Life Insurance Lesson 4
Submitting the Application and Initial Premium
- During sales process, an agent is required to supply both the policy summary and geeral buyers guide to an applicant before collecting the application and initial premium - after doing so, the agent submits the application and (almost always) the initial premium to the insurer - When an insurance company receives an application for insurance, it always provides the applicant with a receipt,
NAIC Regulation applies to all group and individual life insurance policies and certificates except:
- Variable life insurance; - Individual and group annuity contracts; - Credit life insurance; or - Life insurance policies with no illustrated death benefits on any individual exceeding $10,000
Buyer's Guide
- generic document which explains basic terms and definitions related to life insurance - type of whole life insurance being marketed in order to better educate the consumer
Binding Receipt
A binding receipt guarantees Temporary Term coverage at the time of application for a specified benefit amount regardless of whether the insurer later approves or declines the applicant.
Attending Physician's Statement
A report or statement form in which the proposed insured's own doctor details the specifics of previous accidents, diseases, treatments, or prognoses (that they treated the insured for)
Model Life Insurance Replacement regulation
Adopted by the NAIC and many states in order to ensure the proper replacement of life insurance. -Essentially, the NAIC model applies to individual life insurance solicitation and requires a replacing insurer and agent to fully acknowledge and communicate this replacement with the insured and replaced insurer. The overall goal is to adopt a fair and safe replacement of individual life insurance with the focus on the insured's long-term interests.
Marketing Illustration Requirements
An illustration used in the sale of a life insurance policy shall satisfy the applicable requirements of this regulation, 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 and sex of proposed insured, except where a composite illustration is permitted under this chapter - Underwriting or rating classification upon which the illustration is based - Generic name of the policy, the company product name, if different, and form number - Initial death benefit - Dividend option election or application of non-guaranteed elements, if applicable
Credit Report
An insurance company has the right to review an applicant's credit report in determining approval and offered rate of premium. Insurance companies want to know that company expenses spent on issuing a policy to the applicant will not be lost on a policyowner that cannot pay the policy's premiums. This report helps illustrate if the applicant could be a financial risk for the company.
Special Questionnaires
Due to the nature of risk, insurance companies evaluate applicants according to their lifestyle which often includes questions about an applicant's hobbies, finances and occupation. Race car drivers, high rise workers, miners, and extreme sport enthusiasts are naturally higher risk for an insurance company than an office worker or teacher. - Many high-risk occupations and hobbies are simply not insurable, or require special insurance, often provided through the occupation's respective industry. Some insurance companies also increase the rate of motorcyclists due to the increased risk versus driving a car.
Policy Replacement
Life insurance replacement is defined as replacing a life insurance policy using its cash value to purchase a larger face amount or to obtain a new policy, either from the same insurer or through a new insurer
Conditional Receipt
Most often, an insurer provides a conditional receipt upon receiving both the application and initial premium. Under a conditional receipt, the applicant is covered against loss, should it occur, before the policy becomes effective, on the 'condition' that the applicant is found to be insurable as applied for by the insurer's underwriting department upon completion of its underwriting process. -If a standard risk application is declined, but the insurer counter-offers with a substandard risk offer, the applicant will not be covered for any loss incurred before the acceptance of the new offer and, if required, the submission of any increased premium associated with the substandard risk offer provided by the insurer.
Inspection Report
Often required by the insurer when a life insurance applicant is applying for a large amount of insurance. Inspection reports often have the same types of questions as in the special questionnaire, but more extensive. Also, an insurance company might hire an investigator to interview family members, neighbors and/or associates to attain a general impression of an applicant's integrity. Again, this type of 'inspection' is only employed to help evaluate clientele needing larger amounts of coverage than the industry average.
Delivering and Servicing the Policy
Personal delivery is the best way to deliver the policy and obtain the statement of good health if necessary, though some insurers mail the policy directly to the insured. Legally, the policy is considered delivered and the sale completed when the policy is mailed to or personally handed to the insured. Policy review is an important final step the agent should take with the insured to ensure the policy is completely understood and all questions have been answered.
Policy Retention
Retention is defined as maintaining an insured's current life policy as the policy matures over time. Often, the retention of an insured's policy is preferred over its replacement due to the cash value accumulation over the life of the policy. Replacing a policy often reduces or forfeits the current policy's cash value, so careful consideration should be given to the accumulated cash value of a policy in determining whether to replace or retain the life insurance plan.
Policy Summary
Reviews specific product being purchased in detail such as: - identifying the agent and insurer from which the policy is being marketed - policy's premium rate, - policy exclusions, - dividends, - policy riders, - cash values - benefit amounts. **A whole life insurance policy summary is also required to include cost comparison 'indexes,' or charts which compare similar whole life policies based on the cost of each policy to the policyowner. These indexes are important in order to make a more informed choice when purchasing whole life insurance; however, cost indexes are not included in term life insurance since cash value does not exist.
Inspection Receipt
Sometimes an applicant wishes to review, or 'inspect' a prospective policy before providing the initial premium to the insurer. When this occurs, an inspection receipt is provided to the applicant by the insurer. - An inspection receipt is proof that an application has been received by the insurer and in return, a policy has been delivered to the applicant for inspection purposes only. An inspection receipt states that the insurance company is not legally obligated to cover any loss by the applicant until it also receives the applied-for policy's premium. - After inspecting the policy and upon accepting the policy's terms, the applicant then pays the initial premium to the insurer and the underwriting process begins.
Net Payment Cost Index
Used if, instead, the policyowner intends to keep the whole life policy in force until the death of the insured - compares similar policies based on the death benefit provided to the beneficiary. The focus is on the amount of death benefits payable to the policy's beneficiary, as opposed to the surrender value of the policy for the policyowner.
Medical Report
When applying for life insurance, a medical report is often required by an underwriter to approve an applicant. In addition to this report, applicants are sometimes required to obtain an Attending Physician's Statement (APS) to provide additional support for proof of insurability.
Handling a Claim
When death occurs, proof of the death is sent to the insurer and prompt payment is sent to the designated beneficiary. Often, the agent will help contact the insurer regarding the loss if the family needs help during their grieving. By law, the insurer is required to provide the death benefit within 60 days of proof of death; however, most insurers will finalize the insurance process within a few days and promptly pay the claim to the beneficiary.
In force illustration
a chart that shows the cash value status of the policy and projections for the future given the current rate of return at the time of the illustration. - the policy must have been in force for at least 1 year
Basic Illustration
a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements.
Illustration
a presentation or depiction that includes non-guaranteed elements of a life insurance policy over a period of years. - an agent often incorporates 'illustrations' to help explain the benefits and costs of a life insurance policy
Traditional Cost Comparison Method
accounts for the various cost factors of a whole life policy (except for interest earned over time, also known as the 'time value of money,' making the comparison less accurate.) The *'net payment cost index'* is calculated using the traditional cost comparison method.
Supplemental Illustration
an illustration furnished in addition to a basic illustration that 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.
NAIC Life Insurance Solicitation Model Regulation
cost comparison methods to provide a standard from which to follow in comparing whole life insurance developed by the NAIC *requires new disclosures such as that a prospective buyer is to be provided with a general 'buyer's guide' and a 'policy summary' specific to the product being marketed. *As stated by the NAIC, its model regulation provides illustration formats, prescribes standards to be followed when illustrations are used and specifies the disclosures that are required in connection with illustrations. The goals of this regulation are to ensure that illustrations do not mislead purchasers of life insurance and to make illustrations more understandable.
Policy Amendments
defined as benefit limits, exclusions of certain risk or additional premium that the insurer adds to a policy for any applicant underwritten as substandard risk.
Temporary Insurance Agreement (Temporary Term)
even if the insurer later declines the applicant, any claims made during the temporary term must be paid by the insurer. Although it has been utilized in the past, most life insurers typically issue a conditional receipt, while binding receipts are more common with property and auto insurance contracts.
Surrender Cost Index
is based on the assumption that a policyowner will surrender a whole life policy in the future. A lower surrender cost index number equates to a less expensive policy in comparison to other policies, thus providing a higher cash value once surrendered, assuming the policyowner does not keep the policy in force until death. The focus is on the surrender value of the policy for the policyowner, as opposed to the death benefit amount for the beneficiary.
External Replacement
meaning it is replaced with another policy by a different insurer.
Internal Replacement
meaning that it is replaced with another policy by the same insurer
Interest-Adjusted Cost Comparison Method
merged over time as more accurately comparing the true cost of similar life insurance policies because it takes into account the 'time value of money,' based on the insurer's projected rate of return in interest for the policy. The *'surrender cost index'* is calculated using the interest-adjusted cost comparison method.
Non-Guaranteed Elements (of an illustration)
premiums, benefits, value, credits or charges under a life insurance policy that are not guaranteed or determined at policy issue
Guaranteed Elements (of an illustration)
premiums, benefits, values, credits or charges under a life insurance policy that are guaranteed and determined at policy issue.
USA PATRIOT Act
requires financial institutions, including life insurance companies, to establish anti-money laundering and suspicious activity reporting programs in an attempt to prevent criminal money laundering. this federal law provides for enhanced security and surveillance of both domestic and international financial activities linked to terrorism. It mandates a more in-depth monitoring of suspicious financial transactions and the disclosure of such activity to government anti-terrorism agencies that monitor the funding of terrorism. As mandated by this Act, each financial institution must maintain anti-money laundering and suspicious activity reporting programs, provide company training for such programs, and comply with a self-assigned audit of company records using a non-company auditing agency.
Time Value of Money
states that receiving a dollar today is more valuable than in the future because, if invested today, it can earn interest and increase in value over time, as opposed to receiving a dollar in the future. Essentially, time adds value in that interest builds over time, thus providing a larger return for money invested now. Using compounding interest, time increases the value of money exponentially, thus the more time money has to grow the larger its value will be in the future.
Cost Index
takes into account the various cost factors of a life insurance policy and computes an 'index number' to more easily compare similar whole life insurance policies. In providing this comparison it is important to compare policies based on the age of the applicant as well as the amount of insurance being purchased. Non-guaranteed factors, such as dividend projections, are typically not accounted for in a cost index and should be considered in addition to the index number of the policy. **As an industry standard, cost index charts, provided in the policy summary, compare each $1,000 increment of a policy's face amount for 10-year and 20-year time periods using an average annual rate of return in interest of 5%. In choosing a lower cost policy, the lower the index number the less costly it is to the policyowner.
Effective Date
the date that the application is submitted along with the initial premium and a conditional receipt is given to the applicant. In a circumstance where an inspection receipt is requested by the applicant to review the coverage before premium is submitted, the effective date is then the date the policy is issued by the insurer and appears on the face page of the policy.
