Life Insurance Basics (2)
A _________ also includes a premium finance loan that is made on or before the date of issuance of the policy if the loan proceeds are not used solely to pay premiums for the policy, and/or if the owner receives a guarantee of the future life settlement value of the policy
life settlement contract
Costs associated with death (post mortem)
taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance
All life insurance policies fall into 2 categories:
temporary and permanent protection
Term life insurance (pure life insurance)
temporary life insurance provided for a specific period of time
The primary criteria an underwriter will use in assessing the desirability of a particular candidate for life insurance are
the applicant's health (current and past), occupation, lifestyle, and hobbies or habits
Field underwriter
the one who has solicited the potential insured
Owner
the owner of the life insurance policy who seeks to enter into a life settlement contract
A business can suffer a financial loss because of the premature death of a key employee. A business can lessen the risk of such a loss by the use of
key person insurance
Bequests
leaving funds to the insured's church, school, or a charity
Survivor protection
life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death
Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:
costs associated with death (post mortem), debt cancellation, emergency reserve funds, education funds, retirement fund, bequests
There are several types of buy-sell agreements that can be used for partnerships and corporations:
cross purchase, entity purchase, stock purchase, stock redemption
In-addition funding plans
designed to pay any amount in addition to the employee's qualified retirement plan
Nonparticipating policy
does not pay dividends to the policy owners
A person may create an estate through
earnings, savings and investments
Human life value approach
gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured
Insurance companies have developed 2 basic approaches to help producers and buyer to determine the needed amount of protection:
human life value approach and needs approach
With a binding receipt, coverage begins
immediately for a specific length of time, until the policy is issued
Deferred compensation funding falls into two major classes:
in-addition funding plans, elective plans
Some factors considered by the needs approach are
income, debt, mortgage, expenses
Advertisement may not use terms such as:
investment, investment plan, profit, interest plan, savings, savings plan, etc
Life expectancy
a calculation based on the average number of months the insured is projected to live due to medical history and morality factors
Buy-sell agreement (business continuation agreement)
a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled
To be a life settlement provider or a life settlement broker you must have
a license
The Insurance Code prescribed a method for calculating
a life insurance surrender cost index
The needs approach
based on the predicted needs of a family after the premature death of the insured
A buyer's guide provides
basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance
Fixed life insurance
contracts that offer guaranteed minimum or fixed benefits that are stated in the contract
A licensed attorney, a certified public accountant or an accredited financial planner has the authority to
negotiate life settlement contracts without obtaining a license as a broker
The purpose of life insurance solicitation regulation is to
provide buyers with information which will improve their ability to select the most appropriate policy, improve their understanding of the basic features of the policy, and improve their ability to evaluate the relative costs of similar plans of life insurance
Life settlement
refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash
Life insurance may be used to accumulate
specific amounts of monies for specific needs with guarantees that the money will be available when needed
Replacing insurer
the company that issues the new policy
Existing insurer
the company whose policy is being replaced
Life settlement contract establishes the tern under which the life settlement provider will pay compensation to the policy owner, in return for the assignment, transfer, sale, or release of any portion of any of the following:
the death benefit, policy ownership, and beneficial interest, interest in a trust or any other entity that owns the policy
An individual's life value is calculated by looking at
the insured's wages, inflation, the number of year to retirement, and the time value of money
The owner may rescind a life settlement contract within _____ after the receipt of the life settlement proceeds
15 days
Life settlements are not allowed in the first ____ after insurance of a life insurance policy, although expectations may apply
2 years
Every insurer must maintain a copy of every printed, published or prepared advertisement at its home or principal office for
4 years
Underwriting
the risk selection and classification process
The application is
the starting point and basic source of information used by the company in the risk selection process
Replacing insured's salary or lost services
the surviving spouse who was the caregiver of the children may have to train to enter the job market
Social security income blackout
the time during which the surviving spouse and/or children do not receive any social security survivor benefits
Stock purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
3 rating classifications for deciding if the applicant should pay a higher premium:
standard, substandard, preferred
Variable life insurance
contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance
If a person has been a life insurance producer for at least ______, he or she is deemed to have met the licensing requirements for life settlement brokers
1 year
Attending Physician's Statement (APS)
specific medical details from applicant's physicians
Medical Information Bureau (MIB)
a membership corporation owned by member insurance companies and is a non profit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals
Life settlement provider
a person who enters into a life settlement contracts with the owner
Life settlement broker
a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract
Illustration
a presentation or depiction that includes non guaranteed elements of a policy of individual or group life insurance over a period of years
Stranger-originated life insurance
a type of insurance that is initiated on behalf of a 3rd party that has no insurable interest in the life of the insured, for the primary purpose of affecting a life settlement contract
Policy summary
a written statement describing the features and elements of the policy being issued
Prior to entering a life settlement contract with a policy owner (whether the insured is terminally ill or chronically ill), a provider must obtain the following documents:
a written statement from a licensed attending physician that the owner is of a sound mind and the insured's consent to release of the insured's medical records to a provider or broker if the policy was issued less than 2 years prior to the date of the life settlement contract application
The purpose of the buyer's guide is to
allow the consumer to compare the costs of different policies
Executive bonuses
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
Split-dollar plan
an arrangement where the player and employee agree to purchase and fund life insurance on an employee
Solicitation of insurance
an attempt to persuade a person to buy an insurance policy and it can be done orally or in writing
The purchase of life insurance creates
an immediate estate
Life settlement broker's license must be renewed
annually
The regulation on life insurance solicitation does not apply to the sale of:
annuities, credit life and group life insurance, variable life insurance policies in which the death benefits and cash values vary according to the investments in a separate account, life insurance policies issued in connection with pension and welfare plans that are subject to ERISA
Business of life settlement
any activity relating to the solicitation and sale of a life settlement contract to a third party who has no insurable interest in the insured
Deferred compensation funding
any employer retirement, savings, or other deferred compensation plan that is not a qualified retirement plan
Participating (mutual) life insurance
any policy that distributes its dividends to policy owners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance
Replacement
any transaction in which new life insurance or a new annuity is purchased
With the key person insurance coverage, the key employee is ensured, and the business is all of the following:
applicant, policy owner, premium payer, beneficiary
Retirement fund
as a source of retirement income
In life insurance, insurable interest must exist between the policy owner and the insured
at the time of the application
Planning for survivor protection requires
careful examination of current assets and liabilities as well as determining what survivors' needs may be
State regulation requirements regarding illustrations:
must say "life insurance illustration", name of user, name and business address of agent, name age and gender of insured, underwriting or rating classification upon which the illustration is based, policy name and the company product name, initial death benefit, dividend option election or application of non guaranteed elements
Substandard (high exposure) risk
not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits
Qualified institutional buyer
one that ones and invests at least $100 million in securities and is allowed by the SEC to trade in unregistered securities
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
Education funds
paying for children's education expenses so they can remain in school, or for a serving spouse who may need additional education or training in order to re-enter the job market
Emergency reserve funds
paying for unexpected expenses following the death of insured, such as travel expenses and lodging for family members
Debt collection (as an alternative to Estate Liquidation)
paying off debts of the insured such as home mortgage, or auto loans (most lenders require a collateral assignment of life insurance as a condition for a loan)
Standard risks
people who are entitles to insurance protection without extra rating or special restriction
Elective plan
permit the employee to defer part of their salary or bonus as a tax-deferred savings
A valid insurable interest may exist between the policy owner and the insured when the policy is insuring any of the following
policy owner's own life, the life of a family member, or the life of a business partner, key employee or someone who has a financial obligation to the policy owner
A policy summary will include
premium, cash value, dividend, surrender value and death benefit figures for specific policy years
Premium receipt
premiums collected
Duties of the replacing producer
present to the applicant a notice regarding replacement that is signed by both the applicant and the producer, 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 applicant, submit to the replacing insurance company a copy of the replacement notice with the application
Guaranty Associations are formed to
protect policy owners, insureds, beneficiaries, and anyone entitled to payment under an insurance policy from the incompetence and insolvency of insurers
Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns
replacing insured's salary or lost services, social security income "blackout" period, liquidation vs. retention of capital
Duties of the replacing insurance company:
require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant and send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the applicant is received in the replacing insurance company's home or regional office
The 2 year probation may be waived in the following cases:
the owner or insured is terminally or chronically ill or physically or mentally disabled, the owner or insured disposes of ownership interests in a closely held corporation, death of a spouse, divorce, retirement from full time employment, the owner becomes bankrupt or insolvent, any other condition that the department of insurance determines to be extraordinary circumstances for the owner
Insurable interest
the policy owner must face the possibility of losing money or something of value in the event of loss
Liquidity
the policy's cash values can be borrowed against at any time and used for immediate needs
Liquidation vs. retention of capital
under the retention of capital approach, enough insurance is purchases so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset (such as a home)
It is an ___________ to make any statement that an insurer's policies are guaranteed by the existence of the Insurance Guaranty Association
unfair trade practice
Cross purchase
used in partnerships when each partner buys a policy on the other
Unconditional (binding) receipt
used most often with property and casualty insurance
Conditional receipt
used only when the applicant submits a prepaid application
Stock redemption
used when the corporation buys one policy on each shareholder
Entity purchase
used when the partnership buys the policies on the partners
The illustrations regulation does not apply to the following policies:
variable life insurance, individual and group annuity contracts, credit life insurance, life insurance policies with illustrated death benefit of less than $10,000
Permanent life insurance
various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is pain
Group life insurance
written as a master policy covering the lives of more than one individual covered under the single policy
Individual life insurance
written on a single life
