Life Insurance Basics

Fixed Life Insurance

(or annuities) are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract.

Duties of the replacing producer

-Present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer. 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.

Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns:

-Replacing insured's salary or lost services -Social security income (blackout) period -Liquidation vs. retention of capital

What is the minimum age for a person to obtain a life insurance on him- or herself?

15 Minors must be at least 15 before they can attain life insurance for themselves or their family members

Which of the following statements is not true concerning insurable interest as it applies to life insurance?

A debtor has an insurable interest in the life of a lender.

According to the Replacement Rule, replacement of life insurance is defined as a process in which

A new policy is bought and an old policy is converted to a Reduced Paid-up policy.

Attending Physician's Statement (APS)

A statement usually obtained from the applicant's doctor.

Viatical Settlement

An arrangement that allows someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when and where they are most needed, before death.

Liquidity

As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner

How long must insurers maintain a copy of each authorized form used (policy summary)

At least 3 years

An underwriter is reviewing the medical questions in the application and needs further information due to a medical situation the applicant had in the past. What will the underwriter require?

Attending Physician Statement

Business Uses of Life Insurance

Buy-Sell Funding Key Person Executive Bonuses Corporate-owned Policies

What does "liquidity" refer to in a life insurance policy?

Cash values can be borrowed at any time.

Which of the following would NOT be considered a deceptive act?

Comparing an insured's current policy with a potential replacement policy

Interest-Adjusted Net Cost Method

Considers the time value of money by applying an interest adjustment to yearly premiums and dividends.

Which of the following is used to compare the cost of one life insurance policy against another in order to guide prospective purchasers to policies that are competitively priced?

Cost comparison methods

Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:

Costs Associated with Death (Post Mortem) Debt Cancellation (as an alternative to Estate Liquidation) Emergency Reserve Funds Education Funds Retirement Fund Bequests

A key person insurance policy can pay for which of the following?

Costs of training a replacement

Which of the following is NOT an example of a valid insurable interest?

Debtor in the life of the creditor

All of the following are business uses of life insurance except

Funding against company's general financial loss

Conditional Receipt

Given to the policy owners when they pay a premium at time of application. Such receipts bind the insurance company if the risk is approved as applied for, subject to any other conditions stated on the receipt.

Human Life Value Approach (HLVA)

Gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money

Determining amount of personal life insurance

Human Life Value Approach Needs Approach

An insurer has placed a notice on its advertising stating that it's policies are protected by the Life and Disability Insurance Guaranty Fund. This practice is

Illegal: insurers cannot advertise protection by the Fund.

Substandard Risks (Higher Risk Exposure)

Individuals who are not acceptable at standard rates because of poor health, bad habits or occupational hazards.

An insured has a life insurance policy with a face value amount of $500. He pays a premium each week to the agent who sold him the policy. What kind of policy does the insured have?

Industrial life

The medical information bureau (MIB) was created to protect

Insurance companies from adverse selection by high risk persons.

All advertisements are the responsibility of the

Insurer. The insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.

Ordinary Life Insurance

Is also written on an individual basis;however, it differs from industrial life

Life insurance surrender cost index

Is an index that determines the policy's guaranteed cash surrender value to the policyowner at the end of the 10th and 20th policy years, accounting for the annual cash dividends at 5% interest.

Industrial or Home Service Insurance

Is life insurance written on an individual basis that provides insurance to industrial workers or people who are unable to afford insurance for bigger amounts

Mortality

Is the ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population

Underwriting

Is the risk selection and classification process.

application

Is the starting point and basic source of information used by the company in the risk selection process.

Stranger-Originated Life Insurance (STOLI)

Life insurance arrangement in which a person with no relationship to the insured purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies.

Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed.

Expense

Loading charge, also affects premium rates

Replacement

Means any transaction on which new life insurance or a new annuity is purchased and, as a result, the existing life will insurance annuity has been or will be any of the following: - lapsed, forfeited, surrendered, or otherwise terminated - reissued with any reduction in cash value - converted to reduce paid-up insurance, continued as extended term insurance or otherwise reduced in value by the use of nonforfeiture benefits or other policy values; - amended so as to affect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid ; - Pledged as collateral or subjected to borrowing, whether in a single loan or under a schedule of borrowing over a period of time for amounts in the aggregate exceeding 25% of the loan value set forth in the policy; or - used in a financed purchase

Net Single Premium

Mortality - Interest = Net Premium

Which of the following is NOT true regarding the needs approach method of determining the value of an individual's life?

Need is predicted using the number of years until the insured's retirement.

Variable Life Insurance

Or annuities are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance.

An insured purchased an individual life insurance policy with a face amount of $15,000. He pays a premium each month. What type of policy is that?

Ordinary life (The distinguishing feature of Ordinary Life Insurance is that the policy is written on an individual basis with a face amount of $1,000 or more. The premiums are paid annually, semiannually, quarterly or monthly.)

An applicant wants to buy a policy that has a cash value element. Which type should she buy?

Permanent

Classes of Life Insurance Policies

Permanent vs term Participating vs Nonparticipating

Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value?

Predicted needs of the family after the insured's death.

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy?

Premiums are not tax deductible as a business expense.

Life and Disability Insurance Guaranty Fund

Protects the interests of the insureds and policyholders when insurers become insolvent, and helps detect and prevent insurance company impairments (established by the Department of Insurance) (there is a disability account, a life insurance account, and an annuity account) (cannot say a policy is guaranteed by the existence of this)

When a replacement is involved, a replacing insurance company is responsible for all of the following except

Provide a copy of the important notice regarding replacement of Life insurance to the applicant.

Buyer's Guide

Provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance.

Interest

Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds. This interest is a primary factor in lowering the premium rate.

Classification of risks

Standard, Preferred, Substandard, Declined

Which of the following types of risk will result in the highest premium?

Substandard risk

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.

Which of the following may not be included in an insurance company's advertisement?

That it's policies are covered by the Guaranty Association

Comparative Interest Rate Method

The comparative interest rate (CIR) is the rate of return that must be earned on a "side fund" in a buy term invest the difference plan so that the value of the side fund will be equal to the surrender value of the higher premium policy at a designated point in time.

Which of the following would NOT fall into the category of costs associated with death?

The expense of a vacation for surviving family members

Duties of insurers

The insurer must maintain a system for supervision of insurance producers that ensures the following: - a method to inform producers of the requirements of this section (including producers' training manuals); - A procedure to confirm that the aforementioned requirements have been met; - a system to provide each producer with a statement of the insurer's position on the acceptability of replacements; - a procedure to detect unreported replacements

Insurable Interest

The policyowner must face the possibility of losing money or something of value in the event of loss.

Adverse Selection

The tendency of risks with higher probability of loss to purchase and maintain insurance more often than the risks who present lower probability.

Which is generally true regarding insureds who have been classified as preferred risks?

Their premiums are lower.

What is the purpose of the buyer's guide?

To allow the consumer to compare the costs of different policies

Which of the following is the best reason to purchase life insurance rather than annuities?

To create an estate

Life insurance policy cost comparison methods

To help consumers make educated decisions on purchasing life insurance, the industry developed specific methods and indexes that measure and compare the actual policy costs. These comparisons are usually included in policy illustrations. Traditional methods of comparing costs are interest-adjusted net cost method and comparative interest rate method

An insured receives a monthly summary for his life insurance policy. He notices that the cash value if the policy is significantly lower this month than it was last month. What type of policy does the insured have?

Variable

What is the name of the insured who enters into a viatical settlement?

Viator. Viator means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.

Delivery Receipt

When an agent hand delivers an individual policy or annuity to the policyowner, the agent must obtain a signed delivery receipt.

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about

Whether an insurable interest exists between the individuals

Individual Life Insurance

Written on a single life. The rate and coverage is based upon the underwriting of that individual

Minor

a person under legal age

Estate

a person's net worth

Policy Summary

a written statement describing the features and elements of the policy being issued

Solvency

ability to meet all financial obligations

Advertising must be

accurate and not misrepresent the facts

Declined Risks

applicants who are rejected

Standard Risk

are persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions.

Preferred Risk

are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.

Life insurance

coverage on human lives

cash value

equity amount accumulated in permanent life insurance

Needs Approach

is based on the predicted needs of a family after the premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses.

A life insurance producer

is the company's field underwriter

Survivor Protection

life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death

Group Life Insurance

life insurance that provides a master policy for a group; each eligible group member receives a certificate of insurance

Factors in Premium Determination

mortality, interest, and expense

Gross Annual Premium

net premium + expense (loading) = gross premium

Lump-sum

payment of the entire benefit in one sum

Policy Review

personal delivery allows agent to make sure insured understands all aspects of the contract; pointing out provisions or riders that may be different than anticipated, explaining how they affect the contract; explaining rating procedure and possible choices and provisions available to policy owner that may be active at this time

illustrations

presentation or depiction of nonguaranteed elements of a life insurance policy

liquidation

selling assets in order to raise capital

Death Benefit

the amount paid upon the death of the insured in a life insurance policy

Replacing Insurer

the company that issues the new policy

Existing Insurer

the company whose policy is being replaced