Ch: 4

Defamation is the opposite of misrepresentation in the sense that it is any false, misleading or inaccurate information about another.

Defamation is any false, maliciously critical or derogatory communication - written or oral - that injures another's reputation, fame or character. Individuals and companies both can be defamed. Unethical producers practice defamation by spreading rumors or falsehoods about the character of competing producers or the financial condition of another insurance company

Policy replacement results from one of two possible motives

First, the producer genuinely may believe canceling one policy (or reducing its values) to replace it with another benefits the client. This can occur when an existing policy appears to be completely inappropriate or no longer meets the client needs, such as in a divorce or the death of beneficiaries. The second motive-the one that has resulted in investigations into the abuse of replacements-is the result of a producer's desire to generate new first-year commissions without regard to the client's needs. Producers are paid high first-year commissions, followed by lower subsequent renewal commissions. It is not unusual for a producer to receive up to 80% of the first year premiums as commission on life insurance policies.

Unfair Trade Practices Act

It gives the Chief Financial Officer the power to: •investigate insurance companies and producers •issue cease and desist orders •impose penalties on violators •seek a court injunction

Twisting also is referred to as "external replacement":

It involves illegally inducing a person to drop existing insurance to buy similar coverage with another producer or company. This often is associated with making false statements about another insurer or producer, an illegal act that also runs contrary to ethical market conduct.

regulation of ethical conduct in some states is called "marketing ethics."

Regulation of an insurance agent's ethical conduct is conducted through the Department of Financial Services.

churning -

a practice in which the policy values in an insurance policy are used to purchase another policy with the same insurer for the sole purpose of earning additional premiums or commissions. In cases involving churning, there is no demonstrable benefit to the insured with the new policy.

Buyer's Guide

is a generic form that talks about the type of insurance policy being sold and is intended to help the buyer choose the appropriate policy by improving understanding of the basic features of the policy.

Replacement by its broadest definition under the Society of Financial Services Professionals:

may involve an action which eliminates the original policy or diminishes its benefits or values. Examples of this are policy loans, taking reduced paid-up insurance or withdrawing dividends.

Twisting is

the unethical act of persuading a policyowner who currently has coverage through another insurer to reduce or drop a policy solely for the purpose of selling another policy without regard to possible disadvantages to the policyowner. By definition, twisting involves some kind of misrepresentation by the producer to convince the policyowner to switch insurance companies or policies

improper replacement is divided into two categories:

twisting and churning.

solicitation of insurance means any attempt to persuade someone to purchase an insurance product by:

•describing the benefits, premiums or rates of return; •inviting prospects to enter into a contract for an insurance product; •making recommendations concerning insurance products; •completing orders or applications for insurance products; or •comparing insurance products, advising on insurance matters, or interpreting policies or coverages.

misrepresentation is any misleading or inaccurate information regarding the insurer(s) the producer represents.

Misrepresentation occurs when a producer is effectively trying to make his or her products, insurer(s), or anything else the producer represents look more favorable to an applicant than what it actually is. Therefore, any written or oral statement that does not accurately describe a policy's features, benefits or coverage is considered a misrepresentation

Coercion

is an unfair trade practice that occurs when someone in the insurance business applies physical or mental force or threat of force to persuade another to transact insurance that results in, or tends to result in, the unreasonable restraint of, or monopoly in, the business of insurance.

Policy Summary

is more specific to the policy being sold and will include information about the premium, riders, benefit amounts, cash surrender values, dividends and cost indexes.

Outline of Coverage

is used in health insurance and includes information regarding the benefits, exclusions and renewal provisions of the policy.

Florida authorization for an insurer to conduct business in the state is provided with a Certificate of Authority,

issued by the Office of Insurance Regulation.

The agent legally represents the insurer, and in this way behaves as the insurer in the following ways:

•The acts of the agent are considered to be the acts of the principal. •A contract completed by an agent on behalf of the principal is considered to have been completed by the principal. •Premiums mat to the agent on behalf of the principal are considered to have been premiums made to the principal •Knowledge that the agent has about the applicant or contract is considered to have been knowledge that the principal had.

The free-look period allows the policyowner to get a refund if the policy is unsatisfactory for any reason within a certain amount of time

- 14 days for life insurance; -21 days for annuities; -10 days for health insurance; -30 days for long-term care and Medigap.

"conditional contract"

- one contingent upon conditions that existed at the time of application or when a medical examination is completed. It provides that the applicant is covered immediately from the date of application as long as he or she passes the insurer's underwriting requirements

The application generally consists of three parts:

1.General - name, age, address, birth date, sex, income, marital status, occupation, hobbies, type of policy, amount applied for, other insurance owned, etc. 2.Medical - this section may be satisfied by answering some health questions, or the insurance company may want a medical exam; each insurance company has its own underwriting standards as to whether a medical exam will be required. 3.Agent's report - in this important section the agent provides first-hand knowledge about the applicant's financial condition and character.

In addition, a licensed agent is not allowed to transact any kind of insurance for which he or she is not properly appointed.

An appointment is defined as and insurance company giving an agent formal authority (a record of which is kept at the Department of Financial Services) to act on the company's behalf. An appointment includes the authority given by an insurer or employer to a licensee to transact insurance or adjust claims on behalf of an insurer or employer. An individual may not be appointed until that individual has been licensed for the same kind of insurance.

Churning also is known as "internal replacement":

It involves replacing policies within the same company, often by the same producer who sold the original policies.

Needs Approach

The needs approach considers what the family survivors will have from the deceased person's Social Security benefits, pension and personal savings. After those factors have been considered, the producer accounts for what will be needed to meet the following eight needs and then sells the individual the difference in the amount of life insurance. The needs considered are: •final expense fund, •housing fund, •education fund •monthly income (including the dependency period and blackout period), •emergency fund, •Coverdell Education Savings Account •disability income •retirement

Human Life Value Approach

This method determines the economic value of the life of a person by discounting estimated future net earnings. The method is simple: 1.Estimate an individual's average annual future earnings (after subtracting taxes and living expenses); 2.estimate the number of years the individual expects to work; 3.choose a conservative interest rate at which future earnings should be discounted; and 4.multiply the present value of a dollar payable annually for the number of years until expected retirement, using the selected interest rate, by the estimated average future annual earnings.

A fiduciary is a person who holds a position of special trust and confidence, which is typically in the context of money. An agent has a fiduciary responsibility to both the insurer and the applicant/policyowner, and this responsibility comes with criminal consequences when funds are misappropriated, including:

•$300 or less is a first-degree misdemeanor •$300 - $20,000 is a third-degree felony •$20,000 - $100,000 is a second-degree misdemeanor •$100,000 or more is a first-degree felony

In Florida, rebating is allowed if the agent adheres to the following rules:

•The rebate has to be available to all insureds in the same actuarial class. •The rebate must be in accordance with a rebating schedule filed by the agent with the insurer issuing the policy to which the rebate applies. •The rebating schedule must be uniformly applied so that all insureds who purchase the same policy through that producer for the same amount of insurance receive the same rebate percentage. •Rebates should not be given to an insured who purchases a policy from an insurer that prohibits its producers from rebating commissions. •The rebate schedule must be prominently displayed in public view at the producer's place of business and a free copy made available to insureds on request. •The age, sex, place of residence, race, nationality, ethnic origin, marital status, occupation or location of the risk cannot be used in determining the percentage of the rebate or whether a rebate will be available.