Louisiana Life & Health Test
Employee Retirement Income Security Act of 1974 (ERISA)
ERISA is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans
Self-insurers
Establishes a self-funded plan to cover potential losses instead of transferring the risk to an insurance company
Simplified Employee Pensions (SEPs)
For small businesses to overcome costs, compliance, and administrative hurdles. SEPs are arrangements where an employee establishes and maintains an individual retirement account (IRA) to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much more considerable amount that can be contributed each year to a SEP. SEPs must not discriminate in favor of highly compensated employees in regard to contributions or participation.
Objectives of the National Association of Insurance Commissioners (NAIC)
- To encourage uniformity among the state insurance laws and regulations - To assist in the administration of those laws and regulations by promoting efficiency - To protect the interests of policyowners and consumers - To preserve state regulation of the insurance business
In order for a contract to be legally valid and binding
- offer and acceptance - consideration (both parties must offer something of value) - legal purpose - competent parties
Interest Only Option
A death settlement option where the insurance company holds death benefit for a period of time and pays only the interest earned to the named beneficiary. A minimum rate of interest is guaranteed and the interest must be paid at least annually.
Qualified Defined Contribution Plans (3)
A defined contribution plan's provisions address the current amounts going into the plan and identify the participant's vested (nonforfeitable) account. - Profit sharing plans - Stock bonus plans - Money Purchase plans
Life with Period Certain Annuity (life income with term-certain option)
A life with period certain is designed to pay the annuitant an income for life, but guarantees a definite minimum period of payments. The life with period certain option provides income to the annuitant for life but guarantees a minimum period of payments. Thus, if the annuitant dies during the specified period, benefit payments continue to the beneficiary for the remainder of that period
Nonparticipating policy
A nonparticipating insurance policy, typically issued by stock companies, do not allow policy owners to participate in dividends or electing the board of directors
Participating vs Nonparticipating
A participating life insurance policy is a policy that has dividend payments from the life insurance company. It is called participating because it is permitted to share/participate in the excess earnings of the life insurance company. A nonparticipating policy does not have the right to share in excess earnings and does not receive any dividend payments.
Graded Premium
A premium funding option characterized by a lower premium in the early years of the contract with premiums increasing annually for an introductory period. After the introductory period, the premium jumps to an amount higher than what the initial level premium would have been and then remains fixed or constant for the life of the policy.
Joint and Survivor Option
A settlement option which guarantees that benefits be payed on a life-long basis to two or more people. This option may include a period certain and the amount payable is based on the ages of the beneficiaries. Life Income Option:A benefit settlement option which 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.
Mutual Insurance Company
Are insurance companies characterized by having no capital stock, being owned by its policy owners and usually issue participating insurance
Fraternal Benefit Society
Are nonprofit benevolent organizations that provide insurance to its members
Reserves
Are the accounting measurement of an insurer's future obligations to its policyholders. Classified as liabilities on the insurance company's accounting statements. Liquidity indicates a company's ability to make unpredictable payouts to the policyowners
Proper solicitation
As a representative of the insurer, an agent has the duty and responsibility to solicit good business. This means that an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the insurance-buying public to observe the highest professional standards when conducting insurance business. In many states, an agent is required to deliver the applicant a LIfe Insurance Buyer's Guide and a Policy Summary
Simple Negligence
Defined as the failure to act in a reasonable or prudent manner
Eligible Groups
People may not form a group just to secure group insurance coverage. The group must be formed for a purpose other than acquiring insurance. Eligible groups include: - single employee groups (employer) - multiple employee groups (employee related) - Labor unions -Trade associations -Credit/Debit groups - Fraternal Organizations - Customer groups -Trustee groups (established by two or more employees or labor unions Employees must: - Be full time and actively working - If contributory, must approve of automatic payroll deduction - The employee has 31 days during the enrollment period to sign up, otherwise they may need evidence of insurability
Tax treatment of individual life insurance
Premiums paid for individual life insurance policies are considered to be a personal expense and are not tax-deductible. Premiums paid on life insurance may be tax deductible to an employer if the insurance is used as an employee benefit. Premiums may also be tax-deductible if the policy is to provide charitable contributions. Additionally, premiums for an insurance policy to benefit an ex-spouse as court-ordered alimony are tax-deductible
Salary Reduction SEP Plans (SARSEP)
SARSEPs incorporate a deferral/salary reduction approach in that the employee can elect to have employer contributions directed into the SEP or paid out as taxable cash compensation. The limit on the elective deferral to a SARSEP is the same as a 401(K). SARSEPs are reserved for small employers (those with 25 or fewer employees) and had to be established before 1997. As a result of tax legislation, no new SARSEPs can be established, however, plans that were already in place at the end of 1996 may continue to operate and accept new employee participants.
Rollover IRA
Specific tax-free "rollover" provisions of the tax law provide some degree of portability when an individual wishes to transfer funds from one plan to another, specifically to a rollover IRA. They provide a way for individuals who have received a distribution from a qualified plan to reinvest the funds in a new tax-deferred account and content to shelter those funds and their earnings from current taxes. An example of a rollover IRA is when an individual has left one employer for another and have received a complete distribution from their previous employer plan.
Law of large numbers
States that larger numbers of similar risks grouped together become more accurately predictable.
Risk Reduction
Takes place when the chances of loss are lessened. Changing one's lifestyle to minimize a known risk is an example of risk reduction (ex: reducing risk by only using public transportation)
2003- Do Not Call Implementation Act
The Do not call registry allows consumers to include their phone numbers on the list to which telemarketers cannot make solicitation calls. Calls made on behalf of charities, political organizations and surveys are exempt. Insurance calls are not exempt from the do not call registry
1958- intervention by the FTC
The Federal Trade Commission (FTC) sought to control the health insurance industry's advertising and sales literature. In 1958, the Supreme Court held that the McCarran-Ferguson Act disallowed such supervision by the FTC.
1999- Financial Services Modernization Act
The Glass-Steagall Act of 1933 was repealed by this act. Under this new legislation, commercial banks, investment banks, retail brokerages, and insurance companies can now enter each other's lines of business.
2001- Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
The Patriot Act was adopted in response to the 9/11 terrorist attacks. The Patriot Act is intended to strengthen US measures to prevent, detect, and deter terriorists and their funding. The act also aims to prosecute international money laundering and the financing of terrorism.
Tort Law
The purpose is to provide full compensation for proved harm. To right a wrong done to a person and provide relief from the wrongful acts of other (monetary compensation)
Tertiary Beneficiary
The third beneficiary in line to receive death benefit proceeds if the primary and contingent beneficiaries both die before the insured
Insurance
The transfer of risk through pooling or accumulation of funds
Loss
The unintentional decrease in the value of an asset due to a peril
Universal Life Death Benefit Options
Universal life insurance offers two death benefit options. Option One (Option A), the policy owner may designate a specified amount of insurance. The death benefit equals the cash values plus the remaining pure insurance (decreasing term plus increasing cash values). This level death benefit is composed of the increasing cash values and the remaining pure insurance (decreasing term). Under Option B, the death benefit equals the face amount (pure insurance) plus the cash values (level term plus increasing cash values). To comply with the Tax Code's definition of life insurance, the cash values cannot be disproportionately larger than the term insurance portion.
Buy-Sell Funding for Close Corporations
Unlike a partnership, a close corporation is legally separate from its owners. An entity plan funded by life insurance used for a corporation is known as a stock redemption plan. The corporation is bound to purchase the stock of the deceased stockholder at a prearranged price. If funded by life insurance, the corporation buys a policy on each of the stockholder's lives.
Revocable Beneficiary
a beneficiary that the policy owner may change at any time without notifying or getting permission from the beneficiary
Interest Factor
a calculation for determining the amount of interest an insurance company can expect to earn from investing insurance premiums
Spendthrift clause
a clause which prevents creditors from obtaining any portion of policy proceeds upon an insured's death. Additionally the clause can be selected by the policy owner to prevent a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time
Fixed/Level Premium
a concept of averaging what would be the total single premium for a policy over periodic payments. More periodic payments= higher total premium
Hazard
a condition or situation that creates or increases a chance of loss - Physical hazard: poor health, overweight, blind - Moral: dishonestly; drugs, alcohol abuse - Morale: careless attitude; reckless driving, jumping off a cliff, stealing, racing, careless lifestyle
Surrender Cost index
a cost comparison calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period
Lump sum option
a death settlement option where death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is considered the automatic (or default) option for most life insurance contracts.
Joint Life and Survivor Option
a joint and full survivor option provides for payment of the annuity to two people. IF either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone. A full survivor option pays the same benefit amount to the survivor. A two-thirds survivor option pays two-thirds of the original joint benefit. A one-half survivor option pays one-half of the original joint benefit.
Policy rider
a legal attachment amending a policy. Additional benefits or reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider
Straight Life Annuity with Period Certain
a life annuity with a period certain pays a benefit for life. However, it pays a survivor benefit if the annuitant dies before the end of the periof certain. The annuitant or survivors are entitled to a guaranteed income of at least a specified number of years, or a refund if the annuitant dies before the end of the guaranteed refund period. This refund availability indicates that there will be a guaranteed minimum returned to a beneficiary if the annuitant dies.
Mortality Rate
a measure of the number of deaths (in general, or due to a specific cause) in some population, scaled to the size of that population, per unit time.
Vesting Schedules
all qualified plans must meet standards that set forth the employee vesting schedule and nonforfeitable rights at any specified time. Vesting means the right that employees have to their retirement funds. Benefits that are "vested" belong to each employee even if the employee terminates employment prior to retirement.
Conversion privilege
allows a policy owner, before an original insurance police expires, to elect to have a new policy issued that will continue the insurance coverage. Conversion may be affected at attained age (premiums based on the age attained at the time of conversion) or at original age (premiums based on the age of the insured at the time of original issue). Conversion is a common privilege for term life insurance and all group insurance. The insured does not have to prove insurability (good health) when converting a policy
Risk Pooling
also known as loss sharing, spreads risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group
Expense factor/Loading Charge
also known as the loading charge, is a measure of what it costs an insurance company to operate
Life Settlement
an agreement in which a policyholder sells or transfer ownership in all or part of a life insurance policy to a third party for compensation that is less than the expected death benefit of the policy.
Education Funds
an annuity provides a steady stream of income, typically used for retirement, but can also be used to fund education or family members
Buy-Sell Plan
an attorney drafts a buy-sell plan stating the employee's agreement to purchase the proprietor's estate and sell the business at a price that has been agreed upon beforehand.
Contributory Plan
an employee group insurance plan in which employees share the cost. The insurance company requires that at least 75% of all eligible employees participate - Employees contribute to the premium payments
Structure Settlements
annuities are also used to distribute funds from the settlement of lawsuits or the winnings of lotteries and other contests. Annuities are good vehicles for lawsuit settlements because they can be tailored to meet the needs of the claimant. These awards are usually paid out over a period of several years.
Loss exposure
any situation that presents the possibility of a loss
1035 Contract Exchange
applies to annuities. If an annuity is exchanged for another annuity, a "gain" (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy. This provision in the tax code allows you, as a policyholder, to transfer funds from a life insurance, endowment, or annuity to a new policy, without having to pay taxes
Equity Indexed Annuity
are a fixed deferred annuity that offers the traditional guaranteed minimum interest rate and an excess interest feature that is based on the performance of an external equities market index
Defined Contribution Plans
are a tax-qualified retirement plan in which annual contributions are determined by a formula set forth in the plan. Benefits paid to a participant vary with the amount of contributions made on the participant's behalf and the length of service under the plan.
Annual Premium Retirement Annuities
are a vehicle that provides tax-deferred income to the owner. The income earned on the annual premium paid into the contract will not be taxed until it is removed from the account. Amounts deposited into the account are not tax-deductible. However, the interest or earnings paid on the principal is tax-deferred. These older types of contracts were characterized by high loads.
Entity Plans
are agreements in which a business assumes the obligation of purchasing a deceased owner's interest in the business, thereby proportionately increasing the interests of surviving owners.
Cross-Purchase Plans
are agreements that provide that upon a business owner's death, surviving owners will purchase the deceased's interest, often with funds from life insurance policies owned by each principal on the lives of all other principals.
Rollovers
are an individual retirement account established with funds transferred from another IRA or qualified retirement plan that the owner had terminated
Profit-sharing Plans
are any plans whereby a portion of a company's profits is set aside for distribution to employees who qualify under the plan
Keogh Plans (HR-10)
are designed to fund the retirement of self-employed individuals. The name is derived from the Keogh Act (HR-10) author, under which contributions to such plans are given favorable tax treatment - Keogh plans are subject to the same max contribution limits and benefit limits as qualified corporate plans - Must comply with the same participation and coverage requirements as qualified corporate plans - Are subject to the same nondiscrimination rules as qualified corporate plans; Keogh plans have a max contribution of $57,000.
Employee Stock Ownership Plans (ESOPs)
are employee-owner programs that provide a company's workforce with an ownership interest in the company. Shares are allocated to employees and may be held in an ESOP trust until they retire or leave the company
Profit-Sharing Plans
are established and maintained by an employer and allow employees to participate in the company's profits. They set aside a portion of the firm's net income for distributions to employees who qualify under the plan. Since contributions are tied to the company's profits, it is unnecessary that the employer contributes every year or that the amount of contribution is the same. However, the IRS states that to qualify for favorable tax treatment, the plan must be maintained with "recurring and substantial" contributions. The IRS also states that withdrawal of funds from a profit-sharing plan may be subject to a 10% tax penalty in addition to income taxes if they are made before the age 59 1/2.
Binding receipts
are given by a company upon an applicants first premium payment. The policy, if approved, becomes effective from the date of the receipt.
Health Insurance Contracts
are indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc.) You cannot profit from an indemnity contract
Blanket Health Policies
are issued to cover a group who may be exposed to the same risks, but the composition of the group are continually changing. These may be issued to an airline or a bus company to cover its passengers or a school to cover its students. No certificates of coverage are issued in a blanket health plan, as compared to group insurance.
Settlement Options
are optional modes of settlement provided by most life insurance policies. Options include lump-sum cash, interest only, fixed-period, fixed amount, and life income
Defined Benefit Plans
are pension plans under which a specific benefit formula determines benefits
Inspection reports
are reports of an investigator providing facts required for a proper underwriting decision on applications for new insurance and reinstatements
Representations
are statements made by applicants on their applications for insurance that they represent as being true to the best of their knowledge
Warranties
are statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.
Annuity units
are the converted accumulation units once variable annuity benefits are to be paid out to the annuitant. At the time of the initial payout, the annuity unit calculation is made. From then on, the number of annuity units remains the same for that annuitant.
Credits
are the determining factor between being classified as fully insured or currently insured. Once a person becomes fully insured, death benefits are extended to his/her family. The family becomes eligible for survivorship benefits. Four credits are the maximum any one person can earn in a given year. Therefore, for the 40-quarter rule to apply, an individual must have been employed and have paid FICA taxes for ten years, at least
Credit life Insurance Policies
are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding.
FICA taxes (Federal Insurance Contributions Act)
are used to fund the social security program. If a person has not contributed through their payroll program, they are not eligible for benefits
Life insurance contracts
are valued contracts, which means it will pay a stated amount
Market Value Adjustment
can be attached to a deferred annuity that features fixed interest rate guarantees combined with an interest rate adjustment factor that can cause the actual credit rates to increase or decrease in response to market conditions. Instead of having the annuity's interest rate linked to an index as with the equity-index annuity, an MVA annuity's interest rate is guaranteed fixed if the contract is held for the period specified in the policy. The market-value adjustment feature applies only if the contract is surrendered before the contract period expires. Otherwise, the annuity functions the same way a fixed annuity does
Joint Survivor/Last Survivor Life Policies
cover the lives of two individuals and saves on premium costs by averaging the ages of the two insured. Joint Life Survivor policies only pay the death benefit upon the death of the last insured person. For example, say B and M purchase a joint life survivor policy. If B were to die first and then M died 10 years later, no benefits would be paid from the policy until M died. A joint Life and Survivor policy covers two lives but only pays benefits after the death of the last insured.
A Joint Life policy
covers the lives of 2 individuals and saves on the premium cost by averaging the ages of the two insureds. Joint life policies pay the face amount after the first person covered on the policy dies. This is similar to a Joint Checking account. The policy is shared between two people, and when one person dies, the other receives the entire account. If B and M were insured under a joint life policy and B were to die, M would receive the entire benefit and would also no longer be insured. A policy that promises to pay the face amount on the death of the first of 2 lives covered by the policy is called a Joint Life Policy.
Currently Insured
currently insured status, in regards to social security, is a status of limited eligibility that provides only death benefits
Qualified Defined Benefit Plans
establishes a definite future benefit, predetermined by a specific formula. When the term pension is used, the reference typically refers to a defined benefit plan. Usually, the benefits are tied to the employee's years of service, amount of compensation, or both. EX: a defined benefit plan may provide for a retirement benefit equal to 2% of the employee's highest consecutive five-year earnings, multiplied by the number of years of service. Or the benefit may be fined as simply as $100 a month for life. The defined benefit plan must: - provide for definite determinable benefits, either by a formula specified in the plan or by actuarial computation - provide for systematic payment of benefits to employees over a period of years (usually for life) after retirement. The plan must detail conditions under which benefits are payable and the options under which benefits are paid. - provide retirement benefits primarily. The IRS will allow provisions for death or disability benefits, but these benefits must be incidental to retirement
Per Stirpes (by the bloodline)
evenly distributes benefits amongst a beneficiary's heirs in the event that a beneficiary dies before the insured
Full Retirement Age (FRA)
if a covered worker retired at the full (normal) retirement age, they will receive 100% of the PIA, starting on the first day of the month in which they reach full retirement age. However, if a covered worker retires early at the age of 62, the maximum social security benefit is 80%. Likewise, if a covered worker chooses to delay benefits beyond reaching full retirement age (up to age 70), they will experience a slight benefit increase. Typically age 65 is thought of as full (normal) retirement for covered workers born prior to 1938. Since 1938, the full retirement age gradually increases by a few months for every birth year until it reaches 67 for people born in 1960 and later.
IRC Section 457 Deferred Compensation Plans
if a plan is eligible under Section 457, the amounts deferred will not be included in gross income until they are actually received or made available. Life Insurance and annuities are authorized investments for these plans. The annual amounts an employee may defer under a Section 457 plan are similar to those available for 401(k) plans. The Self-Employed Individuals Retirement Act (1962) made it possible for business owners and self-employed individuals to participate in qualified retirement plans if they chose to do so, just like their employees.
Non qualified withdrawal
if a withdrawal is taken without meeting the above criteria and the amount fo the withdrawal exceeds the total amount contributed, it is a non-qualifiable withdrawal. The earnings from the contributions become taxable
Group Policy termination
if the master policy is terminated, each individual member who has been insured for at least five years is permitted to convert to an individual policy, providing coverage up to the face value of the group policy
Utmost Good faith
implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies
Buy-Sell Funding for Partnerships
in a partnership, the law states that any change in its membership will cause its dissolution. Therefore, if a partner dies, the partnership ends. The remaining partner must now wind up the business and pay the deceased partner's estate to an amount equal to the deceased's fair share of the business's liquidated value. If a forced sale results where assets are sold for less than they're worth, this fair share of the business may be less than anticipated. A buy-sell agreement for partnerships binds the surviving partners to purchase the deceased partner's partnership interest at a prearranged price identified in the agreement. The agreement obligated the deceased partner's estate to sell its interest to the surviving partner. An entity plan specifies that the partnership is obligated to buy out the deceased partner's ownership interest. A cross-purchase plan specifies that the agreement will exist between the partners themselves and not between the partnership and the partners as in the entity plan. EX: Partnership consists of four partners, each partner will purchase, own and pay for a policy covering each of the other partners (12 total policies.)
Jumping Juvenile Insurance (Estate Builder)
in addition to purchasing insurance on a child for burial expenses, insurance may also be purchased to protect the child's insurability. Some parents purchase these plans to begin a savings plan for their child. The face amount of this policy can be as low as $1,000 to start. The coverage amount "jumps up" (typically 5 times the initial amount) when the child reaches the age of majority/a specified age (i.e. 21). This benefit increase comes without any evidence of insurability and no premium increase.
Life settlement
in many states, viatical settlements are being replaced by life settlements. Which is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Life settlements do not require the insured to be suffering from a chronic or terminal illness in order to qualify to sell and transfer the policy.
Universal Life Insurance Policy
incorporates flexible premiums and an adjustable death benefit. The investment gains from a universal life policy usually go toward the cash value. The policy owner can use the cash value to manipulate the flexible aspects of a universal life insurance policy. A customer who wants a policy that gives them the most options and the most control would be looking for a Universal Life Policy. Universal Policies use gains to fund the cash value and give the policy owner options for flexible premiums and adjustable death benefits.
Viatical Settlement
involves someone with a terminal illness selling their existing life insurance policy to a third party for a percentage of the death benefit. IN this agreement, the owner of a life insurance policy sells the policy to another person in exchange for a bargained for payment, which is generally less than the expected death benefit under the policy. The original policy owner is called the Viator and the new third-party owner is called the viatical, or sometimes referred to as the viatee.
Alienation of Benefits
involves the assignment of a pension or retirement plan participant's benefits to another person. It is permitted only under exceptional circumstances per IRS rules, such as certain participant loans and certain domestic relations orders.
Social Security (OASDHI)
is "funded" by payroll taxes collected from employees, employers and those who are self-employed. Provides several benefits to those who are eligible, including but not limited to retirement income, disability income, a lump sum death benefit, and survivor benefits. It delivers a basic protection level to most working Americans against the financial problems brought on by death, disability, and aging. Benefits are based on how long a covered worker has worked throughout his life. The amount a person receives is based on the individual's average indexed monthly earnings (AIME) during their working years. To receive maximum benefits, the eligible individual must have forty quarters of coverage: a person must have worked for ten years to be fully insured.
Law of Large Numbers
is a basic principle of insurance that the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period
Monthly Debit Ordinary Insurance
is a combination of industrial and ordinary insurance sometimes offered by home service companies. The hybrid nature of these policies allow for higher face amounts, and higher premiums. These policies are usually paid monthly via mail or bank draft, but they may also be collected at the policy owner's home.
Family servicemembers' group life insurance coverage (FSGLI)
is a component of the SGLI program. FSGLI provides coverage for spouses and children of servicemembers insured under SGLI. Non-military spouses are covered automatically for $100,000 or the amount of the member's coverage, whichever is less. Premiums for spouse coverage are based on the spouse's age and the amount of coverage. Dependent children are covered for $10,000 each at no cost to the member.
The Endowment Policy
is a contract providing for payment of the face amount at the end of a fixed period, at a specified age of the insured, or at the insured's death before the end of the stated period
Voidable contract
is a contract that can be made void at the option of one or more parties to the agreement
A face amount plus cash value policy
is a contract that promises to pay at the insured's death the face amount of the policy plus a sum equal to the policy's cash value
Certificate of insurance
is a document issued by an insurance company/broker that is used to verify the existence of insurance coverage under specific conditions granted to listed individuals. With group insurance, the group (typically employer) is the policy owner and maintains a master policy. The insureds (typically employees) receive a certificate of insurance instead of a policy.
Aleatory
is a feature of insurance contracts in that there is an element of chance for both parties and that the dollar given by the policyholder (premiums) and the insurer (benefits) may not be equal. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss
The Fair Credit Reporting Act
is a federal law requirign an individual to be information if she is being investigated by an inspection company
Exclusion Ratio
is a fraction used to determine the amount of annual annuity income exempt from federal income tax. The exclusion ratio is the total contribution or investment in the annuity divided by the expected ratio
Split-Dollar Plan (SDP)
is a funding method and not a specific type of life insurance policy. It is characterized by an arrangement between an employer and an employee. Can only be funded with whole life, cash value or continuous premium life insurance. The death benefit is split, as a cash value. In some cases, the premium may be split as well. The purpose is to join the needs of one person with the premium paying ability of another party.
Contributory Plan
is a group insurance plan issued to an employer under which both the employer and employees contribute to the cost of the plan. Generally 75% of the eligible employees must be insured in most states. The employees must contribute to the cost of the plan
Conduit IRA
is a holding tank for funds that initially came from a qualified plan and are on their way to another qualified plan. No withholding tax is necessary unless any of the funds are distributed directly to the individual.
Buy-Sell Agreement
is a legal agreement that provides for (1) an orderly continuation or transfer of the business and (2) an amount of money to be paid to the deceased's survivors. Funds to be paid to the surviving family may come from life insurance. Life insurance may be purchased to fund a buy-sell agreement
Franchise insurance
is a life or health insurance plan for covering groups of persons with individual policies uniform in provisions, although perhaps different in benefits. Soliticiation usually takes place in an employer's business with the employer's consent. Franchise insurance is generally written for groups too small to qualify for regular group coverage. May be called wholesale insurance when the policy is life insurance
Human Needs Approach
is a method for determining how much insurance protection a person should have by analyzing a family's or business's needs and objectives if the insured were to die, become disabled, or retire.
Minimum deposit funding
is a method of financing life insurance best suited for individuals in high marginal tax brackets. It allows the policy owner to use policy loans to pay premiums due each year. Policy owner is allowed each year to borrow that year's cash value increase and use it to pay the premium. The owner only pays the difference between the premium due and the amount borrowed (plus interest on loan)
Gross Negligence
is a more severe act because it involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm
A unilateral contract
is a one-sided agreement, where only the insurer is legally bound. In an insurance contract, only the insurance company is legally bound to do anything
Substandard
is a person who is considered an under average or impaired insurance risk because of physical condition, family or personal history of disease, occupation, residence in unhealthy climate, or dangerous habit.
* Whole Life- Modified
is a policy where the premium stays fixed for the first 5 years, and then increases in year 6 and stays level for the remainder of the policy. Modified whole life has all of the same features of any other whole life except the insurance company cuts you a break on premium for the first few years. Ex: K wants to buy life insurance because she knows it is cheaper when she is young. However, she is a college student and cannot afford the large premium associated with whole life. The insurance company may offer her a Modified whole life to lock in her age and provide her all of the benefits of whole life, but give her a discount on premium while she is in college. After the first five years of the policy, she will be out of school and be able to afford the normal premium cost. Modified whole life describes a whole life policy with a premium that increases once after the first few years and then the remains of level for the remainder of the policy.
Convertible term
is a provision that allows policy owners to convert their term insurance into permanent policies without showing proof of insurability. Convertible term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. There isn't a guarantee that your premiums will increase once converted (i.e. change in attained age)
Savings Incentive Match Plan for Employees (SIMPLE)
is a qualified employer retirement plan that allows small employers to set up tax-favored retirement savings plans for their employees. To establish a SIMPLE plan, the employer must not have a qualified plan in place. May be structured as an IRA or as a 401(k) cash or deferral arrangement. All contributions to a SIMPLE IRA or SIMPLE 401(K) plan are nonforfeitable and the employee is immediately and fully vested. Taxation of contributions and their earnings is deferred until funds are withdrawn or distributed.
Attending physician statement (APS)
is a report ordered by the insurance company and completed by a physician, hospital or medical faculty who has treated the person seeking insurance
Qualified Plan
is a retirement or employee compensation plan established and maintained by an employer that meets specific guidelines spelled out by the IRS and consequently receives favorable tax treatment. Typically, the employer makes all or a portion of the contributions on behalf of its employees and is able to deduct these contributions as ordinary and necessary business expenses. Employees are not taxed on the contributions made on their behalf, nor are they taxed on the benefit fund accruing to them until it is actually paid out.
403(b) Plans (Tax-sheltered Annuities)
is a retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers.
401(k) Plans (Cash or Deferred Arrangements)
is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes are not paid until the money is withdrawn from the account.
Guaranteed Minimum Withdrawal Benefit (GMWB)
is a rider in an annuity insurance policy. It guarantees the policyholder a steady stream of retirement income regardless of market volatility. During market downturns, the annuitant can withdraw a maximum percentage of their entire investments in the annuity. Annual maximum percentages available for withdrawal vary with contracts but are usually between 5-10% of the initial investment amount until reaching the depletion of the total initial investment, the annuitant may continue to receive income during the withdrawal period.
Preferred
is a risk whose condition, occupation, mode of living, and other characteristics indicate a prospect for longevity for unimpaired lives of the same age.
Medical Information Bureau
is a service organization that collects medical data on life and health insurance applicants for member insurance companies
Fully Insured
is a status of complete eligibility for the full range of social security benefits: death benefits, retirement benefits, disability benefits, and Medicare benefits. A person must have contributed to FICA taxes for 40 quarters of employment to be fully insured.
Target Premium
is a suggested premium used in Universal life policies. It does not guarantee there will be adequate funds to maintain the policy to any time, especially to life. It may give an indication of what will be needed (under conservative estimates), to maintain the policy.
Credit Report
is a summary of an insurance applicant's credit history, made by an independent organization that has investigated the applicant's credit standing
A policy summary
is a summary of the terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance and annuities
Interim Term Insurance
is a type of convertible term insurance written on a person wanting protection immediately, but who is not able to afford permanent protection immediately. It provides interim coverage between now and the eventual conversion to permanent protection at some point within the first year. While insurability is guaranteed, the premium for the temporary protection is based on the original application age and the premium for permanent protection is based on the age at the time permanent protection begins (the attained age)
Mortgage Redemption Insurance
is a type of decreasing-term life insurance policy. Its purpose is to provide policyholders a way to have their mortgages paid off if they die before it is fully paid. This prevents the full burden of paying the mortgage from falling on the surviving family members' shoulders. With this design, the face value decreases as the balance remaining on the mortgage decreases.
A term rider
is a type of life insurance product which covers children under their parent's policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy. EX; dad owns the insurance policy, mom and children are riding dad's policy as term riders. It allows for additional family members to be covered under one policy by attaching everyone to the main policy.
Joint Life Annuity
is a type of multiple life contract designed to pay benefits to two or more annuitants at the same time. All benefits, however will end once the first annuitant dies. In this manner, it is similar to a joint life policy.
Void Contract
is an agreement without legal effect: an invalid contract. With life insurance contracts, the insurer has 2 years from date of issue to challenge the validity of a contract.
Unearned premium
is an amount of premium for which payment has been made by the policyholder to the insurance company, but coverage has not yet been provided. Unearned premium typically becomes earned premium as the contract progresses, but also would be the amount returned to an insured by the insurer upon policy cancellation.
Single Premium Annuity
is an annuity for which the entire premium is paid in one sum at the beginning of the contract period. This can be a deferred or immediate single premium annuity. Income begins thirty days after the lump sum payment.
Straight life annuity
is an annuity income option that pays a guaranteed income for the annuitant's lifetime, after which time payments stop
Implied authority
is an authority not specifically granted to the agent in the contract of agency, but which common sense dictates the agent has. It enables the agent to carry out routine responsibilities
Noncontributory plan
is an employee benefit plan under which the employer bears the full cost of the employees' benefits; in most states, the plan must cover 100% of eligible employees. The employees do not contribute to the cost of the plan
Deferred Compensation Funding
is an executive benefit an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement, or death. Generally refers to non-qualified retirement plans.
Traditional IRA
is an individual qualified retirement account through which eligible individuals accumulate tax-deferred income up to a certain amount each year, depending on the person's tax bracket. Withdrawals - Must begin receiving payments at age 72 - Any distribution before age 59 1/2 will have adverse tax consequences - There won't be a 10% penatly fee for early deductions if the owner dies/becomes disabled, if the owner is face with a certain amount of medical expenses, higher education expenses, to cover first time home purchase, to pay for health insurance premiums while unemployed.
Roth IRA
is an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59 1/2 are tax free. Withdrawals are either qualified or non-qualified. A qualified withdrawal is one that provides for full-tax advantage (funds must have been held in the account for a minimum of five years and the withdrawal must occur bc the owner has reached age 59 1/2, dies, disabled, or distribution is used to purchase first home. Non-qualified withdrawals are subject to tax.
Human Life Value Approach
is an individual's economic worth, measured by the sum of the individual's future earnings devoted to the individual's family - Does not consider those who receive a financial benefit from the individual's continued life - Usually calculated by the present value of the individual's projected earnings minus expenses (income taxes and cost of living) are multiplied by the years until retirement age.
A buyer's guide
is an informational consumer guide books that explain insurance policies and insurance concepts; in many states, they are required to be given to applicants when certain coverages are being considered. Buyer's guides are often used with life insurance, long-term care insurance and annuities
Offer and acceptance
is an offer that may be made by the applicant by signing the application, paying the first premium, and submitting a physical examination. There must be acceptance by the company. OR the insurance company makes an offer, and the applicant accepts through premium payment
Joint and Survivor Annuity
is another form of a multiple life contract. The benefits under this type of annuity are paid throughout the lifetime of one or more annuitants. Therefore, payments continue until the last annuitant dies. In other words, joint and survivor annuities guarantee income payments for the duration of two lives. a
Hazard
is any factor that gives rise to a peril
Cash Refund Option
is available where the beneficiary of the annuitant chooses to receive the refund in a lump sum.
Risk Retention
is being aware of the risks involved and taking precautions for financial protection (ex: choosing a deductible that is fitting for your situation)
* Whole Life- Modified Endowment Contract (MEC)
is best described as a policy that exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract. A MEC does not meet the 7-pay test and is considered over-funded, according to the IRS. For that reason, the policy will lose favorable tax treatment. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a seven-year period. For example, if your annual premium for a policy was $1,000 and you paid $20,000 in the first five years, you will have failed the 7-pay test by exceeding $7,000 (7-years time one year of the premium). Said differently, you have exceeded the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract.
Nontraditional Life Policy: Current Assumption Whole Life (CAWL)/ Interest-Sensitive Whole Life
is characterized by premiums that vary to reflect the insurer's changing assumptions with regard to its death, investment and expense factors. However, interest sensitive products also provide that the cash values may be greater than the guaranteed levels. If the company's underlying death, investment, and expense assumptions are more favorable than expected, policy owners will have two options: lower premiums or higher cash values. Underlying assumptions could also turn out to be less favorable than anticipated, which would call for a higher premium than that at policy issue. The policy owner may be able to withdraw the policy's cash value interest-free. The provision that allows this is called the Partial surrender provision.
Corporate-owned Life Insurance (COLI)
is generally treated as a deductible business expense. The proceeds are paid tax-free up to a certain level. If more than this amount is provided to an employee, the excess premium used to purchase must be reported by the employee as taxable income. Some insurers include a "change of insured provision" which is primarily useful in corporate-owned life insurance policies. When a covered employee retires or his employment is terminated, the employer may change the name of the insured with that of a new or replacement employee.
A conditional receipt
is given to the policy owners when they pay a premium at the time of application. Such receipts bind the insurance company if the risk us approved as applied for, subject to any other conditions stated on the receipt
Morale hazard
is hazard arising from indifference to loss because of the existence of insurance
Group Life Insurance
is insurance written for members of a group, such as a place of employment. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each member. One of the benefits of group life coverage is usually there is no evidence of insurability required
Master policy
is issued to the employer under a group plan; contains all the insuring clauses defining employee benefits. Individual employees participating in the group plan receive individual certificates that outline highlights of the coverage
Stranger-Originated Life Insurance (STOLI)
is life insurance arrangements where investors persuade consumers (usually seniors) to take out new life insurance policies with the investor named as beneficiary. Investors loan money to the insured to pay the premiums for a defined period. The insured ultimately is assigned ownership of the policy to the investors, who receive the death benefit when the insured dies. The insured receives additional financial benefits, such as an upfront payment or a loan. This practice is illegal.
Ordinary Life Insurance
is life insurance of commercial companies not issued on a weekly premium basis. It is made up of several types of individual life insurance, such as temporary (term), permanent (whole, universal, variable) life insurance coverage, as well as endowment policies. It is individual life insurance that includes many types of temporary and permanent insurance protection plans written on individuals. Policies are individually underwritten, meaning each insured must qualify for the insurance, and premiums are most often paid in monthly, quarterly, or annual installments. - It is the principal type of life insurance purchased in the US
Old Age, Survivor, and Disability Insurance (OASDI)
is more commonly referred to as Social Security. To pay for these programs, the federal government imposes a tax on earned income that must be withheld by your employer. The OASDI deduction on your paycheck shows how much was withheld.
Annuitant
is one to whom an annuity is payable or a person upon the continuance of whose life further payment depends.
A Competent party
is one who is capable of understanding the contract being agreed to. All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol
Parol Evidence Rule
is oral or verbal evidence which is verbally given in a court of law. The Parol Evidence rule limits a contract to its written terms. Oral statements may not generally be used to nullify insurance contract provisions and are not part of the written contract.
Servicemembers' Group Life insurance (SGLI)
is provided up to $400,000 (in $50,000 increments) for full time members of the armed services. The coverage provided is group term life insurance, and all active members are covered unless they choose otherwise
Adverse selection
is selection "against the company". Tendency of less favorable insurance risks to seek or continue insurance to a greater extent than others. Also tendency of policy owners to take advantage of favorable options in insurance contracts
Stock Bonus Plans
is similar to a profit-sharing plan, except that the employer's contributions do not depend on profits. Benefits are distributed in the form of company stock.
Consideration
is something of value that each party gives to each other. The insured provides consideration with payment of premium. the insurer provides consideration by promising to pay the insurance benefit.
Renewable term
is term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having proof of insurability. Either the policy is terminated after the specified time or it can be renewed. If you renew it the premium price will go up and you will have the policy for the same amount of years as the first. All TERM insurance has a final TERMINATION date where you can no longer renew it
Increasing term
is term life insurance that provides an increasing face amount overtime based on specific amounts or a percentage of the original face amount
Reinsurance
is the acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage
Risk transfer
is the act of shifting responsibility of risk to another in the form of an insurance contract. Purchasing insurance does not eliminate risk entirely
Primary Insurance amount
is the benefit (before rounding down to the next lower whole dollar) a person would receive if he/she elects to begin receiving retirement benefits at his/her normal retirement age. At this age, the benefit is neither reduced for early retirement nor increased for delayed retirement
Moral hazard
is the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health upon an individuals general insurability
Cash Value
is the equity amount or "savings" accumulation in a whole life policy
Express authority
is the explicit authority granted to the agent by the insurer as written in the agency contract
Concealment
is the failure of the insured to disclose to the company a fact material to the acceptance of the risk at the time application is made
Principal
is the original sum of money paid into an annuity through premiums
Blackout period
is the period following the death of a family breadwinner, during which no social security benefits are available to the surviving spouse
Backdating
is the practice of making a policy effecitve at an earlier date than the present. This is typically done to lower insurance premiums by ignoring a recent birthday. In most states agents are allowed to back-date up to 6-months, provided the insurer allows this practice. The insurer must allow backdating. Second, the company will usually impose a time limit on how far back a policy can be backdated, typically six months. Importantly, the policy owner is required to pay all back-due premiums and the next premium is due at the backdated anniversary date.
Subrogation
is the right for an insurer to pursue a third party that caused an insurance loss to the insured. It is used to recover the amount of the claim paid to the insured for the loss
Nonforfeiture Values
is the value of the fund less any surrender charges if funds are being withdrawn. Funds may be withdrawn with no surrender charges if the owner dies or becomes disabled or requires specific types of extended medical care in a skilled nursing or other types of extended care facility.
Disability Benefit Qualifications
is when Social security uses both medical disability criteria and non-medical criteria to determine whether you qualify for social security disability (SSDI, the program based on work credits) or Supplemental Security Income (SSI, the low-income program). However, you must be able to prove that you are medically disabled first.
Accumulation Period
is when the premiums an annuitant pays into annuities are credited as accumulation units. The accumulation period may continue between the time after premiums have ceased, but the payout has not yet begun. At the end of the accumulation period, accumulation units are converted to annuity units.
Juvenile Insurance
is written on the lives of children who are within specified age limits and generally under parental control (third-party ownership). Adult applicant is usually the premium payor until the child comes of age and is able to take over the payments. Applicant is usually considered juvenile if they are under the age of 15 (some states 16)
Industrial (Home service) Life Insurance
issues very small face amounts, such as $1000 or $2000. Premiums are paid weekly and collected by debit agents. It is often marketed and purchased as burial insurance, but may also include dismemberment benefits, or a benefit multiplier (indemnity) for accidental deaths
An Adjustable Life policy
owner is usually looking for a policy offering flexible premiums. As financial needs and objectives change, the policy owner can make adjustments to the premium and/or face amount of an adjustable life insurance policy. Adjustable life policies are able to provide these features by combing whole life and term life into a single plan. If a policy owner was looking for a policy in which they could control the amount and frequency of payments with a death benefit that can be adjusted as their life needs change, they would want an adjustable life policy. There typically are no dividends involved with adjustable life policies. Increasing the face amount may require a policy owner to provide proof of insurability. Usually, a customer with an Adjustable life policy has a special need for flexible premiums.
Unearned Premium
premium which has been paid by a policy owner for insurance coverage which has not yet been provided
* With Whole Life- Straight Life Insurance (Ordinary Whole life)
premiums are payable throughout the insured's lifetime and coverage continues until the insured's death. Said differently, premiums are payable as long as coverage is in force. Like all other whole life policies, straight whole life provides fixed premiums, a level death benefit, and cash value. Whole life also requires the face amount to be paid out to the insured at age 100 (when the policy matures), provided a death benefit has not already been paid. "If G wants a policy with a fixed level premium and a benefit that pays out at death or age 100, G would want a whole life policy. Straight whole life allows you to maintain coverage throughout your entire lifetime and spread cost out over your entire life".
Premium collection and reserves
producers collect the initial premium from the applicant at the time of the application. All future premiums are billed to the insured and are remitted by the insurance company. Insureds who cannot afford premiums may sometimes use a premium financing organization which will function similar to an installment loan
Estoppel
prohibits an insurer from denying a claim due to specific actions (or inactions) by the insurer or its representatives.
Deferred Annutiy
provide for postponement of the payment of an annuity until after a specified period or until the annuitant attains a specified age. May be purchased on either a single-premium or flexible premium basis. Deferred annuities typically do not begin making income payments for at least one year after the date of purchase
Qualified Withdrawals
provide the tax-free distribution of earnings from a Roth IRA. To be a qualified withdrawal, the funds must have been held in the account for a minimum of five years; and if the withdrawal occurs for one of the following reasons, no portion of the withdrawal is subject to tax; permanent disability; made by a beneficiary after the owner's death; or used to buy, build or rebuild your first home ($10,000 maximum)
Whole life insurance
provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium. All whole life has the same type of benefits. The only difference in "types" of whole life is how the policy is paid. All whole life lasts until death or age 100, has fixed premium and level benefit with cash value accumulation, regardless of how it is paid. - straight life insurance - Limited pay - modified - modified endowment contract (MEC)
Veterans' Group life insurance & federal (FEGLI)
provides group term life insurance for all other federal employees or civil workers
Cash refund option
provides that, upon the death of an annuitant before payments totaling the purchase price have been made, the excess of the amount paid by the purchaser over the total annuity payments received will be paid in one sum to designated beneficiaries.
Variable Life Insurance Policies
require a producer to have proper FINRA and National Association of Securities Dealer (NASD) securities regristration prior to selling any variable policy contract, whether it be life insurance or an annuity, as they include regulated securities. These policies are also known as interest sensitive policies. The policies usually have a fixed level premium, but the cash value and death benefits of a Varaible life policy can fluctuate according to the performance of its underlying investment portfolio. A typical variable life policy investment account grows through mutual funds, stocks, and bonds. This includes variable life, universal variable life, variable whole life, and Variable annuity. If a policy owner or applicant was looking for a policy to offset inflation, they would want to look into a variable policy. Since the policy owner is assuming all of the investment risk and the rate of return is not guaranteed, a person must have proper FINRA securities registration in addition to an insurance license to sell any variable contracts.
The USA Patriot Act (2001)
requires insurance companies to establish formal anti-money laundering programs. The purpose is to detect and deter terrorism
Insurable Interest
requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without it, an insurance contract is not legally enforceable and would be considered a wagering contract-- It only needs to exist at the time of the application
Economic Benefit Doctrine
requires that any benefit granted to an individual that has economic or financial value be included as compensation for income tax purposes in the year the benefit is granted/ The key to avoiding the imposition of the economic benefit doctrine is the existence of a substantial risk of forfeiture. Therefore, individual life insurance avoids this doctrine since premature death can cause a substantial risk to a surviving family.
Taxation of proceeds paid at death
since premiums paid are not tax-deductible, the proceeds (death benefit) from the life insurance policy are generally paid income tax-free to the named beneficiary if taken as a lump sum. Benefits are normally subject to federal estate tax if included in (paid to) the policy owner's gross estate. If death benefits are paid in installments, the principal is received tax free and any interest received is taxable.
Uniform Simultaneous Death Act
states that if the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who dies first, the law will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries
Section 529 Plans
the Economic Growth and Tax Relief Act of 2001 created the qualified 529 savings plan. Section 529 plans are state-operated investment plans that give families a federal tax-free method to save money for college and other qualified, post-secondary higher education expenses. Two types: a college savings plan allows parents to "lock-in" future tuition at in-state public colleges at current prices. 529 Plans are exempt from federal taxes as are any withdrawals made for college costs
Changes in the Application
the application for insurance must be completed accurately, honestly, and throughly and it must be signed by the insured and witnessed. When an applicant makes a mistake in the information given to the agent, the applicant can have the agent correct that information, but the applicant must initial the correction. If the company discovers a mistake, it usually returns the application to the agent which he then corrects the mistake with the applicant and has the applicant initial the change
* With Whole Life- Limited Pay
the coverage remains on a limited-pay life policy until age 100 or death, whichever happens first. Even though the premium payments are limited to a certain period, the insurance protection extends until the insured's death, or to age 100. Ex: if you were to purchase a 20-pay policy, premiums would need to be paid for 20 consecutive years. After that, you would not be required to make any additional premium payments, and your coverage would be guaranteed until death or age 100. For example, a 40-year-old applicant who would like to retire at age 70 and wants a policy with level` premiums, permanent protection, and premiums paid up at retirement would also choose a paid-up-to-age-70 limited pay policy. A limited pay life insurance policy covers an insured's whole life with premium payments paid over a limited time.
Life Insurance for Members of the armed forces and federal employees
the federal government provides life insurance coverage for those in the armed services and other federal employees.
Primary beneficiary
the first beneficiary in line to receive benefit proceeds upon the death of an insured
Flexible Premium Deferred Annuity (FPDA)
the most popular annuity product sold today. It provides flexibility regarding payments and allows for the supply of income to an annuitant in the future. Interest earned is tax deferred. This type of annuity has virtually replaced the annual premium retirement annuity contract. This older contract provided a fixed schedule of annual premiums and possessed a high load. It also included bundled premiums. FPDAs have no (or little) front-end loads due to the tremendous competition between insurers. Many FPDAs do have back-end or surrender charges.
Conversion period
the period of time during which the terminated employee may convert to an individual plan of insurance without proof of insurability is within 31 days after termination. If death occurs during the conversion period, the death claim will be paid by the group policy. An individual is covered under the group policy during the conversion period.
Beneficiary
the person or entity designated in a life insurance policy to receive the death proceeds
* With Variable Universal Whole Life (VUL)
the policy owner controls the investment of cash values and selects the timing and amount of premium payments. Variable Universal Life policies give a policy owner the best of both Variable and Universal Life. If a policy owner was looking for a policy that allowed them to control how much and when premium was due, what investment accounts were used for funding, and where the returns from those investment accounts went, they would be looking for a Variable Universal Life policy. The policy owner can control the timing and amount of premium payments, as well as the investment of cash values with a variable universal life policy. Policy owner assumes the investment risk as the cash value of the benefit is in accordance with the ups and downs of the stock market. Death benefit is guaranteed.
Key Employee Life Insurance
the principal reason that key employee insurance was developed is to compensate a business for the loss of earnings due to a key employee's death (or disability)
Retirement Earning Limit
when a person arrives at retirement age (age 65+), there is no limitation or restriction on the amount of income he can earn from any type of employment. If an individual decides to begin receiving income prior to reaching full retirement age (age 62-64+), whatever they earn will reduce the retirement benefit to which he is entitled. This is known as the earnings test.
1035 Exchange
when an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes as a Section 1035 exchange. Policy exchanges that qualify as a 1035 exchange are not taxable
Taxation of 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
Incident of Ownership-- Beneficiary Selection
when the employer is the contact owner in a group life policy, they retain all rights of ownership except the right to name or change the beneficiary. Therefore the covered employee or "certificate holder" possesses the an "incident of ownership" in the group plan. Therefore, it is the "certificate holder" who names the beneficiary, not the policy owner. The employee may name the employer as a beneficiary of the group policy only if the employer has insurable interest in the employee.
An investor (or stranger) originated life insurance policy [S(I)OLI)
when the insured dies, the policy owner (investor) benefits. In normal circumstances, it is a beneficiary with insurable interest who benefits from the death of an insured. An investor originated life policy is when an investor purchases a policy on the life of someone else to profit upon that person's death. The investor is typically the policy owner, payor, and names themselves beneficiary. Usually, this is in exchange for a monetary living benefit for the insured. For example, L, the investor, has taken out a $100,000 life insurance policy on E, the insured, and in exchange for allowing the policy on his life, receives $500 a month to help with bills. Investor or Stranger Originated Life Insurance policies are illegal, as they are designed to circumvent the insurable interest requirements of an insurance contract and poisiton the policy owner to benefit upon the death of the insured.
Salary Continuation Plan
works the same as deferred compensation except that the employer funds the plan rather than the employee. The employer establishes an arrangement whereby an employee will continue to receive income payments upon death, disability or retirement.
Level Term/Level premium
Has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, premiums increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called Level Term Insurance. Term insurance always expires at the end of the policy period. Provides a fixed, low premium in exchange for coverage which lasts a specified time period. EX: A $100,000 10-year level term policy, provides a straight, level $100,000 of coverage a period of 10 years. If the insured dies within the 10 years, the beneficiary will receive the policy's face amount ($100,000). If he dies after the 10 years, nothing will be paid and the policy expires.
Rating Services
Help publicize the financial health of insurers. Primary purpose is to determine the rated company's (insurer) financial strength. Example of a rating service company: A.M. Best, Fitch Ratings, Standard & Poor's, and Moody's
Industrial Insurer
Insurers that make up a specialized branch of the industry, primarily providing policies with small face amounts of weekly premiums. Other names include home service or debit insurers
Principle of Indemnity
Involves making an insured whole by restoring them to the same condition as before a loss
Lloyds of London
Is NOT an insurer, but a group of individuals and companies that underwrite unusual insurance
Risk Retention Group
Is a group-owned liability insurer which assumes and spreads products liability and other forms of commercial liability risks among its members
Certificate of Authority
Is a license issued to an insurer by a department of insurance which authorizes that company to conduct insurance business in that particular state
Executive Bonus Plans (Section 162 Bonus Plan)
Is a non-qualified employee benefit arrangement. An employer pays a compensation bonus to a selected employee who uses the bonus payment to pay the premiums on a life insurance policy covering his life. The employee owns the policy personally. The employer may use the amount of the bonus as a tax deduction, and the employee, must include the amount of the bonus in his or her gross income. IN the event of death, the policy proceeds are paid to the designated beneficiary income tax-free. Any withdrawals, surrenders, or loans made by the employee are taxed as they would be if the employee had purchased the policy without the bonus arrangement
Multi-line Insurer
Is an insurance company or independent agent that provides a one-stop-shop for business or individuals seeking coverage for all insurance needs. EX: many large insurers offer individual policies for automobile, homeowner, long-term care, and health insurance needs
Participating Plan
Is an insurance policy under which the policy owners share in the company's earnings through receipt of dividends and also elect the company's board of directors
Captive Insurer
Is an insurer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure
Alien Insurer
Is an insurer in the US whose principal office and domicile location is outside this country
Non-admitted/Unauthorized Insurer
Is an insurer who has not received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state
Admitted Insurer/Authorized Insurer
Is an insurer who has received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state
Domestic Insurer
Is an insurer with its principal or home office in a state where it is authorized
Reciprocal Insurer
Is an unincorporated organization in which all members insure one another
Surplus Lines Insurance
Is nontraditional insurance only available from a surplus lines insurer. They offer coverage for substandard or usual risks not available through private or commercial carriers
Claims Department
Is responsible for processing, investigating and paying claims
Annual renewable term
Is term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability. The renewal is typically automatic and renews at an increased premium.
Decreasing Term
Is term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases over time until it is paid off. Once the debt is paid off, the insurance policy will expire.
Dividend Surplus
Is the amount of earnings paid to policy owners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses and general business purposes
Underwriting Department
Is the department within an insurance company responsible for reviewing applications, approving or declining applications, and assigning risk classifications
Insurer
Is the insurance company
Health Insurance Benefits (Medicare)
Medicare is a federal health insurance program comprise of four available parts. This government sponsored program provides health care and other medical benefits for those age 65 and older and those eligble who are disabled. Medicare is administered by OASDHI and funded or financed through payroll taxes paid through Social Security by employers, employees, and the self-employed. Part A of Medicare covers Hospital Insurance (HI). Part B, if elected, covers Supplementary Medical Insurance (SMI). Parts C and D are Medicare Advantage and the Prescription Drug Plan, respectively.
National Association of Insurance and Financial Advisors/National Association of Health Underwriters (NAIFA)
Members of these organizations are life and health agents dedicated to supporting the industry and advancing the quality of service provided by insurance professionals. These organizations created a Code of Ethics detailing the expectations of agents in their duties toward clients.
Corporate-owned Annuities
Must name a natural person as an annuitant referred to as the "measurable life". If a natural person is named as an annuitant, the interest is not taxable, whereas naming the corporation as the annuitant, interest earned is taxable as ordinary income.
Willful and Wanton Negligence
Not only does the negligent individual recklessly disregard reasonable standards of care, he or she is also aware of the probability that some form of bodily harm or property damage will occur. Borderline an intentional act
2010- Patient Protection and Affordable Care Act (PPACA)
Often shortened to the Affordable Care Act (ACA), it represents one of the most siginficant regulatory overhauls and expansions of health insurance coverage in US history
Valued or Indemnity
A valued contract pays a stated sum regardless of the actual loss incurred (ex: life insurance) An Indemnity contract is one that pays an amount equal to the loss (ex: property, casualty, and health insurance policies)
Stock Insurance Company
A stock company is an insurance company owned and controlled by a group of stock/shareholders whose investment in the company provides the safety margin necessary in the issuance of guaranteed, fixed premium, nonparticipating policies.
Life insurance premiums are calculated based on
- Mortality factor/rate - Interest factor - Expense factor
Other approaches to determining proper amount of life insurance
- The "Multiple Earnings Method" selects a number of years to replace the insureds annual salary - Interest-Only Method: determines how much insurance is needed to maintain after-tax family consumption levels if the insurer holds the principle for future payments. - Single Needs Method: identifies the amount of insurance needed based upon a specific need (loan or debt, education funds, etc.) - Capital Needs Analysis: determines the immediate cash needs of an individual or family - Seat of the pants Method: arbitrarily selects the amount of insurance necessary
Principles of Agency Law
- The acts of the agent (within the scope of his authority) are the acts of the principal - A contract completed by an agent on behalf of the principal is a contract of the principal - Payments made to an agent on behalf of the principal are payments to the principal - Knowledge of the agent regarding the business of the principal is presumed to be knowledge of the principal
Irrevocable Beneficiary
A beneficiary which may not be changed by the policy owner without the written consent of the beneficiary
Broker
A broker represents themselves and the insured (client/customer)
Reinsurer
A company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to
Conversion to individual policy
All group policies contain a conversion privilege. A covered employee has the option of converting his or her group term life coverage to his own individual plan upon termination from the company. Most insurers only allow the terminated employee to convert the group coverage to an individual whole life policy
Foreign Insurer
An insurer with its principal office or domicile location in a state different from the state it's transacting insurance business
Participation Standards
All qualified employer plans must comply with ERISA minimum participation standards designed to determine employee eligibility. In general, employees who have reached age 21 and have completed one year of service must be allowed to enroll in a qualified plan.
State Guaranty Associations
All states have established guaranty funds or guaranty associations to support insurers and protect consumers if an insurer becomes insolvent. Should an insurer be financially unable to pay its claims, the state guaranty association will step in and cover the consumers' unpaid claims up to a specific amount. These are funded by insurance companies through assessments and exist to protect consumers if an insurer becomes insolvent.
Claim Settlement Practices
All states require prompt, fair, and equitable claim settlement practices
Catch-Up Contributions
Both SARSEP and SIMPLE plans allow participants who are at least 50 years old by the end of the plan year to make additional "catch-up contributions".
Actuarial Department
Calculates policy rates, reserves and dividends
Private (Commercial) Insurer
Companies owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are NOT government-owned
Term Life Insurance
Gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period because of the termination date. It is an inexpensive type of insurance, making it attractive for large policies. DOES NOT HAVE A cash value and will always be cheaper than whole life with the same face value. It provides pure death protection since it only pays a death benefit if the insured dies during the policy term. However, if the insured survives the term, there is no loss, and as such no benefits are paid.
1970- Fair Credit Reporting Act
In an attempt to protect an individual's right to privacy, the government passed this act, which is the authority that requires fair and accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about any investigations that are being made upon the completion of the application
1944- United States Code (USC) Sections 1033 and 1034
It is a criminal offense for an individual who has been convicted of a felony involving dishonesty or breach of trust to willfully engage or participate in the business of insurance without obtaining a "letter of written consent to engage in the business of insurance" from the regulating insurance department of the individual's state of residence.
Tax-sheltered annuity: 403(b) or 501(c)(3) Plans
Is a special type of annuity plan reserved for nonprofit organizations and their employees. Is a retirement plan for certain employees of public schools, employees of specific tax-exempt organizations, and certain ministers. Upon retirement, payments received by employees from the accumulated savings in tax-sheltered annuities are treated as ordinary income.
Pure risk
Is a type of risk that involves the chance of loss only; there is no opportunity for gain; insurable
Completing the Application
It is the agent's responsibility to see that the application is completed fully and accurately. An insurance company will return the application to the agent if the agent submits an incomplete application.
Policy Effective Date
Not only does it identify when coverage is effective, it also establishes the date by which future annual premiums must be paid. If a receipt (either conditional or binding) was issued in exchange for the payment of an initial premium deposit, the date of the receipt will generally be noted as the policy effective date in the contract.
Fixed Amount Installment Option
Pays a fixed death benefit in a specified installment amounts until the principal and interest are exhausted
Fixed Period or Period Certain Option
Pays the death benefit proceed in equal installments over a set period of years. The dollar amount of each installment depends upon the total number of installments
1944- United States v. Southeastern Underwriters Association (SEUA)
The Supreme Court ruled that the insurance industry is a form of interstate commerce. Thus, the insurance industry should be regulated by the federal government and subject to a series of federal laws. This nullified state laws that conflicted with federal legislation
Graded Premium Whole life
Similar to modified whole life, graded premium policies also redistribute the premiums. Premiums are lower than typical whole life rates during the preliminary period after the policy is issued (usually lasting five to ten years). The premiums will initially increase yearly during the preliminary period then remain level afterwards.
1959- intervention by the SEC
The Supreme Court ruled that federal securities laws applied to insurers that issued variable annuities and, thus, required these insurers to conform to both SEC and state regulation. The SEC also regulates variable life insurance.
Contingent (SECONDARY) Beneficiary
The beneficiary second in line to receive death benefit proceeds if the primary beneficiary dies before the insured
Suitability of recommended products
The ethical agent assesses the correlation between a recommended product and the client's needs and capabilties by asking and answering: - what are the client's needs - what products can help meet those needs - does the client understand the product and its provisions - does the client have the capability, financially and otherwise, to manage the product - is this product in the client's best interest
Selling to needs
The ethical agent determines the client's needs and then determines which is best suited to address those needs. Two principles of needs-based selling include finding the facts and educating the client
Insured
The insured is the customer receiving insurance protection under an insurance policy
Taxation of cash values
The interest paid on the cash value as it increases/accumulates is tax-deferred. The total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the cost basis.
Periodic Premium Annuities
The level premium annuity is characterized by level or constant payments each year, which funds the annuity
Buy-Selling Funding for Sole Proprietors
There is a two-step business continuation plan to keep the business running after the proprietor's death, whereby the employee takes over management of the business.
Full and Accurate disclosure
There should never be an attempt to hide or disguise the product's nature or purpose or the company being represented.
Group Credit Life
These are set-up by banks, finance companies, etc. to provide that if the insured dies before a loan is repaid, the policy benefits will be used to settle the loan balance. Premiums for group credit life insurance are based on claims experience and expense factors. The premiums are usually paid by the insured. A decreasing term policy is commonly used.
Unfair Trade Practices Act
This act gives the head of each state insurance department power to investigate insurance companies and producers, issue cease and desist orders, and impose penalties. Also gives officers the authority to seek a court injunction to restrain insurers from using any methods believed to be unfair. (Ex: misrepresentation and false advertising, coercion and intimidation, unfair discrimination, and inequitable administration of claims settlements)
1945- The McCarran-Ferguson Act
This law made it clear that the states' continued regulation of insurance was in the public's best interest. Also made possible the application of federal antitrust laws to the extent that (insurance business) is not regulated by state law. This act led each state to revise its insurance laws to conform to the federal laws
Accidental Death and Dismemberment (AD&D)
This policy can provide financial benefits if an insured is killed, loses a limb, suffers blindness, or is paralyzed in a covered accident
1868- Paul v. Virginia
US Supreme Court case that involved one state's attempt to regulate an insurance company domiciled in another state. The Supreme Court sided against the insurance company ruling that the sale and issuance of insurance is not interstate commerce, thus upholding states' right to regulate insurance
Common Disaster Provision
a provision of the Uniform Simultaneous Death Act which ensures a policy owner 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. It also states that the primary beneficiary must outlive the insured a specified period of time in order to receive the proceeds.
Single premium funding
a policy funding option where the policy owner pays a single premium that provides protection for life as a paid-up policy
Net (Single) Premium
a premium calculation used to calculate an insurer's policy reserves factoring in interest and mortality
Class Designation
a beneficiary group designation (ex: all my children), opposed to specifying one or more beneficiaries by name
Fixed and Variable Annuities
a fixed annuity pays a guaranteed predetermined, or level benefit payment amount during the annuity phase. Premiums are placed in the insurer's general premium asset account with other non-variable product premiums. These premiums are invested in fixed-rate vehicles (ie. CDs, money market, etc) to provide a "fixed" return based upon interest rate guarantees. Premiums paid on variable annuities are placed in a separate account. These funds are invested in securities or equities such as common stock, preferred stock, or bonds. It provides the potential for increasing income if the securities perform well.
Net Payment Cost Index
a formula used to determine the true cost of a policy for a policy owner. It uses the same formula as the surrender cost index with the exception that it doesn't assume that the policy will be surrendered at the end of the period. The net payment cost index is useful if one's primary concern is the amount of death benefits provided in the policy.
Modified Premium
a premium funding option characterized by an intitial premium that is lower than it should be during an introductory period of time (normally the first three to five years). After this time, the premium will increase to an amount greater than what the initial level premium would have been, and then remains level or constant for the life of the policy.
Endowment Life Insurance
an endowment policy is characterized by cash values that grow at a rapid pace so that the policy matures or endows at a specified date (before age 100). Endowment life insurance contracts pay a death benefit to a named beneficiary upon the death of an insured during a specified "endowment" period; or it pays the policy owner/insured a cash value equal to the face amount of the policy at the end of the endowment period (when the contract matures/endows) if the insured is still living. Endowments don't pay the cash value upon death, therefore, an endowment pays at the earlier of death or at the end of a specified period.
Accelerated Benefit (Option) Rider
allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and is certified by a physician as expected to die within 1-2 years
Dual Benefit Liability
an individual is sometimes eligible for two retirement income benefits. However, he or she is only allowed to collect one. For instance, a surviving spouse reaches age 65 and his or her actual retirement eligible age. He or she is now eligible for a retirement income benefit. However, he or she is also entitled to his or her deceased spouse's benefit, as well. Since both cannot be collected, the surviving spouse will select the greater of the two.
Risk Classification
is the grouping of different risks according to their estimated cost or likely impact, likelihood of occurrence, countermeasures required, etc.
Split-Dollar Plans
are arrangements between two parties. Life Insurance is written on one party's life who names the beneficiary of the net death benefits (death benefit less cash value). The other party is assigned the cash value, with both typically sharing premium payments.
Peril
is the immediate specific event causing loss and giving rise to risk
Credit policies
are designed to help the insured pay off a loan in the event they are disabled due to an accident or sickness or in the event they die/ If the insured becomes disabled, the policy provides for monthly benefit payments equal to the monthly loan payments due. If the insured dies, the policy will pay a lump sum to the creditor to pay off the loan. Credit policies typically cannot exceed the amount of the loan, as that is the limit of the creditor's insurable interest in the insured(s).
Education IRAs (Coverdell Education Savings Account)
available for investors to make nondeductible contributions of up to $2000 per child under the age of 18. The funds can be used for primary and secondary school expenses in addition to higher education fees. Any funds leftover may be rolled over into another Education IRA before age 30.
Individual or Single Life Annuity
is the most common form of annuity. This type of annuity covers one life only. Generally there is no survivorship with this type of annuity
Equity Index Universal Life Insurance/Equity Indexed Life
combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index. Unlike, a traditional whole life plan, this plan allows policyholders to link accumulation values to an outside equity index like S & P 500. 80%-90% of the premium is invested in traditional fixed income securities and the remainder of the premium is invested in contracts tied to a stipulated stock index. - Characterized by a guaranteed minimum interest rate, tax deferral of interest accumulations, and policy loan access. The equity index returns are designed to keep pace with or beat inflations which protects the policyholder against downside market risk. - These contracts combine term life insurance with an investment feature, similar to a universal life plan. - Death benefit amounts are based upon the coverage amount selected by the contract owner plus the account value
Apparent Authority
deals with the relationship between the insurer, the agent, and the customer. It is the appearance of authority based on the agent-insurer relationship. It is a situation in which the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal
Morbidity Rate
demonstrates the incidence and extent of disability that may be expected from a given group of persons
Periodic Payment Annuity (Flexible Premium)
describes an annuity owner making multiple premium payments to accumulate principal. Typically, after the initial premium, these payments are flexible with frequency and amount
Needs-Based Selling
describes the ethical duty of a producer to sell a protect that fits the prospect's needs rather than the producer's needs. By committing producers to professionalism and the client's needs, insurance producers can act responsibly and ethically
Fiduciary Responsiblity
describes the relationship between the agent or producer and client or company funds. Because the agent handles money of the insured and insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust
Taxation of policy dividends
dividends paid on a whole life policy are tax exempt as they are considered to be a return of overpaid or excess premiums. Although unlikely, any dividends received in excess of the premiums paid are taxable as ordinary income. If dividends are left with the insurer to accumulate interest, the interest earned will be taxable as ordinary income in the year received.
The law of agency
establishes a relationship in which one person is authorized to represent and act for another person or company - Insurance company (insurer)= principal - Agent/producer represents the insurance company not the applicant
Per capita (by the head)
evenly distributes benefits among all named living beneficiary
Funding Standards
for a plan to be qualified it must be funded. There must be real contributions on the part of the employer, the employee, or both. These funds must be held by a third party and invested.
Application
form supplied by insurance company, filled in by the agent & medical examiner (if applicable) Part 1: asks general questions about the proposed insured: name, age, address, birthdate, sex, income, martial status and occupation. Also includes type of policy, amount of insurance, name and relation to beneficiary, other insurance insured owns, additional insurance applications pending, tobacco use Part 2: focuses on proposed insured's health and asks questions regarding health and family history. This could be all the is required or medical tests may be asked for. Part 3: Agent reports personal observations about the proposed insured. Additional information such as financial condition and character, background and purpose of the sale, and how long the agent has known the applicant.
Simplified Employee Pension (SEP)
is a type of qualified retirement plan under which the employer contributes to an individual retirement account set up and maintained by the employee.
Speculative Risk
is a type of risk that involves the chance of both loss and gain; it is not insurable
Policy
is a written contract in which one party promises to indemnify another against loss that arises from an unknown event
Quarter of coverage
is a basic unit for determining whether a worker is insured under the Social Security program
Constructive delivery
is accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policy owner, including the company's own agent. Mailing the policy to the agent for unconditional delivery to the policy owner also constitutes constructive delivery, even if the agent never personally delivers the policy
Waiver
is an agreement waiving the company's liability for a certain type or types of risk ordinarily covered in the policy; a voluntary giving up of a legal, given right
Period certain annuity
is an annuity income option that guarantees a definite minimum period of payments (ex: 10 years)
Persistency
is the percentage of policies an insurer has in force after a specified period of time. Persistency is negatively impacted by policies replaced by other insurers, canceled by the policy owner, or laps due to nonpayment. Companies with higher persistency are more stable and profitable than those with lower persistency. Companies aim for 80% persistency after three-years and 60% after five years. Meaning, 60% of the policies written five years ago should still be active.
Risk
is the uncertainty regarding loss; the probability of loss occurring for an insured or prospect
Accumulation units
make up the value of contributions made by the annuitant less a deduction for expenses. The value of each accumulation unit is a credit to the individual's account and varies depending on the value of the underlying stock investment
Long-term Care riders
may be attached to an annuity or a life insurance policy and allow for the payment of a percentage of the death benefit if an individual is not terminally ill but requires long-term care.
Disability Benefits
may be paid by Social Security (OASDHI) under the federal government or through state governments providing state-sponsored disability benefits or Workers' Compensation. Disability is described as an employee who is unable to engage in any occupation. A person may first become eligible for disability benefits under Social Security after having been disabled for five months. Benefits are based upon his length of employment. Will be paid to a worker (and eligible dependents) if that worker meets the restrictive total disability definition under Social Security - social secuirty beenfits are only available prior to the age of 65 - does not pay partial disability or short-term disability benefits - benefits include monthly payments to the disable worker, spousal benefits, and children's benefits
Fully and Permanently Insured
means an individual has paid FICA contributions for at least 40 quarters (which are not required to be consecutive)
Legal purpose
means an insurance contract must be legal and not in opposition of public policy - Insured must have provided written consent (legal purpose)
A conditional contract
means certain conditions must be met by all parties in the contract. this is needed when a loss occurs in order for the contract to be legally enforceable. All insurance contracts are conditional contracts
Risk Avoidance
occurs when individuals evade risk entirely. It is the act of not doing something that could possibly cause a loss or the inactivity of participation in an event that may potentially cause a loss situation
Family income policies
pay an income beginning at the insured's death and continues for a period specified from the date of policy issue. For example, G purchased a family income policy at age 40, with a 20-year rider period. If G were to die at age 50, G's family would receive an income for 10 years.
A Family Maintenance Policy
pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period. If P is looking to purchase a life insurance policy that will pay a stated monthly income to his beneficiaries for 20 years after he dies and a lump sum of $20,000 at the end of that 20-year period, he should purchase a Family Maintenance policy. Family maintenance policies provide an income for a specific period starting at the death of the insured.
Spousal IRA
persons eligible to set up IRAs for themselves may create a seperate spousal IRA for a nonworking spouse. They can contribute up to the annual maximum to the spousal account, even if the working spouse is in an employer-sponsored plan.
Business Uses of Policy Loans
policy loans can be used for many business needs, such as funding buy-sell agreements, deferred compensation for key employees, or split-dollar arrangements
Annuity Premiums
possess their own mortality tables, which are different from those used for life insurance. Items taken into consideration include the interest rate piad, the amount of total contributions or accumulations, and the settlement options selected. An annuitant's occupation or hobbies do not influence an annuity since these things will not affect the liquidation of funds.
Key Person Insurance
protects a business against financial loss caused by the death or disability of a vital member of the company, usually individuals possessing special managerial or technical skills or expertise
Fixed Annutiy
provide a guaranteed rate of return. The interest payable for any given year is declared in advance by the insurer and is guaranteed to be no less than the minimum specified in the contract. With fixed annuities, the investment risk is on the insurer.
Money Purchase Plans
provide for fixed contributions with future benefits to be determined. These plans most truly represent a defined contribution plan. A money purchase plan must meet the following three requirements: - contributions and earnings must be allocated to participants in accordance with a definite formula - Distributions can be made only in accordance with amounts credited to participants - Plan assets must be valued at least once a year, with participants' accounts being adjusted accordingly
Immediate Annuity
provide for payment of an annuity benefit at one payment interval from the date of purchase. Immediate annuities can only be purchased with a single payment. They typically begin paying income within one month of purchase.
Variable Annutiy
shift the investment risk from the insurer to the contract owner. They are similar to a traditional, fixed annuity in that retirement payments will be made periodically to the annuitants, usually over the remaining years of their lives. Under the variable annuity, there is no guarantee of the dollar amount of payments; they fluctuate according to the value of the account invested, primarily in common stocks. They invest deferred annuity payments in an insurer's separate accounts instead of an insurer's general accounts Because variable annuities are based on non-guaranteed equity investments (ex: common stock), a sales representative who wants to sell such contracts must be registered with the Financial Industry Regulatory Authority (FINRA) as well as hold a state insurance license.
Temporary Insurance Agreement
similar to the binding receipt, this type extends coverage immediately. Coverage remians in effect during the entire underwriting period. If the insured dies during the underwriting period, the claim will be paid. The insurer has the right to cancel coverage if the application is ultimately denied by underwriting
Retirement Benefits
social security retirement benefits are only available to covered workers who are fully insured upon retirement, and these benefits are paid monthly. If a covered worker retires at the normal retirement age, he or she will receive 100% of the PIA. However, if a worker retires early at the age of 62, the maximum social security benefit is 80% of the PIA. This reduction remains all through retirement. Retirement benefits pay covered retired workers, their spouses, and all other eligible dependents a monthly retirement income
Re-entry (Revertible) Term Insurance
some term policies include a re-entry feature which states that the premium can change at renewal based on insurability. This means that to maintain the lowest premium rate (or a discount from standard), the insured may have to prove insurability again upon renewal. If there is an insurability problem, meaning the insured fails the medical exam, coverage may be maintained but at a higher premium rate. Sometimes re-entry is also referred to as revertible term
Taxation of Social Security Benefits
states that Social Security Benefits are subject to federal income tax if the beneficiary files an individual tax return and his or her annual income is greater than $25,000.
Policy proceeds
the amount actually paid as a death, surrender, or maturity benefit. In the case of a death benefit, it includes the face value plus any earned dividends less any outstanding loans and interest. If surrender benefit, the amount includes any cash value less surrender charges and outstanding loans and interest. If maturity benefit the amount includes the cash value less any outstanding loans and interest
Earned premium
the amount of premium paid by the policy owner for policy coverage or insurance protection already received
Surrender Charges
the charges assessed when the contract owner cancels an annuity. Sometimes referred to as back-end loads. A penalty is assessed whenever a cash withdrawal is made in excess of a specified percentage, in any policy year. If the total annuity is surrendered, the surrender charges are subtracted from the annuity value. Charge percentage usually decreases every year.
Advertising Code
the code specifies certain words and phrases that are considered misleading
Insurance policy
the employee purchases a life insurance policy on the life of the propreitor. The employee is the policyowner, beneficiary and pays the premiums. Upon the proprietor's death, the funds from the policy are used to buy the business.
Noncontributory Plan
the employer pays the entire cost of the plan. The insurance company requires that 100% of all eligible employees participate. The most significant benefit of a noncontributory insurance plan is that it helps the insurer avoid adverse selection. - Employees/plan participants do NOT contribute to the premium payments
Cash Value
the equity or savings element of whole life insurance policies
Premium Mode
the frequency in which a policy owner elects to pay premiums
Reserves
the money set aside (required by the state's insurance laws) to pay future claims
Gross (annual) Premium
the net premium for insurance plus commissions, operating and miscellaneous expenses, and dividends
In a contract of adhesion...
there is only one author- the insurance company. If there is ambiguity in the contract, the courts always favor the insured over the insurer
Annuity Period/Annuitization
this is the income phase, the period of time beginning when the contract owner gives up the right to the funds in the contract, in return for a promise of a monthly income
Facility of payment
this provision permits an insurer to pay a portion or all of the policy proceeds to any individual who appears to be equitably entitled. Generally such payment is provided to a party who paid for medical or final expenses of the deceased insured. This may occur when a death claim is not filed within two months following the death of the insured. May also be triggered when a minor is listed as beneficiary
Non-Medical Life Insurance
typically does not require a medical exam and tends to be more expensive than medically underwritten policies. The insurer will average out everyone's risk and charge accordingly. Although insurers typically will not require a medical exam, they will still inquire about the applicant's medical history and lifestyle
Coverage Requirements
under the IRS "minimum coverage" rules, a qualified retirement plan must benefit a broad cross-section of employees. The purpose of coverage requirements is to prevent a plan from discriminating against rank-and-file employees in favor of the "elite" employees. A qualified plan cannot discriminate in favor of highly-paid employees in its coverage provisions or in its contributions and benefits provisions.
The Social Security Act of 1935
was created to provide for United States citizens' general welfare who are 65 years of age and older. The Act was enacted by the Senate and House of Reps to enable individual states to make more adequate provisions for furnishing financial assistance to the aged, blind, dependent and crippled children, maternal and child welfare, public health, and to establish more adequate provision for the administration of their unemployment compensation laws to establish a social security board, to raise revenue and to provide a basic floor of protection to all working Americans against the financial problems brought on by death, disability and aging.
Installment Refund Option
will pay the beneficiary the same monthly income benefit that the annuitant was receiving until the end of the period certain
Taxation of policy loans
with regard to policy loans, if a contract owner borrows against the cash value in the contract, there are no tax consequences in most situations. However, if a policy is a MEC, distributions are subject to the interest first rule which states that they are taxable as income if the cash value of the contract immediately prior to the payment exceeds the cost basis in the contract.