Life Insurance Basics
Agents or producers are also known as
"field underwriters."
Replacement
any transaction in which new life insurance or a new annuity is purchased & existing life insurance or annuity has been or will be lapsed or forfeited
which is the primary source of info used for insurance underwriting?
application
Insurable interest may be
based on economics or family relationships.
A policy that provides for business continuation in the event that a business partner dies is
based upon a "cross-purchase buy/sell" agreement.
Surcharges or Rate-Ups, may be accomplished by
basing rates on an older age, a different gender, a flat fee, or as percentage adjustment to the Manual Rate.
A Rate-Up or Surcharge may
be charged every year for a dangerous hobby or health problem.
Life settlement contracts are
between the life insurance policy owner and a third party.
A "life settlement" contract is
between the policy owner and a third party.
Replacing insurer
company that issues the new policy
Interest-adjusted net cost method
considers the time value of money by applying an interest adjustment to yearly premiums & dividends *each year premiums & dividends are figured, interest is taken into consideration
Binders may start
coverage. Binding authority is in the producer's contract.
Applicants who are rejected are considered
declined risks
Under an executive bonus, the premium paid to the employee as a bonus is
deductible by the business and the amount paid to or for the employee is reportable as taxable income to the employee.
The human life value approach was created to
establish what a family would lose in income upon the death of the sole or chief income provider.
When life insurance is used to pay estate taxes it is known as
estate conservation.
Individual life and annuity policies sold in this state must have a
free look of 10 days.
The "needs approach" to life insurance does not consider
future earnings.
A brother and sister have an insurable interest in each other based upon
genetics.
A "preferred risk" need not have a
high income.
higher frequency=
higher premium * if paid yearly, lower premium, * if paid monthly, higher premium
Acquisition costs of life insurance companies are
highest the first policy year.
can the company discriminate?
in favor of good risks & against poor risks, if done FAIRLY
executive bonus
the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy -employee owns the policy and has all control
A "conditional receipt" is not given to an applicant unless
the initial premium has been paid.
The less frequent the Mode of payment,
the lower the total annual premium will be, and vice versa. There is no service charge or fee if you elect the Annual Mode of payment.
Insurable Interest
the policy owner must face the possibility of losing money or something of value in the event of loss
Coverage can NEVER begin unless
the premium has been paid.
The company underwriter determines the final rating classification, not
the producer.
The HIV consent form states that
the results of an HIV test will only be shared with certain individuals, such as the underwriter.
A corporation may buy a policy on a shareholder to provide for "stock redemption" in the event of
the shareholder's death.
Insurable Interest must exist at
the time of application, but not necessarily at the time of a claim.
"Insurable interest" must exist at
the time of policy issue.
An increase in an insurer's investment income will allow
them to lower premiums.
Applicants may backdate a life insurance application for
up to six months in order to obtain a lower premium.
Conditional receipt
used ONLY when the applicant submits a prepaid application - states whether coverage will e effective on the date of the application or the date of the medical exam , whichever occurs last
Stock Purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Cross Purchase
used in partnerships -each partner buys a policy o the other
Stock Redemption
used when the corporation buys one policy on each shareholder
Entity Purchase
used when the partnership buys the policies on the partners
An incomplete application is
usually returned. However, should the underwriter approve it, coverage begins and the company has waived its ability to contest a claim.
Key Person Insurance
when a business gets insurance on a key employee - Key employee is insured -Business is the applicant, policy owner, premium payer& beneficiary
Liquidity
when the policies cash value can be borrowed against at any time & used for immediate needs
Must the person being insured be present?
yes & of competent legal capacity EXCEPT 1. a spouse may get insurance upon the other spouse 2. a person with insurable interest in a minor or anyone a minor is dependent upon * minors of 15 y.o may get life insurance on their own life
You have an insurable interest in another person if
you would benefit if they continue to live.
When life insurance is purchased as an "executive bonus" for a corporate employee, the policy belongs to
the employee.
Examples of third-party policy ownership include
Key Person and Partnership insurance, as well as a policy written on the life of a spouse or minor child.
Conditional or "binding" receipts are used in
L&H. Binders are used in P&C.
Human Life Value Approach is calculated by looking at
- Insureds Wages -Inflation -The # of years to retirement - Time Value of Money
Policy Summaries
-premium -cash value -dividend -surrender value -death benefit
Life & Disability Insurance Guaranty Fund
-the purpose is to protect the interests of insureds & policyholders when insurers become insolvent (unable to pay debts owed)
CLASSES OF LIFE INSURANCE POLICIES
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PERSONAL USES OF LIFE INSURANCE
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The 3 primary factors used in premium determination
1. mortality 2. interest 3. expense
Valid insurable interest may exist between
1. policy owners own life 2. the life of a family member(spouse of close relative) 3. the life of a business partner, key employee, or someone who has a financial obligation to the policy owner
what is true about buy-sell agreements?
Buy-sell agreements are normally funded with a life insurance policy
Insurers must provide to all prospective life insurance purchasers both a
Buyer's Guide and a Policy Summary.
The Securities and Exchange Commission, SEC, enforces
Federal securities laws.
Fixed VS Variable
Fixed: offer guaranteed minimum or fixed benefits that are stated in the contract Variable: cash values accumulate based upon a specific portfolio of stocks w/o guarantees of performance
Group VS Individual
Group: Written as a master policy covering the lives of more than one individual * individuals re dive certificates of insurance * rate & coverage is based upon group underwriting, w/ ALL individuals covered for the same amount & rate Individual: written on a single life
Net single premium
Mortality-Interest= Net Premium
Ordinal VS Industrial (Home Service)
Ordinal: larger face amounts ( minimum $1000) - premiums can be paid annually, semiannually, quarterly or monthly -premiums are paid by the insured directly to the insurance company -a physical exam may be required Industrial (home service): small amounts (less than $1000) -premiums are payable on a weekly or monthly basis -premiums are collected by a representative of the insurance company at the insureds home -policies are written as non medial- no medical exam required but medical history info is still collected
Participating vs Nonparticipating
Participating refers to any policy that distributes its dividends to policy owners by cash payments, reduced premiums, units of paid up insurance , a savings program, or by the purchase of term insurance Non-participating does NOT pay dividends
Permanent VS Term
Permanent Life Insurance i used to refer to various forms of WHOLE life insurance policies that remain in effect to age 100, as long as the premium is paid -provides lifetime protection & includes a savings elect (cash value) Term life insurance is temporary life insurance provided for a specific period of time - AKA Pure Life Insurance
An individual applied for an insurance policy & paid the initial premium. The insurer issued a conditional receipt, 5 days later, the applicant had to submit to a medical exam, what would be the polices effective date?
The date of the medical exam, *policy is in effect on the date of the application or the date of the medical exam (whichever is later )
Life Settlement
any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a 3rd party for some form of compensation
what must happen when an individual policy or annuity has been personally delivered to the policy owner?
The policy owner must sign a delivery receipt * When an individual policy or annuity is delivered by hand to the policy owner, a delivery receipt must be signed & state the date the contract was received.
A 60-year-old male has a higher mortality rate than
a 60-year-old female.
The SEC, Securities Exchange Commission, is
a Federal agency that regulates securities.
Buy-Sell Funding AKA business continuation agreement
a legal contract that determines what will be done w a business in the event that an owner dies or becomes disables * ANY form of life insurance may be used to fund a buy-sell agreement
Under the life insurance free look,
a policy owner who returns their policy within 5 days of delivery will receive a full refund.
The Agent's or Producer's Report is
a section of the application where the producer lists their opinion of the applicant.
Premiums
agent must issue the premium receipt, type of receipt issued will determine when coverage will be effective
changes on the application/amendments
an agent should never erase of white out on an application make change & initial it
A "viatical settlement" is
an agreement where a terminally ill insured, a "viator", sells their life insurance policy to an investor for less than its face amount, but for more than its cash value.
A "stock redemption" plan is
an agreement whereby a corporation agrees to buy back the stock of a deceased shareholder.
Stranger-Originated Life Insurance (STOLI)
an arrangement in which a person with no relationship to the insured purchases a life policy with the intent of selling it to an investor & profiting -violate the principle of insurable interest -ins urers take an aggressive legal stance against policies they suspect are involved in STOLI transactions
FINRA, Financial Industry Regulatory Authority, is
an association that regulates its own members.
A Surcharge is
an example of a Counteroffer. There is no coverage until the client accepts the policy at the higher rate and pays the increased premium.
Buying a life insurance policy creates
an immediate estate.
Life Insurance surrender cost index
index that determines the polices guaranteed cash surrender value available to the policyower at the end of the 10th and 20th policy years, accounting for the annual cash dividends at 5% interest
A preferred risk is
individuals who meet certain requirements & qualify for lower premiums than the standard risk
Stockholders in small, privately held closed corporations often enter
into Buy/Sell agreements with the corporation that are funded by Life policies.
Client funds used to purchase Whole Life and Fixed Annuities are
kept in the insurance company's General Account, which is invested more conservatively.
Client funds invested in a Variable Life contract or Variable Annuity must be
kept in the insurance company's Separate Account, which is similar to a mutual fund.
A person who seeks to sell their life insurance policy in a viatical settlement is
known as a "viator."
Survivor Protection
life insurance provides the funds necessary for the survivors of the insured to be able to maintain their lifestyle
Life insurance premiums are based on
mortality, death, plus company expenses minus interest earned on company investments.
Gross Annual Premium
net premium + expense (loading9= Gross Premium
If a producer gives an applicant a conditional receipt and the underwriter rejects the application, there is
no coverage.
Substandard (High Exposure) Risk
not acceptable at standard rates because of physical condition diseases, occupations , or dangerous habits -these policies are referred to as "rated"
A "rated" policy is
one issued to a sub-standard risk with dangerous hobbies or health problems.
A "standard risk" is
one with an average life span. Most clients' are "standard."
The earliest that coverage COULD start would be the day of application, assuming the client has
paid the first premium, had no conditions to fulfill, and had not lied on the application.
Life insurance mortality tables are based upon
people and time.
Life insurers may discriminate based upon
physical hazards, including the age and health, of the client.
A parent does not need their minor child's consent in order to
purchase life insurance on them.
Estate Creation
purchasing a life insurance policy creates an immediate estate
Variable Life producers do NOT have to be
registered with the New York Stock Exchange, NYSE.
Life insurance covers death due to either
sickness or accident.
Cash Accumulation
some life policies (such as whole life-provide permanent protection) accumulate cash value that is available to the policy owner during the policy term
Application
starting point & basic source of information used by the companion the risk selection process part 1- general information such as name, age, address, dob, gender, income, marital status, occupation part 2- --medical information
Binders are
temporary insurance containing all the terms of the policy to be issued.
The total cost of premiums that the insured pays over a 12-month period is known as
the "gross annual premium."
Variable Life producers DO have to be registered with
the Financial Industry Regulatory Authority, FINRA.
a corporation is the owner & beneficiary of the key person life policy, if the corporation collects the policy benefit then
the benefit is received tax free because the benefit is treated as a reimbursement to the business for loss of services from that key person
Existing insurer
the company whose policy is being replaced