OH Life Insurance: Life Insurance Basics

Estate Creation

- A person may create an estate through earnings, savings, and investments (requires significant discipline and time) - The purchase of life insurance creates and immediate estate of at least that amount the moment the first premium is paid - There is no other legal method by which an immediate estate can be created at such a small cost

Viatical Settlement Contract

- A written agreement entered into between a viatical settlement provider and a viator - The contract includes and agreement to transfer ownership or change the beneficiary designation of a life insurance policy at a later date, regardless of the date that compensation is paid to the viator - must establish the terms under which the viatical settlement provider will pay compensation in return for the viator's assignment, transfer, sale, devise, or bequest of the death benefit or ownership to the viatical settlement provider

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 - Viators (owners of the original policy) usually receive a percentage of the policy's face value from a third party who purchases the policy - The new owner continues to maintain premium payments and will eventually collect the entire death benefit

Liquidity

- As a result of the cash accumulation feature, some life insurance policies provides liquidity to the policyowner - Means the policy's cash values can be borrowed against at any time and used for immediate needs

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

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 the individual's life value by looking at the insured's wages, inflation, number of years to retirement, and the time value of money

All policy illustrations must include:

- Name of the insurer - Name and business address of the agent - Name, age, and sex of proposed insured - Underwriting or rating classification of the illustration base -

Survivor Protection

- Provides the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death - Requires careful examination of current assets and liabilities as well as determining what survivor's needs will be

Insurable Interest in Life Insurance

- To purchase insurance, the policy owner must face the possibility of losing money or something of value in the event of loss - Insurable interest must exist between the policyowner and the insured AT THE TIME OF APPLICATION - One a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists - Not required by beneficiaries

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 - Tax deductible to the employer and income taxable to the employee

Variable Life Insurance

- contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance - keep pace with inflation and are determined by the value of securities backing it

General information (part one of the application)

- includes general questions about the applicant - inquires about existing policies - identifies the type of policy applied for, the amount of coverage, and information concerning the beneficiary

Medical information (part two of the application)

- includes information on the prospective insured's medical background, present health, medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives - if the amount of insurance is relatively small the agent and proposed insured will complete all of the medical information (nonmedical application) - For larger amounts the insurer will usual require a medical examination

permanent life insurance

- life insurance is a general term 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 and includes a savings element (or cash value)

Conditional Receipt

- used only when the applicant submits a prepaid application - states that coverage will be effective either on the date of the application or on the date of the medical exam - most come type of receipt

Group Life Insurance

- written as a master policy covering the lives of more than one individual covered under the single policy - Individuals covered do not receive a policy but instead receive certificates of insurance - the rate and coverage are based upon group underwriting, all individuals covered for the same amount and rate

Net Single Premium

-Includes mortality and interest components necessary to keep policy in force until maturity. -Mortality - interest = net premium

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.

Viator does NOT include:

1. A licensee under the Viatical Settlements Act (including a life insurance producer acting as a viatical settlement broker) 2. An accredited investor or qualified institutional buyer 3. A financing entity 4. A special purpose entity 5. A related provider trust

Examples of unfair discrimination between individuals in the same class:

1. Age or gender 2. Physical or mental impairment 3. Blindness or partial blindness 4. Genetic characteristic or genetic testing

Sources of Underwriting Information and Regulations

1. Application 2. Agent Report 3. Attending Physician Statement (APS) 4. Investigative Consumer Report (Inspection) 5. Medical Information Bureau (MIB) 6. Medical Examinations and Lab Testing Including HIV

A valid insurable interest exists between the policyholder and the insured when the policy is insuring any of the following

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

What are the three primary factors that are used in premium determination?

1. Risk (mortality-rate of death within a specific group) 2. Interest 3. Expense

Personal Uses of Life Insurance

1. Survivor Protection 2. Estate Creation 3. Cash Accumulation 4. Liquidity 5. Estate Conservation

Buy-Sell Funding

A buy-sell agreement (or business continuation agreement) is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled

Viatical Settlement Provider

A person, other than a viator, that enters into or effectuates a viatical settlement contract with a viator resident in this state

Replacement

A practice of terminating an existing policy or letting it lapse, and obtaining a new one.

Medical Information Bureau (MIB)

An information database that stores the health histories of individuals who have applied for insurance in the past. Most insurance companies subscribe to this database for underwriting purposes. Insurers cannot refuse coverage solely on the basis of adverse information on an MIB report

What type of insurance policy can be used to fund a buy-sell agreement?

Any form of Life Insurance

Primary criteria an underwriter uses to assess the desirability of a candidate:

Applicant's: - health (current & past) - occupation - lifestyle - hobbies/habits

What signature are required on an application?

Both the agent and the proposed insured (usually the applicant) If the proposed insured and the policyowner are not the same person then the policyowner must also sign the application

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

Cash values can be borrowed at any time

Interest-Adjusted Net Cost Method

Considers the time value of money by applying an interest adjustment to yearly premiums and dividends. two versions of the interest-adjusted net cost method are the surrender cost index and the net payment cost index

Determining lump sum needs:

Cost associated with death (postmortem) Debt cancellation (as an alternative to estate liquidation) Emergency reserve funds Education funds Retirement fund Bequests: leaving funds to an insured's church, school, or charity

Types of Buy-Sell Agreements

Cross Purchase Entity Purchase Stock Purchase Stock Redemption:

Attending Physician's Statement (APS)

Designed to obtain more specific information about a particular medical problem revealed in the application or during the medical examination

Nonparticipating policy life insurance

Does not pay dividends to the policyowners

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.

Investigative Consumer Report (Inspection Report)

General reports of the applicant's finances, character, work, hobbies, and habits that supplement the information of the application. Subject to rules an regulations outlined in Fair Credit Reporting Act.

Premium Payment Mode

How often the premium is paid; monthly, quarterly, semi-annual, annually Mode refers to the frequency the policyowner pays the premium Higher frequency = Higher premium

Preferred risks

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

Expense factor (loading charge)

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums.

The Medical Information Bureau was created to protect?

Insurance companies from adverse selection by high risk persons

Interest Factor (in premium determination)

Insurance companies invest the premiums in an effort to earn interest on these funds interest is a primary factor in lowering premium rate

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.

Estate Conservation

Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets.

When do agents try to collect the initial premium?

Most agents attempt to collect the initial premium and submit it along with the application to the insurer Collecting the initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued

Viator

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

Standard risks

Persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Representative of the majority of people at their age with similar lifestyles Average risk

Field Underwriter responsibilities:

Proper solicitation of applicants; Helping prevent adverse selection; Completing the application; Obtaining the required signatures; Collecting the initial premium and issuing the receipt, if applicable; and Delivering the policy. A life insurance producer is the company's field underwriter

Buyer's Guide

Provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. Insurers must provide a Buyer's Guide to all prospective policy applicants prior to accepting their initial premium

Agent's Report

Provides the agent's personal observations concerning the proposed insured The agent's report does not become a part of the entire contract, but is part of the application process

Premium Receipt

Receipt given to the applicant by the producer or insurer, as proof of a premium payment.

Backdating

Sometimes it is possible to lower the premium rate by backdating an application for insurance -If the applicant chooses to do this, the policy may be backdated for no more than 6 months -The only reason that an application may be backdated is to lower premium

Risk rating classifications

Standard, substandard, and preferred

In a viatical settlement who is considered the viator?

The insured

What individual most have insurable interest in the insured?

The policyowner

What is the best reason to purchase life insurance rather than annuities?

To create an estate

Minor

a person under legal age

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 or more viatical settlement providers

Estate

a person's net worth

Illustration

a presentation or depiction that includes non guaranteed elements of a policy of individual or group life insurance over a period of years

Policy Summary

a written statement describing the features and elements of the policy being issued provides specific information on the policy being issued must be titled "A Statement of Policy Costs and Benefit Information"

Solvency

ability to meet financial obligations (example: insurance company maintains enough assets to pay claims)

Gauranty Association

aids in the detection and prevention of insurer insolvency. in the event of insurer insolvency, protection is ltd to $100k cash value OR $350k in total benefits. max is $250k for the present value of annuity insurers can not advertise protection by the insurance guaranty association

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 application if no medical exam is required if medical exam is required, the date of coverage will coincide with the date of the medical exam

participating (mutual) life insurance

any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance

Substandard (High Exposure) Risk

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

Declined Risks

applicants who are rejected. Risks that the underwriters assess as not insurable are declined.

Fixed Life Insurance

contracts that offer guaranteed minimum or fixed benefits that are stated in the contract

Life insurance

coverage on human lives

Cash value

equity amount accumulated in permanent life insurance

All advertisements are the responsibility of the

insurer

Gross Annual Premium

is the one year cost for mortality plus the cost of operating the company (or expense loading) loading includes commissions, taxes, advertising & includes the amount added to a pure or basic rate to provide for a profit margin to the insurer; Net Premium + Expense = Gross Premium

Term Life Insurance

life insurance provided for a specific period of time

Lump sum

payment of the entire benefit in one sum

Illustrations

presentation or depiction of nonguaranteed elements of a life insurance policy

Liquidation

selling assets in order to raise capital

Disclosure Authorization Notice

states the insurer's practice regarding collection and use of personal information

If the initial premium is not paid with the application:

the agent will be required to collect the premium at the time of policy delivery policy does not go into effect until the premium is collected

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

Mortality Factor

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

Comparative Interest Rate Method

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 the higher the CIR the less expensive the higher-premium policy (whole life) relative to the alternative plan (term plus side fund)

Underwriting

the risk selection and classification process the process in which an insurance company determines whether or not a particular applicant is insurable and if so what premium to charge

The Application

the starting point and basic source of information used by the company in the risk selection process two parts: general information and medical information

Mortality table

used by insurers to indicate the number of individuals within a specified group starting at a certain age, who are expected to be alive at a succeeding age

Stock Purchase

used by privately owned corporations when each stockholder buys a policy on each of the others

Cross Purchase

used in partnerships when each partner buys a policy on 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

Individual Life Insurance

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

Ordinary Life Insurance

written on individual basis; larger FV (at least 1k); paid annually, semiannually, quarterly, or monthly; paid by insured directly to insurance company; physical exam may be required

Industrial/Home Service Insurance

written on individual basis; small amounts (>2k); weekly or monthly premiums collected by rep. of insurance company at home of insured; written as nonmedical (no med-exam required, but med history)

Duties of the replacing insurance company

• Require from the producers list of the applicants life insurance contracts to be replaced. • A copy of the replacement notice provided by the applicant. • Send each existing insurance company a written communication advising of proposed replacement within the specified time frame which starts at the time the application is received in the replacing insurers home or admin office. • A policy summary or ledger statement containing policy data on the prosper life insurance or annuity must be included.