life insurance chapter 2

The types of receipts that can be issued when a premium is submitted with the application are:

- Conditional Receipt - Provides that coverage is effective as of the date of application or date of completed medical exam (if required), whichever is later, as long as the insurer would have issued the policy as standard or better. This receipt provides conditional coverage even if the underwriting process has not been completed. If an applicant is a substandard risk, there is no conditional coverage. - Temporary Insurance Agreement is a receipt that provides immediate coverage during the underwriting period (rather than a specified number of days) until a policy is issued or the application is declined.

If a replacement is involved, the replacing agent must:

-Present to the applicant at the time of application a Notice Regarding Replacement which must be signed by both the agent and the applicant -Collect and provide a list of life insurance policies or annuities to be replaced along with the names of the insurers and contract numbers -Leave with the applicant the originals or copies of all written or printed communication used for presentation—including sales proposals and comparisons of policies

Cost comparison indexes

If an agent or insurer makes a presentation comparing the cost of life insurance which does not recognize the time value of money, the agent must present the Life Insurance Surrender Cost Index and the Life Insurance Net Payment Cost Index.

liquidity

Immediate funds available upon death to pay creditors, taxes and final expenses, as well as cash values available for policy loans, withdrawals, and full surrenders.

issue (original) age

Insured's age on the policy issue date

Individual

Individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which usually terminate upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of continuing the policy to the policyowner.

Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed.

estate creation

Life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors.

Term

Lowest of initial premium outlay and designed for someone with a large insurance need, but with limited cash flow. This coverage is often referred to as temporary, as it is usually written to cover a short time period. This policy does not build cash values and the benefit will remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples.

Premium Payment Mode

Mode is the frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Payment modes other than annual may result in higher premiums to offset the lost interest earnings and increased administration costs. For this reason, an annual mode results in the lowest premium outlay while monthly premiums result in the highest. The more frequently premiums are paid, the more expensive the mode of payment.

Mortality Cost Formula

Mortality Cost - Interest (investment return) = Net Premium (pure rate) Net Premium (pure rate) + Loading (insurer expenses) = Gross Premium

beneficiary

One or more "parties" named in the policy to receive the policy's benefits if the insured dies while the contract is in force. The beneficiary cannot be the insured, but can be the owner/applicant.

Earned vs unearned premium

Premiums are earned for each day the policy is in force. Premiums paid in advance are considered unearned premiums until coverage has been provided, and the insurer has "earned" the right to retain the premium.

Policyowner

The individual who has ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily.

Individual Selection Criteria

The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter's responsibility to determine if an individual meets the underwriting requirements of the insurer.

fixed

The policy has a fixed amount of coverage, benefits, and premium. Without riders, future inflationary trends will cause the purchasing power of the policy's benefits to be reduced.

human life value

This approach is a measure of the projected future earnings and services of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents using the following factors: -The individual's age and gender -The individual's occupation -The individual's annual wage -The individual's planned retirement age -Inflation

Policy delivery

When the insurer determines that an applicant is an acceptable risk, the insurer will send the policy to the producer for delivery to the insured. It is the producer's responsibility to deliver the policy and collect any premiums (if not paid at the time of application). The producer is expected to explain the policy to ensure the policyowner/insured understands the benefits, including any ratings, endorsements, exclusions, and riders.

The replacing insurer may request the existing insurer (upon conversation to

furnish it with a copy of summaries or ledger statement which must be sent within 5 working days of request

Two of the approaches used to determine the need and amount of life insurance

human life value and needs analysis

Conservation

includes any attempt by the existing insurer or agent to deter a policyowner from the replacement of existing life insurance or an annuity. This does not include late payment reminders or reinstatement offers.

Inspection Report

is a general report of the applicant's finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider. The applicant must be made aware of any information gathering and has rights provided under the FCRA.

life insurance net payment cost index

is also used to compare similar policies, however this index shows the cost based on the death benefit payable after a surrender period of 10 or 20 years rather than the cash surrender value.

The life insurance surrender cost index

used to compare the cost of similar policies based on determining the guaranteed cash surrender value, if any, available at the end of the 10th and 20th policy years.

if the insurer does not deliver the policy by reasonable means as determined by the commissioner

the burden of proof will be on the insurer to establish that the policy was delivered. A policy is considered to have been received 6 months after the date of issuance if premiums have been paid to date.

effective date

the date when insurance coverage begins

expiration date

the date when insurance coverage ends

since new evidence of insurability may be required,

the existing policy should not be terminated until the replacing policy is issued and delivered

Permanent Whole Life

A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting factors are equal. This policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner

vatical / life settlements

An individual selling an owned insurance policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available.

if a policy is not approved as applied for

the insurer may make a "counteroffer" to the applicant. The insurer may issue a policy with a higher rating or exclusions to the policy. The producer must hand-deliver the policy to the applicant to collect any additional premium, explain any substandard rating or changes in coverage and premium, and reinforce the value of the contract.

Estate Conservation

provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner preserving the insured's estate

application

A written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the primary source of information used for underwriting purposes.

In CA, life insurance applications generally ask for the following types of information:

- Personal - Includes name, address, driver's license number, Social Security number, income, employment, tobacco use, number of dependents, etc. - Ownership - Establishes who will actually own the policy and be responsible for paying the premiums. - Product - The policy, riders, and options for which application is being made. - Beneficiary - Who will receive the benefit and the payout order (primary vs. contingent). - Business Coverage - Used only if the policy is being purchased for business uses. - Premium - How premiums will be paid (direct bill, electronic transfer, etc.) and how often they will be paid (annually, quarterly, etc.) - Existing Coverage - Any insurance policies already covering the proposed insured. - Limited Temporary Life Insurance Eligibility - Determines if the proposed insured is eligible for coverage until the policy is issued. If not, no policy will be issued and any payment made will be refunded. - Nonmedical Questions - Information regarding foreign travel, high risk occupations, and hazardous hobbies. It also determines if the applicant has already applied for coverage, been rejected for coverage, or applied for bankruptcy.

when calculating premium rates, life insurers assume that all:

-Premiums are paid annually in advance of the period of coverage -Premiums will be invested and earn interest -Claims will be paid on the last day of the year

California Life Policy Illustration/buyers guide requirements

California law requires that the purchaser of life insurance be provided with a copy of the NAIC Buyer's Guide to Life Insurance not later than the time of policy delivery (there are similar Guides for both annuities and long-term care insurance). The Buyer's Guide provides basic information concerning life insurance, the different types of policies which are sold, and the comparative costs of each.

Duties of all Insurers

Every life insurer must inform its field representatives or other personnel responsible for compliance with the replacement requirements and require a statement indicating whether replacement is involved with each completed application for life insurance or annuity.

Duties of replacing agents

Every life insurer must inform its field representatives or other personnel responsible for compliance with the replacement requirements and require a statement indicating whether replacement is involved with each completed application for life insurance or annuity.

insured

The individual whose life is covered under the policy. The insured's death results in the payment of the policy proceeds.

Policy Reserves

The net premiums paid plus additional interest earned must be set aside for future claims and possible contract obligations. A Reserve is the actuarial amount needed to cover potential liabilities to policyholders, such as cash surrender and nonforfeiture values

charities

To help fund favorite charitable organizations upon the insured's death, new or existing policies may be donated to charities.

changes in the application

Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application.

applicant

a person applying to be insured under an insurance contract. The applicant, owner, and insured may be the same or up to three different persons.

Agent's Report

a personal statement submitted by the producer to the insurer regarding the applicant's financial condition, any personal knowledge of the applicant, etc. This information remains confidential between the producer and the insurer, and it does not become part of the entire contract.

an agent who violates any replacement regulations is liable for

an administrative penalty of no less than $1,000 for the first violation. For subsequent violations, the penalty is no less than $5,000 and no more than $50,000 per violation. An insurer who violates any replacement regulations is liable for an administrative penalty of $10,000 for the first violation and for subsequent violations no less than $30,000 and no more than $300,000 per violation.

medical examinations

are conducted by physicians or nurses who provide results of an examination and information regarding the applicant's present health. Examinations are usually requested by the insurer after determining if the amount of coverage, age of applicant or his/her health history warrant the examination. They are commonly requested due to the higher amounts of insurance applied for coupled with the high degree of cardiovascular concerns, high cholesterol and enzyme levels, as well as the prevalence of the HIV virus. Additional medical testing may include a simple physical exam, a stress test on a treadmill, or even an electrocardiogram (EKG).Medical exams are at the insurer's expense. The results of the Medical Examination is the only report that might be copied and made part of the policy.

Group Selection Criteria

is issued based on the characteristics of the group as a whole instead of each individual. Having one uninsurable individual in the group will not cause a declination.

replacing insurer

is the insurer that issues a new policy which is a replacement of an existing policy or annuity contract. Replacement does not apply to: -Credit life insurance -Group life insurance or annuities -Conversion of an existing policy -Proposed life insurance that is to replace life insurance issued by the same insurer

existing insurer

is the insurer whose policy is or will be changed or terminated through a replacement.

an attending physician statement (APS)

is used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. The applicant's treating physician will complete this as part of the applicant's medical history. An applicant must sign a written release to enable a release of the APS. The insurer pays for this.

The MIB, Inc. (Medical Information Bureau) Report is

primarily used to collect adverse medical information about an applicant's health (supported by insurance companies) and act as an information exchange. MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Canada. MIB's Underwriting Services are used exclusively by MIB's member life and health insurance companies to assess an individual's risk and eligibility during the underwriting of life, health, disability income, critical illness, and long-term care insurance policies. These services "alert" underwriters to fraud, errors, omissions or misrepresentations made on insurance applications. In addition, MIB may help lower the cost of life and health insurance for consumers. MIB's coded reports represent general medical information and other conditions (typically hazardous hobbies and adverse driving records) affecting the insurability of the applicant. If the coded reports are inconsistent with the information provided by the applicant, underwriters are required to conduct a further investigation to obtain more information about the reported medical histories or conditions prior to making an underwriting decision. Because the MIB information is general, the MIB cannot solely be used to decline an applicant for insurance.

Risk Classifications include

- Standard Risks - Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy. - Preferred Risks - Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy. - Substandard Risks (Higher Risk Exposure) - Individuals who are not acceptable at standard rates because of poor health, bad habits, or occupational hazards. Individuals in this category are issued "rated policies" as follows:Graded (Lien) Plan - A graded death benefit usually provides 50% of the face amount to start and increases to the full face amount over 1-2 years. The substandard premium does not change. This is generally used with senior life insurance plans to provide minimal benefits without a medical examination.Rated-up Age - The premium for a "rated-up" policy is that of a standard risk, but for an insured 5 to 10 or more years older than the actual age of the proposed insured.Flat Rate - A flat additional premium may be assessed on a temporary (1 to 5 years) or permanent basis.Tabular Rate - A surcharge is calculated by adding 25% of the base rate to the standard premium for each "Table" number based on the condition causing the substandard rating. There are 10 standard tables used. - Declined - This is not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. In this case, the applicant is deemed uninsurable. Being declined by one insurance company does not mean a person will be declined by all other insurance companies.

an insurer is required to deliver a life insurance policy to the owner in order to start the free look period. Policy delivery in California will be accomplished by

- personal delivery, with a signed receipt of delivery -registered or certified mail with a signed receipt of delivery - first-class mail with a signed receipt of delivery -delivery by reasonable means. as determined by the commissioner

a basic illustration oust also include all of the following:

-A brief description of the policy being illustrated, including a statement that it is a life insurance policy -A brief description of the premium outlay or contract premium for the policy -A brief description of any policy features, riders or options, guaranteed or non- guaranteed, shown in the basic illustration and the impact they may have on the benefits and values of the policy -Identification and a brief definition of column headings and key terms used in the illustration -The date prepared, issue age of the applicant, and number of years the policy will be in force. If a basic illustration is used by an insurance producer, or other authorized representative of the insurer, in the sale of life insurance and the policy is applied for as illustrated, a signed copy of that illustration must be submitted to the insurer and provided to the applicant at the time of the policy application.

Each agent who accepts an application for life insurance or annuity that involves replacement of any existing life or annuity policy must submit to the insurer a Notice regarding replacement, which must include:

-A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction -A signed statement as to whether or not the agent knows if replacement is involved

every existing life insurer that undertakes a conversation will:

-Furnish the policyowner with a policy or contract summary for the existing insurance or annuity within 20 days from written communication of the replacing insurer. -Maintain evidence of policy summaries, contract summaries, or ledger statements used in any conservation for at least 3 years.

An illustration used for life insurance must be clearly labeled "life insurance illustration" and include:

-Name of insurer -Name and business address of producer or insurer's authorized representative, if any -Name, age, and gender of proposed insured -Underwriting or rating classification upon which the 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

The requirements for the replacement of life insurance and annuities contracts have been established to

-Regulate the activities of agents and insurers: -Protect the interests of life insurance and annuity purchasers from the loss of benefits -Assure that the purchaser receives enough information to make an informed decision -Reduce the opportunity for misrepresentation -Establish penalties for failure to comply with the rules of replacement

When using an illustration for life insurance, an insurer or agent will not:

-Represent the policy as anything other than a life insurance policy -Use or describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead -State or imply that the payment or amount of non-guaranteed elements is guaranteed -Use an illustration that does not comply with the requirements of this regulation -Use an illustration that at any policy duration depicts policy performance more favorable to the policyowner than that produced by the illustrated scale of the insurer whose policy is being illustrated -Provide an applicant with an incomplete illustration -Represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact -Use the term "vanishing" 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 nonforfeiture values -Use an illustration that is not self-supporting

Trial Application

A trial application is one submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.

pre-need plan

A type of coverage with a small face amount ($50,000 OR LESS) , typically purchased to pay the burial expenses of the insured.

When replacement is involved, the insurer must

-Require the agent submit a Notice Regarding Application and a list of all existing policies or contracts, including the names of the insurers and policy numbers with the application -Send to the existing life insurer within 3 working days of the date the application is received a written communication advising of the replacement or proposed replacement (this includes the identification information and a policy summary, contract summary, or a ledger statement containing policy data on the proposed life insurance or annuity) -Maintain evidence of the Notice Regarding Replacement, the policy or contract summary, any ledger statements used, and a replacement register for at least 3 years -Provide in its policy or a separate written notice that the applicant has a right to an unconditional refund of all premiums paid within 30 days from the date of policy delivery

policy illustration requirements apply to all group and individual life insurance policies except:

-Variable life insurance -Individual and group annuity contracts -Credit life insurance -Life insurance policies with no illustrated death benefits on any individual exceeding $10,000

A violation occurs if

-an agent or insurer recommends the replacement or conservation of an existing policy by use of materially inaccurate presentation or comparison of an existing contract's premiums, benefits, dividends, and values. This is also known as "twisting" and is a misdemeanor. -It is also a violation to recommend that an insured 65 years of age or older purchase an "unnecessary replacement annuity." An unnecessary replacement annuity means the sale of an annuity to replace an existing annuity that results in a surrender charge for the annuity that is being replaced and does not confer a substantial financial benefit over the life of the contract to the purchaser so that a person would reasonably believe the purchase is unnecessary.

Participating

A class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when it is declared by the board of directors. The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However, once all premiums have been recovered, any further dividends are taxable.

Nonparticipating

A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder.

Third-party ownership

A policy owned by a person other than the insured.

Variable

A policy that uses a separate account for the cash value accumulation. The separate account includes subaccounts which are similar in nature to mutual funds, and a securities and life insurance license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy's overall death benefit can increase along with the cash values with positive investment performance coming from the separate accounts selected; however, there is no guarantee of return and down markets can cause significant loss of policy value.

Gross Premium

Additional charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating expenses, commissions, medical examination costs, etc.

Completing the application and Field underwriting

An application is a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the producer's responsibility to probe beyond the stated questions, which is known as field underwriting. The application is the primary source of information for an insurer underwriting a potential risk. If attached to the policy, a copy of the application becomes part of the entire contract.

nonmusical application

An application used when a policy requested does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required initially. On the basis of answers provided in a nonmedical application, the underwriter may order additional medical testing, such as collection of blood and urine, EKG, physician exam, etc., prior to accepting the proposed insured.

Group

An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors, or members. Group insurance generally provides protection for an employee's named beneficiary, typically a spouse if married. The coverage may be changed only in the Master policy. The coverage is normally written on a renewable term basis providing no cash value or living benefits as found in individual cash value policies. The amount of coverage can be limited to a fixed dollar amount such as $50,000 or a multiple of earnings (for example, 2 times annual salary). Some group plans allow for the purchase of additional coverage which may be partially or fully underwritten. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability.

replacement

Any transaction in which new life insurance or an annuity is to be purchased and it is known that the existing contract will be: -Lapsed, forfeited, surrendered, or terminated -Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values -Amended to reduce the benefit or term in which the coverage would remain in force -Reissued with a reduction in cash value -Pledged as collateral or subjected to borrowing for amounts in the aggregate exceeding 25% of the loan value set forth in the policy

individual underwriting by the insurer : insurable interest

Before the process of underwriting begins, the underwriter will make the final determination as to whether insurable interest exists.

required signatures

Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application.

issues relating to AID's and HIV testing

California law established standards that prevent insurers from unfairly discriminating against individuals of the same class when it comes to testing for the presence of HIV, AIDS, and AIDS-related conditions (ARC). Life insurance applications cannot contain questions about prior HIV testing unless the question is limited to prior testing for the purpose of obtaining insurance. Geographic location or personal information such as occupation, marital status, relationship of insured to beneficiary or known or suspected homosexuality or bisexuality cannot be used to require an HIV test. A current and prior HIV positive test result (two positive blood tests) may be the basis of a decline for life insurance. All tests require informed consent and the results must remain confidential in accordance with privacy protection provisions. Applicants for life insurance must be given a disclosure that they will be tested for HIV/AIDS and have the opportunity to name a health care professional with whom a positive test result may be shared. If no healthcare professional is named, they must be urged to seek counseling. The insurer must pay for the cost of the testing. Negligent disclosure of HIV results to a third party which identifies an individual may result in a civil penalty of up to $1,000.

California Senior Market and policy illustrations

Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must disclose on those illustrations, or on an attached cover sheet, the following statement: "This is an illustration only. An illustration is not intended to predict actual performance. Interest rates, dividends, or values that are set forth in the illustration are not guaranteed, except for those items clearly labeled as guaranteed." All preprinted illustrations containing non-guaranteed values must show the columns of any guaranteed values in bold print.

Net Premiums

Excludes the expense component and takes into account interest and mortality factors only. The process of calculating this rate requires: - The age and sex/gender of the insured and the benefits to be provided - The mortality rate to be used and the rate of interest assumed

in CA, every person has an insurable interest in the life and death of:

Himself/herself Any person on whom he/she depends wholly or in part for education or support Any person under a legal obligation to him for the payment of money or respecting property or services, of which death or illness might delay or prevent the performance Any person upon whose life any estate or interest vested in him or her depends

The application for underwriting consists of two parts:

Part 1 contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance. Part 2 contains questions pertaining to medical background, past and present health, any medical visits, medications, height/weight, hospitalizations/surgeries in recent years, and the medical status of immediate family members (includes ages, causes of death, etc).

Factors in Premium Determination for Life Insurance

Premiums are based on expected mortality, interest, and expenses, and these factors are used by all insurers to determine premiums. Mortality - Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of birth. The mortality rate is taken from the Mortality Table that shows life expectancy and the death rate per 1,000 people living in the United States. This table allows the insurer to rate policies using the law of large numbers, so accurate mortality predictions are extremely important. The higher the age group, the higher the mortality rate—translating to a higher premium. The Mortality Table also show that males have a higher mortality rate than females. Based on this statistic, males will pay a higher rate than females. Interest - Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. Interest earnings reduce the amount of premium needed to fund the future liability of the policy death benefit. Expenses - The amount charged to cover each policy's share of expenses of operation (salaries, commission, premium taxes, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency.

Producer Responsibilities

Producers are the initial point of contact for most insurance transactions. Transacting insurance can involve any of four different phases in the sale of products: solicitation, negotiation, execution of a contract, and handling matters subsequent to a contract.

Survivor Protection

Providing funds for surviving spouses and dependents

Stranger Originated Life Insurance (STOLI)

STOLI transactions occur when a person with no insurable interest in the life of another induces that person to purchase a life insurance policy with the sole intent of becoming the beneficiary and profiting upon the death of the insured. The insured assigns the policy ownership to the investor and receives a payment for an amount less than the death benefit but greater than the policy's cash value. Essentially, the insured is "selling" his/her mortality. Upon policy assignment, the purchaser will continue to pay premiums to keep the policy in force. Upon death of the insured, the purchaser/beneficiary files a claim for the death benefit. STOLI has been prohibited by law in California since 2010 due to the absence of legitimate insurable interest at the time of policy issue. The California DOI has issued a Senior Advisory on STOLI transactions.

Solicitation

Soliciting insurance can be done through traditional forms such as advertising in local print media, on radio or television, or through direct mail. Seeking opportunities to conduct sales appointments with potential clients is also considered solicitation. Many producers also obtain referrals from new and existing clients, who lend credibility to the producer and his/her products and services. Contacting these referrals is solicitation, and is also protected by other laws which may require prior approval to contact.

Example of Individual Selection Criteria

The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will, at this time, require additional information in the form of an Attending Physician Statement (APS) and/or a medical examination. The underwriter may rate or deny the application based on this additional information. The MIB report reveals past medical concerns and cannot be used as the only medical report for rating or denying an application.

Consequences of incomplete applications

The producer's primary underwriting role is to make sure the application provides proper information for the insurer. The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with questions unanswered, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application.

insurable interest

The relationship that must exist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a financial or economic loss by the owner results in the event that the insured dies. Examples of insurable interest include a policy taken out on a family member, business partner, or debtor of the policyowner.

Needs Analysis Approach

This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following steps into arriving at the proper amount of coverage needed: -Calculate all financial needs caused by an immediate death, including debts, medical bills, and final expenses -Provide lifetime income to the spouse -Pay off a mortgage or other debt -Provide funds for children's education -An Emergency Reserve Fund may be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured -Subtracts any assets available to fund financial needs after death (such as retirement plan assets, other insurance, liquid investments, separate savings)

Flexible

Universal and Variable Universal Life policies offer the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies have the potential to provide greater cash accumulation than whole life policies.

Rating applicants

Upon receipt of the information, such as the application, medical exam, blood and urine test results, etc., underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters then determine the classification to be used in the calculation of the premium.

Department of Motor Vehicles (DMV)

report may be requested to provide information regarding the applicant's driving history. If an applicant has engaged in high risk hobbies (skydiving, scuba diving, motorcycle racing), a hazardous activity questionnaire will be required to determine, based on the risk and frequency, if those activities will affect insurability

attained age

the insured's age at the time the policy is renewed or replaced

constructive or legal delivery occurs only if

the premium was paid at the time of application. Once the insurer issues the policy, a legal contract has been formed since the policy becomes the acceptance. Once the insurer mails the policy to the producer, it is considered constructively or legally delivered by the insurer. It is still the producer's responsibility to obtain delivery signatures and explain policy benefits to the policyowner/insured.

underwriting

the process of selection, classification and rating, determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged. The purpose of underwriting is to prevent adverse selection. The sources of underwriting include the application, medical exams, an Attending Physician's Statement, the Medical Information Bureau (MIB) Report, an inspection report, agent's report, DMV records, and a hazardous activity questionnaire.

when the initial premium is not paid with the application

the producer must collect the premium before coverage can begin. The producer must also obtain a Statement of Good Health from the applicant/insured at the time of policy delivery that verifies the insured has remained in the same health status continuously since the time of application. If the applicant is not in good health, the policy should be returned to the insurer for further underwriting.