the investors as beneficiaries. The investors loan money to the insured to pay the premiums and then the insured eventually assigns ownership to the investors who begin to make premium payments on behalf of the insured. When they die, the investor will receive the policy's death benefit.

life settlement

Life settlement: In many states, viatical settlements are being replaced by life settlements. A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Unlike viatical settlements, life settlements do not require the insured to be suffering from a chronic or terminal illness to sell and transfer the policy. With a life settlement, the policyowner may sell the policy to a life settlement firm for any reason. As with viatical settlements, a life settlement broker represents the policy owner and must hold an appropriate life settlement license. Disclosure requirements (e.g., right of rescission, fifteen days) are similar as well. Life settlement contracts do not include: An assignment of a policy as collateral for a loan; The making of a policy loan, or the paying of surrender benefits or other benefits, by the issuer of a policy with respect to that policy; A 1035 exchange of life insurance policies as described by the Internal Revenue Code; An agreement where all the parties are closely related to the insured by blood or law or have a lawful substantial economic interest in the continued life, health and bodily safety of the person insured, or are trusts established primarily for the benefit of such parties; or Legitimate corporate or pension benefit plans.

► DISABILITY EXCLUSIONS

Like most other insurance policies, disability policies typically exclude losses arising from war, military service, attempted suicide, overseas residence, aviation under certain circumstances (pilot or crew of aircraft), and losses that result when an insured is injured while committing a felony.

Mortality rate vs morbidity rate.

MORTALITY RATE refers to the frequency of deaths in a defined population at a specific time interval. MORBIDITY RATE refers to the occurrence of diseases in a defined population at a specific time interval. Higher morbidity and mortality rates translate to higher insurance premiums.

► Major Medical Expense Plans

Major medical expense plans offer high maximum benefits and broad coverage under one policy: --Provides benefits for medical practitioners' services, private duty services, anesthesia and anesthetist services, ambulance services, therapy services, blood and plasma, oxygen and its administration, dental services, convalescent care, home health care services, prosthetic devices, and rental of hospital wheelchairs, beds, casts, splints, trusses, braces, and crutches and benefits for prolonged injury or illness --Benefit periods are generally for one year --Benefits for usual, customary, reasonable, and necessary medical expenses, subject to policy limits --Benefits are paid typically after the coinsurance provision has been satisfied --Comprehensive coverage for hospital expenses (room and board and miscellaneous expenses, nursing services, physicians' services, etc.) --Catastrophic medical expense protection --Unlike the basic medical expense plans, these policies usually carry deductibles, coinsurance, copayment requirements, and have large benefit maximums --Coverage is provided for both inpatient and outpatient hospital expenses --Hospice benefits under a major medical plan normally includes coverage for pain management, home-based services, and counseling --The list of prescription drugs covered by a pharmacy benefit is called a drug formulary Major medical expense insurance usually picks up where basic medical expense insurance leaves off in one of two ways: as a supplement to a basic plan or as a comprehensive stand-alone plan. Supplementary Major Medical These policies are used to supplement the coverage payable under a basic medical expense policy. After the basic policy pays, the supplemental major medical will provide coverage for expenses that were not covered by the basic policy, and expenses that exceed the maximum. If the time limitation is used up in the basic policy, the supplemental coverage will provide coverage, thereafter. --A deductible must be satisfied by the insured once the basic medical expense plan pays up to its specified limit. This deductible is known as the corridor deductible because it falls between basic expenses and major medical coverage. Comprehensive Major Medical -Combines the features of basic expense (first dollar) coverage and major medical coverage, sold as one policy -Cover practically all medical expenses, hospital, physicians, surgical, nursing, drugs, laboratory tests, etc. -Comprehensive major medical policies include a deductible (usually a single deductible per person and per family, but corridor deductible may also apply), coinsurance, and are generally sold on a group basis. An example of a comprehensive health policy is a major medical policy. -Comprehensive major medical policies either provide first dollar coverage or a deductible needs to be satisfied by the insured before the policy begins reimbursements. -Most major medical plans contain a "lifetime maximum benefit" that limits the insurer's total exposure under a contract, while few contain a "per cause maximum benefit" which limits the medical expenses covered for each cause -More expensive plans are characterized by an unlimited lifetime limit

► BUSINESS NEEDS FOR HEALTH INSURANCE

Many health insurance producers have found a niche servicing the business market. The reason for this is because the health insurance needs of the business market are as great as the needs of individuals. Business uses of health insurance can be broadly divided into two categories: employee benefit plans and business continuation plans. Employee Benefit Plans While the term employee benefit plan can encompass a wide variety of benefit offerings, such as life insurance, pension or profit-sharing plans, vacation pay, deferred compensation arrangements, funeral leave, or sick time, it is rare when it does not include some kind of provision for health insurance or health benefits. Large and rapid increases in the cost of health care are likely the primary reasons for the popularity of employer-sponsored health plans. Many people rely on these plans as their sole source of health insurance. Business Continuation Plans Just as life insurance provides a way to help a business continue in the event an owner or key employee dies, health insurance also serves continuation purposes in the event of a disabling sickness or injury. It does so through the following plans: ---Business Overhead Expense Insurance -Business overhead expense insurance is designed to reimburse a business for business expenses and payroll in the event the business owner becomes disabled. It is sold on an individual basis to professionals in private practice, self-employed business owners, partners, and occasionally close corporations. -Overhead expenses include such things as rent or mortgage payments, utilities, telephones, leased equipment, employee's salaries, and the like. This includes all the expenses that would continue and must be paid, regardless of the owner's disability. Business overhead expense policies do not include any compensation for the disabled owner. They are designed to help the day-to-day operation of businesses to continue. The benefits payable under these kinds of policies are limited to the covered expenses incurred or the maximum that is stated in the policy. -For example, assume Dr. Miller is the insured under a business overhead expense policy that pays maximum monthly benefits of $4,500. If Dr. Miller became disabled and actual monthly expenses were $3,950, the monthly benefits paid would be $3,950. If Dr. Miller's actual expenses were $4,700, the benefits payable would be $4,500. The premium for business overhead insurance is a legitimate, tax-deductible business expense. The benefits when paid, however, are treated as taxable income. Disability Buy-Sell Plans -A disability buy-sell agreement (sometimes called a disability buy-out agreement) operates in much the same way as a life insurance buy-sell agreement. In this case, the plan sets forth the terms for selling and buying a partner's or stock owner's share of a business in the event of disability and is no longer able to participate in the business. It is a legal, binding arrangement funded with a disability income policy. Benefits payable under a disability buy-sell policy are paid to the company or another shareholder. -Unlike typical disability income insurance plans that pay benefits in the form of periodic payments, the buy-out plan usually contains a provision allowing for a lump-sum payment of the benefit, thereby facilitating the buyout of the disabled's interest. The policy proceeds and premiums are normally received tax-free. If the owners desire, the plan often permits the buyout to occur through the use of periodic income payments. -Disability buy-sell plans are characterized by lengthy elimination periods, often as long as two years. The reason for this is simple: because the plan involves the sale of a disabled partner's or owner's interest in the business, it is important to be quite sure that the disabled person will not be able to return to the business. A disabled partner can represent a double liability. The remaining partners must not only pick up the slack left by the disabled partner's absence, but usually must pay an income, as well. It is understandable why the disability buy-sell plan is popular with business owners. Reducing Term Insurance This policy is designed to provide monthly benefits to the business when the owner is totally disabled to specifically pay off a loan or another financial obligation. In other words, the monthly benefit is payable only for the remaining period of time of the outstanding debt. The policy is owned by the business and the insured is the owner. Premiums are not tax deductible. However, the business receives tax-free monthly benefits. Key Person (Employee) Disability Insurance -Just as key person life insurance indemnifies the business for the lost services of a key person, so does a key person disability income policy. This type of coverage pays a monthly benefit to a business to cover expenses for additional help or outside services when an essential person is disabled. The key person could be a partner or working stockholder of the business. The key person could also be a management person who is personally responsible for some very important functions, such as a sales manager. -The key person's economic value to the business is determined in terms of the potential loss of business income that could occur, as well as the expense of hiring and training a replacement for the key person. The key person's value then becomes the disability benefit that will be paid to the business. The benefit amount may be paid in a lump sum or in monthly installments. Generally, the policy's elimination period will be 30 to 90 days, and the benefit period will be one or two years. The business is the owner and premium payor of the policy. Benefits are received by the business tax-free because the premium paid is not tax deductible.

health and accident insurance

Medical Expense Insurance Medical expense insurance provides financial protection against the cost of medical care by reimbursing the insured, fully or in part, for these costs. These are called reimbursement plans. It includes many kinds of plans that cover hospital care, surgical expenses, physician expenses, medical treatment programs, outpatient care, and the like. Medicare supplement insurance and long-term care insurance, two types of health insurance coverage designed for the elderly, are also examples of medical expense insurance plans. Disability Income Insurance Disability income is also referred to as loss of income, loss of time or income replacement policy, is designed to provide a replacement income when wages are lost due to a disability. It does not cover the medical expenses associated with a disability. Rather, it provides the insured with a guaranteed flow of periodic income payments either weekly or monthly when disabled. Accidental Death and Dismemberment Insurance -Accidental death and dismemberment insurance, commonly referred to as AD&D insurance is the purest form of accident insurance. It provides the insured with a lump-sum benefit amount in the event of accidental death or dismemberment under accidental circumstances. Typically, AD&D coverage is a part of group insurance plans. -Within each of the previous three categories are many forms and variations of coverage that have evolved to meet unique insurance needs. Even the type of health insurance provider can make a difference in the basic makeup of any of these kinds of coverages. Each of these basic coverages, as well as the many types of health insurance providers, will be discussed in later chapters. They are introduced here to help acquaint you with the health insurance field in general. ►HOW HEALTH INSURANCE IS PURCHASED -Health insurance policies are issued by commercial insurers and service organizations. The coverages and benefits provided under a health insurance policy begin on the policy's effective date. Though all health insurers have standard policies, most insurers allow individuals to select various options or benefit levels that will more precisely meet their needs. As is the case with life insurance, health insurance is available to individuals and families through individual policies or group plans. An individual health insurance policy is a contract between the insured and the insurer. Individual health insurance contracts require an application and may require evidence of the insured's insurability. -Short-term policies can be purchased on an interim basis when in between jobs or waiting for a new policy to start. Short-term policies are also referred to as interim coverage, term policies, short-term medical insurance, or period of time policies. Short-term policies cannot be renewed. Insureds must apply for a new policy if they need coverage past their policy's expiration date. -Group health insurance provides coverage under a master contract to members of a specified group. Like group life insurance, group health plans are available to employers, trade and professional associations, labor unions, credit unions, and other organizations. This also includes blanket and franchise policies. The master contract is an agreement between two parties: the group (i.e., employer) and the insurer. While the master contract extends coverage to the group's members, group members are not considered part of the contract. The group (i.e., employer) is the policy owner and is responsible for selecting coverage options and paying the premium. Although the group is responsible for paying the insurer, they can require premium contributions (i.e., paycheck deductions) from each participating member or cover the entire premium. Group policies have lower premiums than individual policies due to reduced administrative charges from collecting only one monthly premium per group. Normally, group members complete an enrollment form to receive coverage; however individual underwriting or evidence of insurability is not required. Generally speaking, the provisions and coverages of group health insurance contracts are more liberal than individual health contracts. -Health insurance is also provided through state and federal government programs. At the state level, Medicaid is available to persons with limited assets, insufficient income, those receiving welfare benefits, and those in need who are blind, aged, disabled, or under twenty-one years of age. The federal government offers health insurance coverage through Medicare and OASDI disability provisions, which are both components of the Social Security system. ► A PROPER HEALTH INSURANCE PROGRAM What is a "proper" health insurance program? That question cannot be answered without first addressing several preliminary issues. Is the insurance intended for an individual, family, or a business? Is coverage currently available from a group plan or social insurance program? How willing is the policyowner to assume some responsibility for medical care expenses (through policy deductibles and coinsurance) in exchange for reduced premiums? These and other questions must first be answered before reaching a conclusion as to the "right" health insurance program. ► INDIVIDUAL NEEDS FOR HEALTH INSURANCE At one time it was acceptable to expect one's family to provide support when illness or disability struck. Those days are now long past. Today, we all must prepare for and assume the responsibility of covering the cost of medical care. Unless one is independently wealthy, the prospect of covering costs out-of-pocket is not an attractive one. The loss of one's health can have wide-ranging consequences. Not only does the cost of medical care come with a high price tag, but the loss of income that often accompanies a disabling illness or injury can compound the devastating effects of the health loss. Current demographics, which show that most families have both parents working, emphasize the need to consider both parents' income needs when designing a complete health insurance program.

► Medical Savings Accounts

Medical Savings Accounts (MSA's) were created to help employees of small employers, as well as self-employed individuals, pay for their medical care expenses. MSA's are tax-free accounts set up with financial institution such as banks and insurance companies. -Qualified medical savings accounts are available for employers with no more than 50 employees

►Medical Treatment in Tax-supported Institutions

Medical treatment in tax-supported institutions must be treated on the same basis as medical treatment in other private or public institutions. Coverage must include costs for:• Cerebral palsy,• Other orthopedic and crippling disabilities,• Mental and nervous diseases or disorders,• Intellectual disability,• Alcoholism and drug or chemical dependency, and• Respiratory illness

► GOVERNMENT INSURANCE PROGRAMS

Medicare -Medicare is a federal program founded in 1965. Medicare is administered by OASDHI and funded or financed through payroll taxes. Its purpose is to provide hospital and medical expense insurance protection to those aged 65 and older. Those age 65 and older and ineligible for Social Security benefits may still apply for Medicare coverage for a specified premium. -Medicare is also available for disabled individuals who are under age 65. These individuals must have received Social Security Disability benefits for 24 months or have End Stage Renal Disease (ESRD) or Amyotropic Lateral Sclerosis. There is a 5 month waiting period after a beneficiary is determined to be disabled before a beneficiary begins to collect Social Security Disability benefits. People with ESRD and ALS, in contrast to persons with other causes of disability, do not have to collect benefits for 24 months in order to be eligible for Medicare. -The Social Security Administration handles enrollment for the Medicare program and provides information about Medicare to the public; it does not make Medicare policies. All other parts of the Medicare program, except for public information and enrollment are administered by The Centers for Medicare and Medicaid Services. -Medicare benefit payments are handled by insurance companies that act either as intermediaries or carriers. Intermediary insurance companies handle services provided by hospitals and home health agencies, etc. On the other hand, insurance companies that handle benefit claims are known as carriers. Medicare Part A -Anyone age 65 and older who is eligible for Social Security benefits is covered under Part A at no monthly cost -The primary source of financing for Part A is Federal payroll and self-employment taxes -The lifetime maximum for inpatient psychiatric care under Medicare Part A is 190 days -Medicare Part A benefit period starts the day the insured enters a hospital and covers the following: ---Inpatient hospital care benefit covers expenses of semiprivate room, meals, nursing services, drugs, tests, operating room, and other medical services and supplies ---------Inpatient hospital care benefit period is 60 days of hospitalization; if an insured enters the hospital twice within the 60-day period it is considered one benefit period, however, if readmission occurs after the 60 days, then a new benefit period begins ---Skilled nursing facility expenses are sometimes covered by Medicare Part A, but ONLY if the insured was hospitalized shortly before entering the facility -----------Medicare Part A will cover a maximum of 100 days per benefit period in a skilled nursing facility (days 1-20 will pay 100%, days 21-100 will pay a flat dollar amount per day) ----------All services must be provided by skilled and licensed nurses, otherwise, coverage will not be provided ---Home health care benefits will be provided for medical services, supplies and equipments (i.e., wheelchairs), home health aides, part-time nursing care, and therapy services (i.e., physical, occupational, and speech therapy) ---Hospice care benefits cover inpatient and outpatient services for terminally ill patients -------Medicare will cover all costs without a deductible for an unlimited period, except prescription drugs and respite care require co-payments -------Respite for usual caregivers may not exceed 5 consecutive days -However, Medicare Part A does not cover: --The services of a private duty nurse or attendant --Private rooms --The first three pints of blood --Personal conveniences (i.e., telephones or television rentals) Medicare Part B -Medicare Part B (Medical Insurance) provides medical insurance for required doctors' services, outpatient services and medical supplies, and many services not covered by Part A. --Medicare Part B is optional --Anyone who is eligible for Medicare Part A is automatically enrolled in Medicare Part B unless coverage is denied by the insured --Medicare Part B is partially funded by user premiums --The initial enrollment period for Medicare Part B ends three months after the 65th birthday month --The open enrollment period for Medicare Part B is January 1st through March 31st. However, coverage begins on the following July 1st. --Medicare Part B covers home health care services for those who participate in Part B, but not Part A ------There is no deductible or so-payment, however, patients must pay a 20% for medical equipments (i.e., wheelchairs) -After the annual deductible is met, a Medicare Part B insured will pay 20% of the remaining covered expenses and Medicare Part B will cover 80% of the covered charges -A doctor who accepts Medicare Assignment is agreeing to not charge more than the amount Medicare pays for the service performed -Medicare Part B covers doctor's services performed anywhere such as hospitals, clinics, or doctor's offices, as long as, such services were performed in the United States --Other doctor's services covered by Medicare Part B include: X-rays Diagnostic tests office visits, calls and second opinions before a surgery Medical, surgical, and doctor's services Medical supplies Anesthesia Physical, speech and occupational therapy Radiological and pathological services Blood transfusions Drugs Biologicals --Outpatient medical services and supplies covered by Medicare Part B: Outpatient clinical services and outpatient physical, speech and occupational therapy Medically necessary ambulance and emergency room services X-rays, mammograms, Pap smears, and colorectal screenings Drugs Biologicals Medical supplies Blood transfusions - after the first three pints Artificial limbs, eyes, and replacement of internal organs Flu shots Diabetes education and glucose monitoring Casts, splints, braces (neck, back or limbs), and surgical dressings --Medicare Part B does not cover: The services of a private duty nurse or attendant Intermediate or custodial care The cost of skilled nursing care at home over 100 days per benefit period Vision and hearing care, dental care, prescription drugs, cosmetic surgeries, routine physical examinations, and foot care Injuries as a result of war Care provided outside the U.S. Physician costs exceeding Medicare's approved amount Immunizations Medicare Cost Assistance -An individual may receive assistance from his or her State of residence in order to pay Medicare premiums. In some cases, Medicare Savings Programs may also pay Medicare Part A (Hospital Insurance) and Medicare Part B (Supplementary Medical Insurance) deductibles, coinsurance and co-payments if a person meets certain conditions. Excess Charge and Claims and Appeals The difference between the physician's actual charges and Medicare's approved amount is called "excess charge". When benefits are denied, enrollees have the right to appeal to the Social Security office and file a claim. When filing a claim the patient must complete the Medicare claim form, attach the bill from the doctor and submit it to the Medicare carrier (also referred to as the fiscal intermediary). Social Security Disability Income Social Security provides services other than survivorship and retirement benefits. In addition to Medicare, the federal government also provides disability related benefits through the Social Security OASDI program. Social Security is funded by payroll taxes collected from employees, employers and those who are self-employed. Let's review some of the important points here: -To be eligible for Social Security Disability benefits, you need to be fully insured, in which you need at least one quarter of coverage for each calendar year after turning 21 years old. The minimum number of credits needed is 6. -To be fully insured on a permanent basis, 40 quarter credits are required - at this point you are fully insured for Social Security Disability benefits whether you continue to work or not -The maximum Social Security Disability benefit an insured may receive is equal to 100% of the insured's Primary Insurance Amount (PIA) -Disability income benefits are available to covered workers who qualify under Social Security requirements -One of the requirements is that the individual must be mentally or physically disabled to the point where substantial gainful work cannot be performed -The impairment must be expected to last at least 12 months or result in an earlier death -A five-month waiting period is required before an individual will qualify for benefits, during which time he/she must remain disabled -The worker's spouse and dependent children are entitled to an income benefit which is a percentage of the worker's primary insurance amount, usually 50% of the worker's PIA -Social Security benefits will continue to be payable, as long as, the insured remains disabled Medicaid --Medicaid is Title XIX of the Social Security Act, added to the Social Security program in 1965. Its purpose is to provide matching federal funds to states for their medical public assistance plans to help needy persons, regardless of age. Medicaid provides medical care for: -low income persons who meet financial tests other persons with limited assets -those with insufficient income -those receiving welfare benefits, and -those in need who are blind, aged, disabled, or under twenty-one years of age. --The determination of benefits is based on need regardless of age, up to age 65. To qualify, applicants must have both income and assets below certain limits, which vary from State to State. -Medicaid is financed by both the federal and state governments (partially funded by the federal government and administered by individual states) -The benefits may be applied to Medicare deductibles and co-payment requirements Spousal Impoverishment Rule Under the Medicaid spousal impoverishment provision, a certain amount of the couple's combined resources is protected for the spouse living in the community. Depending on the income the community spouse actually has, a certain amount of income belonging to the spouse in the institution can also be set aside for the community spouse's use. Tri-care TRI-CARE is a federal government accident and health plan which provides accident and health coverage to active duty and retired members of the uniformed services and their families and survivors.Tri-care offers eligible persons three choices for their health care including: 1. Tricare Prime where military treatment facilities are the principal source of health care; 2. Tricare Extra which is a preferred provider option that saves money; and 3. Tricare Standard that operates on a fee for service option (this is the Champus coverage). Federal Employees Health Benefits Program ((FEHB) (FEHB) Program is a system of "managed competition" through which employee health benefits are provided to civilian government employees and annuitants of the U.S. government. There are two types of plans that participate in the FEHB program: fee-for-service plans and health maintenance organizations (prepaid). State Workers' Compensation Programs --All states have workers' compensation laws enacted to compensate employees for lost wages and medical expenses due to occupational accidents and diseases or compensable injuries. Workers' Compensation laws are either State mandated (i.e., compulsory) or voluntary (i.e., elective). Whether Workers' Compensation laws were compulsory or elective, most states exclude farm workers and domestic servants from coverage. Employers can provide workers' compensation benefits by purchasing coverage through state programs, private insurers, or by self-insurance. These benefits pay for disability, medical, survivor (death), and rehabilitation benefits. There is no time limit on how long Workers' Compensation medical expense benefits continue for disabled workers. In order for occupational accident and diseases and compensable injury benefits to be paid, an occupational disease or injury must meet the following criteria: -Injury must be accidental -Injury or occupational disease must arise due to the employee's employment; occupational diseases must be peculiar to the occupation -Injury or occupational disease must occur during the course of employment --Disability benefit amounts vary by State and are paid for various types such as total permanent disability, total partial disability, temporary total disability and temporary partial disability. A total permanent disability means the employee is totally disabled and unable to return to work. Examples of total permanent disability include loss of both hands. On the other hand, a permanent partial disability means the employee is able to return to work, however, the employee is unable to perform all previous or some work duties due to the disability. A temporary total disability means the employee is totally disabled due to an injury for a short period of time. Once recovered, the employee is able to fully return to work. On the other hand, a temporary partial disability means the employee is able to work, but with diminished capability. --It is important to know that the benefits arising from a worker's compensation claim could be inadequate to replace the loss of income. -As mentioned earlier, Workers' compensation pay for survivor benefits, also known as death benefits. Under this coverage, Workers' Compensation will pay for burial services and for the employee's survivors and dependents. However, it pays benefits only if the employee's death was caused from a job-related injury. These benefits depend on several factors, such as the employee's earnings and the number of dependents. Worker's Compensation survivor benefits continue until the survivor remarries or until dependents become adults. --Benefits paid by Workers' Compensation are coordinated with benefits provided by medical plans, group disability and Medicare. Extraterritorial Provisions Workers' Compensation provides benefits for employees who work outside the U.S. If an employee suffers a work related injury or illness, the policy will pay toward the cost to transport the employee back to the country where medical treatment may be desired. Second Injury Funds Second Injury Funds are also known as subsequent injury fund. This is a special fund set up by each State to pay all or part of the compensation required when a partially disabled employee suffers a subsequent injury. This fund will pay what the current employer's policy does not. The source of the fund is derived from a 1/4% premium tax on all insurers or carriers who write Workers' Compensation coverage.

How insurance is sold

Most consumer purchase insurance through licensed producers who present insurers products and services to the public via active sales and marketing methods. Insurance producers may be agents (represent a particular company) or brokers (not tied to any particular company and can represent many insurers' products. There is a contract and appointment with agent/broker and the insurance company grants the agent/broker authority to bind an insurer to an insurance contract.

Personal Contract

Most insurance (except life insurance) is considered to be a personal contract or personal agreement between the insurer and the insured. This means it is actually the owner (person) of the property who is insured, not the property itself. Life insurance can be transferred by notifying the insurer in writing, and the new policyowner is granted all the rights of policy ownerships.

►Pre-existing Conditions

Most policies contain a benefit limitation on pre-existing conditions. Limitations apply to all pre-existing conditions whether or not the insured declared them on the application. Unlike the impairment rider, the exclusion for pre-existing conditions is subject to the time limit for certain defenses.

Life insurance Death benefit settlement options and payment of claims

Most states require insurers to pay interest on any proceeds not paid within a specific amount of time. Death benefits can be paid out in a variety of ways. These methods are known as settlement options. The policyowner may select a settlement option at the time of the application and may change the option at any time during the life of the insured. If the policyowner chooses to select a settlement option, it cannot be changed by the beneficiary. In most cases, however, the settlement selection is made by the beneficiary at the time of the insured's death. Death Benefit settlement options include: Lump Sum (cash payment): the death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is the most common option used and is considered the automatic (or "default") option for most life insurance contracts. The lump sum option is used when the policyowner wants funds paid in one single disbursement. Interest Only: Under this option, the insurance company holds the death benefit for a period of time and pays only the interest earned to the named beneficiary. A minimum rate of interest is guaranteed, and the interest must be paid at least annually. This option provides the beneficiary with flexibility since the proceeds may be left with the insurer, which frees him or her of any investment worry while guaranteeing both principal and a minimum rate of return (i.e., interest).As always, interest paid by an insurer on policy proceeds is taxable. Again, even when the policy proceeds are left with the insurer, and the beneficiary selects this option, they continue to possess the right to withdraw the proceeds in the future at their discretion unless the policyowner explicitly listed restrictions. For ex) if the policyowner selects the interest only settlement option, they could also choose that the beneficiary has the option to pull out 100% of the principal at any time or cannot withdraw any of the principal until after a set age or number of years. The last 3 options are simplified versions of annuity: Fixed Amount: fixed amount installment option permits the death proceeds to be left "at interest" with the insurer and to pay a fixed death benefit in specified installment amounts until the principal and interest are exhausted. The amount of monthly income selected by the beneficiary, the amount of proceeds, and the interest rate paid by the insurer will all determine the length of time in which the beneficiary receives the monthly income. The larger the installment payment, the shorter the payout period. Under this option, the amount of income is the primary consideration rather than the period of time over which the proceeds and interest are to be liquidated. The fixed amount option allows the beneficiary to designate an amount of income to be replaced, such as $1,200 per month. These payments continue until the principal and interest are exhausted. Fixed Period: When the fixed period or period certain option is chosen, the death benefit proceeds are paid in equal installments over a set period of years. The fixed period option is one of the two options based upon the concept of systematically liquidating principal and interest over a period of years, without references to life contingencies. Under this option, the beneficiary leaves the death proceeds with the insurer. Interest is paid on the proceeds (i.e., principal) by the insurer. Monthly income is then paid to the beneficiary for a specified period of time as selected by the beneficiary (i.e., ten years). Part of the installments paid to a beneficiary consists of interest calculated on the proceeds of the policy. This option provides for the payment of proceeds in installments over a definite number of years. The amount of each installment is determined by the amount of proceeds, the period of time (total number of installments) selected, the guaranteed rate of interest, and the frequency of payments. The fixed period option is valuable when the most crucial consideration is to provide income for a definite period of time, for example, until all children graduate high school. The face amount and the length of time for which payments will be made are the primary factors that determine the monthly income amount paid to the beneficiary. Life income: liquidates policy proceeds (i.e., principal) and interest with regard to life contingencies. Installment payments are guaranteed for as long as the recipient lives. Therefore, the life income option provides the beneficiary with an income that they cannot outlive. The amount of each installment is based on the recipient's life expectancy and the amount of principal. Several options: -Single, pure, or straight life income option: Under the single, pure, or straight life income option, like a straight life annuity, monthly installments are paid to the beneficiary for as long as they live. In other words, income payments end upon the death of the recipient (i.e., the beneficiary). No refund or any other payments are made once the beneficiary dies. This option potentially provides the most significant amount of income per $1,000 of proceeds. However, as mentioned previously, it also possesses the most significant amount of risk since there is no survivorship. -Refund life income option: The refund life income option, also known as the joint life option, guarantees the return of an amount equal to the principal less any payments already made. In other words, it provides a minimum guaranteed return. Once the primary beneficiary dies, their survivors may receive the refund on an installment basis or in a lump sum, which is referred to as a cash refund. The former is also known as the installment refund. -Life income option with a period certain: The life income option with a period certain pays a monthly income for as long as the beneficiary lives. However, should the beneficiary die before a predetermined number of years have elapsed, the insurer will continue monthly payments to a second beneficiary for the remainder of the designated period certain (i.e., for a specified period such as ten years). For example, let's say the settlement option is designed as life income for 20 years with period certain. If the primary beneficiary dies after 15 years, the insurer will continue monthly payments to the second beneficiary for the remaining five years. -Joint and survivor option: The joint and survivor option guarantees that benefits will be paid on a life-long basis to two or more people. This option may include a period certain with a reduction in benefits after the death of the first beneficiary. The amount payable is based on the ages of both beneficiaries.

Risk Retention and Risk Purchasing Groups

Mutual insurance company formed to insure people in the same business, occupation or profession. These group owned liability insurers spread the risk among its members, for retaining or pooling risks. Owned by policyholders, who are business owners, who are also the shareholders. Only has to be licensed in one state and can insure members in any state.

Lloyds of London

NOT an insurer, but a group of individuals and companies that underwrite unusual insurance

Net vs gross premiums

Net (single) premium is a premium that makes provision for mortality cost (death benefit) and interest. The "net single premium" is influenced by the assumed interest rate, the proposed insured's gender, the benefits to be provided, and the mortality rate. The "net level annual premium" allows for a small adjustment to the interest rate to account for the fact that most people do not pay the policy's required premium in a single payment, but instead over a period of years. Gross Premium is the premium charged by an insurer that is comprised of or influenced by the factors mentioned previously of mortality, interest, and expenses. It is the actual premium paid by the policyowner for life insurance coverage. The gross annual premium is the gross premium adjusted for the fact that most people do not pay the policy's required premium in a single payment, but instead over a period of years. Net single premium= mortality cost - interest Gross premium=Net premium+insurer expenses

Nontraditional life policies:

Nontraditional life policies: Interest-sensitive, whole life, adjustable life, universal life, variable life and variable universal life. In the 1980s, insurance companies introduced new policy forms, most of which are more flexible in design and provisions than their traditional counterparts.

Lloyd's of London

Not an insurer. Individuals and companies that individually underwrite insurance. Lloyd's can be compared to the New York Stock Exchange, which provides area and facilities for buying and selling public stock. Lloyds function is to gather and disseminate (spread) underwriting information (signing and accepting liability under) Helps its associates settle claims and disputes, providing coverage that might be unavailable in certain areas.

Governments Insurers social programs include

OldAge, survivors and disability insurance OASDI (social security) , Supplemental Medical Insurance SMI (Medicare) Veteran and Group life insurances, National Flood and Federal Crop Insurance

Reciprocal Insurers

Organized on the basis of ownership by their policyholders, and they all insure the risks of the their fellow policyholders in the company. An attorney-in-fact manages reciprocal insurers

Participating Plan

Participating plan is an insurance policy under which the policyowners share in the company's earnings through receipt of dividends and also elect the comany's board of directors

MORE CHARACTERISTICS OF QUALIFIED EMPLOYER PLANS

Participation Standards All qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan. If the plan provides 100% vesting upon participation, they may be required to complete two years of service before enrolling. New employees must receive a copy of their plan sponsor's latest Summary Plan Description within 90 days after becoming covered by the plan. Church, governmental, and collectively bargained plans are specifically exempt from ERISA regulations. Coverage Requirements -Under the IRS "minimum coverage" rules, a qualified retirement plan must benefit a broad cross-section of employees. The purpose of coverage requirements is to prevent a plan from discriminating against rank-and-file employees in favor of the "elite" employees (officers and highly compensated employees). Their positions often enable them to make basic policy decisions regarding the plan. The IRS will subject qualified employer plans to coverage tests to determine if they are discriminatory. As mentioned earlier, all qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan. A qualified plan cannot discriminate in favor of highly-paid employees in its coverage provisions or in its contributions and benefits provisions. -Form 5500 is a disclosure document that employee benefit plans use to satisfy annual reporting requirements under ERISA. Vesting Schedules All qualified plans must meet standards that set forth the employee vesting schedule and nonforfeitable rights at any specified time. Vesting means the right that employees have to their retirement funds. Benefits that are "vested" belong to each employee even if the employee terminates employment prior to retirement. An employee always has a 100% vested interest in benefits that accrue from the employee's own contributions to all plans. Benefits that accrue from employer contributions must vest according to vesting schedules established by law. -All qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan. Funding Standards -For a plan to be qualified, it must be funded. In other words, there must be real contributions on the part of the employer, the employee, or both. These funds must be held by a third party and invested. The funding vehicle is the method for investing the funds as they accumulate. -The exclusive benefit rule states that assets held in a company's qualified retirement plan must be maintained for the exclusive benefit of the employees and their beneficiaries. Under a qualified retirement plan, the survivor benefits can be waived only with a married worker's spouse's written consent. -Federal minimum funding requirements are set to ensure that an employer's annual contributions to a pension plan are sufficient to cover the costs of benefits payable during the year, plus administrative expenses. Contributions -Qualification standards regarding the amount and type of contributions that can be made to a plan vary, depending on whether the plan is a defined contribution plan or a defined benefit plan. Generally, all plans must restrict the amount of contributions that can be made for, or accrue to, any one plan participant. -The annual addition to an employee's account in a qualified retirement plan cannot exceed the IRS's maximum incidental limits. A plan is considered "top-heavy" if more than 60% of the plan assets are attributable to key employees as of the last day of the prior plan year. -With these basics in mind, let's turn to the two major categories of qualified employer retirement plans used primarily by corporate employers. The first is called a defined contribution plan, which allows the plan sponsor and the employee to make periodic contributions per a defined formula. The other category is called a defined benefit plan, which defines the amount of retirement income each participant will receive.

► RISK FACTORS IN HEALTH INSURANCE

Physical Condition An applicant's present physical condition is of primary importance when evaluating health risks. A physical condition refers to the applicant's health. (i.e., smoker vs. nonsmoker applicants). Moral Hazards The habits or lifestyles of applicants also can flash warning signals that there may be additional risk for the insurer. Personalities and attitudes may draw attention in the underwriting process. These are called moral hazards. Examples of moral hazards include, but not limited to: --Excessive drinking and the use of drugs represent serious moral hazards --Applicants who are seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits) likewise might be heavy risks, particularly those applying for disability income insurance --Other signals of high moral hazard can be a poor credit rating or dishonest business practices Occupation -There is little physical risk associated with professional persons, office managers, or office workers. However, occupations involving heavy machinery, strong chemicals, or high electrical voltage, for example, represent a high degree of risk for the insurer. In certain cases, an applicant may have two jobs, in which case, the insurance company will base the benefits and the premiums based on the more hazardous occupation. -According to the change of occupation provision, if the insured changes to a less hazardous job, the insurer will return any excess unearned premium. However, if the change is to a more hazardous occupation, the benefits are reduced proportionately and the premium remains the same. ► Other Risk Factors Additional health insurance risk factors include the applicant's age, sex, medical and family history, and avocations. Age Generally, the older the applicant, the higher the risk Sex An applicant's sex is also an underwriting consideration. Men show a lower rate of disability than women, except at the upper ages. Women are sometimes required to undergo a Pap test, which is used for detecting cervical cancer. --An insurance company may NOT reject a prospective insured's application on the basis of gender

Funding insurance premiums

Policies may be purchased by paying a single premium or by paying periodically. With SINGLE premium funding, the policyowner pays a single premium that provides protection for the life of the policy. Single premium funding is generally associated with "single pay whole life insurance." FIXED/LEVEL premium funding averages the "single premium" over the policy period. The policyowner pays MORE (than the actual cost of insurance) in the early years to help cover the cost of insurance in later years. This allows the premiums to remain level throughout the life of the policy. MODIFIED premium funding is an initial premium that is lower than it should be during an introductory period of time (first 3-5 yrs) After this time, the premium will increase to an amount greater than what the initial level premium would have been and then remains level or constant for the life of the policy. Some customers may find this advantageous as it allows them to purchase permanent insurance for a more manageable initial price with a higher percentage of the cost added to a later period when the policyowner's income is expected to be higher. GRADED Premium funding is like modified with lower premium in the early years of a contract, but instead, premiums increase ANNUALLY or every year for the initial period and then jumps to a higher amount than what the initial level premium would have been and then remains level for the life of the policy. FLEXIBLE Premium Funding allows the policyowner to adjust the premiums throughout the life of the contract. Paying premiums FROM Policy Values: Depending on the type of policy, a policyowner may be able to use the policy's cash value and dividends to pay the premium. With dividends, a policyowner could choose to pay down premiums on the existing policy or buy additional coverage in the form of paid-up whole life additions or one-year term. While using the policy (cash) value to pay premiums is an option, this funding method also decreases the value of the policy. The policy will lapse if the policy's value becomes insufficient, and the policyowner does not pay the required premium. Minimum Deposit (financed) insurance: not an actual policy type. it is a method of financing life insurance best suited for those in high marginal tax brackets, It allows the policyowner to use policy loans to pay premiums due each year. For example, the policyowner is allowed each year to borrow, subject to certain tax restrictions, that year's cash value increase, and use it to pay the premium. policyowner only pays the difference between the premium due and the amount borrowed (plus interest on the policy loan). the policyowner must make two to three initial premium payments to build up the cash value. Additionally, under IRS rules, at least four of the initial seven annual premiums must be paid from funds other than policy loans to avoid classification as a MEC.

►Managed Care

Policy Design The design or structure of a policy and its provisions can have an impact on an insurer's cost containment efforts. -A higher deductible will help limit claims and contain costs -Coinsurance is another important means of sharing the cost of medical care between the insured and the insurer -Shortened benefit periods can also prove beneficial from a cost containment standpoint Medical Cost Management Medical cost management is also known as case management, managed care, claims control, and cost containment. It is defined as the process of controlling how policyowners utilize their policies. There are four general approaches insurers use for cost management: mandatory second opinions, precertification review, ambulatory surgery, and case management. Mandatory Second Opinions -In an effort to reduce unnecessary surgical operations, many health policies today contain a provision requiring the insured to obtain a second opinion before receiving elective surgery. -Under the mandatory second surgical opinion provision, an insured typically will pay more out-of-pocket expenses for surgeries for which only one opinion was obtained. -The mandatory second surgical option provision can help contain the cost of a group medical plan. Case Management Case management is sometimes referred to as Utilization Review. Case management involves a specialist within the insurance company, such as a registered nurse, who reviews a potentially large claim as it develops to discuss treatment alternatives with the insured. The purpose of case management is to let the insurer take an active role in the management of what could potentially become a very expensive claim. Most of these services are performed on a prospective basis, a concurrent basis, a retrospective basis or a combination of all three. -A prospective review involves analyzing a case before admission to determine what type of treatment is necessary. -Concurrent review involves the monitoring of a hospital stay by a nurse while a patient is in the hospital to determine when they will be released, if they require home health care or if a transfer to another facility such as a hospice center or extended care facility is warranted. -Retrospective review involves an analysis of care, after the fact, to determine if it was necessary and appropriate. The purpose of this review is not to deny claims but to monitor trends regarding treatment so that future actions may be taken to reduce or eliminate unnecessary health care costs, especially in high cost areas. Precertification Review -Prospective, Pre-admission, pre-hospitalization, and pre-certification are all common names used for this particular type of managed care. -To control hospital claims and prevent unnecessary medical costs, many policies today require policy owners to obtain approval from the insurer before entering a hospital for elective surgeries. -Pre-admission testing or pre-admission certification usually involves evaluating an individual's overall health prior to being hospitalized for surgery to determine whether the requested treatment is medically necessary -Preadmission testing helps control health care costs primarily by reducing the length of hospitalization and preventing unnecessary medical costs -Failure to obtain a preadmission certification in non-emergency situations reduces or eliminates the health care provider's obligation to pay for services rendered -In an emergency situation, hospital pre-admission certification typically requires notification to be given after the patient is admitted to the hospital Concurrent Review Concurrent review or sometimes called utilization review is part of a managed care program in which health care is reviewed as it is being provided. It involves monitoring the appropriateness of the care, the setting, and the length of time spent in the hospital. This ongoing review is directed at keeping costs as low as possible and maintaining effectiveness of care. Retrospective Review A retrospective review involves the review of medical records after medical treatment. An insurance company can use the results to approve or deny coverage someone already received, and the information can also be used in a review of the insurance company's coverage guidelines and criteria for a particular condition. Ambulatory Surgery The advances in medicine now permit many surgical procedures to be performed on an outpatient basis where once an overnight hospital stay was required. These outpatient procedures are commonly referred to as ambulatory surgery. Preventive Care Managed care program also helps lower health costs by encouraging preventive care. This includes annual physical exams and other procedures that help detect illnesses and medical problems early. Point-of-Service Plans A point-of-service (POS) health plan is best defined as a plan that combines indemnity plan features with those of HMO's. It allows the insured to choose either a network or an out-of-network provider at the time care is needed. -With in-network coverage, the insured receives care through a particular network of doctors and hospitals participating in the plan. All care is coordinated by the insured's primary care physician, which includes referrals to specialists. -In-network provides the highest coverage for subscribers. An insured receiving out-of-network care usually pay more of the cost than if it had been in-network, except for emergencies. Exclusive Provider Organizations (EPOs) An EPO is a hybrid of an HMO and a PPO. EPOs typically offer a little more flexibility than an HMO and are generally have a lower cost than a PPO. Like a PPO, an insured does not need a referral to get care from a specialist. But like an HMO, an insured is responsible for paying out-of-pocket if they seek care from a doctor outside the plan's network.

Policy Issue and Delivery

Policy Effective Date "when does the policy become effective." The effective date is important for two reasons: not only does it identify when the coverage is effective, but it also establishes the date by which future annual premiums must be paid. Suppose a receipt (either conditional or binding) is issued in exchange for the initial premium payment. In that case, the receipt's date will generally be noted as the policy effective date in the contract. If a premium deposit is not given with the application, the policy effective date is usually left to the insurer's discretion. Often, it will be the date the insurance company issues the policy. However, the policy will not be truly effective until it is delivered to the applicant, the first premium is paid, and a Statement of Good Health is obtained. Backdating: -As we have learned, the premiums required to support a life insurance policy are determined, in part, by the insured's age. If the insurance company can treat an applicant as being a year younger, the result can be a lifetime of slightly lower premiums. The purpose of backdating a life insurance policy is to use premiums based on an EARLIER age. Thus, it is understandable that applicants might want to backdate a policy, making it effective earlier than the present. -Many insurers are willing to let an applicant backdate (or "save age") a policy. However, some conditions must be met before this step can be taken. First, the insurer must allow backdating. Second, the company will usually impose a time limit on how far back a policy can be backdated (typically SIX months). More importantly, the policyowner must pay all back-due premiums, and the next premium is due at the backdated anniversary date. After the underwriting is complete and the company has decided to issue the policy, other company offices assume the responsibility for issuing the policy. Once issued, the insurance contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent directly to the policyowner since, as an important legal document, it should be explained by the sales agent to the policyowner. Constructive Delivery: From a legal standpoint, policy delivery may be accomplished without physically delivering the policy into the policyowner's possession. Constructive delivery is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent. Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy. However, if the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery. Mere possession of a policy by the client does not actually establish delivery if all conditions have not been met. For example, a policy may be left with an applicant for inspection and an inspection receipt obtained to indicate that the policy is neither in force during the inspection period nor will it be in force until the initial premium has been paid. Explaining the Policy and Ratings to Clients: -Most applicants will not remember everything they should about their policies after they have signed the application. This is another reason an agent should deliver policies in person. Only by personally delivering a policy does the agent have a timely opportunity to review the contract and its provisions, exclusions, and riders. In fact, some states (and most insurers) insist that policies be delivered in person for this very reason. -The agent's review is incredibly useful to reinforce the sale and to prevent a potential lapse. It can also lead to future sales by building the client's trust and confidence in the agent's abilities. -Explaining the policy and how it meets the policyowner's specific objectives helps avert misunderstandings, policy returns, and potential lapses. -Agents sometimes may have a chance to prepare applicants in advance when it appears that policies may be rated as substandard, which generally requires an extra premium. Occasionally, both the agent and policyowner may be surprised when the policy is issued as a rated contract. In either case, the agent should stress that the insured has an even greater need for insurance protection because of the impairment or condition that resulted in the rating. Indeed, it may be the policyowner's last chance to purchase such coverage because a worsening of the condition responsible for the rating could render the person completely uninsurable. Obtaining a Statement of Insured's Good Health: -In some instances, the initial premium will not be paid until the agent delivers the policy. In such cases, common company practice requires that, before leaving the policy, the agent must collect the insured's premium and obtain a signed statement attesting to the insured's continued good health. -The agent then is to submit the premium with the signed Statement to the insurance company. Because there can be no contract until the premium is paid, the company has a right to know that the policyowner had remained in reasonably good health from when the policyowner signed the application until receiving the policy. In other words, the company has the right to know if the policyowner represents the same risk to the company as when the application was first signed.

► Policy Fees and PremiumsPolicy Fee

Policy fee is a small transaction fee charged by some insurers for the first or subsequent years of the life of an insurance policy, in addition to the regular premium. Policy fees are either paid annually or only once at the time the policy was issued, depending on the policy. Policy Term The period of time for which a policy remains in existence, as long as, premiums are being paid. Premium Premium is the initial payment and subsequent periodic payments required to keep a policy in force. Premium Mode Premium Mode refers to the policy feature that permits the policyowner to select the timing of premium payments. Insurance policy rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest (interest factor) for a full year. If the policyowner chooses to pay the premium more than once per year (example monthly, quarterly, semi-annually) there normally will be an additional charge because the company will have additional charges in billing and collecting the premium payments. Premium mode is sometimes referred to as the Mode of Premium provision. Premium mode (payment) Options: Depending on the policy, health insurers usually allow premiums to be paid annually, semi-annually (twice per year), quarterly, monthly, and even weekly. It's important to remember that more frequent payments (for example, choosing weekly over monthly) will generally yield a higher overall premium, though each individual installment is lower. Premium Collection: While it was common for insurers to collect cash payments, and many insurers will still accept physical (i.e., cash/check) payments, today, most insurance premiums are collected through electronic funds transfer (EFT). EFTs include setting up one-time or recurring ACH (automatic clearing house) transactions and paying by credit/debit card. Many states prohibit insurers from charging additional fees for EFT payments. Earned vs Unearned Premium -Earned premium is a pro-rated amount of paid-in-advance premiums that has been "earned" by the insurance company for providing the insured coverage. Unearned premium is a pro-rated amount of paid-in-advance premiums that has not been "earned" by the insurer. Unearned premium appears as a liability on the insurer's balance sheet, since unearned premiums arepaid back upon cancellation of the policy. -For example, if your premium is $120 paid-in-advance for the year, after 6 months (half of a year) the insurer will have "earned" only $60 of the $120 you paid. If you were to cancel your policy after 6 months, the insurance company would have to refund you $60 as they did not "earn" that amount. Initial Premium and Receipts It is generally in the best interests of both the proposed insured and the agent to have the initial premium paid with the application and forwarded to the insurer. For the agent, this will usually help solidify the sale and may accelerate the payment of commissions on the sale. However, if a premium is not paid with the application, the agent should submit the application to the insurance company without the premium. The policy will not become valid until the initial premium is collected or until the policy effective date specified in the policy. Recall that one of the requirements for a valid contract is consideration. In the case of an insurance contract, the consideration is the first premium payment plus the application. An insurer will not allow an applicant to possess a policy without receipt of the initial premium.

Initial Premium and Receipts

Premiums paid with the application: Producer should collect a premium from the applicant at the time of application or as early as possible. The premium is generally forwarded with the application to the underwriting department. However, if a premium is not paid with the application, the agent should submit the application to the insurance company without the premium. Even if approved and issued, the policy will not become effective until the initial premium is collected. An application submitted without an initial premium is typically referred to as a TRIAL APPLICATION. In the case of an insurance contract, the consideration is the first premium payment plus the application. Whenever a premium is collected at the time of application, the producer must leave a premium receipt with the applicant. An applicant is provided with a premium receipt at the time the application is completed, and an initial premium is paid. This receipt is proof that an initial premium was paid with the application. The type of receipt provided may determine when coverage will be effective or in force. Premium Receipts: Applicants who pay a premium deposit with the application are entitled to a premium receipt. It is the type of receipt given that determines precisely when and under what conditions an applicant's coverage begins. 2 types: conditional and binding receipt when the producer collects the premium. -Conditional receipts generally provide coverage as of the date of the receipt as long as a specific condition is satisfied. Meaning, coverage can be provided if the proposed insured demonstrates insurability (submitting application). Information may be obtained from other areas as well, such as the Medical Information Bureau, a consumer report, an attending physician statement, a medical exam, or other tests (i.e., blood test). The conditional receipt is predominantly utilized today, whereas the binding receipt is used in a limited fashion. The date appearing on a conditional receipt ALWAYS reflects a date EARLIER than the policy's issue date.

Level term (also called level premium level term)

Premiums tend to be higher than annual renewable term because they are level throughout the policy period. The "level" part of the name is referring to the death benefit, it is always the same straight level coverage. Life insurance written to cover a need for a specific period of time at the lowest premium is called Level Term Insurance

► DISABILITY INCOME POLICY PROVISIONS

Probationary Period -The probationary period specified in a disability insurance policy is the period of time that must elapse following the effective date of the policy before benefits are payable. It is a one-time-only period that begins on the policy's effective date and ends 15, 30 or 60 days after the policy has been in force. The purpose of the probationary period is to exclude preexisting sicknesses from coverage and provide a guidepost in borderline cases when there is a question as to whether an insured became ill before or after the effective date of the policy. The probationary period helps protect the insurer against adverse selection because those who know they are ill are more likely to try to obtain insurance coverage. -Probationary period does not apply to accidents because you cannot anticipate an accident Elimination Period -The elimination period is the time immediately following the start of a disability when benefits are not payable -The elimination period serves as a time-based deductible in a disability income policy -Disability Income policy includes a 30-day elimination period -Elimination periods eliminate claims for short-term disabilities -The longer the elimination period, the lower the premium for comparable disability benefits -The elimination period is sometimes called the waiting period Benefit Period -The benefit period is the maximum length of time that disability income benefits will be paid to the disabled insured -The longer the benefit period, the higher the cost of the policy -Rather than charge additional premiums or exclude coverages when issuing disability income coverage to a substandard risk, an insurer may shorten the benefit period -Individual short-term policies provide benefits for six months to two years -Individual long-term policies are characterized by benefit periods of more than two years, such as 5, 10, or 20 years or up to age 65 Benefit Amount -Short-term disability benefits policies are paid weekly -Long-term disability benefits are paid monthly with a maximum benefit limit -Disability benefit amounts are limited to encourage disabled individual to return to work or because additional benefits are payable under Social Security Coverage after Age 65 Provision Disability income policies typically require the insured to be actively working for a stated number of hours per week if coverage extends past age 65.

whole life insurance

Provides death benefits for the entire life of the insured, and also provides living benefits in the form of cash values. (equity build up) it matures at age 100 and normally has a level premium. all whole life has the same type of benefits, the only difference in types of whole life is how the policy is paid. Whole life death benefits remain constant or level throughout the policy's life. Premiums are set at the time of policy issue and they are also fixed. Cash value and endowment are the main features that distinguish whole life insurance from term life insurance

In a dispute between the insured or beneficiary and the insurer, the agent who solicits an insurance application represents who?

Represents the insurer and not the insured or beneficiary

MORE TYPES OF OASDHI BENEFITS

Retirement Earning Limit -When a person arrives at retirement age (age 65+), there is no limitation or restriction on the amount of income he or she can earn from any type of employment. If an individual decides to begin receiving retirement income prior to reaching full retirement age (age 62 through 64+), whatever they earn will reduce the retirement benefit to which he or she is entitled. This is known as the earnings test. -Those who are under full retirement age for the entire year experience a benefit reduction of $1 for every $2 earned above the annual limit. For 2020, as an example, that limit is $18,240. -Those who reach full retirement age during the year experience a benefit reduction of $1 for every $3 earned above a different limit. For 2020, as an example, that limit is $48,600. Only earnings up to the month before you reach full retirement age count, not earnings for the entire year. An individual collecting retirement income benefits at full retirement age is still allowed to work, and there is no longer any reduction or offset from Social Security income. Dual Benefit Liability An individual is sometimes eligible for two retirement income benefits. However, he or she is only allowed to collect one. For instance, a surviving spouse reaches age 65 or his or her actual retirement eligible age. He or she is now eligible for a retirement income benefit. However, he or she is also entitled to his or her deceased spouse's benefit, as well. Since both cannot be collected, the surviving spouse will select the greater of the two. Disability Benefits -Disability benefits may be paid by Social Security (OASDHI) under the federal government or through state governments providing state-sponsored disability benefits or Workers' Compensation. -Social Security Disability Benefits are only available to covered workers who are fully insured, as defined by Social Security, at the time of disability. Disability, as defined for Social Security purposes, describes an employee who is unable to engage in any occupation. A person may first become eligible for disability benefits under Social Security after having been disabled for five months. An individual is eligible for disability benefits under Social Security based upon his or her length of employment. These benefits will be paid to a worker (and eligible dependents) if that worker meets the restrictive total disability definition under Social Security. ---Social Security disability benefits are only available prior to the age of 65. ---Social Security does not pay partial disability or short-term disability benefits. ---The disability must be total and expected to last 12 months or end in death. ---Benefits include monthly payments to the disabled worker, spousal benefits, and children's benefits. Definition of Disability -As defined under Social Security benefits, a disability describes an employee who is unable to engage in any occupation. The insured has a disability that is expected to result in early death or is expected to last for a continuous period of 12 months. -Disability, as defined for Social Security purposes, is "the inability to engage in any gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or could be expected to last, for a continuous period of 12 months or result in death. The impairment must be so severe that the individual is unable to engage in substantial gainful work that exists in the national economy regardless of whether or not such work exists in the immediate area in which the worker lives. -Once a worker is eligible, he or she must satisfy a five-month waiting period before benefits are payable. Therefore, benefit payments would begin in the sixth month. These benefits are also based on a worker's primary insurance amount (PIA). Health Insurance Benefits (Medicare) Medicare is a federal health insurance program comprised of four available parts. This government sponsored program provides health care and other medical benefits for those age 65 and older and those eligible who are disabled. Medicare is administered by OASDHI and funded or financed through payroll taxes paid through Social Security by employers, employees, and the self-employed (i.e., sole proprietor). Part A of Medicare covers Hospital Insurance (HI). Part B, if elected, covers Supplementary Medical Insurance (SMI). Parts C and D are Medicare Advantage and the Prescription Drug plan, respectively.

Other insured riders

Riders may be added to life insurance policy as insurance for a spouse or an immediate family member of the primary insured. The rider will ALWAYS be term insurance. These riders are known as other insured or dependent (term) riders.

MORE INDIVIDUAL RETIREMENT PLANS

Roth IRA -The 1997 Taxpayer Relief Act introduced a new kind of IRA: The Roth IRA. Roth IRAs are unique in that they provide for back-end benefits. No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn. An amount up to the annual contribution limit can be contributed to a Roth IRA for any eligible individual. Active participant status is irrelevant. -No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn. -An individual can open and contribute to a Roth regardless of whether the individual is covered by an employer's plan or maintains and contributes to other IRA accounts. No more than the maximum amount can be contributed to it in any year, for any account or combination of accounts. -Unlike traditional IRAs, who are limited to those under age 70 1/2, Roth IRAs, impose no age limits. At any age, an individual with earned income can establish a Roth IRA and make contributions. However, Roth IRAs subject participants to earnings limitations that traditional IRAs do not. High-income earners may not be able to contribute to a Roth IRA since the maximum annual contribution that can be made begins to phase out for individuals whose modified adjusted gross incomes reach certain levels. Above these limits, no Roth contributions are allowed. Qualified Roth Withdrawals -Withdrawals from Roth IRAs are either qualified or nonqualified. A qualified withdrawal is one that provides for the full-tax advantage that Roths offer (tax-free distribution of earnings). To be a qualified withdrawal, the following two requirements must be met: ----The funds must have been held in the account for a minimum of five years. ----The withdrawal must occur because the owner has reached age 59 ½, the owner dies, the owner becomes disabled, or the distribution is used to purchase their first home. Nonqualified Roth Withdrawal -A nonqualified withdrawal is one that does not meet the previously discussed criteria. The result is that distributed Roth earnings are subject to tax. This would occur when the withdrawal is taken without meeting the above requirements, and the amount of the withdrawal exceeds the total amount that was contributed. -Since Roth contributions are made with after-tax dollars, they are not subject to taxation again upon withdrawal. The only portion of a Roth withdrawal that is subject to taxation is earnings, and only when those earnings are removed from the account without having met the above requirements. If the owner of the Roth IRA is younger than age 59 1/2 when the withdrawal is taken, it will be considered premature, and the earnings portion will also be assessed a 10% penalty. No Required Distributions -Unlike traditional IRAs, Roth IRAs do not require mandatory distributions. There is no minimum distribution requirement for the account owner. The funds can remain in the account as long as the owner desires. In fact, the account can be left intact and passed on to heirs or beneficiaries. *****No income tax deductions can be taken for contributions made to a Roth, but the earnings on those contributions are entirely tax-free when they are withdrawn.**** Spousal IRA Persons eligible to set up IRAs for themselves may create a separate spousal IRA for a nonworking spouse. They can contribute up to the annual maximum to the spousal account, even if the working spouse is in an employer-sponsored plan. Conduit IRA A conduit IRA is a holding tank for funds that initially came from a qualified plan and are on their way to another qualified plan. No withholding tax is necessary unless any of the funds are distributed directly to the individual. Rollover IRA -Usually, benefits withdrawn from any qualified retirement plan are taxable the year in which they are received. However, specific tax-free "rollover" provisions of the tax law provide some degree of portability when an individual wishes to transfer funds from one plan to another, specifically to a rollover IRA. -Essentially, rollover IRAs provide a way for individuals who have received a distribution from a qualified plan to reinvest the funds in a new tax-deferred account and continue to shelter those funds and their earnings from current taxes. Rollover contributions to an IRA are unlimited by dollar amount. Rollover IRAs are used by individuals who, for example, have left one employer for another and have received a complete distribution from their previous employer's plan. Another example would be those who had invested funds in an individual IRA of one kind and want to roll over to another IRA for a higher return rate. Also, a distribution received from an employer-sponsored retirement plan (or from an IRA) is eligible for a tax-free rollover if it is reinvested in an IRA within 60 days following receipt of the distribution and if the plan participant does not actually take physical receipt of the distribution. The entire amount does not need to be rolled over. A partial distribution may be rolled over from one IRA or eligible plan to another IRA. However, if a partial rollover is executed, the part retained will be taxed as ordinary income and subject to a 10% early distribution penalty. -Only the person who established an IRA is eligible to benefit from the rollover treatment-with one exception. A surviving spouse who inherits IRA benefits or benefits from the deceased spouse's qualified plan is eligible to establish a rollover IRA in the surviving spouse's own name. Assets passing to a surviving spouse generally are not subject to estate taxes at the time of death due to the Unlimited Marital Deduction. Note that tax law now allows non-spousal beneficiaries to take IRA proceeds over their lifetimes, plus the lifetimes of their oldest named beneficiary. -Any rollover must be made directly from one IRA to another IRA, or it will be subject to a 20% withholding. This is true even if the rollover occurs within the 60-day limit. The key here is the word directly. To escape the withholding rate, the rollover must occur without the plan's funds being in the recipient's control for even an instant. Suppose such control does occur, and 20% is withheld. In that case, the recipient must make up this amount out of other funds, or the amount withheld will be subject to income taxation and possibly a penalty for premature distribution. Of course, the amount withheld is applied toward the tax liability, if any, of the money distributed from the fund. The withholding rule also applies to a trustee-to-trustee transfer of rollover funds.

Self insurers

Self-insurance is not a method of transferring risk. Instead of transferring risk to an insurance company, a self-insurer establishes a self funded plan to cover potential losses. Large companies often use this for funding pension plans and some health insurance plans. A self-insurers will often look to an insurance company to provide insurance at a specific maximum loss level. The self insurer will bear the amount of loss below that maximum amount

Agent Marketing and Sales practices

Selling to needs: determine client needs and determine which is best suited to address those needs. Two principles of needs-based selling include finding the facts and educating the client. Suitability of recommended products: ethical agent assesses the correlation between a recommended product and the client's needs and capablities.

Service Providers: medical and hospital care services

Service providers do not sell insurance. these services are provided by hospitals and physicians who are participating in the plan. They sell SERVICES in return for a premium payment, not insurance. The services are packaged into various plans and purchased by subscribers.

►Service Providers

Service providers, such as Blue Cross/Blue Shield offer benefits to subscribers in return for the payment of a premium. Benefits are in the form of services provided by hospitals and physicians in the plan. Blue Cross and Blue Shield Blue Cross and Blue Shield are the dominant health insurers of the United States. The nation's Blue Cross and Blue Shield plans are loosely affiliated through the national Blue Cross and Blue Shield Association and most are considered non-profit organizations. The Blues provide the majority of their benefits on a service basis rather than on a reimbursement basis. This means that the insurer pays the provider directly for the medical treatment given to the subscriber, instead of reimbursing the insured. -Blue Cross covers hospital expenses. -Blue Shield covers surgical and medical expenses. -Blue Cross/Blue Shield offers policies for individual and group coverages. -Blue Cross/Blue Shield operates through HMOs and PPOs. -Members of Blue Cross and Blue Shield are known as subscribers. Blue Cross and Blue Shield plans are called prepaid plans because the subscribers pay a set fee (usually each month) for medical services covered under the plan. Prepaid health plans are contracts between an insurer and a subscriber (or group) where a specific set of benefits is provided in exchange for specific periodic premiums. As participating providers, the doctors and hospitals contractually agree to specific costs for the medical services provided to subscribers.

Graded Premium Whole life

Similar to modified whole life, graded premium policies also redistribute the premiums, premiums are lower than typical whole life rates during the preliminary period after the policy is issued (usually lasting 5-10 years) premiums will initially increase yearly during the preliminary period then remain level afterwards.

CLASSIFICATION ACCORDING TO THE SOURCE OF INCOME

Some annuities may be classified by their investment configuration or the source of income payments that are provided. The investment configuration affects the income benefits paid. For this type of classification there are two types of annuities—fixed annuities and variable annuities. FIXED ANNUITIES -A fixed annuity guarantees a predetermined income or level benefit payment amount, which is paid each month for the life of the annuitant. The recipient (i.e., the annuitant) will receive this monthly income or fixed dollar amount each month for the remainder of his life. Fixed annuities are derived from the insurer's general account assets since it's this account that provides an interest rate guarantee as well as the fixed dollar or income guarantee. The general account of an insurance company is used for the deposits of the premiums that are collected for both insurance and annuity contracts (i.e., this account holds the assets of the insurance company). -As long as the insurer remains solvent, a fixed annuity also guarantees the safety of the principal. In comparison to a variable annuity, this type of annuity is a conservative product. Since it's characterized by a predetermined amount of income, its purchasing power will be most affected by inflation. Once the predetermined income payments begin for a fixed annuity, the beneficiary receives a guaranteed refund when the annuitant dies (if a period certain has been selected). With a fixed annuity, the investment risk is assumed by the insurance company. This means that the insurer invests the funds in safe and conservative investments so that it's able to guarantee the annuity benefit. As required under the terms of the contract, the insurer is required to provide the promised benefit regardless of whether it earns its assumed interest rate. -To summarize, a fixed annuity guarantees a minimum amount of interest to be credited to the purchase payment. Income payments don't vary from one payment to the next. For a fixed annuity, the insurer can afford to make guarantees because the money is placed in the general account of the insurer and this account is part of the insurer's investment portfolio. VARIABLE ANNUITIES -A variable annuity is a contract that's issued by an insurer which provides the contract owner with the option of having premiums invested and managed differently than they are in a fixed annuity. This type of annuity generally consists of two investment accounts—both the general account and a separate account. A guaranteed return is provided when funds are invested in the general account; however, for funds that are invested in a "separate account," they're invested in equity products (e.g., common and preferred stocks), bonds, and other investment vehicles. -With a variable annuity, there's a more significant potential for higher returns from the separate account, but (unlike in the general account) there's no return guarantee. The separate account holds all of the variable account options of the insurer and allows the contract holder to control the investment of his premiums. This means that the contract holder assumes the investment risk when funds are directed to a separate account. The separate account feature is unique to variable products. As the name implies, the assets in an insurance company's separate account are segregated from the insurance company's general account (which is used for fixed annuities). All of the income and capital gains that are generated by the investments in the separate account are credited to the account. Also, any capital losses that are incurred by the separate account are then charged to the account. -Keep in mind, the separate account is not affected by any other gains or losses that are incurred by the insurance company. If the insurance company becomes insolvent, its creditors cannot make claims against the assets in the separate account, but they can make claims against the assets in the general account. The separate accounts of variable products are generally required to be registered as investment companies under the Investment Company Act of 1940. -A variable annuity provides more flexibility since the contract owner is able to determine how much risk he's willing to assume. The benefits that are ultimately paid by the contract will be determined by the performance of the separate account (i.e., performance of the securities portfolio). If an equity fund (i.e., mutual fund) performs well, the monthly income amount being paid to the annuitant will increase. On the other hand, if the fund does poorly, the monthly installment payment will decrease. Similar to the cash value in a variable whole life insurance policy, the separate account value of a variable annuity contract is not guaranteed. -To be qualified to sell a variable annuity, a FINRA Series 6 or Series 7 securities registration and a life insurance license are required. Variable annuities are considered securities and are subject to SEC, FINRA, and state insurance regulation. As is the case with all variable products, a prospectus must be delivered prior to completing the sale of any variable annuity. -Variable annuities were created to provide investors with greater protection against inflation than what traditional, fixed annuities can offer. The contract owner is also given a level of control over how her contributions are invested. A variable annuity is characterized by variable rates of return, and its performance advances or declines based on the value of the investments that are chosen by the annuitant. During the accumulation period of a variable annuity, contributions that are made by the contract owner (minus expenses) are used to purchase accumulation units. SUBACCOUNTS: For variable annuities, the separate accounts typically contain a variety of different underlying portfolios or subaccounts (which are similar to the mutual fund choices that investment companies offer to their investors). The contract owners are able to allocate their payments among these different subaccounts based on their investment objectives. Additionally, contract owners are generally allowed to transfer their money from one subaccount to another as their investment goals change. Each of the subaccounts typically corresponds to a different underlying mutual fund, such as a large-cap stock fund, a long-term bond fund, or a money-market fund. The value of these subaccounts will fluctuate based on the changing market conditions for the underlying securities. Another subaccount may have a fixed rate of return which is guaranteed by the insurance company. -During the annuity's accumulation (pay-in) period, the contract holder is permitted to surrender the annuity in exchange for its current value. However, once a person decides to annuitize (begin receiving income payments from the annuity), she may no longer surrender the annuity or freely withdraw money from it. Instead, she's receiving payments based on the performance of the assets in the separate account. At annuitization, the insurance company converts all of the accumulation units that have been purchased into annuity units. Annuity units represent the accounting measurement that's used to determine the dollar amount of each payment that will be made to the annuitant. At this time, the number of annuity units represented in each payment is fixed. However, going forward, the value of each payment that's made to the annuitant is based on a fixed number of annuity units which is then multiplied by a fluctuating unit value.

Underwriting Requirements for Group Life Insurance

Sound group underwriting can prove profitable to an insurer, mainly since it reduces adverse selection. Adverse selection or anti-selection is the tendency or danger of an insurer to write (i.e., approve) more bad risks than acceptable risks. People with more significant risk tend to seek insurance coverage more than those with little risk. Since more individuals are covered under group policies, there is a higher probability that a "bad" risk will be included. Writing large groups of individuals also helps to reduce adverse selection based on the law of large numbers. Proof of insurability may not be required of larger groups. Insurers may require some type of insurability for smaller groups. As we learned, the smaller the group, the greater the potential for adverse selection (law of large numbers). For example, if an insurer writes a group life insurance policy for five hundred employees, the law of large numbers says that some of those employees will be of high risk, and some will be low risk, but the majority should be of standard risk. The insurance company will hardly notice if, throughout the year, they need to pay out one or two death claims out of the group of five hundred insureds. However, if the insurer writes a group life insurance policy for ten insureds, the law of large numbers no longer applies. The risk is far less predictable. Paying out one or two death claims out of the group of ten insureds could have a significant impact. Group life plans will not exclude employees with a physical impairment (i.e., paralysis) from the group life plan. Underwriters take policy persistency into account as well. As it pertains to insurance, persistency is the percentage of active policies in force, without lapsing or being replaced by policies of other insurers. Insurers may measure policy persistency in various periods. For example, one year, three years, or five years from policy issue. Classification of Risk: Insurers require that a minimum number of group members/employees participate in a group insurance plan in order to minimize adverse selection. Adverse selection means that the people most likely to need life insurance will purchase life insurance in greater numbers than those in good health. The following rating classification system is used to categorize the favorability of a given risk: Preferred - Low Risk - Lower Premiums Standard - Average Risk - No Extra Ratings or Restrictions Substandard - High Risk - Rated Up - Higher Premiums Declined - Not Insurable - Potential of Loss to Insurance Company is Too High Lower risks tend to have lower premiums. If an applicant is too risky, the insurer will decline coverage.

EMPLOYEE BENEFIT PLANS

Split-Dollar Plan (SDP) -This type of plan is a funding method and not a specific type of life insurance policy. It is characterized by an arrangement between an employer and an employee. The plan can only be funded with whole life, cash value, or continuous-premium life insurance. The death benefit is split, as is the cash value (i.e., living benefit). In some cases, the premium may be split as well. -The purpose of a split-dollar plan is to join the needs of one person (i.e., the employee) with the premium paying ability of another party (i.e., employer). An SDP can provide an employee with life insurance protection that he cannot afford on his own. The employer may discriminate when providing such plans. In other words, the employer can provide an SDP for any employee he or she chooses (does not have to provide for all). -The most common type of SDP is an employer providing funds to pay that part of each annual premium equal to the annual increase in cash value. The employee pays the balance. For example, if the annual premium was $500 and the cash value increase was $420 after the premium was paid, the employer pays $420 and the employee $80. The employer is entitled to receive death proceeds in an amount equal to the policy's cash value. The employee's beneficiary will receive the balance of the policy proceeds. SDPs can also be used among family members (i.e., parent/child) or stockholders in a corporation. Other split-dollar plan variations include single bonus plans, reverse split-dollar plans, and employer (non-contributory) pay-all plans. Deferred Compensation Funding Deferred compensation is an executive benefit an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement, or death. Deferred compensation funding generally refers to non-qualified retirement plans. In other words, plans that do not receive the same tax advantages as qualified plans, according to the Internal Revenue Code. These arrangements are generally between an employer and employee where compensation is paid to the employee later. Some employers use cash value life insurance or annuity products to provide promised funds Salary Continuation Plan Salary Continuation Plan works the same as deferred compensation except that the employer funds the plan rather than the employee. The employer establishes an agreement whereby an employee will continue to receive income payments upon death, disability, or retirement. Corporate-owned Life Insurance -Corporate-owned life insurance (COLI) is generally treated as a deductible business expense. The proceeds are paid tax-free up to a certain level (i.e., $50,000). If more than this amount is provided to an employee, the excess premium used to purchase must be reported by the employee as taxable income. -Some insurers now include a "change of insured provision" in life insurance policies utilized for business purposes, which allow for a change of insureds. This provision is useful primarily in corporate-owned life insurance policies. When an employee covered by the policy either retires or his employment is terminated, the employer may change the name of the insured with that of a new or replacement employee, subject to insurability requirements. The availability of this provision eliminates the need to write a completely new policy that would result in additional policy fees, commissions, or other expenses that are incurred when purchasing new life insurance. Corporate-owned Annuities -Contributions to a corporate annuity are taxed differently than individually owned annuities. If a corporation owns an annuity, it must name a "natural person" as an annuitant. Sometimes this natural person is referred to as the "measurable life." If a natural person is named as an annuitant, the interest credited to the annuity each year is generally not taxable (i.e., tax-deferred). If a non-natural entity is named an annuitant (i.e., the corporation), interest earned is taxable as ordinary income in the year credited. -There is an exception to this non-natural person rule. Suppose the annuity is held by a trust, corporation, or other "non-natural person" as an agent for a natural person (i.e., a human being). In that case, interest earned continues to be tax-deferred. Other exceptions to this rule include but are not limited to: ----An annuity contract that is acquired by a person's estate following the death of that person; ----An annuity contract that is held under a qualified retirement plan, a TSA, or an IRA; or ----An immediate annuity contract purchased with a single premium, with periodic payments to commence within a year. Executive Bonus Plan Also referred to as a Section 162 bonus plan, an executive bonus plan is a non-qualified employee benefit arrangement. An employer pays a compensation bonus to a selected employee who uses the bonus payment to pay the premiums on a life insurance policy covering his or her life. The employee owns the policy personally. The employer may use the amount of the bonus as a tax deduction, and the employee, whether he or she uses it to buy insurance or not, must include the amount of the bonus in his or her gross income. In the event of the employee/insured's death, the policy's proceeds are paid to the designated beneficiary income tax-free. Any policy withdrawals, surrenders, or loans made by the employee are taxed as they would be if the employee had purchased the policy without the benefit of the bonus arrangement.

ANNUITIES USE

TAX-SHELTERED ANNUITY 403(B) OR 501(C)(3) PLANS -A tax-sheltered annuity (TSA) is a special type of annuity plan that's reserved for non-profit organizations and their employees. Such a plan is also referred to as a 403(b) plan or 501(c)(3) plan because it was made possible by those sections of the IRS tax code. For many years, the federal government, through its tax laws, has encouraged specified non-profit charitable, educational, and religious organizations to set aside funds for their employees' retirement. -Regardless of whether the money is set aside by the employers of these organizations, or the funds are contributed by the employees through a reduction in salary, the money being placed in TSAs can be excluded from the employees' current taxable income. -Upon retirement, payments that are received by employees from the accumulated savings in tax-sheltered annuities are treated as ordinary income. However, since the total annual income of an employee is likely to be less after retirement, the tax to be paid by a retiree is likely to be less than while he was working. Additionally, the benefits can be spread out over a specified period or over the remaining lifetime of the employee. This generally allows the amount of tax owed on the benefits in any one year to be small. [EXAM TIP: In addition to TSAs and IRAs, annuities are an acceptable funding mechanism for other qualified plans, including pensions and 401(k) plans.] STRUCTURED SETTLEMENTS Annuities are also used to distribute funds from the settlement of lawsuits or the winnings of lotteries and other contests. Such arrangements are referred to as structured settlements. Court settlements of lawsuits often require the payment of large sums of money throughout the rest of the life of the injured party. For these settlements, annuities are perfect vehicles because they can be tailored to meet the needs of the claimant. Annuities are also suited for distributing the large awards that people win in state lotteries. These awards are often paid out over a period of several years, usually 10 or 20 years. Because of the extended payout period, the state can advertise large awards and then provide for the distribution of the award by purchasing a structured settlement from an insurance company at a discount. The state can get the discounted price because a $1 million award being distributed over 20 years is not worth $1 million today. Trends indicate that significant growth can be expected from both these markets for annuities. EDUCATION FUNDS An annuity provides a steady stream of income, typically used for retirement, but can also be used to fund education for children or family members.

► Taxation of Health and Accident Insurance

Tax Treatment of Individual Health Plans -Individual disability income premiums are not tax-deductible and benefits received are tax-free -Individual Medical expense plans premiums may be included in unreimbursed medical expenses (i.e., and be tax-deductible if those expenses exceed 10%, as of 2019 of the insured's adjusted gross income). In the previous years, premiums were tax-deductible if those expenses exceed 7.5%. Benefits under individual medical expense plans are received tax-free Tax Treatment of Group Health Plans As an incentive for employers to provide health insurance benefits to their employees, the federal government grants favorable tax treatment to group plans. Let's briefly review this treatment: Taxation of Group Health Premiums Employers are entitled to take a tax deduction for premium contributions they make to a group health plans, as long as the contributions represent an "ordinary and necessary business expense." By the same token, individual participants do not include employer contributions made on their behalf as part of their taxable income. As a general rule, individual premium contributions to a group health plan are not tax deductible. The deduction is limited to the amount exceeding 7.5% of adjusted gross income . Any premiums the individual contributes for group disability or group AD&D coverage are not considered qualifying medical expenses when determining this excess. Taxation of Group Health Benefits Any benefits an individual receives under a medical expense plan are not considered taxable income because they are provided to cover losses the individual incurred. It is a somewhat different story with disability income plans. Disability benefit payments that are attributed to employee contributions are not taxable, but benefit payments that are attributed to employer contributions are taxable. Tax Treatment of Death Proceeds Federal income taxes will not likely be applied to death benefits paid to the named beneficiary of an insured under a health insurance policy. However, the proceeds may still be included as part of the insured's taxable estate for estate tax purposes. Nondiscrimination Rules These rules apply to employee benefit plans that provide retirement benefits. Their purpose is to deny favorable tax treatment to plans that do not provide equitable benefits to a large cross section of employees. Since the plans are not provided for a large number of employees, contributions to the plan will not be tax-deductible. This means that the owners and officers of a firm cannot receive tax favored benefits if a plan is designed primarily for them and not for other employees.

Tax Consequences of Life Insurance

Tax Treatment of Individual Life Insurance: According to the Internal Revenue Code, premiums paid for individual life insurance policies are considered to be a personal expense, and as such, are not tax-deductible. Just because a premium is used to buy life insurance on a spouse or in a third-party ownership situation does not mean that the premiums will be tax-deductible. Premiums paid on life insurance may be tax-deductible to an employer if the insurance is used as an employee benefit. Premiums may also be tax-deductible if the policy is to provide for charitable contributions. Additionally, premiums for an insurance policy to benefit an ex-spouse as court-ordered alimony are tax-deductible. Taxation of Proceeds Paid at Death: Since the premiums paid are not tax-deductible, the proceeds (death benefit) from the life insurance policy are generally paid income tax-free (tax-exempt) to the named beneficiary, if taken as a lump sum. The exception to this rule is the transfer for value rule, which applies when a life insurance policy is sold to another party before the insured's death. Benefits are generally subject to federal estate tax if they are included in (paid to) the policyowner's gross estate. If death benefits are paid in installments, as opposed to a lump sum, the principal is received tax-free, and any interest received is taxable. Economic Benefit Doctrine: The Economic Benefit Doctrine requires that any benefit granted to an individual that has an economic or financial value be included as compensation for income tax purposes in the year the benefit is granted. The key to avoiding the imposition of the Economic Benefit Doctrine is the existence of a substantial risk of forfeiture. Therefore, individual life insurance avoids this doctrine since premature death can cause a substantial risk to a surviving family. Taxation of Cash Values The interest paid on the cash value as it increases or accumulates is tax-deferred. The total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the cost basis. According to the cost recovery rule, if the policy is surrendered for its cash value, the portion that exceeds the cost basis, or premiums paid, is considered ordinary income and taxable. As long as the cash value stays in the policy, taxes will never be imposed on any portion, not even the amount that exceeds the cost basis. Taxation of Policy Loans With regard to policy loans, if a contract owner borrows against the cash value in the contract, there are no tax consequences in most situations. However, if a policy is a MEC, distributions are subject to the interest first rule, which states that they are taxable as income if the cash value of the contract, immediately prior to the payment, exceeds the cost basis in the contract. Borrowing against the cash value is sometimes referred to as a partial surrender. This action on the part of the owner, while not resulting in a taxable event, does lower the owner's equity in the policy. If a total surrender occurs, the cash value received is not taxable as long as it does not exceed what the owner paid in premiums (the cost basis). Additionally, when a contract owner borrows against the cash value of a whole life policy, the interest paid to the insurer is not tax-deductible. For example, assume Bob is the owner of a $100,000 whole life insurance policy on his own life. The cash surrender value is $45,000. He has paid $35,000 in premiums over the years. If Bob borrows $40,000 against the policy, he will not be subjected to tax consequences as long as the policy stays active. Bob will repay the loan from the insurer plus interest. The interest is not tax-deductible. If Bob surrenders the policy, he will have a taxable gain of $10,000 (the difference between $35,000 in cost basis and $45,000 in surrender value) that he must report as taxable ordinary income. Taxation of Accelerated Death Benefit: When benefits are paid under a life insurance policy to a terminally ill person, the benefits are received tax-free. To be considered terminally ill, a physician must certify that the person has a condition or illness that will result in death in two years. Taxation of Policy Dividends: Dividends paid on a whole life policy are tax-exempt as they are considered to be a return of overpaid or excess premiums. While unlikely to happen, any dividends received over the premiums paid are taxable as ordinary income. If dividends are left with the insurer to accumulate interest, the interest earned will be taxable as ordinary income in the year received. If the life insurance policy is determined by the IRS to be a Modified Endowment Contract (MEC), dividends will be taxable unless they are used to purchase paid-up additional insurance. In addition, dividends payable under a MEC may be subject to a 10% penalty tax (applying to premature distributions before age 59½). 1035 Exchange: When an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes as a Section 1035 exchange. Policy exchanges that qualify as a 1035 exchange are not taxable. A Section 1035 exchange enables the postponement of tax consequences.

OTHER POLICY LOAN CONSIDERATIONS

Taxation: policy loans may be taken out of an individual whole life policy without any tax implications as long as the policy remains active. policy loans may be taken out of an individual whole life policy without any tax implications as long as the policy remains active. Right to defer loan: This right to defer is designed to protect an insurer if a large number of policyholders desire to make withdrawals at the same time. This right to defer does not apply to death benefit claims or automatic premium loan payments.

Term Insurance Riders

Term insurance riders were created to give insureds an inexpensive option to add additional temporary coverage to a permanent policy. These riders allow for an additional death benefit (above the permanent face value) if the insured dies during a specified term. While there is an additional expense for the extra protection, it is nominal compared to the cost for the permanent protection and less than if the insured were to take out a separate term policy. Additionally, if the insured is still alive at the end of the term, the rider will fall off the policy, the extra coverage terminates, and the cost associated with the rider will fall off the future premium costs. However, the premium and face value associated with the permanent protection for which the rider was attached remain intact. This additional insurance does not have any impact on cash values or dividends and typically would be dropped if the insured exercises a nonforfeiture option or allows the policy to lapse. This additional insurance does not have any impact on cash values or dividends and typically would be dropped if the insured exercises a nonforfeiture option or allows the policy to lapse. Like a standard term life insurance contract, term riders are a common way for an insured to have excess coverage during a specific phase of life, i.e., raising children. There are many different term riders a policy owner may choose from, most of which resemble the term life policies covered earlier.

Term life insurance

Term life provides the GREATEST AMOUNT OF DEATH BENEFIT PER DOLLAR OF INITIAL CASH OUTLAY. this has the greatest amount of coverage for a limited period of time, has a TERMination date, term life is the cheapest type of pure life insurance, and due to having a termination date and not having any cash value, it will always be cheaper than a whole life policy with the same face value. It provides pure death protection since it only pays a death benefit if the insured dies during the policy term. term policies do NOT build cash value Types: level term, decreasing term, and increasing term

Mode of Premium Provision (premium payment)

The "mode of premium provision" states that premiums must be paid to an insurer or its representative in order for coverage to be provided and allows the policy owner to select the mode of premium. Insurers vary with regard to the payment modes made available. Some policy owners wish to pay on an annual basis. The policy owner will save the most money (i.e., lower premiums) if they pay annually, as annual premium payments result in lower administrative and maintenance costs for the insurer. This savings is typically passed to the policy owner. The more costly methods of paying premiums include quarterly, semi-annual, or monthly. Insurers experience substantially higher administrative and maintenance costs when the premium is paid monthly

► Additional Underwriting Information

The Medical Report Quite often, a policy is issued on the basis of the information provided in the application alone. If the application's medical section raises questions specific to a particular medical condition, the underwriter may also request an attending physician's statement (APS) from the physician who has treated the applicant. An insurer's request for an attending physician's report must be accompanied by a copy of the signed authorization. The statement will provide details about the medical condition in question. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. Many companies accept reports that are completed by a paramedic or a registered nurse. When completed, the medical report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate. The Medical Information Bureau -Another source of underwriting information that specifically focuses on an applicant's medical history is the Medical Information Bureau (MIB). The MIB report will also identify life insurance in force with other carriers, as well as, lifestyle habits such as drug use. The bureau is formed by more than 700 member insurance companies. -Its purpose is to serve as a reliable source of medical information concerning applicants and to help disclose cases where an applicant either forgets or conceals pertinent underwriting information or submits medical information with fraudulent intent. A Medical Information Report (MIB) may disclose lifestyle habits such as drugs, drinking, overeating and smoking. The MIB operations help to hold down the cost of life and health insurance for all policyowners through the prevention of misrepresentation and fraud. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. --This is how the system works. If a company finds that one of its applicants has a physical ailment or impairment listed by the MIB, the company is pledged to report the information to the MIB in the form of a code number. By having this information, home office underwriters will know that a past problem existed should the same applicant later apply for life and health insurance with another member insurance company. The information is available to member companies only and may be used only for underwriting and claims purposes. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. USA Patriot Act The USA Patriot Act was enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. The purpose of the USA Patriot Act is to detect and deter terrorism. A life insurance policy that can be cash-surrendered is an attractive money laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in the form of an insurance company check. Special Questionnaires When necessary, special questionnaires may be required for underwriting purposes to provide more detailed information related to aviation or avocation, foreign residence, finances, military service, or occupation. For example, if an applicant has a hobby of skydiving, the insurance company needs detailed information about the extent of the applicant's participation to determine whether or not the insurance risk is acceptable. The most common of these special questionnaires is the aviation questionnaire required of any applicant who spends a significant amount of time flying. INSPECTION REPORTS -Inspection reports usually are obtained by insurance companies on applicants who apply for large amounts of life and health insurance. These reports contain information about prospective insureds, which is reviewed to determine their insurability. Insurance companies normally obtain inspection reports from national investigative agencies or firms and may contain information obtained by a telephone call to the proposed insured. -The purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of living, finances, and any exposure to abnormal hazards. Investigators or inspectors may interview employees, neighbors, and associates of the applicant, as well as the applicant. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report. -Inspection reports ordinarily are not requested on applicants who apply for smaller policies, although company rules vary as to the sizes of policies that require a report by an outside agency. Credit Reports -Some applicants may prove to be poor credit risks, based on information obtained before a policy is issued. Thus, credit reports obtained from retail merchants' associations or other sources are a valuable underwriting tool in many cases. -Applicants who have questionable credit ratings can cause an insurance company to lose money because they are likely to allow their policies to lapse within a short time, perhaps even before a second premium is paid. This can cause the company to lose money because the insurer's expenses to acquire the policy cannot be recovered in a short period of time. It is possible that home office underwriters will refuse to insure persons who have failed to pay their bills or who appear to be applying for more life and health insurance than they reasonably can afford. The Fair Credit Reporting Act of 1970 To protect the rights of consumers for whom an inspection or credit report has been requested, Congress in 1970 enacted the Fair Credit Reporting Act. As previously mentioned, this federal law applies to financial institutions that request consumer reports. Those who are denied coverage have the right to be provided with the source of the adverse information. Any information derived that reflects adversely upon an applicant may be challenged if claimed to be inaccurate or untrue. DISCLOSURES -An insurer's obligation involving the disclosure of an insured's nonpublic information is to give notice, explain, and allow opting out. If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that it is permitted to do so under The Fair Credit Reporting Act. =Where required by state law, the agent also must sign a form attesting that a disclosure statement has been given to the applicant. Moreover, a form authorizing the insurance company to obtain investigative consumer reports or medical information from investigative agencies, physicians, hospitals, or other sources generally must be signed by the proposed insured and the agent as a witness. The insurance company's name and the agent's name and license identification number must appear on the application. It may be printed, typed, stamped, or handwritten, if legible. INFORMATION AND PRIVACY PROTECTION ACT Each insurer must conform with state and federal laws regarding the dissemination of an applicant's or insured's private information according to the Information and Privacy Protection Act. Also, this act prohibits insurers to base their decision solely on the basis of previous adverse underwriting decision from support organizations, such as MIB and medical reports. PRIVACY NOTICE -According to HIPAA, a privacy rule that provides federal protections for an individual's health information and gives patients an array of rights concerning individually identifiable health information, when an agent submits an application that reveals personal information regarding the applicant, the agent is responsible for providing the insurance applicant with privacy notices. -Producers must also secure an HIV consent form from the applicant in applicable situations and communicate that blood tests may be a required underwriting practice. In other words, even though the insurer requires a blood test as part of its regular underwriting activity, it must still secure a signed consent form which indicates to the applicant that any blood taken will be screened for HIV and that he or she is providing permission for such testing to be completed.

Additional sources of underwriting information

The Medical Report: Most companies have set nonmedical limits, meaning that applications for policies below a certain face amount (perhaps $50,000 or even $100,000) will not require any additional medical information other than what is provided by the application. However, for policies with a more substantial face value(over 100k), a medical report may be required to provide further underwriting information. Suppose the application's medical section raises questions specific to a particular medical condition. In that case, the underwriter may also request an ATTENDING PHYSICIANS STATEMENT (APS) from the physician who has treated the applicant. A copy of the signed authorization must accompany an insurer's request for an attending physician's report. (needs to be signed by physician) This Statement will provide details about the medical condition in question. Many companies accept reports that are completed by a paramedic or a registered nurse. When completed, the medical report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate. Inspection Reports: -Inspection reports usually are obtained by insurance companies on applicants who apply for large amounts of life and health insurance. These reports contain information about prospective insureds, which is reviewed to determine their insurability. Insurance companies usually obtain inspection reports from national investigative agencies or firms and may contain information obtained by a telephone call to the proposed insured. purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of living, finances, and any exposure to abnormal hazards. Investigators or inspectors may interview employees, neighbors, associates of the applicant, and the applicant. It may also include a credit report. When an INVESTIGATIVE CONSUMER REPORT is used in connection with an insurance application, the applicant has the RIGHT to receive a copy of the report. An insurer's obligation involving the disclosure of an insured's nonpublic information is to give notice, explain, and allow opting out. *These are not requested on applicants who apply for smaller policies.* -If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that it is permitted to do so under The Fair Credit Reporting Act. FCRA established procedures for collecting and disclosing information obtained on consumers through investigation and credit reports. The law is intended to ensure fairness concerning confidentiality, accuracy, and disclosure. The FCRA is quite extensive. Credit Reports: Some applicants may prove to be higher credit risks, based on information obtained before a policy is issued. Thus, credit reports obtained from retail merchants' associations or other sources are a valuable underwriting tool in many cases. Applicants who have questionable credit ratings can cause an insurance company to lose money. Applicants with low credit standings are likely to allow their policies to lapse within a short time, perhaps even before a second premium is paid. An insurance company can lose money on a quickly lapsed policy because the insurer's expenses to acquire the policy cannot be recovered in a short period of time. The home office underwriters may refuse to insure persons who have failed to pay their bills or who appear to be applying for more life insurance than they reasonably can afford. The Fair Credit Reporting Act of 1970 ongress enacted the Fair Credit Reporting Act to protect consumers' rights for whom an inspection or credit report has been requested. As previously mentioned, this federal law applies to financial institutions that request these types of consumer reports. Insurance companies fall under this category. A life insurance applicant must be informed of their rights that fall under the Fair Credit Reporting Act upon completing the application. USA Patriot Act: The USA Patriot Act was enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. The purpose of the USA Patriot Act is to detect and deter terrorism. A life insurance policy that can be cash surrendered is an attractive money-laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in the form of an insurance company check.

► Health Savings Accounts (HSAs)

The Medicare Prescription Drug and Modernization Act of 2003 established a new way for consumers to pay for medical expenses: health care savings accounts (HSAs). An HSA is a tax-favored vehicle for accumulating funds to cover medical expenses. Eligibility Those under age 65 are eligible to establish and contribute to HSAs if they have a qualified high-deductible health plan. Contribution Limits Annual contributions of up to 100% of an individual's health plan deductible can be made to an HSA. Individuals who are 55 to 65 years old can make an additional catch-up contribution. Tax Treatment The owner decides which type of investment is used in the HSA and earnings grow tax-free. The owner can also make tax-free withdrawals to cover current and future qualified health care costs. Qualified health care expenses include amounts paid for: -Doctors' fees, prescription and nonprescription medicines -Necessary hospital services not paid for by insurance -Retiree health insurance premiums -Medicare expenses (but not Medigap) -Qualified long-term care services -COBRA coverage Qualified medical expenses are expenses incurred by the HSA owner, the spouse, and dependents. Nonqualified withdrawals are subject to income taxes and a 20% penalty. HSAs are fully portable, and assets can accumulate over the years. Upon death, HSA ownership may be transferred to a spouse tax free.

LIFE INSURANCE DEATH BENEFITS; Special Situations

The Uniform Simultaneous Death Act states that if the insured and primary beneficiary both die in a common disaster (i.e., plane crash) and it cannot be determined who died first, the insured will be considered to have survived the primary beneficiary (or died last). In other words, the primary beneficiary will be considered to have died before the insured. Therefore, the face amount is paid to the contingent beneficiary. he Uniform Simultaneous Death Act is that it only applies to situations where it cannot be definitively determined if the insured died before the beneficiary. If the primary beneficiary clearly died first, and then the insured died, the benefits would be payable directly to the contingent beneficiary. If the insured died first, the death benefit is payable (i.e., due) to the primary beneficiary. If the primary beneficiary then died shortly after that, the face amount will be paid to the estate of the primary beneficiary and not directly to a contingent beneficiary. Again, possible death taxes and probate charges may be assessed before the heirs receive what remains. The common disaster provision further clarifies these complicated situations by adding a survivorship clause. This clause requires that the primary beneficiary not just survive longer but outlive the insured for a specified amount of time, typically 14 or 30 days. The common disaster provision ensures a policyowner that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary. Benefits will only be paid to the primary beneficiary's estate if the primary beneficiary lives past the minimum time period. The goal of both the Uniform Simultaneous Death Act and the common disaster provision is to protect the contingent beneficiary. If there is not a contingent beneficiary listed, the benefits will be paid to the insured's estate, just as if the primary beneficiary died before the insured. Spendthrift Clause This provision protects a beneficiary from creditors with regard to life insurance proceeds. When the death benefit is left with the insurer, no creditors can attach a lien of any kind to the proceeds. The spendthrift clause also protects a beneficiary by minimizing or restricting the use of proceeds as long as the insurer holds them. Only after proceeds have been distributed can the beneficiary assign or transfer the benefits to a creditor. Additionally, under the spendthrift clause, a beneficiary cannot take the present value of future payments in a lump sum (commuting) or use future payments as collateral for a loan (encumbering). The spendthrift clause is most often used to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time. Outside of preventing distribution directly to the insured's creditors, this clause does not have any effect if the beneficiary receives the proceeds as one lump sum payment. Additionally, once the beneficiary receives the payment, creditors may be able to take steps to collect on money owed.

Assignment Provision

The assignment provision reiterates one of the policy owner's rights, as stated in the contract. It enables the policy owner to transfer any or all of their policy rights to someone else. This transfer of rights or ownership is known as policy assignment. The previous owner is called the assignor, and the new owner is called the assignee. ABSOLUTE ASSIGNMENT: complete transfer of the policy to another person COLLATERAL/CONDITIONAL: partial and temporary transfer of policy rights to another. In a conditional assignment, the policy owner or assignor transfers a policy right to an assignee. Most conditional assignments involve the use by the assignor of a whole life policy's cash value as collateral to secure a loan from a financial institution.

Conversion Privilage

The conversion privilege allows a policy owner, before an original insurance policy expires, to elect to have a new policy issued that will continue the insurance coverage. Conversion may be affected at attained age (premiums based on the age attained at the time of conversion) or at original age (premiums based on the age of the insured at the time of original issue). Conversion is a common privilege for term life insurance and all group insurance. The insured does not have to prove insurability (good health) when converting a policy.

Comparing life insurance policy costs

The cost of a policy could be defined as the difference between what one pays and what one receives back. If one pays a premium for life insurance and receives nothing back, the cost for the death protection is the premium. If one pays a premium and receives something in return, such as a dividend or cash value, your true cost is less than the premiums paid. Therefore, a lower premium does not automatically mean a lower-cost policy. Cost comparative methods are designed to evaluate the true cost of the policies against this standard. Interest Adjusted Net Cost Method: Interest adjusted cost indexes are designed to provide information on these four items: (1) premiums; (2) death benefits; (3) cash value; and (4) dividends. These are the variables that must be considered in evaluating cost, and they are the basis for the life insurance policy cost comparison methods. The index numbers are designed to give the consumer a means of comparing the cost of policies of the same generic type. The indexes also factor the insured's age and the amount of coverage desired. Due to the increasing complexity of life insurance policy structures, premium payment methods, benefits, and dividend configurations, the average consumer would not make cost comparisons without these index figures. Life insurance surrender cost index: this index uses a calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period. The surrender cost index is important to the consumer who places a high priority upon the growth of cash value in the policy. It aids in cost comparisons if the policyowner plans to surrender the policy for its cash value in ten or twenty years. Net Payment Cost Index: a formula used to determine the actual cost of a policy for a policyowner. It helps the consumer compare costs of death protection between policies that will be held for ten or twenty years. The net payment cost index provides the policy owner an estimate of their average annual premium outlay, adjusted for the time value of money. The net payment cost index is useful if one's primary concern is the amount of death benefits provided in the policy, and is not as concerned with the build-up of cash value. It helps compare future costs, such as in 10 to 20 years, if one continues to pay premiums and does not take the policy's cash value. Comparative interest Rate method: determines the rate of return required on an investment account to yield the same return of a life insurance policy that has cash value. The amount spent on the term insurance plus the hypothetical investment account must be the same as the required premiums for permanent insurance. The face value of the temporary and permanent insurance products being compared must also be the same. The comparative interest rate is the rate of return required on the investment account, so the value of the investment is equal to the surrender value of the higher premium policy at a specific point (i.e., 30 years, death).

Disability Income Benefit Rider

The disability income benefit rider provides an income benefit if the insured is totally and permanently disabled as defined by the policy. Most riders provide a benefit of one percent of the face amount of the policy, which is payable if the insured is totally disabled. The monthly income paid is generally limited to no more than $1,000 per month. Income benefits begin after the six-month waiting period as previously described. For example, if Jim owns a $20,000 life insurance policy with this rider included and becomes totally disabled, he would be paid $200 per month (1% of $20,000). As a whole, the disability income benefit rider contains the same type of qualifications and structure as the waiver of premium rider. In fact, most disability income benefit riders waive the premium in addition to including a disability income benefit.

Entire Contract provision

The entire contract clause or provision is found at the beginning of the policy. It states that the entire contract consists of all included policy documents, the attached photocopy of the original application, and any attached riders or endorsements. Nothing may be incorporated by reference, meaning that the policy cannot refer to any outside documents as being part of the contract. Therefore, the insurer cannot deny a claim in the future by stating that it did not provide the policy owner with the entire contract or making changes to the policy. Mutually agreeable change can be made.

Expense Factor

The expense factor, also known as the loading charge, is a measure of what it costs an insurance company to operate.

Incontestable Clause

The incontestable clause or provision specifies that after a certain period of time has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the insurance policy so long as the contract continues in force. after the policy has been in force for the specified term, the company cannot contest a death claim or refuse payment of the proceeds even on the basis of fraud, a material misstatement, or concealment. The insurance company may only challenge (contest) a claim during the policy's contestable period. three situations to which the incontestable clause does not apply. A policy issued under any of these circumstances would not be considered a valid contract, which gives the insurer the right to contest and possibly void the policy at any time: -Impersonation or Identity. -Lack of insurable interest at time of application -Intent to murder A company can always void or cancel a policy for nonpayment of premiums. Additionally, statements related to age and sex or gender can be contested at any time.

Changes to the application

The insurance application must be completed accurately, honestly, and thoroughly, and it must be signed by the insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. If the company discovers a mistake, it usually returns the application to the agent. The agent then corrects the mistake with the applicant and has the applicant initial the change. If error, the company may only rescind or cancel the contract but only during the policy's CONTESTABLE period. Once the policy's INCONTESTABLE clause takes effect, the insurer can no longer rescind or cancel the contract.

Ceding Company

The insurance company who is transferring the risk

Long-term Care Rider

The long-term care rider, like an individual long-term care policy, will generally pay benefits when the insured is unable to perform at least two activities of daily living (ADLs). the long-term care benefits received will typically be paid out income tax-free. When designed using the generalized or independent approach, the long-term care rider is recognized as independent from the base life insurance policy. As such, the base policy's face amount or cash value is not impacted by any benefits paid out. When designed using the integrated approach, the base policy's death benefit and or cash value amounts will be reduced by any long-term care benefits paid out.

Master Policy

The master policy is issued to the employer under a group plan; contains all the insuring clauses defining employee benefits. Individual employees participating in the group plan receive individual certificates that outline highlights of the coverage.

Viatical (Viatee):

The new third-party owner in a viatical settlement.

Actuary

The person who calculates policy rates, reserves and dividends, and makes other applicable statistical studies and reports. They are concerned about the cost of insurance as a whole or for a specific class of risk

Policyholder

The person who owns a life insurance policy, usually the insured person or a relative

Policy loan uses

The primary advantage of a policy loan is that it provides ready cash for the policy owner without having to apply or qualify for the loan. Whether it is to pay debts, pay for emergencies, pay for education expenses, or used for a business purpose, a policy owner may use the cash value for any reason when they need cash. The cash value may also be used as collateral in order to secure another type of loan with a lending institution.

Settlement Options Provision

The settlement options available provide the beneficiary with more flexibility with which to receive proceeds.

Personal Producing General Agency System (PPGA)

The system is similar to career agency system. However, PPGAs do not recruit, train or supervise career agents. They primarily sell insurance and may build a small sales force to assist them. PPGAs are responsible for maintaining their own offices and staff. Agents hired by a PPGA are considered employees of the PPGA, not the insurance company. They primarily sell insurance

Group Basic Medical Expense

The three standard forms of basic medical expense insurance- hospital, surgical, and physicians' expenses- are available for group insurance. In addition, a number of newer coverages have been developed in recent years, including dental and vision care, prescription drugs, home health care, extended care facilities, diagnostic x rays, and laboratory services. Group Major Medical Plans -Like individual major medical plans, group major medical plans may be offered as a single, extensive plan (comprehensive major medical) or superimposed over a group basic plan (supplemental major medical). Participants are usually required to satisfy an initial deductible with comprehensive plans and either a corridor or an integrated deductible with supplemental plans. -Benefits provided by group major medical plans are usually more extensive than those of individual plans. For example, it is not uncommon to find group plans that offer individual benefit maximums of $1 million. Others do not set any maximum benefit limits. Also, deductibles are usually lower for group plans, typically ranging from $250 to $500, whereas deductibles for individual policies can be $1,000 or more. There are two other characteristics of group medical expense plans that distinguish them from individual plans. These are the coordination of benefits provision and the treatment of maternity benefits. Coordination of Benefits -The purpose of the coordination of benefits (COB) provision, found only in group health plans, is to avoid duplication of benefit payments and over insurance when an individual is covered under more than one group health plan. The provision limits the total amount of claims paid from all insurers covering the patient to no more than the total allowable medical expenses. For example, an individual who incurs $700 in allowable medical expenses would not be able to collect any more than $700, no matter how many group plans they are covered by. -The COB provision establishes which plan is the primary plan, or the plan that is responsible for providing the full benefit amounts as it specifies. Once the primary plan has paid its full promised benefit, the insured may submit the claim to the secondary provider for any additional benefits payable. In no case, however, will the total amount the insured receives exceed the costs incurred or the total maximum benefits available under all plans. -Coordinating benefits is appropriate for married couples when each is covered by an employer group plan. For example, John and Cindy, a young married couple, each are participants in their own company's health plan and are also covered as dependents under their spouse's plan. John's plan would specify that it is the primary plan for John. Cindy's plan would be his secondary plan. Likewise, Cindy's plan would specify that it is the primary plan for Cindy. John's plan would be her secondary plan. For dependent children coverage the plan of the parent whose birthday comes first during the calendar year is primary; the other parent's plan is secondary. Coordinating benefits is also needed for workers with Medicare. Workers 65 or older with an employer group health plan receive primary coverage from that group plan. Medicare provides secondary coverage on all claims except work-related injuries and illnesses. -However, sometimes, Group plan benefits are reduced to the extent that benefits are payable under Medicare for the same expenses in a Medicare carve-out. This means that, if applicable, Medicare pays first and then the group plan pays a portion of the medical expenses. Wellness Programs The majority of large employers that offer health benefits today also offer at least some wellness programs in an effort to promote employee health and productivity and reduce health related costs. Workplace wellness programs vary in the services and activities they include, but typically focus on participant's problems such as drug abuse or stress. Other incentives include gym memberships, stop-smoking programs, and weight management programs. Although typically offered through the workplace, wellness programs can be offered by insurance plans directly to their enrollees. COBRA Continuation of Benefits -Participants in group medical expense plans are protected by a federal law that guarantees a continuation of their group coverage if their employment is terminated for reasons other than gross misconduct. Practically speaking, the law protects employees who are laid-off but not those who are fired "for cause." -The law also does not protect those who failed to pay the required premium and those who are covered by other hospital, surgical or medical coverage for individuals in a group plan. This law, known as the Consolidated Omnibus Budget Reconciliation Act of 1985 (i.e., COBRA), requires employers with 20 or more employees to continue group medical expense coverage for terminated workers (as well as their spouses, divorced spouses, and dependent children) for up to 18 months (or 36 months, in some situations) following termination. The employer must provide the employee with a written notification of the continuation privilege. Some important points about this law should be noted. It is not the same as the policy conversion privilege by which an employee may convert a group certificate to an individual policy. However, HIPAA requires that the group insurance carrier must offer an individual plan after COBRA has expireS. COBRA permits the terminated employee to elect to continue the group coverage within 60 days of termination. The benefits under COBRA continuation coverage will end if the employer terminates all group health plans. COBRA Continued Coverage for Former Employees The following events would qualify for extended and converted medical expense coverage under COBRA for a terminated employee: --Employment is terminated (for other than gross misconduct): 18 months of continued coverage (or up to 29 months if disabled) --Employee's hours are reduced (resulting in termination from the plan): 18 months of continued coverage (or up to 29 months if disabled) --Employee dies: 36 months of continued coverage for dependents --Dependent child no longer qualifies as "dependent child" under the plan: 36 months of continued coverage --Employee becomes eligible for Medicare: 36 months of continued coverage --Employee divorces or legally separates: 36 months of continued coverage for former spouse ----Former spouses may be eligible to convert to an individual policy, as long, as the ex-spouse does not re-marry before exercising conversion privileges -Continued insurance coverage under COBRA must be paid for by the ex-employee -Insured's dependents are not required to prove insurability when they exercise their continuation or conversion privileges The law does not require the employer to pay the cost of the continued group coverage. The terminated employee or surviving dependents are responsible to pay the premium, which may be up to 102% of the premium that would otherwise be charged. (The additional 2% is allowed to cover the insurer's administrative expenses.) The schedule of benefits will be the same during the continuation period as under the group plan. ---Common exclusions to continuation of group coverage includes: dental, vision care, and other prescription drug benefits. ---An employee is eligible to convert to an individual health policy within 180 days after the continuation privilege expires The Employee Retirement Income Security Act (ERISA) -The Employee Retirement Income Security Act (ERISA) of 1974 was intended to bring about equality in pension plans. The act's fiduciary standards benefit plan participants and beneficiaries. This act spells out the contributions that may be made to such plans as well as the benefits they may offer. ERISA requires stringent reporting and disclosure requirements for establishing and maintaining both group health insurance and other qualified plans. Annual financial reports must be filed with the IRS. Plan descriptions must be filed with the Department of Labor. Group Disability Income Plans -Group disability income plans differ from individual plans in a number of ways. Individual plans usually specify a flat income amount, based on the person's earnings, determined at the time the policy is purchased. In contrast, group plans usually specify benefits in terms of a percentage of the individual's earnings. In addition, a large group disability income policy does not have medical underwriting. However, like individual plans, group disability can include short-term plans or long-term plans. The definitions of "short-term" and "long-term" are different for group and individual. -Group short-term disability plans are characterized by maximum benefit periods of rather short duration, such as 13 or 26 weeks. Benefits are typically paid weekly and range from 50% to 100% of the individual's income. -Group long term disability plans provide for maximum benefit periods of more than two years, occasionally extending to the insured's retirement age. Benefit amounts are usually limited to about 60% of the participant's income. If an employer provides both a short-term plan and long-term plan, the long-term plan typically begins paying benefits only after the short-term benefits cease. Often, long-term plans use an "own occupation" definition of total disability for the first year or two of disability and then switch to an "any occupation" definition. Most group disability plans require the employee to have a minimum period of service, such as 30 to 90 days, before he is eligible for coverage. In addition, most group plans include provisions making their benefits supplemental to workers' compensation benefits, so that total benefits received do not exceed a specified percentage of regular earnings. In some cases, group disability plans actually limit coverage to nonoccupational disabilities because occupational disabilities normally qualify for workers' compensation benefits. ---Military personnel must have the right to reinstate their disability group coverage upon release from active military duty Group Health Plan Termination -No employer or fiduciary managing a group life or health plan may willfully refuse to pay premiums in order to cause the cancellation or nonrenewal of the plan. The employer or fiduciary must provide 45 days' notice of termination of the plan to all those covered and receiving benefits. In case the group health plan terminates, employees may convert to an individual health plan without evidence of insurability or a medical exam. Offsets for Payments Group disability benefits are generally coordinated with or decreased by disability income received from government plans, pensions or other forms of social insurance such as Social Security disability or Workers' Compensation. Individual disability income policies generally pay the monthly income benefit in addition to any income derived from other sources. Group AD&D -Accidental death and dismemberment insurance is a very popular type of group coverage, frequently offered in conjunction with group life insurance plans. It may also be provided as a separate policy, in which case it is normally paid for entirely by the employee. Such employee-pay-all plans are called voluntary group AD&D because plan participation is voluntary. -Benefits may be provided for both occupational and nonoccupational losses or for nonoccupational losses only. Voluntary group AD&D typically provides benefits for both types of losses. Like individual AD&D, group AD&D pays a principal sum upon the insured's accidental death (or loss of any two body members). A capital sum is payable upon the accidental loss of one body member. Some group AD&D plans specify a higher death benefit if the insured dies while on company business. Group AD&D, unlike group life and group medical, normally does not include a conversion privilege.

HEALTH UNDERWRITING

The underwriting process is accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates. Underwriting requirements will vary based on the insurance company, but the overall underwriting process is very similar. Underwriters have several sources of underwriting information available to help them develop a risk profile of an applicant. The number of sources checked usually depends on several factors, most notably the size of the requested policy and the risk profile developed after an initial review of the application. The larger the policy, the more comprehensive and diligent the underwriting research. Regardless of the policy size, if the application raises questions in the underwriter's mind about the applicant, that, too, can trigger a review of other sources of information. The most common sources of underwriting information include: the application, the medical report, an attending physician's statement, the Medical Information Bureau, special questionnaires, inspection reports, and credit reports. The Application The application for insurance is the basic source of insurability information; it is a written request made by the applicant to the insurer asking for an insurance contract based on the information provided. Regardless of what other sources of information the underwriter may draw from, the application is the first source of information to be reviewed and will be evaluated thoroughly in order to determine whether to accept or reject the applicant. Thus, it is the agent's responsibility to see that an applicant's answers to questions on the application are fully and accurately recorded. In addition to that, the application is very important because it helps the insurer to know the applicant more. There are three basic parts to a typical life insurance application: Part I-General, Part II-Medical, and Part III-Agent's Report. --When attached to the insurance policy, the application becomes part of the legal contract between the insurer and the insured. Consequently, the general rule is that no alterations of any written application can be made by any person other than the applicant without the applicant's written permission. Part I-General Part I of the application asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status, and occupation. Details about the requested insurance coverage are also included in Part I, such as: ► Type of policy ► Amount of insurance ► Name and relationship of the beneficiary ► Other insurance the proposed insured owns ► Additional insurance applications the insured has pending -Other information sought may indicate possible exposure to a hazardous hobby, foreign travel, aviation activity, or military service. Whether the proposed insured smokes is also indicated in Part I. Part II-Medical Part II focuses on the proposed insured's health and asks a number of questions about the health history. This medical section must be completed in its entirety for every application. Depending on the proposed policy face amount, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen. Part lll - Producer's/Agent's Report -Part III of the application is often called the producer's or agent's report. This is where the agent reports personal observations about the proposed insured. Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully. -In Part III, the agent provides additional information about the applicant's financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant. The agent's report also usually asks if the proposed insurance will replace an existing policy. If the answer is yes, most states demand that certain procedures be followed to protect the rights of consumers when policy replacement is involved, such as: --Discussing the underwriting requirements that may impose new premium due to the insureds' new age and possible new medical conditions --Pre-existing conditions that may impose limited coverage in the new policy and other benefit limitations Completing the Application -The application is one of the most important sources of underwriting information and it is the agent's responsibility to see that it is completed fully and accurately. An insurance company will return the application to the agent if the agent submits an incomplete application. Then, the agent should schedule another appointment with the applicant to complete the unanswered questions. Statements made in the application are used by insurers to evaluate risks and decide whether or not to insure the applicant. Therefore, one of the actions a producer should take when submitting an application is to advise the insurer of any other relevant information not contained in the application. An applicant's statements are considered representations. -Representations are statements an applicant make as being substantially true to the best of the applicant's knowledge and belief, but which are not warranted to be exact in every detail. Representations must be true only to the extent that they are material to the risk. Warranties, on the other hand, are statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void. Any false statement made by the applicant on the application is known as a misrepresentation. Misrepresentations generally do not affect coverage unless they relate to a matter material to the risk. A material misrepresentation involves a material fact that, had it been known by the insurer at the time of application, would have caused the insurer to reject the application. If the material representations was intentional by the applicant, then it is considered fraud. -Each application requires the signatures of the proposed adult insured, the policyowner if different from the insured, and the agent who solicits the application. The applicant's signature is required on an insurance application to represent that the statements on the application are true to the best of the applicant's knowledge. By reading and signing the insurance application, the applicant should realize that any false statements on an insurance application could lead to loss of coverage. These statements on an application are known as executing agreements because they place the policy into effect. -Where required by state law, the agent also must sign a form attesting that a disclosure statement has been given to the applicant. Moreover, a form authorizing the insurance company to obtain investigative consumer reports or medical information from investigative agencies, physicians, hospitals, or other sources generally must be signed by the proposed insured and the agent as witness. The name of the insurance company and the agent's name and license identification number must appear on the application. It may be printed, typed, stamped, or handwritten, if legible. --Once the application is submitted and approved it becomes part of the policy **Policies may be issued as applied for by the applicant or they may be amended or modified by the insurer when issued. If they are amended or modified when issued, they are generally rated-up as well. This means that the premium will be higher than the standard rate.

►ELEVEN OPTIONAL PROVISIONS

There are 11 optional health policy provisions. Companies may ignore them and use only those that are needed in their policy forms. 1. Change of Occupation This provision also allows the insurer to reduce the maximum benefit payable under the policy if the insured switches to a more hazardous occupation or to reduce the premium rate charged if the insured changes to a less hazardous occupation. 2. Misstatement of Age The misstatement of age provision allows the insurer to adjust the benefit payable if the age of the insured was misstated when application for the policy was made. If the insured was older at the time of application than is shown in the policy, benefits would be reduced accordingly. The reverse would be true if the insured were younger than listed in the application 3. Other Insurance with This Insurer Under this provision, the total amount of coverage to be underwritten by a company for one person is restricted to a specified maximum amount, regardless of the number of policies issued. ----This provision is designed to protect the insurer 4. Insurance with Other Insurer In attempting to deal with the potential problem of overinsurance, the insurance with other insurer provision states that benefits payable for expenses incurred will be prorated in cases where the company accepted the risk without being notified of other existing coverage for the same risk. 5. Insurance with Other Insurers Similar to the previous, the insurance with other insurers provision allows an insurer to pay benefits to the insured on a pro-rata basis when the insurer was not notified prior to the claim that the insured has other health coverage. 6. Relation of Earnings to Insurance - Average Earning Clause If disability income benefits from all disability income policies for the same loss exceed the insured's monthly earnings at the time of disability, the relation of earnings provision states that the insurer is liable only for that proportionate amount of benefits as the insured's earnings bear to the total benefits under all such coverage. 7. Unpaid Premiums If there is an unpaid premium at the time a claim becomes payable, the amount of the premium is to be deducted from the sum payable to the insured or beneficiary. 8. Cancellation Though prohibited in a number of states, the provision for cancellation gives the company the right to cancel the policy at any time with 45 day's written notice to the insured. This notice must also be given when the insurer refuses to renew a policy or change the premium rates. If the cancellation is for nonpayment of premium, the insurer must give 10 day's written notice to the insured, unless the premiums are due monthly or more frequently. The cancellation provision also allows the insured to cancel the policy any time after the policy's original term has expired. 9. Conformity with State Statutes Any policy provision that is in conflict with state statutes in the state where the insured lives at the time the policy is issued is automatically amended to conform with the minimum statutory requirements. 10. Illegal Occupation The illegal occupation provision specifies that the insurer is not liable for losses attributed to the insured's being connected with a felony or participation in any illegal occupation. 11. Intoxicants and Narcotics The insurer is not liable for any loss attributed to the insured while intoxicated or under the influence of narcotics. --Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded --Foreign travel may not be excluded in every instance, but extended stays overseas or foreign residence may cause a loss of benefits

►OTHER HEALTH INSURANCE POLICY PROVISIONS

There are a number of other very important clauses and provisions that should be noted: No Loss / No Gain Provision These are state laws that supposedly prevent a policy owner from profiting from the purchase of insurance. They state that the purpose of insurance policies are primarily to "indemnify" a person for a loss. The principle of indemnity involves making the policy owner "whole" again; or restoring her to the same financial position which was present before an illness. Filing and Approval of Policy Forms -Accident and Health insurance policies must be issued and approved by the commissioner -If the commissioner does not reject the policy within 90 days it is considered approved as is -Insurers may request a hearing within 20 days if their policy is rejected Free Look (Right to Examine Clause) The free look provision allows applicants to inspect the policy after receipt and make a final decision about whether it meets their needs. If the individual cancels during the free look period, any premium paid is refunded. If the policy is canceled during the free look, the insurance company is not liable for any claims originating during that period. The free look period always begins the day the customer receives the policy. In most cases, the free look period lasts for 10 days. However, the time period required can vary by policy type and state. For example, policies geared towards seniors (Long-term Care or Medicare Supplement policies) typically require a 30 day free-look period. Availability of Coverage This provision authorizes insurers to issue group health insurance policies to small employers (2-50 employees) to cover their employees. Double Indemnity A clause for the payment of twice the regular benefit if an injury is sustained under certain specified circumstances. This is a more limited benefit than a double indemnity benefit under life insurance policies. Insuring Clause The insuring clause is the part of the health insurance policy that states any definitions required, the kind of benefits provided and the circumstances under which they will be paid, and the method of premium payments. The purpose of the insuring clause is to also specify the scope, limits, and conditions of the coverage provided. Consideration Clause In health insurance, the insurance company exchanges the promises in the policy for a two-part consideration from the insured. Consideration is an exchange of something of value on which a contract is based. A health insurance contract is valid only if the insured provides consideration in the form of: ---Date Coverage starts ---The initial period coverage ---The initial full minimum premium required ---The statements made in the application Assignment Provision Policyowners have the right to assign or transfer their rights. If a policywoner transfers all policy rights, an absolute assignment has been effected. In this case, the entire contract has been transferred to another party. However, if the owner assigns one or some of the rights to another, but not all, then the policyowner has engaged in a collateral assignment. Accumulations (or Accumulation Benefits) An insurance company may add an additional percentage to policy benefits when the contract is continuously renewed. For example, a 10% accumulation (benefit increase) after 5 consecutive years of renewal. The purpose of accumulation is to encourage insured to always renew policies. Conversion Privilege for Dependents Beginning October 1, 2010, the Affordable Health Care Act mandated that all policies and plans must provide dependent coverage up to age 26. Adopted children, stepchildren, and foster children usually are eligible for coverage. As long as a policy is in force, coverage for a child generally continues until the child marries or reaches the limiting age. Waiver of Premium The Waiver of Premium provision waives the payment of premiums after the insured has been totally disabled for the specified period of time. Normally, a waiver of premium provision has a 90 days waiting period until premiums are waived. In case, an insured recovers from the disability, then the insured must begin to pay premiums again. If the insured remains disabled, waiver of premium provision will remain effective until the insured reaches the age 65. Benefits due self-inflicted, wartime or military service injuries, and injuries received during the commission of a crime are excluded. Probationary Period The Probationary Period provision in a health insurance contract becomes effective at the inception of the policy. Benefit Payment Provision This provision describes how benefits will be paid out by the policy. Some benefits are paid as lump-sum reimbursements, lump-sum indemnity periods, or as a periodic income benefit. Owner's Rights Provision The owner's rights provision defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy. Types of Beneficiaries A beneficiary can be either specific (a person identified by name and relationship), or a class designation (a group of individuals such as the "children of the insured"). If no one named, or if all beneficiaries die before the insured dies, death benefit will go to insured's estate. By Order of Succession: ► Primary: First in line to receive death benefit proceeds ► Secondary (contingent): Second in line to receive death benefit proceeds ► Tertiary: Third in line to receive death benefit proceeds. If no one is named, death benefit will go to insured's estate Dependent Children Benefits Dependent children must be covered by their parents health insurance plan until a certain age. Coverage may also continue for children who are incapable of earning their own living due to a mental or physical disability. Preexisting Conditions Medical expense and disability income policies usually exclude paying benefits for losses due to preexisting conditions pertaining to illness, disease, or other physical impairments Such exclusions are subject to the"time limit on certain defenses" provision. Any preexisting condition that the insured has disclosed clearly in the application usually is not excluded or, if it is, the condition is named specifically in an excluding waiver or rider Impairment Rider Also known as an exclusion rider, coverage "waiver" or a "waiver of disability." When attached to a disability income contract, it indicates that the insurer is accepting a greater risk. Since it may be unable to adequately assess the total risk the insurer decides to provide coverage for the individual but limit it with regard to the impairment involved (i.e., illness, injury, etc.). If such a rider is added, the producing agent should explain the limitations provided by the rider. This type of rider can be issued with or without an extra premium charge. Waivers for Impairments Rider Under this rider, an insurance company does not cover an insured's loss due to a preexisting condition. However, if the insured's condition improves, the company may be willing to remove the waiver. The purpose of this rider is to protect the insurer from undue risks.

► Other Types of Group Health Plans

There are four additional types of plans worth noting: blanket health insurance, franchise (or wholesale) health insurance, credit accident and health insurance, and health savings accounts. Blanket Health Plans Blanket health insurance is issued to cover a group or association who may be exposed to the same risks, but the composition of the group (the individuals within the group) are constantly changing. Examples of blanket health insurance include; a common carrier (such as an airline or a bus company) to cover its passengers, a school to cover its students, an employer to cover employees with exceptionally hazardous working conditions, a volunteer fire department to cover its firefighters, or other similar groups. As with other group insurance, the group (or association) is the policy owner, the insured is the group member (employee, passenger, student, etc.) and individual underwriting is not required. Unlike other group insurance, individual applications are not required nor are certificates of coverage issued. Benefits under blanket insurance policies are paid to the person insured, or to his designated beneficiary, or to his estate, except that if the person insured is a minor, such benefits may be made payable to his parent, guardian, or other person actually supporting him. Student Health Plans Colleges and universities may offer a health insurance coverage to its enrolled students. Some colleges and universities may even extend coverage for a period of time after graduation. Franchise Health Plans Franchise health plans, sometimes called wholesale plans, provide health insurance coverage to members of an association or professional society to cover a group of people that do not qualify for true group insurance. Individual policies are issued to individual members and the association or society simply serves as the sponsor for the plan. Some characteristics of the franchise health plan include: -It is available for very small groups -Each individual must complete a health application separately and each must receive a policy -Premium rates are usually discounted -Offers medical, hospital, surgical and disability benefits -Can be contributory or non-contributory Credit Accident and Health Plans Credit accident and health plans (commonly referred to as credit insurance) are designed to help the insured pay off a loan in the event they are disabled due to an accident or sickness. If the insured becomes disabled, the policy provides monthly benefit payments equal to the monthly loan payments due. Credit insurance can be written as an individual credit health insurance policy, or it can be written under a group policy. Group credit insurance, however, requires a minimum number of debtors every year; this number is different depending on state laws. ---Both Individual and group credit insurance are similar to individual and group health policies in terms of underwriting process, selection, and proof of insurability. ---Benefits received under this policy must be used to make the debtor's (borrower's) required minimum payment. ---Premiums may be paid in full by the creditor, in full by the debtor, or shared by both. ---The maximum amount of coverage may not exceed the amount of the indebtedness. ---Coverage will decrease as the loan is being paid. ---If a loan is closed the debtor must receive a notice of proposed insurance by the creditor. ---A creditor may not purchase insurance on a debtor without their permission. ---Once indebtedness is incurred a certificate of authority must be delivered within 30 days. Credit Life Plans Credit life insurance plans protect a lender against the premature death of a borrower before the latter party has the opportunity to pay off a debt. The amount of life insurance on the life of the borrower cannot exceed the amount of the borrowed funds. Decreasing term life insurance is generally used to provide such coverage. The lender or creditor is the policyowner, pays the premium, and is the beneficiary. Non-occupational Health Plans A policy that does not cover injuries sustained while at work, because those injuries are covered by workers compensation.

Career Agency System

These agencies are branches of major stock and mutual insurance companies that are contracted to represent an insurer in a specific area. Insurance agents are recruited, trained and supervised by either a manager-employee or the company or a general agent (GA) who has a vested right in any business written by the GA's agents. The career agency focuses on building sales staff

Proprietary Insurer

These are private or commercial insurance companies. The Insurer is formed for the purpose of earning a profit for its owners

Whole Life- Straight Life Insurance

These premiums are payable through the insured's lifetime and coverage continues until the insured's death. Premiums are payable as long as coverage is in force. Life all other WHOLE LIFE policies, straight whole life provides fixed premiums, a level death benefit, and cash value. Whole life also requires that the face amount be paid out to the insured at age 100 (when the policy matures) Straight whole life allows you to maintain coverage throughout your entire lifetime and spread the cost out over your entire life.

Accidental Death Benefit Rider ADB (Double Indemnity)

This benefit provides a multiple indemnity and provides an additional death benefit if the cause of death listed on a death certificate is "accidental." Policies that pay a multiple of two times the policy face amount are called double indemnity, and those that pay three times the death benefit for death due to accidents are called triple indemnity and so forth. the cause of death that appears on the death certificate will indicate whether the insurer pays the claim. This rider provides the least expensive form of life insurance available today. The primary reason that accidental death insurance is cheaper than other life insurance is that it is limited in scope since it only covers death due to an accident. death must occur within 90 days of the accident. characterized by a level or decreasing face amount. The addition of an accidental death rider to a whole life policy does not impact the policy's cash value. Any policy loans are subtracted from the policy's face amount and not from the accidental death riders. Some accidental death benefit riders may include dismemberment benefits as well. The death benefit paid under accidental death coverage is called the principal sum. The severance (dismemberment) benefit paid under accidental dismemberment is called the capital sum and is usually one-half of the principal sum. A dismemberment involves the loss of a limb as a result of an accident. The loss of a toe or finger does not qualify.

Captive Insurer

This insurer is established by and owned by a parent firm for the purpose of insuring the parent firm's loss exposure.

Life insurance application

This is a formal request for insurance. This includes the completed application and initial premium and these two are the applicant's CONSIDERATION. The insurer's underwriting department's principal source or tool to determine if a potential insured (the applicant) is eligible for insurance coverage. This is the first source of info to be reviewed and will be evaluated thoroughly. Each part is then reviewed Part 1: General Applicant Information: General questions about the proposed insured, including name, age, address, birth date, sex. Also includes Type of policy, Amount of insurance, Name and relationship of the beneficiary, Other insurance the proposed insured owns, Additional insurance applications the insured has pending income, marital status, and occupation. Other information sought may indicate possible exposure to a hazardous hobby (i.e., scuba diving), tobacco smoker, foreign travel, aviation activity, or military service. Part II: Medical and Health History: Focuses on the proposed insured's health and asks several questions about the health history, and of family too. The individual to be insured may be required to take a medical exam or provide a blood test or urine specimen. Physical exams, if requested by the insurer, are performed at the expense of the insurer. Part III: The Agent's Report or Statement. often called the agent's report or agent's Statement. This is where the agent reports personal observations about the proposed insured. The agent is expected to complete this part of the application thoroughly and truthfully. the agent provides additional information about the applicant's financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant. . The agent's report also usually asks if the proposed insurance will replace an existing policy. If the answer is "yes," most states require specific procedures to be followed to protect consumers' rights when policy replacement is involved.

Adjustable life policy

This is a whole life insurance policy with flexible premiums, you can change your policy as your needs change. You can change your premium payments to increase or decrease coverage. No dividends with this policy, and you have to provide proof of insurability when increasing the face amount. These are also known as blended or combination policies, and they combine term and permanent insurance into a single plan. The policyowner determines how much face amount protection is needed and how much premium they want to pay, and the insurer then selects the appropriate plan to meet those needs. Or the policyowner may specify a desired plan and face amount. The insurer would then calculate the premium. As financial needs and objectives change, the policyowner can make adjustments to the coverage such as : -increasing or decreasing the premium, premium paying period, or both -increasing or decreasing the face amount, the period of protection, or both (increasing face amount requires providing proof of insurability) Policy can be converted from term to whole life, or from whole life to term, and it can also be converted from a high premium contract to a lower or limited pay contract. Due to its design and flexibility, adjustable life is usually more expensive than conventional term or whole life policies.

Family income policies (special use)

This policy consists of both whole life and decreasing term insurance. Will provide income to a beneficiary if death occurs during a specified period beginning after date of purchase. Family income portion is supplied by decreasing term policy, income payments to beneficiary begin when the insured dies and continue for the period specified in the policy usually 10,15,20 years from the date of the policy issue, NOT from the date of the insured's death. If the insured dies AFTER the specified period, only the face value (whole life) is paid to the beneficiary since the decreasing term insurance expired.

Accelerated Benefit Provisions

This provision allows an insured to "accelerate" the death benefit of a life insurance policy while still living if a physician diagnoses and verifies that the insured is suffering from a terminal illness and is likely to die within twelve to twenty-four months or less. usually added to policy through an accelerated benefits rider or terminal illness rider. Disclosures: If the accelerated benefit option is exercised, the insurer must provide the policyholder and any irrevocable beneficiary an illustration that: demonstrates any effect the payment of the benefit will have on the cash value, accumulation account, death benefit, premium payments, policy loans, includes a statement that receipt of accelerated benefit payments may adversely affect the recipient's eligibility for Medicaid or other government benefits or entitlements, includes a statement that benefits may be taxable, and includes a statement that assistance should be sought from a personal tax advisor.

Insuring Clause provision

This provision identifies the insurer's promise, the scope and limits of coverage provided by the policy. In other words, it specifies the death benefit or face amount. Additionally, the insuring clause identifies the amount annual premium, the frequency with which the premium is paid, and the name of the beneficiary. An insuring clause might state that the promise to pay is subject to a policy's provisions, exclusions, and conditions. Typically, the insuring clause is undersigned by the president and secretary of the insurance company.

Ownership provisions

This provision states that the policy owner possesses all rights contained in the policy. the primary rights of a policy owner include: The right to assign and change the policy's beneficiaries. The right to determine how proceeds will be paid. (i.e., settlement options) The right to terminate the policy and select a nonforfeiture option. The right to determine and change the premium payment schedule. (Not necessarily the amount of the premium but whether the premium is paid monthly, quarterly, annually, etc.) The right to assign ownership of the policy to someone else. The right to decide what happens with dividends paid out from a participating policy. The right to convert or renew a term policy if such option exists within the contract. The right to exercise any other applicable policies options. (i.e., guaranteed insurability option, policy loans, etc.)

Guaranteed Insurability Option (rider)

This rider allows a policy owner to purchase additional life insurance coverage at specified dates without providing evidence of insurability. Usually, the older the insured gets, the fewer dates the policy owner has to purchase more life insurance. The rider may also allow the policy owner to purchase additional coverage at various milestones, i.e., marriage or the birth of a child (sometimes called the stork provision). The option amount is the maximum life insurance a policy owner can buy on the specified date (option date). The policy owner can buy the option amount or less on the option date, or none at all. However, the option amounts cannot be added from one option to another if the earlier option date was not exercised. Other names referring to the same type of rider include the insurance protection rider (IPR) or future increase option (FIO).

Cost of Living (adjustment) rider

This rider automatically increases the face amount of the policy at specified intervals based upon increases in the Consumer Price Index (CPI). The CPI measures the inflation rate each year. If there were a 2% rise in this index, the policy owner's face amount would increase by 2% for the next year. A decrease in the index, however, will not result in lowering the policy's death benefit. cost of living adjustment (COLA) rider can provide increases in the amount of insurance protection without requiring the insured to provide evidence of insurability. With whole and term life insurance, a COL typically takes shape as an increasing term rider attached to the base policy. Universal life insurance policies already have such a high degree of flexibility that a COL is not sensible.

Uniform Simultaneous Death Act (USDA)

This states that if the insured and the primary beneficiary die at approximately the same time, in a common accident, with no clear evidence as to who died first, the law will assume that the primary died first. Therefore, the death benefit proceeds are paid to the contingent beneficiaries.

► ALTERNATIVE DISABILITY INCOME

Those who do not purchase disability income protection, whether from an individual policy or a group plan, are utilizing alternatives to disability income insurance, such as: Savings Borrowing money from others Depending on a partner's income Liquidate assets However, all these options listed above may not be sufficient enough to cover all losses caused by the disability. For example, a spouse's income may not be sufficient enough to cover all medical and house expenses. Also, no one is willing to lend money to an individual without an income. As you have learned in this chapter, the financial impact of total disability may be worse than the financial impact of death. While death eliminates the income of the deceased, disability can also eliminate that income but place additional financial burdens on the immediate family with regard to continuing and additional expenses. Therefore, any sound financial plan for an individual and family should include disability income protection.

► CHARACTERISTICS OF HEALTH INSURANCE (Health and Accident)

Though closely related to life insurance in purpose, health insurance differs from life insurance in several important ways. A review of the distinguishing characteristics of health insurance will set the stage for a more in-depth discussion to follow in later chapters. Renewability Provisions -Life insurance (particularly whole life insurance) and annuities are characterized by their permanence. These policies cannot be cancelled by the insurer unless the policyowner fails to make a required premium payment. Even term life policies are guaranteed effective for the duration of the term, as long as premiums are paid. However, Health insurance is not as permanent in nature. Health insurance policies may contain any one of a wide range of renewability provisions, which define the rights of the insurer to cancel the policy at different points during the life of the policy. There are five principal renewability classifications: cancellable, optionally renewable, conditionally renewable, guaranteed renewable, and noncancelable. Generally speaking, the more advantageous the renewability provisions to the insured, the more expensive the coverage. -Every individual or blanket family hospitalization policy, except group plans, covering less than 10 persons, must be renewable at the option of the policyholder unless sufficient notice of nonrenewal, generally, 30 days is given to the policyholder in writing by the insurer. Premium Factors -Like life insurance, health insurance is funded by the regular payment of premiums. Unlike life insurance, there are relatively few payment options available with a health policy. For example, health policies do not offer any sort of limited payment option, as one would find with a 10-year pay or paid-up at 65 life policy. Health insurance policies are paid for on a year-by-year basis. Except for the noncancelable type of policy cited previously, health insurance premium rates are subject to periodic increases. Health premiums can be paid under one of several different payment modes, including annual, semiannual, quarterly, and monthly. Monthly premiums are often paid through some form of preauthorized check method, by which the insurer automatically obtains the premium directly from the policyholder's checking account. -There are various factors that enter into premium calculations for health insurance. These include interest, expense, types of benefits, and morbidity. Morbidity is the expected incidence of sickness or disability within a given age group during a given period of time. It is to health insurance what mortality is to life insurance. Other health insurance premium factors are claims experience, age, sex, and occupation of the insured. Participating Versus Nonparticipating Policies -Health insurance policies may be written on either a participating or nonparticipating basis. Most individual health insurance is issued on a non-participating basis. Group health insurance is generally participating and provides for dividends or experience rating. -Group health plans issued by mutual companies usually provide for dividends, while stock companies frequently issue experience-rated plans. A group policy that is experience-rated may make premium reductions retroactive for 12 months. Premium increases for such policies are not retroactive. Experience-rated refunds may be contingent upon renewal of the master policy, but the payment of dividends usually is not contingent upon renewal. Cost-accounting formulas are complex and vary from insurer to insurer. The two major factors that influence whether or not dividends or experience-rated refunds are payable are expenses and claims costs of the insurer. If these cost items are less than anticipated, the group policyowner benefits by receiving a dividend or refund credit. If expenses and claims costs are higher than expected, the group policyowner may not qualify for a dividend or refund credit. Cost Sharing Cost sharing is a general term for the share of costs for services that a plan or health insurance covers that you must pay out of your own pocket, sometimes called out-of-pocket costs. Some examples of cost sharing are copayments, deductibles, and coinsurance. Other costs, including premiums and penalties you may have to pay or the cost of care a plan does not cover usually are not considered cost sharing. Out-Of-Pocket Maximum The out-of-pocket maximum is the most an insured has to pay for covered services in a plan year. After they spend this amount on deductibles, copayments, and coinsurance, their health plan pays 100% of the costs of covered benefits. The out-of-pocket limit does not include monthly premiums. It also does not include money spent for services the plan does not cover. Claims -The role of the health insurance claims examiner differs somewhat from that of the life insurance claims examiner. In the case of life insurance, most claims are fairly well defined-the amount of insurance coverage is readily determined by the policy and benefits are payable if the insured has died. With health insurance, the claims process is not as clearly defined. Medical expense insurance, for example, is typically a reimbursement contract. This means the benefits received by the insured are not fixed but instead dependent on the amount of the loss. The policy exists to reimburse the insured for the amount of loss sustained, up to the policy limits. This reimbursement is normally exempt from income taxes as it returns the insured to their previous financial condition. -This is in contrast to life insurance, AD&D, and disability income insurance that are all valued contracts, which pay the amount stated in the contract if a defined event, such as death or disability occur. The health claims examiner must also decide if a loss has actually occurred. This is especially challenging in disability income cases, where a subjective assessment of "disabled" can create misunderstandings. Assignment of benefits to the health care provider makes accident and health insurance claim handling more convenient to the insured. Reserves Reserves are set aside by an insurance company and designated for the payment of future claims, this is called unpaid claim reserve. Also, part of each premium is designated for the reserves, this is called unearned premium reserve. Subrogation Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss. Loss of Coverage Loss of minimum essential coverage usually counts as a qualifying event that triggers a special enrollment period. If someone loses their plan, they will have a chance to enroll in a new plan, either on or off the marketplace exchange. Events That May Terminate Insurance Plan -Your insurer leaves the marketplace -You leave your job (group health) -Divorce or legal separation -Death -A Special Enrollment Period (SEP) begins sixty days before your plan's termination date, so it's possible to get a new ACA compliant plan without gap in coverage.

1970: Fair Credit Reporting Act

To protect individual's right to privacy, federal gov passed this act, which is the authority that requires fair and accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about any investigations that are being made upon completion of application. If a consumer report is used to deny coverage or charge higher rates, the insurer must give the applicant the name of the reporting agency conducting the investigation

INDIVIDUAL RETIREMENT PLANS

Traditional IRA An individual retirement account, commonly called an IRA, is a means by which individuals can save money for retirement and receive a current tax break, regardless of any other retirement plan. Basically, the amount contributed to an IRA accumulates and grows tax-deferred. IRA funds are not taxed until they are taken out at retirement. Depending on the individual's earnings and whether or not an employer-sponsored retirement plan covers the individual, the amount the individual contributes to a traditional IRA may be fully or partially deducted from current income, resulting in lower current income taxes. IRA Participation -Anyone under the age of 70 1/2 who has earned income may open a traditional IRA and contribute up to the contribution limit or 100% of compensation each year, whichever is less. A non-wage-earning spouse may open an IRA and contribute up to the limit each year. -Since 2002, people who are age 50 and older have been allowed to make "catch-up" contributions to their IRAs, above the scheduled annual limit, enabling them to save even more for retirement. These catch-up contributions can be either deductible or made to a Roth IRA. Deduction of IRA Contributions -In many cases, the amount an individual contributes to a traditional IRA can be deducted from that individual's income in the year it is contributed. The ability of an IRA participant to take a deduction for their contribution rests on two factors: ---Whether or not an employer-sponsored retirement plan covers the participant ---The amount of income the participant makes. -Individuals who are not covered by an employer-sponsored plan may contribute, up to the annual limit, to a traditional IRA and deduct from their current income the full amount of the contribution, no matter what their level of income is. Married couples who both work and have no employer-sponsored plan can each contribute and deduct up to the maximum each year. Individuals who are covered by an employer-sponsored plan are subject to different rules regarding the deductibility of traditional IRA contributions. For them, the amount of income they make is the determining factor: the more they make, the less IRA deduction they can take. Do not confuse the deductibility of contributions with the ability to make contributions. Anyone (if you turned 70 ½ after December 31, 2019, per the new Secure Act) who has earned income (as well as a non-wage-earning spouse) can contribute to a traditional IRA. However, the level of income and participation in an employer plan may affect the traditional IRA owner's ability to deduct the contributions. IRA Funding An ideal funding vehicle for IRAs is a flexible premium fixed deferred annuity. Other acceptable IRA funding vehicles include bank time deposit open accounts, bank certificates of deposit, insured credit union accounts, mutual fund shares, face amount certificates, real estate investment trust units, and particular US gold and silver coins. Traditional IRA Withdrawals -Because the purpose of an IRA is to provide a way to accumulate retirement funds, there are several rules that discourage traditional IRA owners from withdrawing these funds prior to retirement. By the same token, traditional IRA owners are discouraged from perpetually sheltering their accounts from taxes by rules that mandate when the funds must be withdrawn. -Traditional IRA owners must begin to receive payment from their accounts no later than April 1 following the year in which they reach age 72 (per the Secure Act of 2019) if they turned 70 ½ after December 31, 2019). The law specifies a minimum amount that must be withdrawn every year. Failure to withdraw the minimum amount can result in a 50% excise tax that will be assessed on the amount that should have been withdrawn. -With few exceptions, any distribution from a traditional IRA before age 59 1/2 will have adverse tax consequences. In addition to income tax, the taxable amount of the withdrawal will be subject to a 10% penalty (similar to that imposed on early withdrawals from deferred annuities). Early distributions taken for any of the following reasons or circumstances will not be assessed the 10% penalty: if the owner dies or becomes disabled, if the owner is faced with a certain amount of qualifying medical expenses, to pay for higher education expenses, to cover first time home purchase expenses (up to $10,000 and must not have made a principal home purchase in the last two years), to pay for health insurance premiums while unemployed, or to correct or reduce an excess contribution. -At retirement or any time after age 59 1/2, the IRA owner can elect to receive either a lump-sum payment or periodic installment payments from his or her fund. Traditional IRA distributions are taxed in much the same way as annuity benefit payments are taxed. That is, the portion of an IRA distribution that is attributed to nondeductible contributions is received tax-free. The portion that is attributed to interest earnings or deductible contributions is taxed. The result is a tax-free return of the IRA owner's cost basis and a taxing of the balance (interest). -If an IRA owner dies before receiving full payment, the remaining funds in the deceased's IRA will be paid to the named beneficiary. -Suppose the IRA owner is a military reservist called to active duty (between September 11, 2001, and December 31, 2007) for more than 179 days or an indefinite period. In that case, the 10-percent early-withdrawal penalty does not apply. However, regular income taxes will apply. -Suppose the IRA owner is a firefighter, policeman, or an emergency medical technician (EMT) with a pension or retirement plan who retires after age 50. In that case, he or she is also exempt from the penalty tax.

Service Provider: Preferred Provider Organization (PPO)

Under a PPO arrangement, an employer or union that is desiring healthcare services will obtain price discounts or special services from certain health care providers in exchange for referring its employees or members to them. PPOs can be organized by employers or health care providers, and the specific services provided are in the contract. Insurance companies can also contract with PPOs to offer services to insureds.

Group Insurance versus Individual Insurance

Underwriting: a. In an individual policy, the insured must prove they are insurable. b. In group insurance, the group must meet various criteria, but the insureds are not individually underwritten. Policy ownership: a. Traditionally with individual insurance, the insured is also the policy owner. While there may be instances of third-party ownership, this is not common. b. With group insurance, the insured is rarely the policy owner. There is one master policy owned by the employer or plan sponsor.i. --Employers or plan sponsors receive the master policy, and as such, are the policy owner or contract holder.ii. --Employees or plan participants receive the certificates of insurance (not individual policies), and as such, are certificate holders. Policy type a. Group life insurance is always considered temporary insurance. Typically, annually, renewable term is used, which provides a fixed amount of coverage throughout the contract. b. Individual insurance can be any of the previously discussed temporary or permanent insurance products. c. Whenever a person converts their group insurance to individual insurance, they are always converting temporary protection to permanent protection. Cost a. Individual insurance policies are considerably more expensive for the insurer to issue (underwrite, commission, billing, maintenance, etc.). As we've learned, these administrative costs are passed on to the customer, making individual policies more expensive to purchase. b. Group insurance policies are substantially less expensive for the insurer to underwrite, issue, and maintain. As such, group insurance is much cheaper for the customer to purchase. c. In some cases, the employer or sponsor may pay a substantial portion or all of the premium cost for the group insurance policy. With individual insurance, the customer (policy owner) is always responsible for all of the premium cost. --Note: Since the individual does not own or control the policy, they are issued a certificate of insurance (sometimes called certificate of coverage and benefits) to serve as evidence of an employee's coverage. The actual policy, which is called the master policy, is issued to the employer, who becomes the policyholder.--

CLASSIFICATION ACCORDING TO DISPOSITION OF PROCEEDS (ANNUITY PAYMENT/SETTLEMENT OPTIONS)

Unlike a term life or whole life insurance policy, an annuity is not a contract that pays a guaranteed death benefit. When determining the income to be paid to the annuitant, the insurer utilizes a mortality table with an extra element which is referred to as a survivorship factor. An annuity may also be described according to the life payout period or life contingency settlement option selected. Let's analyze the various options: STRAIGHT LIFE ANNUITY -This contingency option—also referred to as a pure life annuity or "life" annuity—is classified according to the period during which the annuitant will receive income. If a straight life settlement option is chosen, once it commences making payments, the recipient will continue to receive payments for her life with no refund paid to her family or any beneficiary upon her death. This settlement option exposes the annuitant to the most significant amount of risk since there's no survivorship (i.e., no refund), but it also provides the annuitant with the highest payout of all options. The purpose of a straight life annuity is to protect against an annuitant outliving her income. This means that a straight life annuity protects against superannuation. (i.e., using up income due to longevity). -Insurers that pay out under life annuities may suffer adversely if there's a sudden decrease in the mortality rate. In other words, people are living longer and, therefore, insurers are paying life incomes longer. In addition, since women have a longer life expectancy than men, monthly payments would be smaller to a female if all other things are equal. -For example, Joe and Joan are twins and inherit an equal amount of money from their favorite aunt. If they both purchase an annuity with the funds and each contract includes the same life income option, Joe's monthly income payments from the annuity contract will be higher since his life expectancy is shorter than Joan's. ANNUITY (PERIOD) CERTAIN An annuity certain or period certain is a description of income or installments for a fixed period as decided upon by the owner. This means that the monthly income will be paid for a specified period only (i.e., not for life). Payments will cease after the specified period, even if the annuitant is still alive. However, if the annuitant dies prior to the end of that period, payments continue to the designated beneficiary for the remainder of the specified period. For example, let's say at age 60 Joe purchases an annuity period certain for 20 years. Joe's annuity payments will cease at age 80 (20 years later), even if he is still alive. However, if Joe dies at age 70 (after 10 years), his family (or designated beneficiary) will continue to receive his payments for 10 more years. STRAIGHT LIFE ANNUITY WITH PERIOD CERTAIN -A life annuity with a period certain pays a guaranteed minimum benefit (i.e., income) for the annuitant's life or for a specified period, whichever is longer. This means that the contract will pay a survivor benefit if the annuitant dies before the end of the period certain (e.g., 10 years). In other words, the annuitant or survivors are entitled to a guaranteed income for at least a specified number of years. -For example, let's say at age 60 Joe purchases a life annuity with period certain for 20 years. Joe will continue to receive annuity payments for as long as he is alive. He cannot outlive his payments. If Joe dies at age 70 (after 10 years), his family (or designated beneficiary) will continue to receive his payments for 10 more years. However, if Joe dies at age 85 (after 25 years), payments will cease, and his family (or designated beneficiary) will not receive any of the proceeds. LIFE WITH REFUND OPTION With a life with refund annuity option, the contract owner makes premium payments to the insurer throughout his life, but the contract also assures the return of the original amount paid into the annuity contract (i.e., the principal). If the annuitant dies before the principal is distributed, the beneficiary receives the remaining amount. Due to this guarantee, the premium for a refund annuity plan is generally higher than other annuity plans. There are two life with refund options available, the installment refund option and the cash refund option. ---INSTALLMENT REFUND OPTION: The installment refund option will pay the beneficiary the same monthly income benefit that the annuitant was receiving until the remaining principal is depleted. ---CASH REFUND OPTION: The cash refund option will pay the remaining principal to the beneficiary in one lump sum. [EXAM TIP: Remember an annuity certain guarantees payments will be made for at least a certain period of time. A refund annuity guarantees the entire principal will be depleted.]

Alternative life insurance polcies

Variable life insurance contracts do not make any promises as to either interest rates or minimum cash values. What these products do offer is the potential to realize investment gains that exceed those available with traditional life insurance policies. This is done by allowing policyowners to direct investment of funds that back their variable contracts through separate account options. By placing their policy values into separate accounts, policyowners can participate DIRECTLY in the account's investment performance, which will earn a variable (as opposed to a fixed) return. Insurer transfers the investment risk to the policyowner, so variable insurance products are considered SECURITIES CONTRACTS as well as insurance contracts. So, They are regulated by insurance regulation and the (SEC) To sell variable insurance products, you must have FINRA license and also NASD

Free Look provision

When a policy is delivered, the new owner possesses the ability to review the contract for a specified period of days. If the new policy owner decides not to keep the policy, they may return it to the insurer as long as this is accomplished within a specified number of days from the delivery date. . This provision allows the policy owner to return the policy for a full premium refund without giving a reason to the insurer.

Variable Whole life

With this policy, premium payments are fixed. Part of the premium is placed into a separate account, which is invested in a stock, bond or money market fund. The death benefit is guaranteed, but the cash value of the benefit can vary considerable according to the ups and downs of the stock market. Your death benefit can also increase if the earnings of that separate fund increase. Variable insurance products do NOT guarantee contract cash values, and it is the policyowner who assumes the invested risk. Variable life insurance contracts do not make any promises as to either interest rates or minimum cash values. What these products do offer is the potential to realize investment gains that exceed those available with traditional life insurance policies. This is done by allowing policyowners to direct investment of funds that back their variable contracts through separate account options.

Managerial System

With this system, branch offices are established in several locations. Instead of a general agent (GA) running the agency, a salaried branch manager is employed by the insurer. The branch manager supervises agents working out of that branch office. The insurer pays the branch manager's salary and pays him a bonus based on the amount and type of insurance sold and the number of new agents hired.

►NAIC MODEL HEALTH INSURANCE POLICY PROVISIONS

Years ago, the National Association of insurance Commissioners (NAIC) developed a Uniform Individual Accident and Sickness Policy Provisions Law model. Almost all states have adopted this model law or similar legislation or regulations. The purpose of the NAIC law was to establish uniform or model terms, provisions, and wording standards for inclusion in all individual health insurance contracts. Twelve Mandatory Policy Provisions In accordance with the NAIC model law, there are 12 mandatory provisions that are required to be in all health insurance contracts. These are as follows: 1. Entire Contract Like its counterpart in a life insurance policy, the entire contract provision in a health insurance policy protects the policyowner in the following ways: -The entire contract includes the actual policy and the application -It states that nothing outside of the contract (the contract includes the signed application, endorsements and any attached policy riders) can be considered part of the contract -It also assures the policyowner that no changes will be made or will any of the contact's provisions be waived after it has been issued -Any change to a policy must be made with the approval of an executive officer of the insurance company whose approval must be endorsed on the policy or attached in a rider 2. Time Limit on Certain Defenses/ Incontestability Under the time limit on certain defenses provision, the policy is incontestable after it has been in force a certain period of time, usually two years. This is similar to the incontestable clause in a life insurance policy. Unlike life policies, a fraudulent statement on a health insurance application is grounds for contest at any time, unless the policy is guaranteed renewable. In addition, the policy may not be voided, deny claims or even reduce claims solely based on pre-existing conditions. -An insurance company can usually contest the information contained in an accident and health application (normally for a 2-3 year period) starting on the date the insurance company dates the policy 3. Grace Period -The policyowner is given a number of days after the premium due date during which time the premium payment may be delayed without penalty and the policy continues in force -If an insurer pays an individual accident and health insurance claim during a policy's grace period, the amount of unpaid premium may be subtracted from the reimbursement -Depending on the state, the minimum grace periods typically specified are 7 days for policies with weekly premium payments (i.e., industrial policies), 10 days for policies with premiums payable on a monthly basis, and 31 days for other policies -The effect of nonpayment of premium before the expiration of a grace period will cause a policy lapse. 4. Reinstatement Under certain conditions, a policy that has lapsed may be reinstated. Reinstatement is automatic if the delinquent premium is accepted by the company or its authorized agent and the company does not require an application for reinstatement. If the insurer takes no action on the application for 45 days, the policy is reinstated automatically. To protect the company against adverse selection, losses resulting from sickness are covered only if the sickness occurs at least 10 days after the reinstatement date. However, accidents are covered immediately upon reinstatement. 5. Notice of Claim -The notice of claim provision describes the policyowner's obligation to the insurer to provide notification of loss within a reasonable period of time. Typically, the period is 20 days after the occurrence or a commencement of the loss, or as soon thereafter as is reasonably possible. -For disability claims, an insurer may request from the insured a notice of claim every 6 months to ensure that the disability is still continuing 6. Claim Forms It is the company's responsibility to supply a claim form to an insured within 15 days after receiving notice of claim. If it fails to do so within the time limit, the claimant may submit the claim in any form, which must be accepted by the company as adequate proof of loss. 7. Proof of Loss The statement that an insured must give an insurance company to show that a loss actually occurred is a Proof of Loss. After a loss occurs, or after the company becomes liable for periodic payments (e.g., disability income benefits), the claimant has 90 days in which to submit proof of loss. If, however, the insured is legally incapable of providing proof of loss within 90 days, they are able to furnish proof no later than a year. Payments that are not considered periodic must start paying immediately after receiving proof of loss. 8. Time of Payment of Claims The time of payment of claims provision provides for immediate payment of the claim after the insurer receives notification and proof of loss. If the claim involves disability income payments, they must be paid at least monthly. 9. Payment of Claims This provision states that health insurance benefits must be payable to the insured. It also allows payment of benefits directly to a hospital or provider of medical services. If a death benefit is provided under a health insurance policy this provision provides for payment of benefits to a named beneficiary. If a beneficiary is not named, then the benefits will go to the insured's estate. If the beneficiary is a minor, then the insurer must pay the benefits to another relative by blood or marriage. This benefit amount may not exceed $1,000. 10. Physical Exam and Autopsy The physical exam and autopsy provision allows the insurer, at its own expense, the right to require a physical examination or autopsy of an insured prior to the issuance of a policy or the payment of benefits, unless it's forbidden by state law. 11. Legal Actions The legal action provision states that no legal action can be brought against an insurer (by the insured) until 60 days after written proof of loss has been furnished to the insurer. The purpose of the Legal Action provision is to provide the insurer with adequate time to research a claim. -Most states also adopted the NAIC recommendation that any lawsuit brought against the insurer by the policyholder must commence within three years from the date proof of loss was furnished. However, Some states (for example, Florida) have extended the time limit for bringing legal action against the insurer to five years. 12. Change of Beneficiary The insured, as policyowner, may change the beneficiary designation at any time if the beneficiary is revocable. However, an irrevocable designation may not be changed without the written consent of the beneficiary.

Fixed/Level Premium

a concept of averaging what would be the total single premium for a policy over periodic payments. More periodic payments = higher total premium.

Conditional contract

a condition is a requirement specified in the contract, which limits the rights provided by the contract. An insurance contract is conditional, the contract includes conditions that must be upheld by the insured to qualify for indemnification. The insurer's promise to pay benefits depends on the occurrence of an event covered by the contract. If the event does not materialize, no benefits are paid.

Adhesion

a contract of adhesion describes a contract that has been prepared by one party(insurance company) with no negotiation between the applicant and insurer. The applicant adheres to the terms of contract on a take it or leave it basis when accepted

Endowment Policy

a contract providing for payment of the face amount at the end of a fixed period, at a specified age of the insured or at the insured's death before the end of the stated period. Cash value grows at a rapid pace so the policy matures or endows at a specified date. These contracts pay a death benefit to a named beneficiary upon the death of an insured during a specified endowment period. Endowment pays at the earlier of death, or at the end of a specified period. Similar to whole life policies with accelerated maturity dates. At maturity date, the cash value has grown to match the face amount, just like what occurs at age 100 with a whole life policy. Due to rapid cash value buildups, endowment policies have high premiums, the shorter the policy, the higher the premiums. Endowment policies are purchased to provide a living benefit for a specified future time for retirement, college, etc.

Surrender Cost Index

a cost comparison calculation formula used to determine the average cost-per-thousand for a policy that is surrendered for its cash value. It aids in cost comparisons if the policyowner plans to surrender the policy for its cash value in ten or twenty years.

Lump Sum Option:

a death settlement option where the death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is considered the automatic (or "default") option for most life insurance contracts.

Interest Only Option:

a death settlement option where the insurance company holds the death benefit for a period of time and pays only the interest earned to the named beneficiary. A minimum rate of interest is guaranteed, and the interest must be paid at least annually.

Net Payment Cost Index

a formula used to determine the actual cost of a policy for a policyowner. It helps the consumer compare costs of death protection between policies that will be held for ten or twenty years. The net payment cost index provides the policy owner an estimate of their average annual premium outlay, adjusted for the time value of money. The net payment cost index is useful if one's primary concern is the amount of death benefits provided in the policy, and is not as concerned with the build-up of cash value. It helps compare future costs, such as in 10 to 20 years, if one continues to pay premiums and does not take the policy's cash value.

Eligible Groups

a group of people cannot form an organization whose primary purpose is to secure insurance coverage for the group. Businesses are operated in order to produce a product or provide a service and earn a profit, and therefore, are eligible to purchase group insurance. A group of persons who are engaged in occupations of a common industry may form an association (i.e., all hat manufacturers) and later purchase group coverage. -Groups eligible to participate in group insurance exam: Single employee groups (employer) Multiple employee groups (employment-related) Labor Unions Trade Associations Credit/Debit groups Fraternal Organizations Customer groups (such as credit union members) Trustee Groups (Established by two or more employers or labor unions) -Eligibility of Group Members - (employees) The employee must be full time and actively working. If contributory, employees must approve of automatic payroll deduction. New employee probationary period is usually 1 to 6 months. The employee has 31 days during the enrollment period to sign up. Otherwise, they may need to provide evidence of insurability.

Certificate of Authority

a license issued to an insurer by a department of insurance (or equivalent state agency) which authorizes that company to conduct insurance business in that particular state.

Surplus Lines Insurance

a nontraditional insurance only available from a surplus lines insurer. They offer coverage for substandard or unusual risks not available through private or commercial carriers (hole in one insurance, nonappearance coverage; cancelled event expenses)

Single Premium Funding:

a policy funding option where the policyowner pays a single premium that provides protection for life as a paid-up policy.

Whole Life- Modified Endowment Contract (MEC)

a policy that exceeds the max amount of premium that can be paid into a policy and still have it recognized as a life insurance contracts. A MEC does not meet the 7 day pay test and is considered over funded according to the IRS, as the policy will lose favorable tax treatment. The test is designed to discourage premium schedules that would result in a paid up policy before the end of the 7 year period. Not truly a life insurance policy. Once a contract is declared a MEC it can never revert back to ordinary insurance, unless there is a material change in the contract and the 7-pay test will apply again.

Whole Life - Modified

a policy where the premium stays fixed for the first 5 years, and then increases in year 6 and stays level for the remainder of the policy. Modified whole life insurance has all of the same features of any other whole life insurance excepts the insurance company cuts you a break on premium for the first few years. Ex) college student can afford this since it is cheaper when she is young, this will still provide all the benefits of whole life, but give her a discount on premium while she is in college, after the first five years of policy she will be out of school and able to afford the normal premium cost on year 6 and then remains level for the remainder of the policy.

Net (Single) Premium:

a premium calculation used to calculate an insurer's policy reserves factoring in interest and mortality.

Graded Premium:

a premium funding option characterized by a lower premium in the early years of the contract, with premiums increasing annually for an introductory period. After the introductory period, the premium jumps to an amount higher than what the initial level premium would have been. It then remains fixed or constant for the life of the policy.

Modified Premium:

a premium funding option characterized by an initial premium that is lower than it should be during an introductory period of time (usually the first three to five years). After this time, the premium will increase to an amount greater than what the initial level premium would have been and then remains level or constant for the life of the policy.

Convertible term

a provision that allows policyowners to to convert their term insurance into permanent policies without showing proof of insurability, this temporary coverage can be changed to permanent coverage without evidence of insurability. Ex) if you take out term insurance policy when you are young to take advantage of your good health and the policy's lower premium, but want the option to convert to a permanent one for final expense benefits once your finances improve, you would want a convertible term life policy. Most important factor to consider when determining to convert term insurance at a certain age is the premium cost. Attained Age: the age you are converting your insurance policy. Original Age: premiums will be lower using this compared to the attained age, but the owner must deposit an amount equal to the difference between what they would have spent on the policy had they started with whole life and what they actually spent on term life plus interest. This deposit guarantees lower premiums and higher cash values.

Stock Insurance Company

a stock insurance company is an insurance company owned and controlled by a group of stockholders (or shareholders) whose investment in the company provides the safe margin necessary in the issuance of guaranteed, fixed premium, nonparticipating policies

Target Premium

a suggested premium used in Universal Life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life, it may give an indication of what will be needed to maintain the policy. Broadly speaking however, all life insurance policies fall into three basic kinds of coverage: ordinary insurance, industrial insurance, or group insurance

Target premium

a suggested premium used in Universal Life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the policy.

Term rider

a type of life insurance product with covers children under their parent's policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is ALWAYS level term, and it is cheaper than each family member getting their own policy. You can attach everyone to the main policy, term riders can also allow an applicant to have excess coverage by adding an additional term rider for them to the main policy

Warranty

a warrant is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract, and if found to be untrue, can be grounds for revoking the contract.

Insurance Policy

a written contract in which one party promises to indemnify another against loss that arises from an unknown event

reserves

accounting measurement of an insurer's future obligations to its policyholders. Classified as liabilities on the insurance company's account statements since they must be settled at a future date.

Policy Summary

addresses the specific product being presented for sale. It identifies the agent, the insurer, the policy, and each rider. It includes information about premiums, dividends, benefit amounts, cash surrender values, policy loan interest rates, and life insurance cost indexes of the specific policy being considered.

Decreasing Term Rider

adds an additional decreasing death benefit for a predetermined amount of time at a predetermined cost to the existing face value of a permanent policy. The cost of a decreasing term rider is less than the cost of a level term rider because the benefit amount decreases each year. or example, Mary would like to add a 20-year decreasing term policy to her whole life insurance to cover the $100,000 balance of her mortgage. The insurance company may design the rider to start with a face value of $100,000 and decrease by $5,000 a year for a fixed additional premium of $20/month in addition to the premium for the permanent whole life policy. However, to discourage Mary from canceling the rider as the coverage decreases, the insurer may design the premiums so that they are over after 15 of the 20 years, or the insurer may design the policy so that the face value stops decreasing after 15 years and remains at a fixed $25,000 for the final five years.

Life insurance death benefits - beneficiaries

aker and is responsible for handling, naming, or changing a beneficiary. There are few restrictions on who may be named a beneficiary of a life insurance policy. However, in the underwriting process, the underwriter may consider the issue of insurable interest. When the policyowner (other than the insured) lists themselves as the beneficiary, they will require proof of insurable interest. While not a full list, examples of acceptable beneficiaries include: Individuals (a person identified by name and relationship): "my spouse Mary," "my son Tom," etc. Class designations: a group of individuals such as the "children of the insured," "all of my siblings." Businesses: Businesses often have life insurance policies on the owner or key person to help mitigate the expense involved in finding a replacement. Charities: As a lump sum donation or to create continued funding such as a scholarship fund. Trust: Provides management of the proceeds. Estate: While a policyowner could choose to list an estate as a beneficiary, that is usually not advisable. Changing a beneficiary: two standard methods- the filing or recording method and the endorsement method. -The filing method: this is the predominant method used and requires that the policyholder notify the insurer in writing of the desired change. The effective date of the change is the date of the request. Some insurers require that a witness sign the request. -Endorsement method: the policy is returned to the insurer so the new beneficiary designation can be added to the policy, the effective date of the change is the date the new policy is printed. A Revocable Beneficiary may be changed or removed by the policyowner at any time without notifying or getting permission from the beneficiary. An Irrevocable Beneficiary may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy. Therefore, the policyowner may not exercise certain rights (i.e., assignment, policy loans, surrender, etc.) without the consent of the beneficiary. In addition, an irrevocable beneficiary has the right to receive a copy of the policy if they desire.

National Association of Insurance Commissioners (NAIC)

all state insurance commissioner or directors are members of the NAIC. Regularly examine aspects of the insurance industry and recommend applicable insurance laws and regulations. -Encourage uniformity among the state insurance laws and regulations -assist in the administration of those laws and regulations by promoting efficiency -Protect interests of policyowners and consumers -preserve state regulation of the insurance business

State Guaranty Associations

all states have established guaranty funds or guaranty associations to support insurers and protect consumers if an insurer becomes insolvent (unable to pay off the debts) they are funded by insurance companies through assessments and exist to protect consumers.

Do Not Call Implementation Act

allows consumers to include their phone numbers on the list to which telemarketers cannot make solicitation calls. Calls made on behalf of charities, political organizations and surveys are exempt. Insurance calls are not exempt from the do not call registry

Exchange Privilege Rider (Substitute Insured Rider)

also known as the substitute insured rider, outlines the conditions and processes for changing the insured of an insurance policy. This rider is typically limited to a business policy covering a key employee or executive. The goal is to simplify updating the insurance policy when such an insured is no longer employed with the business. The exchange privilege rider allows for the policy to continue with the same face amount. However, the premiums are recalculated based on the new insureds age, sex, insurability, etc.

Agent

an agent represents themselves and the insurer at the time of application

Life Settlement

an agreement in which a policyholder sells or transfers ownership in all or part of a life insurance policy to a third party for compensation that is less than the expected death benefit of the policy.

Void Contract

an agreement without legal effect. Not a contract at all because it lacks one of the elements specified by law for a valid contract, a void contract cannot be enforced by either party. An insurer may also void an insurance policy if a misrepresentation on the application is proven to be material.

Policy rider or endorsement

an amendment added to an insurance contract that overrides terms in the original policy; endorsements may add or remove coverages, change deductibles, or revise any other policy feature

Adjuster

an insurance adjuster is a person who engages in investigative work to obtain info for adjusting, settling or denying insurance claims. An adjuster will primarily use claim forms, but may also be involved with investigations into an insured's identity, habits, conduct, business, occupation, honesty, integrity or credibility, etc. A public adjuster acts on behalf of or aids an insured with settling an insurance claim.

Mutli-line Insurer

an insurance company or independent agent that provides a one-stop-shop for businesses or individuals seeking coverage for all their insurance needs. Many large insurers offer individual policies for automobile, homeowner, long term care, life, health needs

Admitted Insurer or Authorized Insurer

an insurer who has received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state

Domestic Insurer

an insurer who lives/ has a main office in the same state where they are authorized

Foreign Insurer

an insurer whose principal office or home is in a different state from the state that they are transacting insurance business

Life Insurance Living benefits

an option for a policy owner to use some of the future death benefit proceeds before the insured's death. The policyowner (typically the insured) is the only party that can initiate a living benefit. Below is a review of the most common living benefits: Cash value: The primary living benefit that a whole life (permanent life) insurance plan possesses during the life of the policy is its cash value build-up. The cash that accumulates may be borrowed against or may be used as collateral. The cash value may also be utilized as supplemental retirement income or withdrawn for emergencies or other situations where cash is needed. Can result in additional fees, taxes, interest charges or reduction to death benefit. During the early policy years, the cash value of an insurance policy will typically be less than the premiums paid. Remember, the cash value is different from the insurance company's reserves, money set aside to pay future claims. Accelerated (death) Benefit: sometimes referred to as the terminal illness rider. allows the policyowner to access a portion of the death benefit if a physician certifies the insured as terminally ill (dead in two years), capped at 50% of the face value. The amount of benefit will be subtracted from the death benefit tax-free. Policy Dividends: a refund of part of the premium under a participating policy or a share of surplus funds. Mutual company insurers derive dividends from savings in mortality and expenses. The policyowner may use dividends for cash payments, to pay the insurance premium, to purchase additional paid-up whole life insurance, to purchase one-year term insurance, or as an investment to accumulate interest. Dividends do not reduce the death benefit. Viatical Settlement: allows someone with a chronic or terminal illness to sell their existing life insurance policy to a third party for a % of the face value. Mutual company insurers derive dividends from savings in mortality and expenses. The policyowner may use dividends for cash payments, to pay the insurance premium, to purchase additional paid-up whole life insurance, to purchase one-year term insurance, or as an investment to accumulate interest. Dividends do not reduce the death benefit. Life settlement: In many states, viatical settlements are being replaced by life settlements. A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Unlike viatical settlements, life settlements do not require the insured to be suffering from a chronic or terminal illness to sell and transfer the policy. With a life settlement, the policyowner may sell the policy to a life settlement firm for any reason. As with viatical settlements, a life settlement broker represents the policy owner and must hold an appropriate life settlement license. Disclosure requirements (e.g., right of rescission, fifteen days) are similar as well. Life settlement contracts do not include: An assignment of a policy as collateral for a loan; The making of a policy loan, or the paying of surrender benefits or other benefits, by the issuer of a policy with respect to that policy; A 1035 exchange of life insurance policies as described by the Internal Revenue Code; An agreement where all the parties are closely related to the insured by blood or law or have a lawful substantial economic interest in the continued life, health and bodily safety of the person insured, or are trusts established primarily for the benefit of such parties; or Legitimate corporate or pension benefit plans.

Reciprocal Insurer

an unincorporated organization in which all members insure one another

back end load

assessed when a policy is surrendered

Return of cash value rider (cash surrender value)

cash value buildup is not paid to a beneficiary in addition to the death benefit unless this specific benefit rider is added to the policy. Policyowner may surrender the policy (cancel coverage) and receive the amount of the cash value. The policyowner may borrow against the cash value and receive some of this equity while keeping the policy in force, but it's considered a loan and interest is charged for it.

Mutual Insurance Company

characterized by having no capital stock, being owned by its policy owners, usually issue participating insurance

Advance Premium Assessment Mutual

charges a premium at the beginning of the policy period. If the original premium exceeds the operating expenses and losses, the surplus is returned to the policyholders as dividends. If total premiums are not enough to meet losses, additional assessments are levied against (imposed on)_ the members

Assessment Mutual companies

classified by the way in which they charge premiums, different ways to distribute the loss

Monthly debit ordinary insurance

combination of industrial and ordinary insurance sometimes offered by home service companies (door to door) These policies allow for higher face amounts and higher premiums. Policies are usually paid monthly via mail or bank draft, but they may also be collected at the policyowner's home.

special use policies

combination or packaging of different policy types, designed to serve a variety of needs.

Equity Index Universal Life Insurance (Equity indexed life)

combines most features of traditional life insurance with potential of earned interest based on the upward movement of an equity index. This plan allows policyholders to link accumulation values to an outside equity index like S&P500. 80% to 90% of the premium is invested in traditional fixed income securities and the remainder of the premium is invested in contracts tied to a stipulated stock index. Characterized by guaranteed minimum interest rate, tax deferral of interest accumulations and policy loan access. Equity indexed life insurance contracts combine term life insurance with an investment feature, similar to a universal life plan. Death benefit amounts are based upon the coverage amount selected by the contract owner plus the account value.

Whole Life- Limited Pay

coverage remains on limited pay life policy until age 100 or death, even though the premium payments are limited to a certain period, the insurance protection extends until the insured's death. For ex) if you purchased 20 day pay-policy , premiums would need to paid for 20 consecutive years, after that, you would not be required to make any additional premium payments and your coverage would be guaranteed until death or age 100. Since the insurance company is receiving their money in larger premium payments, cash value builds quicker in a limited pay policy than in a straight life policy. After the premium paying period, the cash value continues to grow but more slowly since there is not premium money going to it.

Morbidity Rate:

demonstrates the incidence and extent of disability that may be expected from a given group of people.

annuity

designed to protect an individual against outliving her income. Primarily, an annuity is a savings-type vehicle that's used to set aside funds for the future. An annuity can be defined as the liquidation of an estate. This definition is the opposite of life insurance, which involves the immediate creation of an estate. Policy issuance and pricing of both term and whole life insurance is based, in part, on a mortality risk (i.e., mortality factor). However, an annuity is generally an investment product and does not require proof of insurability. The payment made to fund an annuity can be referred to as either a contribution or premium. If an annuity contract owner dies before income commences, there's a payment made to a beneficiary. The essential function of an annuity is the systematic reimbursement or liquidation of funds (i.e., savings) for a specified period or for life. An individual deposits or makes contributions to an annuity during the annuity's pay-in or accumulation period. During this phase, the individual is also referred to the policy or contract owner. The policy owner possesses contractual rights in the annuity contract when the contract is purchased. The annuity period begins once the contract owner starts receiving income. As soon as the insurer makes the first periodic payment, the contract owner is now referred to as the annuitant. Therefore, the annuitant is the person who receives monthly income from the annuity contract. The owner must also designate a beneficiary who will have access to the accumulated funds if the contract owner dies.

Comparative Interest Rate Method

determines the rate of return required on an investment account to yield the same return of a life insurance policy that has cash value. The amount spent on the term insurance plus the hypothetical investment account must be the same as the required premiums for permanent insurance. The face value of the temporary and permanent insurance products being compared must also be the same. The comparative interest rate is the rate of return required on the investment account, so the value of the investment is equal to the surrender value of the higher premium policy at a specific point (i.e., 30 years, death).

Documentation

ethical agent should document each client meeting and transaction. use fact finding forms and obtain the client's written agreement for the needs determined, products recommended, and decisions made.

Per capita (by the head)

evenly distributes benefits among all named living beneficiaries (all living children)

Per Stirpes (by the bloodline)

evenly distributes benefits amongst an insured's according to the family line, branch or root (children and grandchildren)

Concealment

failure of the applicant to disclose a known material fact when applying for insurance. Regardless of whether concealment is intentional or unintentional, the injured party has the right to rescind the insurance contract (rescission means null and void, null meaning invalid) The insurer must prove concealment and materiality. Materiality means, would the insurer have issued the exact same policy with the exact same terms had they have known the concealed facts at the time of application. Statute of Limitations to uncover false warranties, misrepresentations or concealment is 2 years from policy issue.

material misrepresentation

false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk

Voidable contract

for a reason satisfactory to the court, this contract may be set aside by one of the parties in the contract. For ex) a policyholder is failing to comply with a condition of the contract when they stop paying their insurance premium. As such, the contract is now voidable, and the insurance company has the right to cancel the contract and revoke the coverage.

National Conference of Insurance Legislators (NCOIL)

formed to help legislators make informed decisions on insurance issues that affect their constituents and declare opposition to federal encroachment (intrusion) of state authority to oversee insurance business, as authorized under the McCarran-Ferguson Act of 1945.

Producers (Key people within an insurance company)

full range of individuals who solicit insurance products to the public. 1: Agents who represent the insurer which sponsors them. 2:Brokers represent themselves and the insured. 3:Solicitors who represent and solicit insurance on behalf of an agent. 4: Service Representatives who are employees of an insurer. Producers are considered to be part of the sales department

Buyer's Guide

generic publication that explains life insurance in a way that average consumers can understand. It speaks of the concept in general terms and does not address the specific product or policy being considered.

Unearned Premium

includes the premium that has been paid by a policyowner for insurance coverage that has not yet been provided.

Universal Life Insurance (Alternative life insurance policies)

incorporates FLEXIBLE PREMIUMS and an ADJUSTABLE DEATH BENEFIT, part of the premium goes into an investment that grows and earns interest. You can borrow or withdraw your cash value. Universal life allows its plicyowners to determine the amount and frequency of premium payments and adjust the death benefit up or down to reflect changes in needs. This means that changes are made with relative ease by the policy owner and no new policies will need to be issued when changes are desired. A customer who wants a policy that gives them the most options and most control would be looking at this policy. Universal policies use gains to fun the cash value and give the policyowner options for flexible premiums and adjustable death benefits. To provide this flexibility, universal life unbundles/separates the basic components of a life insurance policy. Each month, a mortality charge is deducted from the policy's cash accumulation for the cost of the insurance protection. This mortality charge may include a company expense, or a loading charge. the universal life morality charge steadily increases with age even though the policyowner may pay a level premium, an increasing share of that premium goes to pay the mortality charge as the insured ages. This policy specifies the % of each premium that goes toward the insurance protection and that which is used ot build cash value. As premiums are paid and as cash value accumulates, interest is credited to the policy's cash value. This interest may be either the current interest rate declared by the company (and market conditions) or the guaranteed minimum rate, specified in the contract. If the cash value account is not large enough to support the monthly deductions, the policy TERMINATES *WHOLE LIFE can only allow a policyowners to get cash values through and policy LOAN or complete cash surrender of the policy's cash values (so then the policy will terminate) while UNIVERSAL LIFE allows for partial withdrawals through the policy's cash value account. With universal life, you can surrender the policy for the policy's cash value whenever you want but the company will assess a surrender charge unless the policy has been in force for a certain number of years, and the company must DISCLOSE the policy's surrender charges

liquidity

indicates a company's ability to make unpredictable payouts to policyowners

Treaty reinsurance

insurance contract between two insurance companies to show the sharing of risks assumed.

Group Life Insurance

insurance written for members of a group, such as employment, association or union. Coverage is provided to the members of that group under one master contract, and group is underwritten as a whole, not on each individual member, no evidence of insurability required.

Family plan policies (special use)

insure all family members under one policy, coverage is sold in units, the coverage on the spouse and children is level term insurance in the form of a rider, their coverage is usually convertible without insurability and additional (or future) kids are automatically included at no extra cost.

Industrial life insurance

issues very small face amounts, 1,000 or 2,000. Premiums are paid weekly and collected by debit agents, designed for burial coverage.

National Association of Insurance and financial advisors (NAIFA) and the National Association of health underwriters (NAHU)

life and health agents dedicated to supporting the industry and advancing the quality of service provided by insurance professionals. These organizations created a Code of Ethics detailing the expectations of agents in their duties toward clients

Ordinary Life Insurance

life insurance of commercial companies not issued on the weekly premium basis, made up of several types of individual life insurance, such as temporary (term) and permanent (whole)

Factors in premium calculation

life insurance premiums are calculated per $1,000 of coverage. factors that influence the gross premiums charged for life insurance are mortality, interest and expenses. -The mortality factor has the GREATEST effect on premium calculations or rate-making since it can vary greatly based on personal characteristics of an individual to be insured. Mortality factor is determined from a mortality table which provides an indication of the "probability of death" of an individual at a particular age. In order for a mortality table to be accurate, it must be based upon a large cross-section of individuals and time. Actuaries use this information to determine mortality data that will influence premiums. -Interest Factor: Insurance companies invest the premiums they receive in an effort to earn interest. This interest is one of the ways an insurance company can lower the premium rates. The interest factor is a REFLECTION of an insurer's return on their investments. -Expense Factor: also known as the loading charge or factor, derived from operating expenses, or funds the insurer "pays out." If a company isn't making a profit, they are probably going to raise premiums while companies exceeding profits will probably maintain premiums, or possibly even lower them. Additional premium factors: Age: The older the person, the higher probability of death and disability. Sex / Gender: Women tend to live longer than men, so their premiums are usually lower. Health: Poor health increases the probability of death and disability. Occupation: Hazardous job increases the risk of loss. Hobbies: High-risk hobbies also increase the risk of loss. Habits: Tobacco use presents a higher risk than nonsmokers. Benefits: Naturally, the higher the death benefit amount, the more the policy will cost. Additionally, living benefits (for example, the cash value in a whole life vs. no cash value in term) will also increase the policy cost. Options and Riders: Adding additional options and riders (for example, waiver of premium or guaranteed insurability) will also increase premium amounts. Premium Mode: The mode utilized by the policyowner allows the insurer to assess an extra charge if premiums are paid quarterly, semiannually, or monthly (i.e., anything other than on an annual basis). These additional modes available make it more convenient for the policyowner to pay premiums.

Industrial Insurer

make up a specialized branch of the industry, primarily providing policies with small face amounts with weekly premiums. Other names for industrial insurers include home service or debit insurers. Industrial Insurance is characterized by relatively small face amounts (1000-2000) with premiums paid weekly. Often marketed and purchased as burial insurance.

Legal purpose

means an insurance contract must be legal in nature and not in opposition to public policy

Excess Interest provision

means that the cash value will increase faster than the guaranteed rate if the insurer ears a greater return than the guaranteed rate. Therefore, an excess interest provision allows interest that is more than the policy's guaranteed rate of interest to be credited to the cash value account. There are two methods used for the excess interest provision. -Index-linked Method: The index-linked method credits the excess interest from earnings tied to an economic indicator (i.e., the consumer price index). -Portfolio Method: The portfolio method credits the excess interest in direct relation to the insurance company's earnings on its investments.

Reasonable expectations

means that the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide

Single-premium whole life

most extreme form of limited pay policies. Involves a large one time only premium payment at the beginning of the policy period, and then the coverage is completely paid for the full life of the policy. An immediate nonforfeiture value (cash value) is created. A large part of the premium is used to set up the policy's reserve. The policyowner will pay less for the policy than if the premiums were stretched over several years.

Buyer's Guide and policy summaries

most states require agents to deliver a buyer's guide to consumers whenever they solicit insurance sales. These guides explain the various types of life insurance products (including variable annuities) in a way that the average consumer can understand. Policy summary contains information about premiums, dividends, benefit amounts, cash surrender values, policy loan interest rates, and life insurance cost indexes of the specific policy being considered. Policy summary also contains cost indexes that help the consumer evaluate the suitability of the recommended product.

Policy Dividends

mutual insurers issue participating or par insurance policies and, as such, allow their policy owners the opportunity to receive dividends. Mutual companies can issue only participating policies. An insurance dividend is not considered taxable income since it is actually a return of an overpayment of premium. Therefore, insurance dividends are tax-exempt. most states require a policy that provides a choice of dividend options must include a statement that dividends are not guaranteed. At the end of each year, the insurance company will review the money it brought in (premium payments), the gain (interest) received on that money, the annual operating costs (loading expenses), and the claim expenses paid out (mortality). The mutual insurer that experiences excess surplus after paying claims and other operating expenses pays dividends to policyholders.

Fraternal Benefit Societies

nonprofit benevolent organizations that provide insurance to its members

Four essential elements in a contract

offer and acceptance consideration legal purpose competent parties

Competent party

one who is capable of understanding the contract being agreed to, all parties must be of legal competence (of age, mentally capable, and not influenced by drugs or alcohol)

Payor Rider

only added to a policy an adult purchased to cover the life of a child. if the premium payor (i.e., parent or guardian) dies or becomes totally disabled. The rider solely covers the premium payments for the policy. It does not provide any income or death benefit to the child. Do not confuse the payor rider with the guaranteed insurability rider. The guaranteed insurability rider may be added to a policy covering an adult or child and allows the insured to buy more insurance without a medical exam. The payor rider waives premiums or the cost of a policy covering a child.

Pure Assessment Mutual company

operates on the basis of loss sharing by group members. No premium is payable in advance. Instead, each member is assessed a portion of the losses that occur.

Settlement Options:

optional modes of settlement provided by most life insurance policies. Options include lump-sum cash, interest only, fixed-period, fixed-amount, and life income.

Viator:

original policyowner in a viatical settlement

Parole Evidence rule

parties must put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence. this rule minimizes the use of oral or written documents that are outside the written policy. Oral statements may not be used to counteract or nullify insurance contract provisions.

Fixed Amount Installment Option

pays a fixed death benefit in specified installment amounts until the principal and interest are exhausted.

Family income policy

pays income at the beginning of the insured's death and continues for a period specified from the date