Life Insurance Basics

participating vs nonparticipating policies

participating (mutual) life insurance- refers to at policy that distributes its dividends to policyowners nonparticipating policy- does not pay dividends

Standard risks

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

Premium Payment Mode

-mode: the frequency the policyowner pays the premium -higher frequency=higher premium -monthly>quarterly>semi-annual>annual

3 factors in determining premiums

-mortality -interest -expense

Effective Date of Coverage

-policy does not go into effect until the premium has been collected: this is if the initial premium is not paid with the application, the agent will be required to collect the premium at the time of the policy delivery and may need to be provided with a statement of good health which states that they were not injured between the signing of the application and the policy deliver. -if the full premium was submitted with the application, and the policy was issued as requested, the policy coverage would generally coincide with the date of the application

When does valid insurable interest exist between the policyowner and the insured?

1. Policyowner's own life 2. The life of a family member (a spouse or a close blood relative) 3. The life of a business partner, key employee, or someone who has financial obligation to the policyowner (such as debtor to a creditor)

Process of Issuing a Life Insurance Policy

1. Solicitation and Sales Presentation- an attempt to persuade a person to buy an insurance policy and it can be done orally or in writing 2.Underwriting: Field and Company 3. Premium Determination 4. Policy Issue and Delivery

Buy-Sell Agreement

A legal contract that determined what will be done with a business in the event that an owner dies or becomes disabled. Different Types include: Cross Purchase, Entity Purchase, Stock Purchase, Stock Redemption.

Viatical Settlement Broker

A person who on behalf of a viator and for a fee, commission, or other valuable consideration, negotiates viatical settlement contracts between a viator and one of more viatical settlement providers

Viatical Settlement Provider

A person, other than a viator, that enters into or effectuates (makes effective) a viatical settlement contract

Viatical Settlement Contract

A written agreement entered into between a viatical settlement provider and a viator. An agreement to transfer ownership or change the beneficiary desgination of a life insurance policy at a later date, regardless of the date that compensation is paid to the viator.

How to determine amount of personal life insurance:

Human life value approach and needs approach

Medical Examinations

All at the insurer's expense -Paramedical exam: involved blood work and urine sample, is conducted by a registered nurse or paramedic -Full medical examination: done by a licensed physician, occurs routinely for applicants requesting higher amounts of coverage

Needs Approach

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.

Viator

The owner of a life insurance policy (or a certificate holder under a group policy) who enters or seeks to enter into a viatical settlement contract.

Attending Physician's Statement (APS)

The statement which an underwriter will request if he/she sees answers to certain questions that could indicate greater risk, and the underwriter wants to obtain specific medical details. The insurance company must pay for this information.

conditional receipt

Type of premium receipt, that says that coverage will be effective either on the date of the application or the date of the medical exam whichever occurs last.

Viatical Settlements

allow someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before their death

Executive Bonus

an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The bonus would be tax deductible to the employer and income taxable to the employee

Investigative Consumer Report

an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. These inspection reports are subject to the rules and regulations of the Fair Credit Reporting Act

approval conditional receipt

coverage begins only when the pre-paid application is approved by the insurer. (Rarely used)

Underwriting

is the risk selection and classification process. It involves a careful analysis of many different factors to determine the acceptability of applicants for insurance.

delivery receipt

must be signed when an agent hand delivers an individual policy or annuity to the policy owner. It will be in duplicate and state the date the contract was received. The policy will take effect on the date the receipt was signed.

Insurance Interest

The policyowner must face the possibility of losing money or something of value in the event of loss. It must exist between the policyowner and the insured at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

Substandard (high exposure) risk

applicants are not acceptable at standard rates because of the physical condition, personal or family history of disease, occupation or dangerous habits. These policies are referred to as "rated" because they could be issued with the premium rated-up resulting in higher premium.

Application

the starting point and basic source of information used by the company in the risk selection process. Part 1- General Information: includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. It identifies the type of policy applied for and the amount of coverage Part 2- Medical Information: includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives.

preferred risk

those individuals who meet certain requirements and qualify for lower premium than the standard risk

Person uses of Life Insurance includes:

1. Survivor Protection 2. Estate Creation 3. Cash Accumulation 4. Liquidity 5. Estate Coversion 6. Viatical Settlements: allow someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed, before their death

Backdating

A policy may be "backdated" for no more than 3 motnhs before the date of the application of the medical examination whichever is later. All premiums must be paid from the effective date of the policy.