life insurance premiums, proceeds, and beneficiaries

facility of payment

allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

buyers guide

provides general information about the types of life insurance policies available, in language that can be understood by the average person.

primary factors in premium calculations

1. Mortality Factor 2. Interest Factor 3. Expense Factor

reserves

Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company's obligations to pay future claims.

lump sum

death benefit is paid in a single payment

premium payment options

Annual Semi-Annual Quarterly Monthly

death benefits

Death benefits are paid out in a variety of ways. These methods are known as settlement options. The policyowner may select a settlement option at the time of the application and may change the option at anytime during the life of the insured. Once selected, the settlement option cannot be changed by the beneficiary. -lump sum -interest only -fixed period -fixed amount -life income

interest factor

Insurance companies invest the premiums they receive in an effort to earn interest. This interest is one of the ways an insurance company can lower the premium rates.

signatures

The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application. This is considered third party ownership.

who can be beneficiaries

Individuals Businesses Trust Estates Charities Minors

underwriting process

-application -credit report -medical report -inspection reports -medical info bureau (MIB) -special questionnaires -fair credit reporting act

tax treatment of premiums

Premiums paid on individual life insurance policies are generally not deductible. Premiums for life insurance used for business purposes are generally not tax-deductible. Here are the exceptions to these rules: • Premiums used for a charity are tax-deductible. • Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax- deductible. • Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible.

spendthrift clause

Prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.

revocable beneficiary

The policy owner may change the beneficiary at any time without notifying or getting permission from the beneficiary

policy surrender

When a policy is surrendered for the cash value, some of the cash value received may be taxable, if the value was more than the amount of the premiums paid for the policy.

other factors that impact the premium amount

Age: The older the person, the higher probability of death and disability Sex / Gender: Women tend to live longer than men, so their premiums are usually lower Health: Poor health increases probability of death and disability Occupation: Hazardous job increases the risk of loss Hobbies: High risk hobbies also increase the risk of loss Habits: Tobacco use presents a higher risk than non-smokers

classifications of risk

Preferred - Low Risk - Lower Premiums Standard - Average Risk - No Extra Ratings or Restrictions Substandard - High Risk - Rated Up - Higher Premiums Declined - Not Insurable - Potential of Loss to Insurance Company is Too High

cash value

Cash value applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

fair credit reporting act

Regulates the way credit information is collected and used. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing.

binding receipt

The binding receipt or the temporary insurance agreement provides coverage from the date of the application regardless of whether the applicant is insurable. Coverage usually lasts for 30 to 60 days, or until the insurer accepts or declines the coverage. Binding receipts are rarely used in life insurance, and are primarily used in auto and homeowners insurance.

tax treatment of proceeds

Premiums: Not tax deductible Death Benefit: Tax- free if taken as a lump sum to a named beneficiary Death Benefit Installments: Principal is tax- free - interest is taxable

life income

The life income option provides the beneficiary with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives, the amount of each installment is based on the recipient's life expectancy and the amount of principal. This gives the potential for a greater return, or the potential for greater loss, based on how long the insured lives

credit report

An applicant's credit history is sometimes used for underwriting. The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

inspection reports

This report provides information about the applicant's character, lifestyle, and financial stability. Inspection reports are usually only requested for larger coverages because they add expense to the underwriting process.

policy summary

provides specific information about the policy purchased, such as the premium and benefits.

types of beneficiaries by order of succession

Primary: First in line to receive death benefit proceeds Secondary (contingent): Second in line to receive death benefit proceeds Tertiary: Third in line to receive death benefit proceeds. If no one named, death benefit will go to insured's estate.

common disaster provision

With a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.

medical info bureau (MIB)

The MIB is a nonprofit trade organization which maintains medical information about individuals. Information from the MIB is used by life and health insurers. This helps insurance companies from adverse selection by applicants, as it detects misrepresentations, helps identify fraudulent information, and controls the cost of insurance.

fixed period

Also called period certain. The fixed period option is when the insurer pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a specified number of years.

simultaneous death

If the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the uniform simultaneous death act law will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

premium payment mode

Mode refers to the premium payment schedule. Insurance policy rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest (interest factor) for a full year. If the policyowner chooses to pay the premium more than once per year (example monthly, quarterly, semi-annually) there normally will be an additional charge because the company will have additional charges in billing and collecting the premium payments.

fixed amount

The fixed amount installment option pays a fixed death benefit in specified installment amounts until the proceeds are gone. The larger the installment payment the shorter the payout period.

types of beneficiaries distribution by decent

Per Stirpes: (meaning by the bloodline) In the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary's heirs. Per Capita: (meaning by the head) Evenly distributes benefits among all named living beneficiaries.

1035 exchange

: Policy exchanges that qualify as a 1035 exchange are not taxable.

medical report

A medical report is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS)

mortality factor

A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

field underwriting procedures

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection, assure that the application is filled out completely and correctly, collect the initial premium and deliver the policy. Upon policy delivery, agents must deliver the life insurance buyer's guide and policy summary to the applicant.

purpose of underwriting

Underwriting is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual. Material facts can affect an applicant being accepted or rejected.

effective date of coverage

As explained under conditional receipt, coverage is not effective without collection of the initial premium, approval of the application, and policy issuance and delivery. If the initial premium does not accompany the application, the premium must be collected by the agent. In some cases, the insurer requires the agent to collect a statement of good health from the insured at the time of delivery. If the initial premium is not submitted with the application, the policy effective date is established by insurer. In this case, it could be the date of policy issuance, or the date the policy is delivered to the applicant, premium collected, and statement of continued good health signed.

accelerated death benefit

When benefits are paid under a life insurance policy to a terminally ill person, the benefits are received tax-free. To be considered terminally ill, a physician must certify that the person has a condition or illness that will result in death in two years. -Note: Most states still require a Viatical company to inform the client that under a Viatical arrangement the proceeds could be taxable in certain situations and recommend they consult a tax advisor

special questionnaires

are used for applicants involved in special circumstances, such as aviation, military service, or hazardous occupations or hobbies. The questionnaire provides details on how much of the applicant's time is spent in these activities.

errors

If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes.

tax treatment of cash values

If cash value is surrendered, the portion that exceeds the premiums paid is taxable. For policies that are not surrendered, the cash value grows tax-free. As long as the cash value stays in the policy taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.

expense factor

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. The expense factor is also known as the loading charge

taxation of proceeds paid at death

Life insurance proceeds paid to a beneficiary are usually tax free if taken as a lump sum. The exception to this rule is the transfer for value rule, which applies when a life insurance policy is sold to another party before the insured's death.

level premium funding

The policyowner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level throughout the life of the policy.

backdating

is the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated up to 6 months. This process is also known as "saves age".

personal delivery

of the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personally delivering also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy

the statement of good health

verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application

living benefits

A living benefit is the option to use some of the future death benefit proceeds when they may be most needed, before their death, when the insured has a terminal illness. -accelerated benefit -viatical settlement

accelerated benefit

Allows someone that a physician certifies as terminally ill to access the death benefit. The amount of benefit received will be tax free

viatical settlement

Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the face value. The new owner continues to make the premium payments and will eventually collect the entire death benefit. -Note: the original policy owner is called the Viator and the new third party owner is called the Viatical or sometimes called the Viatee.

irrevocable beneficiary

An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary

interest only

Insurance company holds death benefit for a period of time and pays only the interest earned to beneficiaries

application

Part I - General Information - Age, DOB, Sex, Address, Marital Status, Occupation Part II - Medical Information - Health History Part III - Agent's Report - Agent's personal observations of the applicant. Includes the applicant's financial condition, character, purpose of sale, and how long agent has known the applicant.

entire contract

The insurance policy itself, any riders and endorsements/amendments, and the application comprise the entire contract between all parties. Insurance producers cannot make changes to a policy. The entire contract provision is found at the beginning of every life insurance policy issued. Only an authorized officer of the insurer is permitted to make changes to the contract.

conditional receipt

The producer issues a conditional receipt to the applicant when the application and premium are collected. The conditional receipt denotes that coverage will be effective once certain conditions are met. If the insurer accepts the coverage as applied for, the coverage will take effect from the date of the application or medical exam, whichever is later.

beneficiaries qualifications

There are very few restrictions on who may be named a beneficiary of a life insurance policy. The policyowner is the ultimate decision maker. However, in the underwriting process, the underwriter may consider the issue of insurable interest. When the policyowner lists themselves as the beneficiary, they will require proof of insurable interest.