2023 AL Life Insurance Only - Key Facts
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Policy Loan & Withdrawal Options
- Failure to repay a loan has permanent effect on cash value accumulation - Annual interest on a loan is added to the amount of the loan as it accrues - Lapse: Outstanding policy loan + interest > cash value of the policy - Whole Life: A loan can be taken out once the policy develops cash value Automatic Premium Loan rider can be added to policy (but not to term or credit life policy) - Partial surrenders usually allowed in annuities, universal life and variable life policies
Human Live Value Approach vs. Needs Approach - Personal Uses of Life Insurance
- HLVA: Created to establish what a family would lose in income upon death of sole or primary income provider - Needs Approach: Does not consider future earnings
Insurable Interest - Life Insurance Basics
- Insurable interest must exist at the time of application, but not necessarily at the time of a claim - Insurable interest must be based on economics or family relationships - Insurable interest exists if someone would benefit if another person continues to live
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (General)
- Parties: Producer must sign the application, but are not party to the contract - Producer must explain policy provisions, riders, exclusions to the applicant - Owner's Rights section shows who has the right to change the beneficiary, take out a loan, and take cash surrender - Collateral Assignment: Policyowner can temporarily assign policy to a bank as the sole collateral for a loan (policy loans not taxable) - Absolute Assignment: Policyowner can transfer ownership to another person - Entire Contract: Includes the policy, application, and anything else attached - Changes/Modifications: Must be made in writing and signed by company officer (Producer cannot make changes)
Exposure - Key Concepts
A condition that could result in a loss
Life Settlement - Personal Uses of Life Insurance
A contract between life insurance policy owner and a third party
Substandard Risk - Underwriting
A rated policy is one issued to substandard risk with dangerous hobbies or health problems
Offer and Acceptance - Contracts
A specific and definite proposal to enter into a contract
Warranty - Contracts
A sworn statement of truth and guaranteed to be true
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Term Life)
Added to parent's policy to cover the life of a child, child's coverage ends when age 18 (unless the rider is converted to permanent coverage)
Stock Redemption Plan - Business Uses of Life Insurance
Agreement where corporation agrees to buy back the stock of a deceased shareholder
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Children's Term)
All of the insured's children are covered for a single, flat premium
Utmost Good Faith - Contracts
All parties to insurance transaction are honest
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Guaranteed Insurability)
Allows insured to increase coverage periodically without a physical exam (aka guaranteed purchase benefit)
VARIABLE LIFE - Variable Whole Life
Allows insured to self-direct the cash value investment
Law of Large Numbers - Key Concepts
Allows insurers to predict claims more accurately - To be insurable, losses must be calculable - Applies to groups of people, not individuals (more people in the group, more accurate predictions)
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Nonforfeiture Options (Reduced Paid-Up Nonforfeiture)
Amount of coverage in the new policy is reduced from that of the original policy - May be taken any time there is cash value - Provides coverage for life
Immediate Estate - Personal Uses of Life Insurance
An immediate estate is created when life insurance policy is purchased
Express Authority - Producers
Authority written into producer's contract (aka binding authority)
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Nonforfeiture Options (Extended Term)
Automatic nonforfeiture option
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries
Beneficiary does not need to be the age of majority (18 or 21 depending on the state) to receive proceeds; but proceeds cannot be directly paid to a minor child - Proceeds create an immediate estate for beneficiary
WHOLE LIFE INSURANCE - Whole Life
Benefits are bundled/packaged together - Policies must contain table showing guaranteed cash value at end of each year (anniversary date) for first 20 years (show per thousand) - Matures at age 100 - Pays face amount upon death or age 100, whichever is first - Premiums due until death or age 100
Elements of a Contract - Contracts
COAL - Consideration - Offer - Acceptance - Legal purpose
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Level Term)
Can be added to parent's policy to insure a child
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Change of Insured)
Can be used by employer to transfer a key person life insurance policy from one key person to another
TERM LIFE INSURANCE - Conversion
Can convert to Whole Life, but not reverse
Speculative Risk - Key Concepts
Chance of both loss and chance to gain
Pure Risk - Key Concepts
Chance of only loss and no chance to gain
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Family Policy)
Combination policy that automatically covers all family members including newborns (after short waiting period), at no extra premium charge
Risk Classification - Underwriting
Company underwriter determines final rating classification (not the producer) - Preferred, Standard, Substandard
Receipts - Underwriting
Conditional/binding receipts for life and health insurance (binders for property/casualty insurance)
Consideration - Contracts
Consideration clause provides that something of value must be exchanged - Consideration does not need to be equal, and policy cannot be voided due to unequal consideration
TERM LIFE INSURANCE - Convertible Term
Conversion based on insured's current/attained age
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Grace Period)
Coverage continues even if premium is not paid (Ordinary Life Insurance allows 30 days) - If terminated employee dies within grace period of employer provided group life policy without converting, full death benefit is paid to beneficiary - If insured dies during grace period without paying the premium due, face amount is paid to benefit less the overdue premium
Coverage Start - Underwriting
Coverage never begins unless premium is paid - Earliest that coverage can start is the day of application, if applicant paid first premium, has no conditions to fulfill and had not lied on the application - If producer gives applicant a conditional receipt, and underwriter rejects application, then there is no coverage
FLEXIBLE PREMIUM POLICIES - Universal Life
Differs from Whole Life because it has a flexible premium and guaranteed minimum rate of return (aka Interest Sensitive Whole Life) - Partial Surrender: Policyowner can withdraw some of the cash value without paying tax on the interest - Policies are a combination of a 1-Year Renewable Term and Cash Value account - Loans are allowed on policies - Benefits are transparent/stand-alone
Third-Party Policyownership - Business Uses of Life Insurance
Examples include key person and partnership insurance, and policy written on life of a spouse or minor child
TERM LIFE INSURANCE - Decreasing Term
Face amount decreases, not the premium (the type of life insurance provided in mortgage redemption service)
Concealment - Contracts
Failure to disclose a material fact
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Free Look Period)
Free-Look Period: Usually 10 days from policy delivery (if mailed, from date of mailing aka constructive delivery), if policyowner returns the policy they receive a full refund - Policyowner can exercise the free look provision without giving any reason
WHOLE LIFE INSURANCE - Limited Pay Whole Life
Has limits pertaining either to number of years payments are made (such as 20-pay), or the age when all premiums must be paid (such as paid-up at 65) - Matures at age 100 (although paid-up earlier - such as paid-up at 65) - Premiums due for a shorter period of time than Whole Life - On 20-pay life, cash value is equal to face amount upon maturity
Foreign Insurer - Insurers
Has their home office in another state
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Suicide)
If insured commits suicide within a certain period of time after policy issue, no benefit is payable but all premiums are refunded to the beneficiary - In most states, suicide is covered after 2 years (check your state regulations for the time limit in your state) - If insured dies in an accident, insurer may order an autopsy to determine it was not suicide
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Reinstatement)
If insured's policy has lapsed and they want it back, can apply for reinstatement (unless surrendered for cash) - Upon reinstatement, incontestability and suicide provisions start over
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Misstatement of Age)
If insurer discovers insured misstated their age on the application, insurer will adjust the premiums and benefits according to the correct age of insured - Provision runs for duration of the policy - If insured understates their age, it is the face amount that is reduced
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Payor Benefit)
If parent paying the premium on child's policy dies or is disabled, allows the premium to be waived (not the same as Waiver of Premium rider)
Application Requirements - Underwriting
Incomplete application is typically returned (but if approved, coverage begins and company has waived ability to contest a claim) - Applicants can backdate a life insurance application for up to a certain number of months (usually 6 months) in order to obtain a lower premium
Alien Insurer - Insurers
Incorporated outside the U.S. and sells in the U.S.
VARIABLE LIFE - Variable Products
Investing in variable products is considered a hedge against inflation - No guarantees, not backed by the guaranty fund - Agent must be registered with FINRA to sell variable products
Mortality / Mortality Table - Underwriting
Life insurance premiums are based on mortality (death) + company expenses - interest earned on company investments (mortality table based on people and time)
Discrimination & Consent - Underwriting
Life insurers can discriminate based on physical hazards of the applicant (age and health) - HIV consent form states that results of HIV test are only shared with certain individuals (such as underwriter)
Preferred Risk - Underwriting
Likely to receive a premium discount
GROUP LIFE - Group Life Insurance
Master policy issued to policyowner (usually an employer) - Employees receive a certificate of insurance summarizing coverage and listing employee's beneficiary - Employer may require employee to pay premium for dependent's coverage - Contributory Group Life: Requires that 75% of eligible employees enroll in the policy - Noncontributory Group Life: Requires 100% of eligible employees participate (employer pays the total premium) - Typically less expensive than individual policies Conversion from group policy to individual policy permitted for 31 days from termination, regardless of health - Group cannot be formed only to buy insurance - Participation requirements help avoid adverse selection - Experience rating for large groups only (rates based on claims experience of that group)
FLEXIBLE PREMIUM POLICIES - Adjustable Whole Life
May be suitable for those with fluctuating income - Adjusting the premium on Adjustable Whole Life policy affects the face amount (and vice versa)
Stock Insurer - Insurers
May pay dividends to shareholders/stockholders (dividends not guaranteed)
Insurance Laws (State to State) - Key Concepts
Not required to be uniform from one state to another
Implied Authority - Producers
Not written/expressly granted, but is actual authority producer has to transact normal business activities
Government Insurance - Insurers
Offers insurance based on social needs like flood insurance and workers compensation - Does not offer insurance for purpose of preventing fraud
Standard Risk - Underwriting
One with an average life span, most applicants are standard risks
Unilateral Contract - Contracts
Only one party makes an enforceable promise (the insurer)
SPECIALIZED POLICIES - Joint Life
Pays only when first insured dies
SPECIALIZED POLICIES - Joint and Survivorship Life
Pays only when second insured dies
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Accelerated Benefits)
Pays proceeds before death to those with terminal illness
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Waiver of Premium)
Pays the premium on behalf of disabled insured after a short waiting period, until insured recovers or dies (does not pay cash benefit to insured)
SPECIALIZED POLICIES - Survivorship Life
Pays when surviving insured dies - Commonly used in estate planning so death benefit pays estate taxes when due
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Incontestability)
Policies are incontestable if in force for 2 years (new policies are contestable for material misrepresentation for first 2 years)
Contract of Adhesion - Contracts
Policy ambiguities always favor the insured
WHOLE LIFE INSURANCE - Single Premium
Policy has immediate cash value, and can be used to buy a policy paid-up for life
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Standard Provisions (Proceeds)
Policy proceeds left with the insurer, for the benefit of the beneficiary, are NOT attached by creditors - Proceeds cannot be directly paid to a minor child - If insured buys a policy and dies one month later, insurer must pay the claim
VARIABLE LIFE - Variable Universal Life
Policy that has a flexible premium and investment component (allows policyowner to self-direct cash values into equities)
VARIABLE LIFE - Variable Life
Policy that invests cash values in equities
SPECIALIZED POLICIES - Juvenile Life
Policy written on the life of a minor
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Revocable)
Policyowner can change the beneficiary at any time (beneficiary has no vested rights under policy)
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Irrevocable)
Policyowner cannot change without beneficiary's consent (beneficiary has vested interest in the policy)
TERM LIFE INSURANCE - Level Premium
Premium and face amount are level throughout the term
TERM LIFE INSURANCE - Annual Renewable Level Term
Premium increases annually, with face amount remaining level
WHOLE LIFE INSURANCE - Straight/Traditional Whole Life
Premium is level and coverage provided until insured dies or reaches age 100
Executive Bonus - Business Uses of Life Insurance
Premium paid to employee as a bonus is deductible by the business, amount paid to employee is taxable income to employee - When life insurance purchased as an executive bonus for a corporate employee, policy belongs to that employee
Producer Authority - Producers
Producers have expressed, implied, and apparent authority
Reinsurance - General Key Concepts
Protects insurers in the event of catastrophic loss (most insurers buy this)
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Riders (Return of Premium)
Provides level coverage from the whole life policy, and increasing coverage from the rider - Return of Premium rider and Return of Cash Value rider are both increasing term coverage
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Common Disaster)
Provision assumes that the insured died last
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Spendthrift Clause)
Provision not applicable if proceeds are paid in lump sum
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Contingent)
Receives proceeds if primary beneficiary dies before the insured
TERM LIFE INSURANCE - Term Insurance
Renewable with no physical examination, up to certain age
Producers - Producers
Represent the insurance company, not the insured - May be personally liable if violating producer contract - Independent producers own their accounts and are not employees of insurance company
Indemnity - Contracts
Restoring the insured to the same position as before the loss occurred (to make whole)
Hazard - Key Concepts
Something that increases the chance of loss
Buy-Sell Agreements - Business Uses of Life Insurance
Stockholders in small, private corporations often enter into buy/sell agreements with the corporation that are funded by life policies - Policy that provides for business continuation if business partner dies is based on cross-purchase buy/sell agreement
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Nonforfeiture Options
Surrender charges levied by some insurers on annuities and universal life reduce the amount policyowner receives upon cash surrender - If policy with cash value lapses for nonpayment, insured has 60 days from premium due date to select a nonforfeiture option
Peril - Key Concepts
The cause of a loss (such as fire)
Risk - Key Concepts
The chance of loss
CREDIT LIFE INSURANCE - Group Credit Life
The creditor is both the policyholder and the beneficiary - Policy limits on Credit Life cannot exceed the amount of the loan
Insurance - Key Concepts
The transfer of pure risk of loss from individual to insurance company in consideration for a premium
Representation - Contracts
The truth to the best of one's knowledge
CREDIT LIFE INSURANCE - Decreasing Term
The type of policy used to provide Credit Life Insurance - Credit Life is NOT used for mortgage protection - Policy limits on Credit Life cannot exceed the amount of the loan
Reciprocal Insurer - Insurers
Unincorporated association of individuals who insure each other (managed by an attorney-in-fact)
Waiver - Contracts
When insurer voluntarily gives up the right to obtain information they are entitled to
Estate Conversion - Personal Uses of Life Insurance
When life insurance is used to pay estate taxes
LIFE INSURANCE POLICY PROVISIONS, OPTIONS, RIDERS - Beneficiaries (Class Designation)
When policyowner lists a group of people as beneficiaries
