Texas Life and Health Section 2: Life Insurance Basics

Underwriter

-An individual who reviews the application and other pertinent information and decides if the applicant is an insurable or acceptable risk, whether an insurance policy will be issued, and what the premium for the policy will be

Changes/Modifications in the Application

-Any changes made in the application must be signed by both the applicant and the agent to signify that each is aware of the change -The insurance company may not make any changes to an application once it is received unless those changes are signed by the applicant -Any changes made to a policy before it is issued that are materially different from the policy for which the applicant applied must be explained to the applicant at the time of policy delivery and the policyowner's signature must be obtained to acknowledge the changes

Collecting the Initial Premium and Issuing the Receipt

-At the time of the application and the receipt of the initial premium, a conditional receipt (also called an "Interim Insuring Agreement" or a "Temporary Insuring Agreement") is given to the applicant acknowledging that the insurance is in force from the date of receipt (or medical exam if a medical exam is required), assuming the applicant is insurable at standard rates -The conditional receipt is replaced later with a permanent policy once insurability has been determined

Buyer's Guide

-Helps consumers make an informed purchase -Describes the types of policies and information about replacement of policies -Recommended for use by National Association of Insurance Commissioners (NAIC)

Stranger/Investor-Owned Life Insurance (STOLI)/(IOLI)

-In a stranger originated life insurance a third party is involved who has no relation with the policy owner and initiates the purchase of the policy by paying the premiums and later buying the policy thereby profiting upon the death of the insured. -Such transaction violate the law which is specifically designed to ensure that the person buying the life insurance policy derives benefit from it and has an economic interest (called insurable interest) in the continued life and not death of the insured STOLI arrangements are typically promoted to consumers between the ages of 65 and 85 and include: -allowing someone to purchase life insurance on their life in exchange for an immediate lump sum payment of some amount -allowing someone to purchase insurance on their life in exchange for a partial payment of the policy's face value to their beneficiaries upon their death; -purchasing a life insurance policy or entering into a contract for "free" or "no-cost" insurance an their life

Policy Cost Comparison Methods

-Insurance policies themselves have a cost comparison index included in the policy to help the insured determine the actual cost of the insurance by itself -Insureds should compare index numbers only for similar policies: those that provide essentially the same benefits with premiums payable for the same length of time, and properly calculated for the insured's age and health status -Generally, a policy with smaller index numbers generally is a better buy than a similar policy with larger index numbers 1. Guaranteed or Fixed Cost Method -For these types of policies, the policy performance may be shown by using both guaranteed and current performance. These are called currently illustrated basis cost comparison indexes. 2. Currently Illustrated Method -shows the company's current scale of dividends, premiums or benefits -this scale can be changed after the policy is issued, so that the actual dividends, premiums or benefits over the years can be higher or lower than those assumed in the indexes on the currently illustrated basis 3. Company Retention Method -method in which the present value of premiums, cash values, and dividends is calculated by weighting each item each year by the probability that it will be paid 4. Interest-Adjusted Net Cost/Surrender Cost Index Method -weights dividends and cash values according to how far into the future the various amounts are payable. -Under this method, three amounts are calculated: the interest-adjusted cost, the interest-adjusted payment, and the equivalent level annual dividend

Use and Disclosure of Insurance Information

-Insurer must provide a buyer's guide and a policy summary to all prospective buyers at least seven days prior to accepting the applicant's initial premium, unless the policy or policy summary contains an unconditional refund provision of at least ten days --->In that event, the buyer's guide and policy summary must be delivered with or prior to delivery of the policy -The insurer must provide a buyer's guide and a policy summary to any prospective purchaser upon request -If the policy's equivalent level death benefit does not exceed $5,000, then the requirement for providing a policy summary is satisfied by delivery of a written statement containing the appropriate information

Medical Exam & Lab Tests Including HIV

-Insurers often require applicants to take various medical exams to verify insurability, or to prove the applicant's current health situation --->One of the most used is the paramedical report, in which a nurse or other medical practitioner meets with the applicant and asks questions about the applicant's health and also takes blood pressure and a blood sample for testing --->More in-depth exams may be required to be done by a medical doctor --->Generally, the higher the amount of life insurance coverage requested, the more extensive the required tests --->Among various blood tests performed, testing for HIV is included. When testing for HIV the insurer must: -inform the applicant of the test's purpose and obtain the applicant's written permission -use a test method approved by the U.S Dept. of Health & Human Services -disclose test results to the insured in writing, usually through the applicant's physician -notify the state's Dept. of Health of the applicant's identity and test results If an insurer accepts a risk, it must do so without limitations or exclusions for HIV, AIDS, or a related condition, as follows: -No maximum dollar amount of coverage, which is limited solely to HIV, AIDS, or a related condition, may be included in any policy or certificate -No exclusion of coverage, which is limited solely to HIV, AIDS, or a related condition, may be included in any policy or certificate

Four Questions That Must Be Answered Regarding Every Applicant During Underwriting

-Is there insurable interest? -Is the amount of insurance applied for reasonable? -Is the applicant insurable? -If the applicant is insurable, what should the premium be?

Insurance Privacy Acts

-Most states have privacy acts that require that applicants be given notice of certain activities the insurer will perform in gathering information about them for underwriting purposes, such as credit reports or investigative inspection reports --->Applicants must also be told whether any information will be used for marketing purposes

Life and Health Guaranty Association

-Nicknamed the "association", most states have one -Protects insureds against an insurer's inability to meet contractual obligations due to impairment or insolvency -provides coverage for people with direct, non-group life, health, or annuity policies by: --->providing payment of covered claims under certain policies --->avoiding excessive delays in payment --->minimizing financial loss to claimants --->assisting in the detection and prevention of insurer insolvencies --->providing an association to assess the cost of this protection among insurers -All insurers required to be members -prohibited for a producer to use a state's life and health guaranty association for sale or solicitation of insurance

Gross Annual Premium

-Pay as you go policy -Insurer charges policyowner the cost of maintaining the policy that year, though this cost is generally evened out to stay the same over the life of the policy -Over time the cost for the annual premium policy will exceed the single premium policy, unless the insured were to die early in the policy period where only a few premiums had been paid -Full annualized premium is due each year; if policyowner is paying premium on monthly basis and insured were to die in middle of year, the remaining cost for year would be subtracted from the death benefit before settlement

Fair Credit Reporting Act of 1970

-Regulates the collection and distribution of credit and inspection report information -Deals with the accuracy, obsolescence, and limited uses of information, and the right of the individual to access and contest the information contained in the reports -Applicant has the right to the name and address of the inspecting company if a policy is rated or rejected as a result of the report and can file his or her opinion on the issue with the reporting company -Applicant has the right to have medical information sent to his own physician. Many companies will not send medical information directly to the insured but require that it be sent to the insured's doctor. Medical information will most likely NOT be given to the agent to deliver to the applicant -Consumer reports cannot contain information about bankruptcies over 10 years old or other adverse information (i.e., arrests, liens or lawsuits) that is 7 years old. There is no time limit for information relating to life insurance or credit transactions of $150,000 or more, or for jobs paying more than $75,000.

Consumer Information Privacy Act

-Requires any companies that compile consumer lists and that subsequently sell those lists to other companies for marketing purposes to so notify the consumer about whom the information is collected -The consumer must be given the opportunity to opt out of, or refuse to be included in, the sold mailing list

Backdating of Policies

-Some states do not allow it -For those that do insurers may compute premiums back to an applicant's previous birthday (six months), resulting in a slightly lower premium -If a policy is backdated, premiums must be collected from the date at which the policy is backdated to, and that date then becomes the anniversary of the policy.

Representations

-Statements of what an individual believes to be true, will often be made by insured during application process -False representation will not affect the insurance contract or policy unless it affects the conditions under which the policy would be issued or not. Said another way, it must be material to the risk

Section 303 Stock Redemption

-Takes place when a corporate buys its own stock from the estate of a stockholder to pay death taxes, funeral expenses and the cost of estate administration. The sale is income tax free to the estate -Its purpose is to keep the stock of a closely held company from being sold to outsiders upon the death of ones of the shareholders -To be eligible, stock must be included in stockholder's gross estate for estate tax purposes, and the value of the stock must comprise more than 35% of the adjusted gross estate -The corporation must redeem the stock out of corporate surplus and the redemption must generally occur within four years after death. Life insurance makes it possible to assure cash will be available to the corporation when it is needed to pay for the stock buy back without raiding corporate cash reserves. The business is the owner and beneficiary of the policy -A securities license and a life insurance producer license are needed to sell and set up stock redemption plans

Application Procedures

-The agent must begin the collection of this information at the time of application for the policy -The application is the basic and initial source of information to be reviewed in determining whether or not the policy will be issued -In most life insurance applications, there are three basic areas: --->general information: records simple informational items about the applicant, including: -name -address -dob -age -sex -marital status -occupation -income --->medical information: Information about the present health and the health history of the applicant --->the agent's report: details the agent's observations about -character and condition of applicant -the means of contact (mail solicitation, contact of the agent by the insured, etc.) -the purpose of the sale -any policy replacement information -****One of the most important responsibilities of an agent is to aid the customer in fully and accurately completing the applications There also also basic details about the policy-the type of policy, the amount of insurance, beneficiary information, and other insurance the applicant owns or has applied for that is of the same type

Warranties

-The guarantee given to the insured that specified conditions will be fulfilled in the contract -They can also be specific, guaranteed statements made by an insurance applicant in answer to specific questions (in regard to medical history, nicotine use, dangerous recreational or occupational questions) asked in the life insurance application -Making false statements (false warranties) in an effort to gain from an insurance company constitutes fraud

Consequences of Incomplete Applications

-The policy may be held up and possibly even declined if not returned within the prescribed time frame -If an application is incomplete, the insurer will return it to the applicant who will have to furnish further information, or initial areas that are actually correct

Agent/Producer as Field Underwriter

-The producer is the first source of information regarding suitability of a risk to be assumed by the insurer -One of the main jobs of a producer is to gather information and make preliminary decisions as to the insurability of the applicant

Signatures

-The signature of all insureds is required on the application unless the insured is a minor child, in which case the child's parent or guardian's signature is required -State laws usually require that all adults that are to be insured must sign the application, and many companies require any child 15 years of age or older to sign an application if they are to be insured -It must be the insured's own signature. An agent or another individual who signs another person's name on the application is guilty of forgery and, possibly, fraud

Inspection Report or Investigative Consumer Report

-This report verifies a producer's accuracy and completeness on the application, and checks the applicant's moral or character risks, financial condition, home and business life -The purpose of these reports is to provide a general idea of the proposed insured's lifestyle characteristics (finances, mode of living, reputation, character, and possible exposure to abnormal hazards). --->used when individuals apply for especially large amounts of insurance --->rules vary from one insurer to another as to which risks warrant an inspection report --->usually obtained from national investigative companies --->applicants must be notified that an investigative inspection may be performed

Net Single Premium

-When an insurer charges a net single premium for a life insurance policy, the policy owner pays one large single premium at the policy's inception -This cash along with interest that will accrue on it will be enough to cover all insurer expenses as well as develop cash value and cover death benefit risk -Policyowner does not need to make any further payments

Viatical Loan Contract

-Written agreement through which a life insurance policyholder or a person covered under a group policy who has a catastrophic, life-threatening or chronic illness or condition secures a loan from a viatical loan provider using the policy as collateral. The unsecured loan amount is less than the face value of the policy; the difference between the loan principal and the face value of the policy is used to pay, among other things, the accrued loan interest. -Upon repayment of the viatical loan, the viatical loan provider's collateral interest in the policy terminates and the security interest is released to the original policyholder, or his or her designee. Viatical loans do not include loans taken against the cash value of a life insurance policy for the purpose of paying premiums due

Individual Factors Contributing to Premium Determination

-age -gender -tobacco usage -occupation -hobbies

Viatical Settlement Purchaser

1. A person who gives money as consideration for a life insurance policy or an interest in the death benefits of a life insurance policy 2. A person who owns, acquires or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy that has been or will be the subject of a viatical settlement contract, for the purpose of deriving an economic benefit

Replacement Violations

1. A violation of replacement regulations occurs if an agent, broker, or insurer recommends the replacement or conservation of an existing policy through the use of a substantially inaccurate or incomplete presentation or comparison of an existing contract's: -premiums -benefits -dividends -values. 2. Any comparison of a participating policy that does not include projected dividends based on the most recent dividend scale will be presumed to be incomplete. 3. If a policy owner purchases replacement policies from the same agent/broker, after indicating on applications that replacement is not involved, the pattern of action will be considered prima facie evidence of the agent's or broker's knowledge that replacement was intended. Such patterns will be considered prima facie evidence of the agent's or broker's intent to violate replacement regulations 4. The replacement of a life insurance policy or annuity that is transacted improperly will be considered: -an unfair method of competition -a deceptive practice.

Deferred Compensation Plans

1. An arrangement in which an employee agrees to defer some of their current income until a future date, such as retirement 2. The employer uses the deferred income to purchase cash value life insurance 3. The cash value of the insurance is used to help supplement the employee's retirement income, or if the employee dies before retirement his or her beneficiary will receive the death benefit 4. Deferred compensation plans are non-qualified plans for tax purposes (not tax-deductible) allowing companies to choose which employees can participate. These plans are usually reserved for the company's officers, executives, or other highly paid employees

Types of Business Life Insurance

1. Business Continuation Insurance 2. Buy-Sell Agreements/Cross-Purchase Plans

Business Continuation Insurance

1. Helps a business continue to operate when the death of the owner might otherwise cause the company to go out of business 2. Protects assets of the business from forced liquidation by making funds available to surviving family members and/or partners

Determining the Amount of Life Insurance Needed

1. Human Life Value Approach: this approach calculates the capitalized value of an individual's earning capacity into the future 2. Needs Approach: attempts to determine how much life insurance will be needed by surviving dependents to cover their needs and expenses, and also any expenses that result from the death of the insured. Types of Information Gathered 1. identify needs that arise or continue to exist after death of the insured 2. identify any existing available resources (savings, employer life insurance, Social Security, etc.) 3. calculate the difference between the needs and the available resources. This figure will represent the household's unmet needs, and is the amount to be covered by a life insurance policy Determining Lump-Sum Needs 1. funds for last expenses: funeral costs, applicable taxes, outstanding debts, medical costs, etc. 2. an emergency fund to help with unexpected expenses, especially in the period immediately following the death of the insured 3. educational needs of the family 4. mortgage and other payment funds Planning for Income Needs: income needs would include a readjustment fund to maintain the family's lifestyle while adapting to life without the deceased, income during the period when children are dependents, and a source of income for the lifetime of the spouse Coordination with Social Security, Employee Benefit Plans, and Other Assets: if there are source of available income such as social security, employee life insurance policy, pension plans, investments, etc., those amounts should be considered when computing the amount of a life insurance policy purchase. If those sources are not figured in, the policy amount could be inflated beyond what is actually necessary. Debt and Final Expenses: includes burial costs, medical bills, and other debt

Factors in Determining Premiums

1. Morbidity -the likelihood of illness or accident happening for a particular group of people -accident and health insurance poles are concerned with morbidity and actuarial tables -these statistics are then used to help determine the premium for policies 2. Mortality -the likelihood of death among members -mortality tables use individual health factors along with age and sex to help predict longevity 3. Pre-Existing Conditions -may affect whether a policy will be issued with exclusion riders for those conditions or if the application will be decline 4. Interest Earnings -premium dollars are invested in various investments (stocks, mutual funds, real estate, etc.) -returns on these investments, including earned interest, help to keep the overall cost of life insurance down 5. Insurer Operating Expenses -costs of doing business, including buildings, salaries, agent commissions, technology, and supplies -can raise or lower premium amounts equal the insurer operating expenses 6. Contribution to Surplus/Policy Reserves -liquid cash reserves insurers must maintain to meet expected death benefit payments and cash value payouts from cancelled policies -->a certain amount of each premium payment must go toward the build-up of the monetary reserves set aside for claim payments -->the amount of insurance that can be issued is based on this reserve, or surplus amount 7. Effect of Non-Payment Premium -if insured does not pay premium when due and after any grace periods expire, the policy is cancelled -in some policies is a method built in to avoid policy cancellation --->whole life and other cash value policies can have an automatic premium loan, which pays the premium from the policy's cash value --->with universal life policy, premium will come out of the cash account in the policy if insured misses a payment. If no cash left in account, policy will cancel --->insured must know that decreases in interest will cause more money to be paid in premium to cover these interests 8. Mortality Charge -part of a life insurance premium, and is the actual cost of insurance in a life policy 9. Expense Charge -typically found on universal life insurance policies and is designed to enable insurer to recover its business acquisition costs and premium taxes 10. Load Expense Charges -load is a sales charge or commission that compensates the advisor for his or her services, including fund selection advice -generally two categories of mutual fund costs: 1) sales charges and 2) annual expenses -front end load: sales charge at the time the investor/insured buys the shares. Also called A shares -rear end load: sales charge at the time the investor/insured sells the shares. Also called b shares -level load: when funds have level load, investor pays annual sales charge. --->may be lower than front/back end load --->can also be more if shares are owned for many years. Referred to as C shares -also no-load mutual funds -net premium: gross policy premium minus commissions; the premium available to pay anticipated losses prior to any loading for other expenses

Solicitation and Sales Presentations

1. Producer must state that he or she is a life insurance producer and provide the name of they company, prior to commencing a presentation 2. Terms such as estate planner, financial planner, investment advisory, financial consultant, or financial counselor must not be used in such a way as to imply that the producer is generally engaged in an advisory business in which compensation is unrelated to sale unless true 3. Any referee to policy dividends must include a statement that dividends are not guaranteed 4. Benefits must not display guaranteed and non-guaranteed benefits as a single sum, unless shown separately in close proximity 5. Financial condition of insurance company may not be misrepresented 6. Presentations which do not recognize time value of money through use of interest adjustments may not be used for comparing cost of policies 7. No analysis of a policy or the insurance company by a third party may be included without disclosing the payment made to that third party for the analysis 8. A life insurance cost index that reflects dividends or an equivalent level annual dividend must be accompanied by a statement that it is based on the company's current dividend scale and is not guaranteed 9. All sales proposals and sales presentations which fail to fully and fairly inform an applicant of future premium changes, benefits, and related options constitute a misrepresentation as to material facts

Key Employee Life Insurance

1. Protects the business owner when an individual or small group of people is essential for the business' continued operation 2. Employer buys life insurance on the life of the key employee, usually equal to one to tow years' salary 3. The employer is the beneficiary and owner of the policy, and if the key employee ides, the business can use the death proceeds to hunt for and hire someone to take the place of the deceased key employee

Personal Uses of Life Insurance

1. Survivor Protection: provides income for spouses, children, and other dependents after the death of the insured 2. Estate Planning: the establishment of trusts or purchase of annuities to provide for continued long-term income streams for dependents 3. Cash Accumulation: certain kinds of policies allow the owner to save money due to the cash value that accumulates 4. Security: life insurance can offer a certain amount of financial independence and freedom from doubt or anxiety over money issues for the survivors of the insured 5. Liquidity: life insurance can be an excellent source because of the proceeds paid which are tax free and in cash. Useful for paying off debts and providing cash to pay taxes when there are not enough liquid assets to do so 6. Estate Conservation: provides funds to pay taxes, probate fees, and other final expenses allowing the estate to pass fully to the heirs 7. Viatical Settlements: a terminally ill policy owner sells his or her life insurance policy at a discount for cash to a third party. The insured gains access to money for medical bills prior to death rather than the policy beneficiary getting the death benefit later. When the original owner dies, the third party receives the policy's entire death benefit. The new owner is actually investing in the death benefit of the policy

Viator

1. The owner of a life insurance policy or a certificate holder under a group policy who enters of seeks to enter into a vatical settlement contract 2. A person with a catastrophic or life threatening illness who has a life insurance policy and sells or intends to sell it in a vatical settlement; one who owns and assigns a life insurance policy in a viatical settlement

Policy Summary

1. Title (Statement of Policy Cost and Benefit Information) 2. Name and address of insurance producer and name and home office address of the insurer 3. Generic name of the basic policy and each rider 4. following amounts, where applicable --->annual premium for the basic policy --->annual premium for each optional rider --->guaranteed amount payable upon death --->policy loan interest rate, if applicable --->equivalent level annual dividend, if applicable 5. Date on which policy summary is prepared

Advertising Regulations

1. advertising (including stats and testimonials) cannot be misleading or deceptive and must be truthful, clear, and complete 2. words or phrases which require familiarity with insurance terminology may not be used 3. Regarding pre-existing conditions --->advertisement must disclose extent to which a loss is not covered if the cause of loss is traceable back to a condition existing prior to the policy's effective date --->if a policy does not cover losses traceable back to preexisting conditions, no advertisement may state or imply that the issuance of the policy of payment of a claim would not be affected by the applicant's physical condition or medical history; this limits the use of such phrases as "no medical examination required" 4. Advertisement may not make unfair or incomplete comparisons of policies or benefits or falsely disparage competitors 5. Illegal to make, publish, or circulate an advertisement or announcement containing any untrue, deceptive, or misleading representation or statement, with respect to the insurance business or any person in the business 6. An advertisement may not state or imply that a particular insurer or policy has been approved or endorsed by any government agency. Advertisements also cannot use symbols, trademarks, or names similar to a government agency 7. Any premium or benefit decreases, increases, or limitations must be prominently described 8. The source of statistics must be clearly stated and statistics must be current, correct, and appropriate for term of policy covered 9. All testimonials shown must be true and not taken out of context 10. All advertisements must contain insurer's name and policy's form number 11. Advertisements must not state or imply that prospective insureds become members of a group and are therefore entitled to special rates and privileges 12. Advertisements are prohibited from claiming that a policy represents an initial, introductory, or special offer, unless it is a fact 13. Insurer must maintain its advertisements on file for 4 years so the insurance can inspect them

What must be disclosed in a viatical settlement

1. any affiliation between the viatical settlement provider and the issuer of the life insurance policy to be viaticated 2. the name, address, and the telephone number of the viatical settlement provider 3. the dollar amount of the current death benefit payable to the viatical settlement provider under the policy or certificate. Also the availability of any additional guaranteed insurance benefits, the dollar amount of any accidental death and dismemberment benefits under the policy of certificate, and the viatical settlement provider's interest in those benefits 4. The name, business address, and telephone number of the independent third party escrow agent, and the fact that the viator or owner may inspect or receive copies of the relevant escrow or trust agreements or documents 5. That coverage on the lives of any other join or additional insureds or family riders could be forfeited 6. Any change in ownership or beneficiary must be communicated by the provider to the insured within 20 days after the purchase

Underwriting Differences in Group vs. Individual Life Insurance

1. exposure to claim payment is lowed per individual because the risk is spread over the group, usually resulting in a cost savings to the group because of this reduced adverse selection-everyone is insured 2. underwriters look more closely at specific health history of an insured 3. insurers cannot discriminate against an individual in the group who has poor health. People who might be declined individually may be included in a group policy as a condition of employment/membership in the group 4. Adverse Selection: over time, health risks in the group change as people are added to or subtracted from the group and can lead to an uneven balance between older and unhealthy people compared to the number of younger and healthy individuals 5. Group credit life usually lists the creditor as the beneficiary in order to pay off the debt. Individual credit life lists the individual as beneficiary who will be responsible for paying off the debt when the insured dies

Ordinary vs. Industrial Home Service

1. ordinary life insurance policies normally have face value amounts of more than $1,000, and have a variety of structures and benefits 2. industrial life policies are simple policies with: --->benefits of $1,000 or less (may be more) --->premiums that are collected at the insured's home on a weekly or monthly basis --->originally sold to industrial workers who were paid weekly; also known as home service policies since the agent normally comes to the home to collect the premium --->the agent's territory is called his "debit" --->this method of marketing represents less than 2% of life insurance in force in the U.S.

Examinations, Record Retention, and Investigations of Viatical Settlements

1. the department may examine or investigate any person or business that is necessary or material to the examination of a licensee 2. records must be kept for five years 3. any costs incurred during an exam of a provider or broker will be charged to the provider/broker

Corporate-Owned Life Insurance

A corporation might purchase a life insurance policy to cover key people in order to indemnify the business against the loss of knowledge and experience, and to assist in financing the cost of employee benefit plans such as deferred compensation plans

Viatical and Life Settlements Disclosure to Consumers

A disclosure statement must be given to each viator or insured before the individual is asked to sign any documents and at the time of the vatical settlement is signed by all parties. The disclosure statement must be signed and contain the following: 1. possible alternatives to a viatical settlement, including any accelerated death benefits or policy loans offered under the viator's life insurance policy 2. information that some or all of the proceeds of the vatical settlement may be taxed under federal income tax and state franchise and income taxes 3. proceeds of viatical settlement can be subject to claims from creditors 4. receipt of the proceeds of a viatical settlement may adversely affects the victor's eligibility for Medicaid or other government benefits or entitlements 5. the viator may rescind a vatical settlement contract for 15 calendar days after receipt of the settlement (similar to a 15 day "free look" period). If the insured ides during this 15 day period the contract is considered to have been canceled. Any vatical settlement proceeds must be repaid along with any premiums, loans, and loan interest to the viatical settlement provider or viatical settlement provider or viatical settlement purchaser 6. once the settlement provider receives notice that the ownership interest as been transferred and a beneficiary designated, funds must be sent to the viator within three business days 7. entering into a viatical agreement may cause the insured to forfeit some of the life insurance policy provisions 8. a copy of the NAIC's brochure or similar brochure developed by the commission and describing the settlement process must be given to the potential viator.

Viaticated Policy

A life insurance policy or certificate that has been the subject of a completed viatical settlement contract or viatical loan contract

Medical Information Bureau (MIB)

A non-profit information agency, established by insurance companies, which provides information from other insurers the applicant may have applied to in the past. (The existence and use of the MIB must be disclosed in writing to applicants and a signature obtained.)

Viatical Settlement Broker

A person that on behalf of another and for a fee, commission or other valuable consideration introduces viators to viatical settlement providers, or offers or attempts to negotiate vatical 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 a vatical settlement contract

Three Types of Illustrations Used

A presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years and that is one of these three types: -Basic: shows both guaranteed and non-guaranteed elements -Supplemental: meets applicable requirements and may be presented in a format differing from the basic illustration, but may only depict a scale of non-guaranteed elements that is permitted in a basic illustration -In Force: an illustration furnished after policy is issued and has been in force for a year or more

Viatical and Life Settlements General Rules

A viatical or life settlement purchase agreement is the contract or agreement in which the viatical or life settlement buyer agrees to buy all or part of a life insurance policy on the life of someone with a critical or terminal illness. This gives the buyer access to the policy's death benefit Viatical Settlement Broker Authority & Licensing Life and annuity agents must obtain a license before selling vatical agreements by submitting the proper application and paying the appropriate fee Chronically Ill: this is defined as... -being unable to perform at least two activities of daily living, or ADLs, (eating, toiling, transferring, bathing, dressing, or continence) -requiring substantial supervision by another person to protect the individual from threats to health and safety due to severe cognitive impairment Terminally Ill: having an illness or sickness than can reasonably be expected to result in death in 24 months of less

Viatical Settlement Contract

A written agreement entered into between a viatical settlement provider and a viator. The agreement must establish the terms under which the viatical settlement provider will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy or certificate, in return for the victor's assignment, transfer, sale, devise or bequest of the death benefit or ownership of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider

Interstate Insurance Fraud

According to the National Association of Insurance Commissioners (NAIC): -Estimated to cost between $80 billion and $100 billion annually -The average cost of insider insurance fraud is $72,000 per incident

Avoiding Adverse Selection When Determining Premiums

Adverse selection in this case is insuring too heavily those needing coverage the most (sick and elderly) without the balanced insuring of those who don't need it as much (young and healthy) -major part of underwriter's job to avoid adverse selection and charge sufficient premiums -if premiums are too high, healthy individual will seek coverage elsewhere leaving the sick as the only ones maintaining coverage and using the benefits

Delivery

Agents need to do several things when delivering the policy to their client, and those responsibilities follow Policy Review: -an agent needs to review: --->reasons policy was purchased --->what type of policy it is --->other riders/benefits included in the policy -any necessary disclosures should be made and the insured be furnished with the appropriate related policy material: -Medical Information Bureau information -Consumer reports -Medical record information -Insurance information practice disclosures -HIPAA (Health Insurance Portability & Accountability Act) information and authorization -HIV consent forms and information -Buyer's guides. Explanation of Changes: -agent must provide explanations for any changes made to the policy during the underwriting process, such as a table rating due to the individual's health, or the change from a non-nicotine to a nicotine policy due to factors uncovered in the medical exam -changes made to the policy during the underwriting process must be acknowledged by the policyholder with their personal signature Required Signatures on the Application: -The producer must obtain the signature of the proposed insured, the applicant; the spouse, children to be covered who are age 18 or over, the payor, and the owner. The producer also needs to sign the application Statement of Continuing Good Health: -The agent must also have the insured sign a Statement of Continuing Good Health, acknowledging that the insured's current physical health is the same quality as when the application was completed Collection of Earned Premium: -An agent must collect any earned premium from application to the time of policy issue --->If enough premium is not collected at the time of application, or if the policy is issued after the second premium payment is due, the producer needs to collect the payment at the time the policy is delivered -Coverage does not begin until the full premium for the selected mode has been paid and any required signatures have been obtained Effective Date of Coverage: No coverage is in effect until the initial premium is paid in full to the insurance company -If the applicant would not be insurable with standard rates and dies before the policy is issued whether or not a counter offer is made by the insurer (to rate the policy, for instance) there would be no payment of death benefit -If the full initial premium is not collected at the time of application, no coverage will be effective until the policy is delivered and the insured signs a statement of continued good health and pays the initial premium Delivery Receipt: given to the applicant at the time of policy delivery for two reasons -to indicate if the insured needs to pay additional premium (due to policy alterations required by underwriting) -to affirm that the policy was received in order to start the free-look period Other Disclosures: -Consumer Information Privacy Act -Do Not Call List

Split-Dollar Life Insurance

Allows employees to buy life insurance at reduced costs, "splitting" premium costs with employers 1. The employer pays the cost of the insurance that will be applied to the cash value of the policy. The policy's cash value can be entered as an asset on the company's balance sheet 2. The employee pays the cost of the actual insurance proceeds benefit 3. Upon the employee's death, the employer is paid the greater of the premiums paid or the cash value of the policy. The employee's beneficiary is paid the death benefit minus the amount paid to the employer

USA Patriot Act

Amends two existing statutes 1) Money Laundering Control Act of 1986 --->sets forth criminal laws designed to combat money laundering 2) Bank Secrecy Act of 1970 (BSA) --->a recordkeeping and reporting statute that applies to banking institutions generally --->defines two different types of entities that are subject to the various requirements under the BSA or the regulations thereunder --->The BSA defines the term "Financial Institution" to include investment companies and broker-dealers --->The BSA further defines the term "Covered Financial Institution" to include broker-dealers, but not investment companies The USA PATRIOT Act includes several substantive provisions designed to detect and prevent money laundering -Financial Institutions must develop and implement anti-money laundering programs. These programs must, at a minimum, include the following: (1) the development of internal policies, procedures and controls; (2) the designation of a compliance officer; (3) an ongoing training function; and (4) an independent audit function to test the programs -Financial Institutions should design their anti-money laundering programs to implement procedures and policies that can reasonably be expected to detect and report activity that may be associated with money laundering. It is important to have money-laundering detection procedures in order to avoid possible criminal liability, which can occur if an investment company is "willfully blind" to money laundering that is occurring within its accounts -The anti-money laundering program must also include a designated compliance officer, an ongoing training program, and an independent audit function -All Financial Institutions are required to implement procedures that are reasonably designed to verify the identity of customers at the time an account is opened and to check the list of customers to determine if any customers are included on a list of known or suspected terrorists -Financial institutions must implement procedures that: (1) verify the identity of the person opening the account to the "extent reasonable and practicable;" (2) maintain the records of the information used to verify the person's identity; and (1) prepare and submit reports of suspicious account activity; and (2) participate in information sharing between Financial Institutions and government agencies.(3) consult with "lists of known or suspected terrorists or terrorist organizations provided to the Financial Institution by any government agency" to determine if any customer is included on such a list

Advertising Life Insurance Policies

An advertisement can be: -printed material and descriptive literature produced by an insurer to be used in newspapers, magazines, radio and tv scripts, billboards, and other publications/displays -sales aids of all types produced by an insurer for presentations to the public, including circulars, leaflets, booklets, illustrations, form letters, etc. -prepared sales representations and presentation material for use by agents, brokers, and other representatives of insurers

Credit Report

An applicant's credit report compares requested benefits to actual income, and helps determine premium payment expectations. -Applicants with poor credit ratings are more likely to let their policies lapse within a short period of time -It costs a lot of money for an insurer to issue an insurance policy; underwriters might deny coverage to an individual with a poor credit rating because of the probability of cancellation due to non-payment -The applicant must sign a disclosure form that they have been made aware that credit reports may be used in underwriting policies and determining premium rates

Unfair Financial Planning Practices

An insurance producer, agent, broker or consultant may not: -present themselves as a financial planner, investment advisor, or any other type of specialist engaged in the business of financial planning or giving financial advice if he or she is only certified to sell policies. -do any kind of financial planning without disclosing to the client that he or she is also an insurance salesperson and that commissions for insurance sales will be received in addition to financial planning fees. -charge fees other than commissions for financial planning unless the fees are set down in a written agreement signed by the client and details the services rendered, the fee structure, and that the client is not obligated to purchase any products

Field Underwriting Notice of Information Practices

An insurer or agent must provide a written notice of information practices to all applicants or policyholders which includes: -whether personal information may be collected from persons other than the individual (s) proposed for coverage -the types of persona information that may be collected and the types of investigative techniques that may be used -the types of disclosure allowed by law -a statement that information obtained from a report prepared by an insurance support organization may be retained by the preparer and disclosed to other persons -for insurance applications, a notice must be provided no later than: ---->at the time of policy delivery when personal information is collected only from the applicant or from public records ---->at the time the collection of personal information is initiated when the information is collected from a source other than the applicant or public records -for policy renewals, notice must be provided no later than the policy renewal date, except that no no notice will be required if: ---->personal information is collected only from the policyholder or from public records ---->a legal and proper notice has been given within the previous 24 months -For policy reinstatements or changes in insurance benefits, notice must be provided no later than the time a request for reinstatement or benefit changes is received by the insurance institution unless personal information is collected only from the policyholder or public records

Insurable Interest

An underwriting test for an application of insurance that demonstrates the person purchasing a policy has a legal interest in the continued longevity of the insured -In life insurance, the owner must have an insurable interest at the time of application (ex. spouse, parent, child, someone with a business relationship with the insured such as partner or employer), insurable interest is not required at the time of the insured's death

Conversation

Any attempt by the existing insurer or its agent to dissuade a policy owner from replacing the existing life insurance or annuity. The agent must: -keep a notice regarding the replacement, the policy statement, and any ledger statements used must be kept for three years or until the next regular examination by the Department -offer the applicant the right to return the policy or contract within 20 days of delivery and receive an unconditional full refund of all premiums or considerations paid Duties of Insurers in Respect to Direct Response Sales -If a replacement is involved with a direct response sale, and a replacement is not proposed by the insurer, the applicant must be sent a replacement notice by the insurer -If the insurer proposed the replacement, it must: --->provide a replacement notice to applicants --->request a list of all policies to be replaced --->send written notice to each existing insurer advising them of the replacement, and a copy of the policy summary

Buy-Sell Agreements/Cross-Purchase Plans

Arrangements between partners or associates in which surviving members agree to purchase the ownership interest in the company from the deceased owner's estate at a pre-determined price 1. Life insurance is the funding vehicle 2. A license attorney draws up the actual agreement binding the owners contractually to carry out the purchase upon the death of the other

Disclosures at the Point of Sale

At the time of the sale of an insurance policy, an agent is required to provide informational and disclosure items to the insured that may include: -Medical Information Bureau Information -Consumer reports -Medical record information -Insurance information practice disclosures -HIPAA (Health Insurance Portability & Accountability Act) information and authorization -HIV consent forms and information -Buyer's guides -Policy summaries

Duties of Agents

Every life insurance application must contain statements signed by both the agent or broker and the applicant as to whether the sale involves replacement -If it does involve replacement, the agent and applicant must sign a notice regarding replacement of life insurance or annuity form no later than the time of application -A copy of the notice must be left with the applicant Each insurer must: 1. require from the agent or broker --->a list of all the applicant's existing life insurance or annuities to be replaced, containing the name of the insurer, the insured, and the contract numbers --->a copy of the replacement notice provided to the applicant 2. Send written communication to each existing insurer advising of the proposed replacement within seven working days of --->the date the application is received in the replacing insurer's home office --->the date the contract is issued whichever is earlier 3. Require that a policy holder be furnished with a policy summary for the existing insurance by eachL --->existing insurer OR --->insurer's agent or broker the undertakes a conversation

Fixed vs. Variable Life Insurance

Fixed Life Insurance: has a set, guaranteed interest rate -cash value will always increase at a pre-determined rate -money invested goes into the general accounts of the company, and consequently the safety of such an investment may be affected by the stability and strength of the company Variable Life Insurance: has an interest rate that changes along with a set of mutual funds of other stock market indicator -when stock market performs well the cash value in the variable products increases -if the stocks, mutual funds, or other indicators decreases, the cash value in the variable product will also decrease -since there is more risk with the variable policy, there is a chance for greater return on the cash value (as well as the chance for loss) -a separate account is held by an insurance company for investments made through variable contracts Regulation of Variable Products: -state securities and regulated industries bureaus enforce uniform securities acts -primary focus is on cases involving securities fraud and sale of illegitimate products including boiler room sales activity -they review securities registration and also the disciplinary history of broker-dealers and agents to determine whether licenses should be revoked -producers must have both a life insurance producers license as well as a FINRA securities license to sell any variable products

Attending Physician Statement (APS)

If the applicant has received medical treatment in the past, the insurer may write and request additional information from the doctor as to recovery or current condition

Executive Bonuses

In an executive bonus life insurance plan, the company pays the executive a bonus so that that individual can purchase cash value life insurance with him or her as the owner, insured, and the designator of the beneficiary

Risk Classification

Insurance Applicants are Classified In One of Four Ways: 1. Standard Risks: normal risks with standard premium rates 2. Preferred Risks: insureds with better than average health who consequently may have lower premium rates 3. Substandard Risks: Individuals with higher than average risk because of poorer health or hazardous occupation or hobbies. Results could be an exclusion or impairment rider or waiver attached to the policy, an extra premium charge, or the limitation of type of policy. A waiver, in this case, is the relinquishment by the insured to the right of coverage for the problem 4. Uninsurable/Declined: Applicants who are rejected or denied coverage due to excessive risk(s) that the insurance company does not want to accept Significant relationship between the level of risk and the premium charged, in that the different levels of risk classification help to determine the premium amount--the greater the risk to the company, the greater the charges will be

Selection Criteria and Unfair Discrimination

Insurers cannot: -discriminate against individuals who are blind or partially blind -refuse an insurance application on the basis of a genetic condition, developmental delay, or developmental disability -cannot retire the performance of a genetic test without first receiving the informed written consent of the test subject -discriminate against individuals based on information that they have been victims of abuse, nor may they seek information on such

Fraudulent Acts & Prohibited Practices

It is prohibited to enter into a vatical settlement within two years of the insurance policy's issue unless: 1. the policy was issued as the result of the victor's conversion from a group policy so that coverage has been in effect for 24 months or more 2. the insured has become terminally ill or disposes of ownership interests in a closely held corporation subject to terms of a buyout agreement in effect at the time the original life policy was issued

Do Not Call List

Many agents use telemarketing as a means to contact prospective consumers to determine interest and set appointments -The federal government created the national "Do Not Call Registry" that allows consumers to put their name on the list so that no telemarketers may legally call that number. Individuals and companies that violate the "Do Not Call" program may be fined for each instance -Telemarketers must transmit their phone number when calling and, where possible, their name or the company's name for which they are representing. -Consumers may file complaints with the FTC against those who call after the consumer has been on the list -The producer should also explain that the "Do Not Call" list has an exception for those having "an established business relationship." This means that the producer or his company may call the insured in relation to work-related issues, even if the individual is on the national list. A disclosure statement regarding this must be given the policyholder and the insured needs to sign a statement as to whether or not the company may call to solicit additional business

Illustration Requirements

Must be clearly labeled "life insurance illustration" and contain the following basic information: -name of insurer -name and business address of producer or insurer's authorized representative if any -name, age, sex of proposed insured, except where a composite illustration is permitted -underwriting or rating classification upon which illustration is based -generic name of policy, the company product name, if different, and form number -initial death benefit -dividend option election or application of non-guaranteed elements if applicable An insurer or its producer must not do any of the following: -represent policy as anything other than life insurance policy -state or imply that the payment or amount of non-guaranteed elements is guaranteed -use an illustration that shows policy performance more favorable to the policy owner than that produced by the illustrated scale of the insurer -provide an incomplete illustration -imply that premium payments are not required each year to maintain death benefits unless true -use the term "vanish" or "vanishing premium" or a similar term that implies the policy becomes paid up, to describe a plan for using non-guaranteed elements to pay a portion of future premiums -use an illustration that is "lapse-supported" except for policies that can never develop non-forfeiture values -use an illustration that is not "self-supporting"

Money Laundering

Occurs when criminals attempt to characterize the proceeds from illegal activities as funds derived from a legitimate enterprise

Participating vs. Nonparticipating Life Insurance

Participating: sharing in the profits of the company Nonparticipating: right or absence of participation is related to the premium charged

Premium Payment Modes

Premiums can be paid: -annually (generally least expensive) -semiannually -quarterly -monthly -through a bank check plan in which premium is deducted on a monthly basis from the insured's bank account (most likely to stay in force longest, annual too)

Insurability

Refers to the acceptability to the company of an applicant for insurance

Replacement

Refers to when a new policy or contract takes the place of an existing contract that is or will be: -lapsed, forfeited, surrendered, or otherwise terminated. -converted to reduced paid-up insurance, continued as extended term, or otherwise reduced in value (benefits or term of coverage). -reissued with any reduction in cash value. -used in a financed purchase. The purpose of replacement regulation is to protect the interests of life insurance and annuity purchasers by establishing minimum standards of conduct to: -assure that a purchaser receives information to make a decision in their own best interest -reduce the opportunity for misrepresentation and incomplete disclosures -establish penalties for failure to comply with the requirements Exemptions: Replacement regulations do not apply to: -group life policies, including credit life and pension, profit sharing, group annuities, and other plans with tax-deductible premiums. -variable life policies. -proposed policy changes with the same insurer; for example, exercising a conversion option. life binders or conditional receipts with the same insurer. -registered contracts, provided that the premium or contract contribution amounts and the prospectus or offering circular are furnished in place of a policy summary.

Violent Crime Control Act

Section 1033 deals with interstate insurance fraud Purpose: -to prevent the destructive effects of embezzlement by multiple employees, agents and officers in the insurance industry What it Does: -Creates criminal and civil penalties for insurance fraud committed by individuals in the insurance industry -Prohibits any individual with certain felony convictions from working in the business of insurance without a wavier -Outlines civil and criminal penalties, including prison terms, for individuals who have been convicted of any criminal felony involving dishonesty or breach of trust and who willfully continue to work in the business of insurance without receiving written consent from the appropriate regulatory official. Any individual who works in the business of insurance without receiving this written consent is considered a person who is prohibited -Also provides for fines and imprisonment to those who knowingly employ such individuals Penalties Set Forth in Act: -Any individual who has been convicted of a criminal felony involving dishonesty or breach of trust and willfully engages in the business of insurance, is subject to fines and/or imprisonment of not more than 5 years -A felony involving dishonesty typically includes any offense constituting or involving perjury, bribery, forgery, counterfeiting, false or misleading oral or written statements, deception, fraud, schemes, material misrepresentations and the failure to disclose material facts -A felony involving a breach of trust would include crimes constituting or involving misuse, misapplication or misappropriation of anything of value held as a fiduciary (i.e., as trustee, administrator, executor, conservator, receive, guardian, agent, employee, partner, officer, director or public servant) or the misuse of one's official or fiduciary position to engage in a wrongful act or misappropriation

Individual Policies

Single policies written on or for a particular individual who receives a copy of the policy. the policy can be one of a greater number of types

Direct-Response Sales

Solicitations that take place: -through the mail -by telephone -via the internet -through other mass communication media

Fraudulent Vatical Settlement Act

Some provisions of the various Acts include: 1. requiring and defining the licensing and conduct of viatical settlement brokers 2. possible alternatives to a vatical settlement -->facts regarding vatical settlements, including the financial consequences of selling a life insurance policy in vatical settlements -->possible alternatives to a viatical settlement 3. making it unlawful to solicit or sell viatical settlement contracts using untrue facts or by engaging in any type of fraud regarding vatical settlement contract

Permanent vs. Term Life Insurance

Term Life Insurance: offers coverage for a specific and predetermined period of time, and its only benefit is a death benefit -temporary insurance protection -low cost -no cash value -usually renewable -conversion to permanent life insurance Permanent Life Insurance: offers a death benefit and the accumulation of cash value, three types are: whole, universal, and variable life policies -permanent protection -more expensive to own -builds cash value -loans are permitted against the policy -favorable tax treatment of policy earnings -level premiums

Viatical Loan Borrower

The owner of a life insurance policy or the certificate holder under a group life insurance contract insuring the life of a person with a catastrophic, life-threatening or chronic illness or condition who enters into a viatical loan contract with a viatical provider

Underwriting

The process by which insurers analyze risks to decide if they want to insure them, and at what rates they will insure them

Change of Insured Provision

This allows a company to maintain a key person policy for a succeeding key person if the original leaves the company, without the need to cancel the policy and issue a new ones

Existing Policy or Contract

This is an individual life insurance policy or annuity contract in force, including binders or policies/contracts within unconditional refund periods

Replacing Insurer

This is the insurance company that issues or proposes to issue a new policy or contract that replaces an existing policy or contract

Existing Insurer

This is the insurance company whose policy will be changed or affected by the replacement

Insurable/Uninsurable Risk

Three important considerations in determining an applicant's insurability are: -the insured's physical condition -any moral hazards that may exist -the probability of disability from occupation or hazardous recreational activities After a review of the information from various reports, the underwriter will decide if the applicant is insurable, uninsurable, or insurable with certain conditions or stipulations

Group Policies

Written on a group of people under a single master policy usually issued to their employer or another trustee. Individual group members are usually issued certificates of coverage rather than copies of the policy. 1. The master policyholder or sponsor assists in the plan's administration 2. coverage is generally term life but can be permanent insurance 3. if the employer is the master policyholder and pays the premiums, the costs on policies with a face amount of up to $50,000 are income tax-deductible for the employer