USHA

3. Consequences of Incomplete Applications

Before a policy is issued, all of the questions on the application must be answered. If the insurer receives an incomplete application, the insurer must return it to the applicant for completion. If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer to the question. The insurer will not have the right to deny coverage based on any information that the unanswered question might have contained.

The policyowner also has the option of converting from term to whole life or vice versa.

However, increases in the death benefit or changing to a lower premium type of policy will usually require proof of insurability. In the case of converting from a whole life policy to a term policy, the insurer may adjust the death benefit. The policyowner may also pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium paying-period. Although adjustable life policies contain most of the common features of other whole life policies, the cash value of an adjustable life policy only develops when the premiums paid are more than the cost of the policy.

Universal life policies allow the partial withdrawal (partial surrender) of the policy cash value.

However, there may be a charge for each withdrawal and there are usually limits as to how much and how often a withdrawal may be made. During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation, depending upon the plan. The death benefit will be reduced by the amount of any partial surrender. Note, however, that a partial surrender from a universal life policy is not the same as a policy loan.

Example 1

If an agent collects the initial premium from an applicant and gives the applicant a conditional receipt, and the applicant dies the next day, the underwriting process will proceed as though the applicant were still alive. If the insurer ends up approving the coverage, then the applicant's beneficiary will receive the death benefit of the policy. If, on the other hand, the insurer determines that the applicant was not an acceptable risk and declines the coverage, the premium will be refunded to the beneficiary, and the insurer is not required to pay the death benefit.

Sources of Underwriting Information

In order to properly select and classify insurance risks, the insurer needs to obtain the applicants' background information and medical history. There are several sources of underwriting information that are available to the underwriters.

field underwriter

The agent is the company's front line, because the agent is usually the one who has solicited the potential insured. As a field underwriter, the agent has many important responsibilities, including the following: • Helping prevent adverse selection; • The proper solicitation of applicants; • Completing the application; • Obtaining the required signatures; • Collecting the initial premium and issuing the receipt, if applicable; and • Delivering the policy.

Sources of Underwriting Information: Agent's Report

The agent's report allows the agent to communicate with the underwriter and provide information about the applicant known by the agent that may assist in the underwriting process.

A universal life policy has two components: an insurance component and a cash account.

The insurance component of a universal life policy is always annually renewable term insurance

A buyer's guide provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance.

This document explains how a buyer should go about choosing the amount and type of insurance to buy, and how a buyer can save money by comparing the costs of similar policies. Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium. If the policy contains an unconditional refund provision of at least 10 days (free-look period), a buyer's guide can be delivered with the policy.

31 days.

To keep in compliance with the Do Not Call rules, organizations must consult the registry every 31 days. Any phone numbers on the registry must be dropped from the organization's call lists.

insurable interest

To purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss. In life insurance, insurable interest must exist between the policyowner and the insured at the time of application; A valid insurable interest may exist between the policyowner and the insured when the policy is insuring any of the following: 1. Policyowner's own life; 2. The life of a family member (a spouse or a close blood relative); or 3. The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as debtor to a creditor).

misrepresentations

Untrue statements on the application are considered misrepresentations and could void the contract

2. Changes in the Application

When an answer to a question on the application needs to be corrected, agents have the option, depending on which insurer they represent, of correcting the information and having the applicant initial the change, or completing a new application. An agent should never erase or white out any information on an application for insurance.

premium receipt

Whenever the agent collects premiums, the agent must issue a premium receipt. The type of receipt issued will determine when coverage will be effective.

Insurance Policy

a contract between a policy owner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events.

Agency contract

a contract that is held between an insurer and an agent/producer, containing the expressed authority given to the agent/producer, and the duties and responsibilities to the principal. An agent who is in violation of the agency contract may be held personally liable to the insurer.

Life Insurance

a coverage upon a person's life, and granting, purchasing or disposing of annuities.

Agent/Producer

a person who acts for another person or entity with regard to contractual arrangements with third parties; a legal representative of an insurance company. The classification of producer usually includes agents and brokers; agents are the agents of the insurer. Insurer is the principal.

If the full premium was submitted with the application

and the policy was issued as requested, the policy coverage would generally coincide with the date of application.

Substandard (High Exposure) risk

applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are also referred to as "rated" because they could be issued with the premium rated-up, resulting in a higher premium.

Speculative risk

involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Part 2 - Medical Information

of the application includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. If the amount of insurance is relatively small, the agent and the proposed insured will complete all of the medical information. That would be considered a nonmedical application. For larger amounts, the insurer will usually require some sort of medical examination by a professional.

Part 1 - General Information

of the application includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. It will also inquire about the existing policies and if the proposed insurance will replace them. Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary.

The agent's report

provides the agent's personal observations concerning the proposed insured. The agent's report does not become a part of the entire contract, although it is a part of the application process.

There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term:

• Level, • Increasing, and • Decreasing.

Disclosures at Point of Sale

Every applicant for a life insurance policy must be given a written disclosure statement that provides basic information about the cost and coverage of the insurance being solicited. This disclosure statement must be given to the applicant no later than the time the application for insurance is signed. Disclosure statements will help the applicants to make more informed and educated decisions about their choice of insurance.

Applicant or proposed insured

is a person who requests or seeks insurance from an insurer.

Variable universal life insurance

is a type of insurance that combines many features of the whole life with the flexible premium of universal life and the investment component of variable life, making it a securities version of the universal life insurance.

Single premium whole life (SPWL)

is designed to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment. The policy is completely paid-up after one premium and generates immediate cash.

Whole life insurance

provides lifetime protection, and includes a savings element (or cash value). Whole life policies endow at the insured's age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policyowner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.

An individual who willfully violates this Act enough to constitute a general pattern or business practice

will be subject to a penalty of up to $2,500.

Agents selling variable life insurance products must:

• Be registered with FINRA; • Have a securities license; and • Be licensed by the state to sell life insurance.

SIMPLE Plans

(Savings Incentive Match Plan for Employees) plan is available to small businesses that employ no more than 100 employees who receive at least $5,000 in compensation from the employer during the previous year. To establish a SIMPLE plan, the employer must not have a qualified plan already in place. Employees who elect to participate may defer up to a specified amount each year, and the employer then makes a matching contribution, dollar for dollar, up to an amount equal to 3% of the employee's annual compensation. Taxation is deferred on both contributions and earnings until funds are withdrawn.

Survivorship life

(also referred to as "second-to-die" or "last survivor" policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured.

Ordinary (Straight) Life

(also referred to as ordinary life or continuous premium whole life) is the basic whole life policy (illustrated above). The policyowner pays the premium from the time the policy is issued until the insured's death or age 100 (whichever occurs first). Of the common whole life policies, straight life will have the lowest annual premium.

direct rollover.

. The 20% withholding of funds can be avoided if the distribution is made directly from the first plan to the trustee or administrator/custodian of the new IRA plan.

key person insurance.

A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.With this coverage, the key employee is the insured, and the business is the • Applicant; • Policyowner; • Premium payer; and • Beneficiary.

Annuities are also used to provide what is known as structured settlements.

A structured settlement would take on the form of a court settlement arising from a civil law suit or it may take on the form of the income that is provided to the winner of a state lottery. In addition, many settlement options for a life insurance policy actually involve selecting an annuity payment option.

Accelerated (Living) Benefits

Accelerated death benefits allow the early payment of a portion of the death benefit if the insured has any of the following conditions: • A terminal illness; • A medical condition that requires an extraordinary medical intervention (such as an organ transplant) for the insured to survive; • A medical condition that without extensive treatment drastically limits the insured's life time; • Inability to perform activities of daily living (ADLs); • Permanent institutionalization or confinement to a long-term care facility; • Any other conditions approved by the Department of Insurance.

Annuities are purchased, for the most part, to provide or supplement retirement income. In addition, they are also purchased to fund or to help fund a college education.

Actually an annuity can be used for any situation that requires a steady stream of income at some point in the future.

consideration,

Both parties to a contract must provide some value, or consideration, in order for the contract to be valid. The consideration provision states that the consideration (value) offered by the insured is the premium and statements made in the application. The consideration given by the insurer is the promise to pay in accordance with the terms of the contract. The consideration clause is not always a separate provision, but is often included in the entire contract provision. A separate provision concerning the payment of policy premiums is usually also found in the policy.

Dividends and Dividend Options

Dividends are paid only on participating policies. When the policyowner purchases a policy from a participating insurer, he or she actually pays a "grossed-up" premium. The higher premium is charged as a safety margin in the event the insurer's losses are higher than anticipated. If this extra amount is not needed by the insurer to pay death claims and expenses, or if actual mortality experience improves or interest earned by the company exceeds the assumptions, a dividend will be returned to the policyowner. In other words, dividends are a return of excess premiums, and for that reason they are not taxable to the policyowner. Insurance companies cannot guarantee dividends. The first dividend could be paid as early as the 1st policy anniversary, but must occur no later than the end of the 3rd policy year. From then on dividends are usually paid on an annual basis.

Conversion Privilege

If an employee terminates membership in the insured group, the employee has the right to convert to an individual policy without proving insurability at a standard rate, based on the individual's attained age. The group life policy can convert to any form of insurance issued by the insurer (usually whole life), except for term insurance. The face amount or death benefit will be equal to the group term face amount but the premium will be higher. The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.

Common Disaster Clause

If the insured and the primary beneficiary die at approximately the same time from a common accident with no clear evidence as to who died first, a problem may arise in identifying which party is eligible for the death benefit. The Common Disaster Clause, which is provided under the Uniform Simultaneous Death Law, has been adopted by most states to address this problem, in order to protect the policyowner's original intent, as well as to protect the contingent beneficiary.

Hazardous Occupations or Hobbies

If the insured is engaged in a hazardous occupation or participates in hazardous hobbies (such as skydiving or auto racing), death that results from the hazardous occupation or hobby may be excluded from coverage. The underwriter also has the option of charging a higher premium for insuring these risks.

5. Collecting the Initial Premium and Issuing the Receipt

Most agents attempt to collect the initial premium and submit it along with the application to the insurer. In addition, collecting the initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued.

War or Military Service

Most life insurance policies issued today do not exclude military service. However, there are actually two different types of exclusions that may be used to limit the death benefit if the insured dies as a result of war, or while serving in the military. The status clause excludes all causes of death while the insured is on active duty in the military. The results clause only excludes the death benefit if the insured is killed as a result of an act of war (declared or undeclared).

Aviation

Most life insurance will cover an insured as a fare-paying passenger or a pilot on a regularly scheduled airline, but will exclude coverage for noncommercial pilots, or require an additional premium for the coverage.

nonfamily insureds

Other riders are also available to insure somebody who is not a member of the insured's family -

Explaining the Policy and its Provisions, Riders, Exclusions, and Ratings to the Client

Personal delivery of the policy allows the agent an opportunity to make sure that the insured understands all aspects of the contract. Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and explaining what effect they have on the contract. In addition, the agent should explain the rating procedure to the client, especially if the policy is *rated differently*' than applied for, or has been modified or amended in any other way. The agent should also explain any other choices and provisions available to the policyowner that may become active at this time.

Disability Riders

Some riders provide benefits in the event of the insured's disability, while other riders provide for partial payment of the death benefit prior to the insured's death, called accelerated or living benefits riders.

Dividends: Cash

The insurer simply sends the policyowner a check for the amount of the dividend as it is declared, usually annually.

Beneficiary

The person who receives annuity assets (either the amount paid into the annuity or the cash value, whichever is greater) if the annuitant dies during the accumulation period, or to whom the balance of annuity benefits is paid out.

Owner

The purchaser of the annuity contract, but not necessarily the one who receives the benefits. The owner of the annuity has all of the rights, such as naming the beneficiary and surrendering the annuity. The owner of an annuity may be a corporation, trust, or other legal entity.

Reinstatement

The reinstatement provision allows a lapsed policy to be put back in force. The maximum time limit for reinstatement is usually 3 years after the policy has lapsed. If the policyowner elects to reinstate the policy, he/she will have to provide evidence of insurability. The policyowner is required to pay all back premiums plus interest, and may be required to repay any outstanding loans and interest. The advantage to reinstating a lapsed policy as opposed to purchasing a new one is that the policy will be restored to its original status, and retain all the values that were established at the insured's issue age. Note that a policy that has been surrendered cannot be reinstated.

Modified Endowment Contracts (MECs)

To curtail this activity, and to determine if an insurance policy is overfunded, the Internal Revenue Service (IRS) established what is known as the 7-pay Test. Any life insurance policy that fails a 7-pay test is classified as a Modified Endowment Contract (MEC), and loses the standard tax benefits of a life insurance contract. In a MEC, the cumulative premiums paid during the first 7 years of the policy exceed the total amount of net level premiums that would be required to pay the policy up using guaranteed mortality costs and interest.

noncontributory plan.

Under a noncontributory plan, an insurer will require that 100% of the eligible employees be included in the plan.

Reduced Paid-up Insurance

Under this option, the policy cash value is used by the insurer as a single premium to purchase a completely paid-up permanent policy that has a reduced face amount from that of the former policy. The new reduced policy builds its own cash value and will remain in force until death or maturity.

contributory plan

When the premiums for group insurance are shared between the employer and employees, the plan is referred to as a contributory plan. Under a contributory plan, an insurer will require that 75% of eligible employees be included in the plan.

children's term rider

allows children of the insured (natural, adopted or stepchildren) to be added to coverage for a limited period of time for a specified amount. This coverage is also term insurance and usually expires when the minor reaches a certain age (18 or 21). Most riders provide the minor with the option of converting to a permanent policy without evidence of insurability.

Individual Retirement Account (IRA)

allows individuals to make tax deductible contributions until the age of 70 ½. Plan participants are allowed to contribute up to a specified dollar limit each year, or 100% of their salary if less than the maximum allowable amount. Individuals who are age 50 or older are entitled to make additional catch-up contributions. A married couple could contribute a specified amount that is double the individual amount, even if only one person had earned income. Each spouse is required to maintain a separate account not exceeding the individual limit. In traditional IRAs, withdrawals may begin at age 59 ½, but no later than age 70 ½.

Riders

are added to a policy to modify provisions that already exist. written modifications attached to a policy that provide benefits not found in the original policy. Riders sometimes require an additional premium, but they also help tailor a policy to the specific needs of the insured, and can be classified according to their primary purpose.

Settlement Options

are the methods used to pay the death benefits to a beneficiary upon the insured's death, or to pay the endowment benefit if the insured lives to the endowment date. The policyowner may select a settlement option at the time of policy application, and may also change that option at any time during the life of the insured. Once selected by the policyowner, the settlement option cannot be changed by the beneficiary. If the policyowner does not select a settlement option, the beneficiary will be allowed to choose one at the time of the insured's death.

Buy-sell Funding

are used to contractually establish the intent of someone else to purchase the business upon the insured's death and sets a value (purchase price) on a business. Life insurance is used to fund the buy-sell agreement. Any type of life insurance may be purchased to provide the necessary funds for the agreement. Insurance can be used to either fully or partially fund the buy-sell agreement.

Provisions

define the characteristics of an insurance contract and are fairly universal from one policy to the next.

The substitute insured or change of insured rider

does not permit an additional insured, but instead allows for the change of insureds, subject to insurability. It is most commonly used with Key Person insurance when the key person or employee retires or terminates employment. The rider permits the policyowner, owner or employer, to change the insured to another key employee, subject to insurability.

certificate of insurance

evidencing that they have coverage.

403(b) Tax-sheltered Annuities (TSAs)

is a qualified plan available to employees of certain nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, and to employees of public school systems.

rollover

is a tax-free distribution of cash from one retirement plan to another. Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.

Simplified Employee Pension Plans (SEP)

is a type of qualified plan suited for the small employer or for the self-employed. In a SEP, an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee's gross income. The primary difference between a SEP and an IRA is the much larger amount that can be contributed each year to a SEP (an IRS established annual dollar limit or 25% of the employee's compensation, whichever is less).

A deferred annuity

is an annuity in which the income payments begin sometime after one year from the date of purchase. Deferred annuities can be funded with either a single lump sum (Single Premium Deferred Annuities - SPDAs) or through periodic payments (Flexible Premium Deferred Annuities - FPDAs). Periodic payments can vary from year to year. The longer the annuity is deferred, the more flexibility for payment of premiums it allows.

Executive bonus

is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and therefore has all control. Since the employer treated the premium payment as a bonus, that amount is tax deductible to the employer and income taxable to the employee. It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit.

qualified retirement plan

is approved by the IRS, which then gives both the employer and employee benefits such as deductible contributions and tax-deferred growth. Qualified plans have the following characteristics: • Designed for the exclusive benefit of the employees and their beneficiaries; • Are formally written and communicated to the employees; • Use a benefit or contribution formula that does not discriminate in favor of the prohibited group - officers, stockholders, or highly paid employees; • Are not geared exclusively to the prohibited group; • Are permanent; • Are approved by the IRS; and • Have a vesting requirement.

The return of premium rider

is implemented by using increasing term insurance. When added to a whole life policy, it provides that at death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary. The return of premium rider usually expires at a specified age such as age 60.

group life insurance

is issued to the sponsoring organization, and covers the lives of more than one individual member of that group. Group insurance is usually written for employee-employer groups, but other types of groups are also eligible for coverage. It is usually written as annually renewable term insurance. Two features that distinguish group insurance from individual insurance are • Evidence of insurability is usually not required (unless an applicant is enrolling for coverage outside the normal enrollment period); and • Participants (insureds) under the plan do not receive a policy because they do not own or control the policy.

An individual who unknowingly violates the Fair Credit Reporting Act

is liable in the amount equal to the loss to the consumer, as well as any reasonable attorney fees incurred in the process.

An immediate annuity

is one that is purchased with a single, lump-sum payment and provides income payments that start within one year from the date of purchase. Typically, an immediate annuity will make the first payment as early as 1 month from the purchase date. Most commonly, this type of annuity is known as a Single Premium Immediate Annuity (SPIA).

The basic function of an annuity

is that of liquidating a principal sum, regardless of how it was accumulated.

tertiary beneficiary

is third in line for the death benefits in the event that both the primary and contingent beneficiaries predecease the insured.

irrevocable

may not be changed without the written consent of the beneficiary. Irrevocable beneficiaries have a vested interest in the policy; therefore, the policyowner may not exercise certain rights without the consent of the beneficiary. In addition to being unable to change the beneficiary designation, the policyowner cannot borrow against the policy's cash value (as this would decrease the policy face value until repaid) or assign the policy to another person without the beneficiary's agreement.

Options

offer insurers and insureds ways to invest or distribute a sum of money available in a life policy.

life income joint and survivor

option guarantees an income for two or more recipients for as long as they live. Most contracts provide that the surviving recipient will receive a reduced payment after the first recipient dies.

fixed-amount installments option

pays a fixed, specified amount in installments until the proceeds (principal and interest) are exhausted. The recipient selects a specified fixed dollar amount to be paid until the proceeds are gone. If the beneficiary dies before the proceeds are exhausted, installments will continue to be paid to a contingent beneficiary until all proceeds have been paid out. With this option, the size of each installment will determine how long benefits will be received. The larger the installment, the shorter the income period will be. As with the fixed-period option, this option does not guarantee payments for the life of the beneficiary, but does guarantee that all proceeds will be paid out.

401(k) Plans

qualified retirement plan allows employees to take a reduction in their current salaries by deferring amounts into a retirement plan. The company can also match the employee's contribution, whether it is dollar for dollar or on a percentage basis. Under a 401(k) plan, participants may choose to either receive taxable cash compensation or have the money contributed into the 401(k), referred to as cash or deferred arrangement plans (CODA). Contributions into the plan are excluded from the individual employee's gross income up to a dollar ceiling amount. The ceiling amount is adjusted annually for inflation. The plan allows participants age 50 or over to make additional catch-up contributions (up to a limit) at the end of the calendar year.

transfer (or direct transfer)

refers to a tax-free transfer of funds from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another.

guaranteed insurability

rider allows the insured to purchase additional coverage at specified future dates (usually every 3 years) or events (such as marriage or birth of a child), without evidence of insurability, for an additional premium. When this option is exercised, the insured purchases the additional coverage at his or her attained age. This rider usually expires at the insured's age 40.

A variable annuity

serves as a hedge against inflation, and is variable from the standpoint that the annuitant may receive different rates of return on the funds that are paid into the annuity.

insuring clause (or insuring agreement)

sets forth the basic agreement between the insurer and the insured. It states the insurer's promise to pay the death benefit upon the insured's death. The insuring clause usually is located on the policy face page, and also defines who the parties to the contract are, the premium to be paid, how long coverage is in force, and the amount of the death benefit.

entire contract provision

stipulates that the policy and a copy of the application, along with any riders or amendments, constitute the entire contract. No statements made before the contract was written can be used to alter the contract. Neither the insurer nor the insured may change policy provisions once the policy is in effect without both parties agreeing to it and the change being affixed to the contract.

interest-only option

the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually). The insurer usually guarantees a certain rate of interest and will often pay interest in excess of the guaranteed rate. The interest option is considered to be a temporary option since the proceeds are retained by the insurer until some later point when the proceeds are paid out in a lump sum or paid under one of the other settlement options. When the beneficiary is allowed to select a settlement option, the interest option is sometimes used as a temporary option if the beneficiary needs some time to decide which settlement option to select. For example, the policyowner may specify that interest only will be paid annually to the surviving spouse, with the principal to be paid to their children when they reach a certain age or at the death of the surviving spouse.

If the insured dies during a period of time for which the premium has been paid,

the insurer must refund any unearned premium along with the policy proceeds.

Premium

the money paid to the insurance company for the policy of insurance.

Insured

the person covered by the policy of insurance who may or may not be the applicant or policy owner.

life income with period certain option

the recipient is provided with the "best of both worlds" in terms of a lifetime income and a guaranteed installment period. Not only are the payments guaranteed for the lifetime of the recipient, but there is also a specified period that is guaranteed. For example, a life income with 10 years certain option would provide the recipient with an income for as long as he or she lives. If the recipient dies shortly after starting to receive the payments, the payments will be continued to a beneficiary for the remainder of the 10-year period. As already stated, the installments for the life income with period certain option will be smaller than the life income only option.

Exclusions

the types of risks the policy will not cover. Certain exclusions are standard for all policies, while others are attached to the policy as an exclusion rider. The most common exclusions found in life insurance policies are aviation, hazardous occupation, and war and military service.

Long-Term Care (LTC)

which is often purchased as a separate policy, can also be marketed as a rider to a life insurance policy. These riders provide for the payment of part of the death benefit (called accelerated benefits) in order to take care of the insured's health care expenses, which are incurred in a nursing or convalescent home. As with the living needs rider, payment of LTC benefits will reduce the amount payable to the beneficiary upon the insured's death.

Variable premiums purchase accumulation units in the fund

which is similar to buying shares in a Mutual Fund. Accumulation units represent ownership interest in the separate account. Upon annuitization, the accumulation units are converted to annuity units. The income is then paid to the annuitant based on the value of the annuity units. The number of annuity units received remains level, but the unit values will fluctuate until actually paid out to the annuitant.

The following taxation rules apply to Roth IRAs:

• Contributions are not tax deductible; • Excess contributions are subject to a 6% tax penalty.

A fixed annuity provides the following features:

• Guaranteed minimum rate of interest to be credited to the purchase payment(s); • Income (annuity) payments that do not vary from one payment to the next; • The insurance company guarantees the specified dollar amount for each payment and the length of the period of payments as determined by the settlement option chosen by the annuitant.

taxation rules apply to life insurance policies

• Premiums are not tax deductible; • Death benefit: o Tax free if taken as a lump-sum distribution to a named beneficiary; o Principal is tax free; interest is taxable if paid in installments (other than lump sum).

material misrepresentation

is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they are considered fraud.

Death Benefit (face amount/face value/coverage)

- the amount paid when a claim is issued against a policy of insurance.

Sources of Underwriting Information: Federal Credit Reporting Act

The Fair Credit Reporting Act established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. The law also protects consumers against the circulation of inaccurate or obsolete personal or financial information.

warranty

is an absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Because of such a strict definition, statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.

Insurance transfers

the risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals. If there were no insurance mechanism, the cost of a loss would have to be borne solely by the individual who suffered the loss.

declined risks

Applicants who are rejected. Risks that the underwriters assess as not insurable are declined. For example, a risk may be declined for one of the following reasons: • There is no insurable interest; • The applicant is medically unacceptable; • The potential for loss is so great it does not meet the definition of insurance; or • Insurance is prohibited by public policy or is illegal.

Variable life insurance products are dually regulated by the State and Federal Government.

Due to the element of investment risk, the federal government has declared that variable contracts are securities, and are thus regulated by the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD). Variable life insurance is also regulated by the Insurance Department as an insurance product.

delivery receipt.

Once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured. Although personal delivery of the insurance policy is the best method of finalizing the insurance transaction, mailing the policy directly to the policyowner is acceptable. When the insurer relinquishes control of the policy by mailing it to the policyowner, policy is considered legally delivered. However, it is advisable to obtain a signed

Universal life offers one of two death benefit options to the policyowner.

Option A is the level death benefit option, and Option B is the increasing death benefit option.

Sources of Underwriting Information: Application

The person applying for insurance must submit an application to the insurer for approval for a policy to be issued. The application is one of the main sources of underwriting information for the company.

Sources of Underwriting Information: Investigative Consumer Report (Inspection)

To supplement the information on the application, the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. They are general reports of the applicant's finances, character, work, hobbies, and habits. Companies that use inspection reports are subject to the rules and regulations outlined in the Fair Credit Reporting Act.

Insurer (principal)

the company who issues a policy of insurance.

Interest-sensitive whole life provides the same benefits as other traditional whole life policies with the added benefit of current interest rates

which may allow for either greater cash value accumulation or a shorter premium-paying period.

contingent beneficiary

(also referred to as secondary or tertiary beneficiary) has second claim in the event that the primary beneficiary dies before the insured. Contingent beneficiaries do not receive anything if the primary beneficiary is still living at the time of the insured's death.

Annuitant

The person who receives benefits or payments from the annuity, whose life expectancy is taken into consideration, and for whom the annuity is written. The annuitant and the contract owner do not need to be the same person, but most often are. A corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person.

Lump Sum Payment

Upon the death of the insured, or at the point of endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses a different mode of settlement. As a rule, payments of the principal face amount after the insured's death are not taxable as income.

Dividends: Paid-up Option

Usually, the insurer first accumulates the dividends at interest and then uses the accumulated dividends, plus interest, and the policy cash value to pay the policy up early. In other words, if the insured had a continuous premium whole life policy (in which premiums are paid to age 100), using the paid-up option the policyowner is able to pay up the policy early.

Required Signatures

*Both the agent and the proposed insured (usually the applicant) must sign the application.* If the proposed insured and the policyowner are not the same person, such as a business purchasing insurance on an employee, then the policyowner must also sign the application. An exception to the proposed insured signing the application would be in the case of an adult, such as a parent or guardian, applying for insurance on a minor child.

Nonforfeiture Options

Because permanent life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by the policyowner. These guarantees (known as nonforfeiture values) are required by state law to be included in the policy. A table showing the nonforfeiture values for a minimum period of 20 years must be included in the policy. The policyowner chooses one of the following nonforfeiture options: cash surrender value, reduced paid-up insurance, or extended term.

Misstatement of Age and Gender

Because the age and gender of an insured are important to the premium that will be charged for a life insurance policy, a provision which allows the insurer to adjust the policy at any time due to a misstatement of age or gender is included in the policy. If the applicant has misstated his or her age or gender on the application, in the event of a claim, the insurer is allowed to adjust the benefits to an amount that the premium at the correct age or gender would have purchased. The proceeds calculations should be based on the insurer's rate at the date of policy issue.

The acceptability of a risk is determined by checking the individual risk against many factors directly related to the risk's potential for loss

Besides these factors, an underwriter will sometimes request additional information about a particular risk from an outside source. These reports generally fall into 2 categories: Consumer Reports and Investigative Consumer Reports. Both reports can only be used by someone with a legitimate business purpose, including insurance underwriting, employment screening, and credit transactions.

Consumer reports

include written and/or oral information regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources.

Medical Information and Consumer Reports

For policies with higher amounts of coverage or if the application raised additional questions concerning the prospective insured's health, the underwriter may require a medical examination of the insured. There are two options, depending on the reason for the medical examination: 1. The insurer may only request a paramedical report which is completed by a paramedic or a registered nurse; and 2. The underwriter may require an Attending Physician's Statement (APS) from a medical practitioner who treated the applicant for a prior medical problem.

National Do Not Call Registry

In 2003, the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC) worked together to create, allowing consumers to include their telephone numbers on the list to which solicitation calls cannot be made by telemarketers. Insurance companies need to comply with this regulation when making solicitation phone calls. To comply with the telemarketing sales rules, telemarketers must not do any of the following: • Call any number on the National Do Not Call Registry or on that seller's Do Not Call list; • Deny someone a right to be placed on any Do Not Call Registry; • Call outside permissible calling hours (before 8am and after 9pm); • Abandon calls; • Fail to transmit caller ID information; • Threaten or intimidate a consumer or use obscene language; or • Cause any telephone to ring or engage a person in conversation with the intent to annoy, abuse, or harass the person called.

Medical Information Bureau (MIB)

In addition to an attending physician's report, the underwriter will usually request a Medical Information Bureau (MIB) report. The MIB is a membership corporation owned by member insurance companies. It is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. It is a systematic method for companies to compare the information they have collected on a potential insured with information other insurers may have discovered. The MIB can be used only as an aid in helping insurers know what areas of impairment they might need to investigate further. An applicant cannot be refused simply because of some adverse information discovered through the MIB.

Dividends: Acceleration of Endowment

The acceleration of endowment option also requires the insurer to first accumulate the dividends at interest and then the accumulated amount is used to either shorten the endowment period in the case of an endowment policy, or convert a whole life policy into an endowment.

or master policy/contract

The actual policy, or master policy/contract, is issued to the sponsor of the group, which is often an employer. The group sponsor is the policyholder and is the one that exercises control over the policy.

Payor Benefit

The payor benefit rider is primarily used with juvenile policies (any life insurance written on the life of a minor); otherwise, it functions like the waiver of premium rider. If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are two different individuals.

Automatic Premium Loans

The automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium. For example, a loan against the policy cash value for the amount of premium due is automatically generated by the insurer when the policyowner has not paid the premium by the end of the premium-paying grace period. It is a loan for which the insurer will charge interest. If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit. While the insurer may defer requests for other loans for a period of up to 6 months, loan requests for payment of due premiums must be honored immediately.

Succession - Primary and Contingent

The beneficiary designation can provide for three levels of priority or choice. In the event that the first beneficiary predeceases the insured, the second (or sometimes third) level in the succession of beneficiaries will be entitled to the death proceeds. Each level in the succession of beneficiaries is only eligible for the death benefit if the beneficiary(s) in the level(s) above them has died before the insured.

Beneficiary Designations

The beneficiary is the person or interest to which the policy proceeds will be paid upon the death of the insured. The beneficiary may be a person, class of persons (sometimes used with children of the insured), the insured's estate, or an institution or other entity such as a foundation, charity, corporation or trustee of a trust. Trusts are commonly used in conjunction with beneficiary designations to manage life insurance proceeds for a minor or for estate tax purposes (although naming a trust as beneficiary does not avoid estate taxes). The beneficiary does not have to have an insurable interest in the insured. In addition, the policyowner does not have to name a beneficiary in order for the policy to be valid. Benefits designated to a minor will either be paid to the minor's guardian, or paid to the trustee of the minor if the trust is the named beneficiary, or paid as directed by a court. The guardian and trustee can be the same person. It is generally accepted not to be a good practice to have life insurance benefits payable to a minor.

Dividends: Paid-up Additions

The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy. No new separate policies are issued; however, each of these small single premium payments will increase the death benefit of the original policy by whatever amount the dividend will buy. In addition, each of these paid-up policies will accumulate cash value and pay dividends. The amount of additional coverage that can be purchased with the dividend is based on the insured's attained age at the time the dividend is declared.

Grace Period

The grace period is the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30 or 31 days). The purpose of the grace period is to protect the policyholder against an unintentional lapse of the policy. If the insured dies during this period, the death benefit is payable; however, any unpaid premium will be deducted from the death benefit.

Incontestability

The incontestability clause prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact. During the first 2 years of the policy, an insurer may contest a claim if the insurer feels that inaccurate or misleading information was provided in the application. The incontestability period does not apply in the event of nonpayment of premiums; it also does not usually apply to statements relating to age, sex or identity

Dividends:Accumulation at Interest

The insurance company keeps the dividend in an account where it accumulates interest. The policyowner is allowed to withdraw the dividends at any time. The amount of interest is specified in the policy and compounds annually. Although the dividends themselves are not taxable, the interest on the dividends is taxable to the policyowner when credited to the policy, whether or not the policyowner receives the interest.

Dividends: One-year Term Option

The insurance company uses the dividend to purchase additional insurance in the form of one-year term insurance that increases the overall policy death benefit. The policyowner's choice is to either use the dividend as a single premium on as much one-year term insurance as it will buy, or to purchase term insurance equal to the policy's cash value for as long as it will last. If the insured dies during the one-year term, the beneficiary receives both the death benefit of the original policy and the death benefit of the one-year term insurance.

Dividends: Application to Reduce Premiums

The insurer uses the dividend to reduce the next year's premium. For example, if the policyowner usually pays an annual premium of $1,000 and the insurer declares a $100 dividend, the policyowner would only pay a $900 premium that year.

Owner's Rights

The parties to the insurance contract are the insurer, the policyowner, the insured, and the beneficiary. The policyowner and the insured may be the same person or different persons. Regardless, only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary. Among the ownership rights are naming and changing the beneficiary, receiving the policy's living benefits, selecting a benefit payment options, and assigning the policy. The policyowner has the responsibility of paying the policy premiums, and is also the person who must have an insurable interest in the insured at the time of application for the insurance. When the owner and the insured are not the same person, the insurance arrangement is referred to as the third-party ownership.

Policy Loan and Withdrawal Options

The policy loan option is found only in policies that contain cash value. The policyowner is entitled to borrow an amount equal to the available cash value. Any outstanding loans, and accrued interest, will be deducted from the policy proceeds upon the insured's death. The policy will not lapse with an outstanding policy loan unless the amount of the loan and accrued interest exceeds the available cash value. However, the insurer must provide 30 days written notice to the policyowner that the policy is going to lapse. Insurance companies may defer a policy loan request for up to 6 months, unless the reason for the loan is to pay the policy premium. Policy loans are not subject to income taxation.

Modes of Premium payments

The policy stipulates when the premiums are due, how often they are to be paid (monthly, quarterly, semiannually, annually, etc.) and to whom.

Assignments

The policyowner of a life insurance policy has the right to transfer partial or complete ownership of the policy to another person without the consent of the insurer. However, the owner must advise the insurer in writing of the assignment. Transfer of the life insurance policy does not change the insured or amount of coverage; it only changes who has the policy ownership rights.

cash surrender value

The policyowner simply surrenders the policy for the current cash value at a time when coverage is no longer needed or affordable. Upon receipt of the cash surrender value, if the cash value exceeds premiums paid, the excess is taxable as ordinary income. Once this option is selected, the insured is no longer covered. A policy that has been surrendered for its cash value cannot be reinstated. A surrender charge is a fee charged to the insured when a life policy or annuity is surrendered for its cash value.

revocable

The policyowner, without the consent or knowledge of the beneficiary, may change a revocable designation at any time.

Group Life and Employer-sponsored Plans

The premiums that an employer pays for life insurance on an employee, whereby the policy is for the employee's benefit, are tax deductible to the employer as a business expense. If the group life policy coverage is $50,000 or less, the employee does not have to report the premium paid by the employer as income (not taxable to the employee). Any time a business is the named beneficiary of a life insurance policy, or has a beneficial interest in the policy, any premiums that the business pays for such insurance are not tax deductible. Therefore, when a business pays the premiums for any of the following arrangements, the premiums are not deductible: • Key-employee (key-person) insurance; • Stock redemption or entity purchase agreement; • Split-dollar insurance. The cash value of a business owned life insurance policy or an employer provided policy accumulates on a tax-deferred basis and is taxed in the same manner as an individually owned policy. Policy loans are not taxable to a business. Unlike an individual taxpayer, a corporation may deduct interest on a life insurance policy loan for loans up to $50,000. Policy death benefits paid under a business owned or an employer provided life insurance policy are received income tax free by the beneficiary (in the same manner as in individually owned policies). If the general requirements for qualified plans are met, the following tax advantages apply: • Employer contributions are tax deductible to the employer, and are not taxed as income to the employee; • The earnings in the plan accumulate tax deferred; • Lump-sum distributions to employees are eligible for favorable tax treatment.

Waiver of Cost of Insurance

The waiver of cost of insurance (or waiver of monthly deductions) rider is found in Universal Life Insurance. In the event of disability of the insured, this rider waives the cost of the insurance and other expenses, but does not waive the cost of premiums necessary to accumulate cash values.

Waiver of Premium

The waiver of premium rider waives the premium for the policy if the insured becomes totally disabled. Coverage remains in force until the insured is able to return to work. If the insured is never able to return to work, the premiums will continue to be waived by the insurance company. Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived. If the insured is still disabled after this waiting period, the insurer will refund the premium paid by the insured from the start of the disability. This rider usually expires when the insured reaches age 65. In order for the insured to qualify for this benefit, he or she must meet the policy's definition of total disability. Although this definition will differ from one policy to another, it is generally defined as the inability to engage in any work. More specifically, total disability refers to the insured's inability to perform the duties of his/her own occupation for the first 2 years; then any gainful employment for which the insured is reasonably suited by education, training and experience. No benefits are payable for partial disability.

Because the insurance company is not sustaining the investment risk of the contract, the underlying assets of the contract cannot be kept in the insurance company's general account.

These assets must be held in a separate account, which invests in stocks, bonds, and other securities investment options. Any domestic insurer issuing variable contracts must establish one or more separate accounts. Each separate account must maintain assets with a value at least equal to the reserves and other contract liabilities.

third-party ownership

Third-party owner is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.

Extended Term

Under the extended-term option, the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy. The duration of the new term coverage lasts for as long a period as the amount of cash value will purchase. If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended-term option in the event of termination of the original policy.

Waiver of Premium with Disability Income

With this rider, in the event of disability the insurer will waive the policy premiums and pay a monthly income to the insured. The amount paid is normally based on a percentage of the face amount of the policy to which it is attached.

The first way to classify annuities can be based on how they can be funded (paid for). There are 2 options:

a single payment (lump sum) or through periodic payments in which the premiums are paid in installments over a period of time. Periodic payment annuities can be either level premium, in which the annuitant/owner pays a fixed installment, or flexible premium, in which the amount and frequency of each installment varies.

the fixed-period installments option (also called period certain),

a specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period. In the event of the recipient's death, the payments would continue to a beneficiary. The size of each installment is determined by the amount of principal, guaranteed interest, and the length of period selected. The longer the period selected, the smaller each installment will be. This option does not guarantee income for the life of the beneficiary; however, it does guarantee that the entire principal will be distributed.

The cost of living rider

addresses the inflation factor by automatically increasing the amount of insurance without evidence of insurability from the insured. The face value of the policy may be increased by a cost of living factor tied to an inflation index such as the Consumer Price Index (CPI).

Term riders

allow for an additional amount of temporary insurance to be provided on the insured, without the need to issue another policy. They are usually attached to a whole life policy to provide greater protection at a reduced cost.

Free Look

allows the policyowner 10 days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. The free-look period starts when the policyowner receives the policy (policy delivery), not when the insurer issues the policy. Certain life insurance transactions, such as replacement, may require a longer free-look period.

life-income option

also known as straight life, provides the recipient with an income that he or she cannot outlive. Installment payments are guaranteed for as long as the recipient lives, irrespective of the date of death. The amount of each installment paid is based on the recipient's life expectancy and the amount of principal. If the beneficiary lives for a very long time, payments may exceed the total principal. However, if the beneficiary dies shortly after he or she begins receiving installments, the balance of the principal is forfeited to the insurer. Because there is a chance that the beneficiary may not live long enough to receive all the life insurance proceeds, insurers make options available which provide at least a partial guarantee that some or all of the proceeds will be paid out. With each of the guarantees, the size of the installment is decreased.

annuity period,

also known as the annuitization period, liquidation period, or pay-out period, is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant. The annuity period may last for the lifetime of the annuitant or for a specified period, which could be longer or shorter. The annuitization date is the time when the annuity benefit payouts begin (trigger for benefits).

accumulation period

also known as the pay-in period, is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.

Endowment policies

are another type of whole life insurance that have all the same features as regular whole life policies with a slight variation in the maturity date. They provide a permanent, level death protection if the insured should die prematurely, and they accumulate cash values. Premiums can be paid up until the endowment date, for a limited period of time, or in a lump sum single payment. The primary difference between a whole life policy and an endowment is that an endowment matures (endows) at an earlier age (before age 100). Because the cash value in an endowment has to build up faster since the funds are intended to be used while the insured is alive, the premium for an endowment is considerably higher than an ordinary straight life policy. The sooner the policy endows, the higher the premium will be.

Indexed (or equity indexed) annuities

are fixed annuities that invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity, the indexed annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500.

nonqualified plans

are not subject to the requirements regarding participation, discrimination, and vesting found in qualified plans. Nonqualified plans require no government approval and are used as a means for an employer to discriminate in favor of a valuable employee with regard to employee benefits. Nonqualified plans accept after-tax contributions. Examples of nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.

Standard risks

are persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. They are the average risk.

Profit Sharing plan

are qualified plans where a portion of the company's profit is contributed to the plan and shared with employees. If the plan does not provide a definite formula for figuring the profits to be shared, employer contributions must be systematic and substantial.

Investigative Consumer Reports

are similar to consumer reports in that they also provide information on the consumer's character, reputation, and habits. The primary difference is that the information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer. Unlike consumer reports, these reports cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested. The consumers must be advised that they have a right to request additional information concerning the report, and the insurer or reporting agency has 5 days to provide the consumer with the additional information.

Representations

are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.

Preferred risks

are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.

cross-purchase plan

each partner involved purchases insurance on the life of each of the other partners. With a cross-purchase plan, each partner is the owner, premium-payor, and beneficiary of the life insurance on the lives of the other partners. The amount of the life insurance is equal to each partner's share of the purchase price of the deceased partner's interest in the business.

Increasing term

features level premiums and a death benefit that increases each year over the duration of the policy term. The amount of the increase in the death benefit is usually expressed as a specific amount or a percentage of the original amount. Increasing term is often used by insurance companies to fund certain riders that provide a refund of premiums or a gradual increase in total coverage, such as the cost of living or return of premium riders. This type of policy would be ideal to handle inflation and the increasing cost of living. It is also often added to another policy as a rider, such as with return of premium policies.

distribution

from an IRA is subject to income taxation in the year the withdrawal is made. In case of an early distribution (prior to age 59 ½), a 10% penalty will also apply. There are certain conditions, under which the 10% penalty for early withdrawals would not apply (penalty tax exceptions): • Participant is age 59½ • Participant is totally disabled • The money is used to make the down payment on a home (not to exceed $10,000, and usually for first-time homebuyers) • Withdrawals are for post-secondary education expenses • Withdrawals are for catastrophic medical expenses, or upon death.

primary beneficiary

has first claim to the policy proceeds following the death of the insured. The policyowner may name more than one primary beneficiary, as well as how the proceeds are to be divided.

Consumer reports cannot contain certain types of information if the report is requested in connection with a life insurance policy or credit transaction of less than $150,000. The prohibited information

includes bankruptcies more than 10 years old, civil suits, records of arrest or convictions of crimes, or any other negative information that is more than 7 years old. As defined by the Act, negative information includes information regarding a customer's delinquencies, late payments, insolvency or any other form of default.

• Collateral Assignment

involves a transfer of partial rights to another person. It is usually done in order to secure a loan or some other transaction. A collateral assignment is a partial and temporary assignment of some of the policy rights. Once the debt or loan is repaid, the assigned rights are returned to the policyowner.

• Absolute Assignment

involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured.

Old Age Survivors Disability Insurance - OASDI

is a Federal program enacted in 1935, which is designed to provide protection for eligible workers and their dependents against financial loss due to old age, disability, or death. With a few exceptions, almost all individuals are covered by Social Security. In some aspects, Social Security plays a role of federal life and health insurance, which is important to consider when determining an individual's needs for life insurance.

annuity

is a contract that provides income for a specified period of years, or for life. An annuity protects a person against outliving his or her money. Annuities are not life insurance, but rather a vehicle for the accumulation of money and the liquidation of an estate. Annuities are marketed by life insurance companies. Licensed life insurance agents are authorized to sell some types of annuities.

Roth IRA

is a form of an individual retirement account funded with after-tax contributions. An individual can contribute 100% of earned income up to an IRS-specified maximum, as with traditional IRAs (the dollar amounts change every year). In contrast with a traditional IRA, Roth contributions can continue beyond age 70½ and distributions do not have to begin at age 70½. Roth IRAs grow tax free as long as the account is open for at least 5 years.

Permanent life insurance

is a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid. The most common type of permanent insurance is whole life.

Variable life insurance (sometimes referred to as variable whole life insurance)

is a level, fixed premium, investment-based product. Like traditional forms of life insurance, these policies have fixed premiums and a guaranteed minimum death benefit. The cash value of the policy, however, is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer. The policyowner bears the investment risk in variable contracts.

Replacement

is a practice of terminating an existing policy or letting it lapse, and obtaining a new one. To make sure that replacement is appropriate and in the best interests of the policy owner, insurance producers and companies must take special underwriting measures to help policy owners make informed decisions.

target premium

is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

Joint life

is a single policy that is designed to insure two or more lives. Joint life policies can be in the form of term insurance or permanent insurance. The premium for joint life would be less than for the same type and amount of coverage on the same individuals. It is more commonly found as joint whole life, which functions similarly to an individual whole life policy with two major exceptions: • The premium is based on a joint average age that is between the ages of the insureds. • The death benefit is paid upon the first death only.

Interest-sensitive whole life, also referred to as current assumption life,

is a whole life policy that provides a guaranteed death benefit to age 100. The insurer sets the initial premium based on current assumptions about risk, interest and expense. If the actual values change, the company will lower or raise the premium at designated intervals. In addition, interest-sensitive whole life policies credit the cash value with the current interest rate that is usually comparable to money market rates, and can be higher than the guaranteed levels. The policy also provides for a minimum guaranteed rate of interest.

A policy summary

is a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. A policy summary will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. The policy summary must be provided when the policy is delivered.

Universal life

is also known by the generic name of flexible premium adjustable life. That implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the monthly deductions for cost of insurance. If the cash value is too small, the policy will expire.

limited-pay whole life

is designed so that the premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of limited-pay life are 20-pay life whereby coverage is completely paid for in 20 years, and life paid-up at 65 (LP-65) whereby the coverage is completely paid up for by the insured's age 65. All other factors being equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited-pay policies.

Term insurance

is temporary protection because it only provides coverage for a specific period of time. It is also known as pure life insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed.

minimum premium

is the amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.

premium mode

is the manner or frequency that the policyowner pays the policy premium. Most policies allow for annual, semi-annual, quarterly, or monthly payments. If the insured selects a premium mode other than annual, there will be an additional charge to offset the loss of earnings since the company does not have the entire premium at once, and there are additional administrative costs associated with more frequent billing.

Level term insurance

is the most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy.

Annually renewable term (ART)

is the purest form of term insurance. The death benefit remains level (in that sense, it's a level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases.

Underwriting

is the risk selection and classification process. It involves a careful analysis of many different factors to determine the acceptability of applicants for insurance. In other words, underwriting is the process in which an insurance company determines whether or not a particular applicant is insurable, and if so, what premium to charge.

The Application

is the starting point and basic source of information used by the company in the risk selection process. Although applications are not uniform and may vary from one insurer to another, they all have the same basic components: Part 1 - General Information and Part 2 - Medical Information.

Risk

is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Uniform Simultaneous Death Law

it will be assumed that the primary beneficiary died first in a common disaster. This provides that the proceeds will be paid to either the contingent beneficiary or to the insured's estate, if no contingent beneficiary is designated. The intent is to fulfill the wishes of the policyowner. Most insurers specify a certain period of time, usually 14 to 30 days, in which death must occur in order for this provision to apply. As long as the beneficiary dies within this specified period of time following the death of the insured, it will still be interpreted that the beneficiary died first.

Self-employed Plans (HR-10 or Keogh)

make it possible for self-employed persons to be covered under an IRS qualified retirement plan. These plans allow the self-employed individuals to fund their retirement programs with pre-tax dollars as if under a corporate retirement or pension plan. To be covered under a Keogh retirement plan, the person must be self-employed or a partner working part time or full time who owns at least 10% of the business.

illustration

means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. A life insurance illustration must do the following: • Distinguish between guaranteed and projected amounts; • Clearly state that an illustration is not a part of the contract; • Identify those values that are not guaranteed as such. An agent may only use the illustrations of the insurer that have been approved, and may not change them in any way.

accidental death rider

pays some multiple of the face amount if death is the result of an accident as defined in the policy. Death must usually occur within 90 days of such an accident. The benefit is normally two times (double indemnity) the face amount. Some policies pay triple the face amount (triple indemnity) for accidental death.

accidental death and dismemberment rider (AD&D)

pays the principal (face amount) for accidental death, and pays a percentage of that amount, or a capital sum, for accidental dismemberment. The accidental death portion is the same as that already discussed with the accidental death rider. The dismemberment portion of the rider will usually determine the amount of the benefit according to the severity of the injury. The full principal amount will usually be paid for loss of two hands, two arms, two legs or the loss of vision in both eyes. A capital amount is usually limited to half the face value and is payable in the event of the loss of one hand, arm, leg, or eye. The dismemberment can be defined differently by insurance companies, from the actual severance of the limb to the loss of use.

Decreasing term

policies feature a level premium and a death benefit that decreases each year over the duration of the policy term. Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time. Decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year. A decreasing term policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term.

other insured rider

provides coverage for one or more family members other than the insured. The rider is usually level term insurance, attached to the base policy covering the insured. This is also known as a family rider. If the rider covers just the spouse of the insured, it can be specified as a spouse term rider, and allows the spouse to be added to coverage for a limited period of time and for a specified amount (it usually expires when the spouse reaches age 65).

Living Needs Rider

provides for the payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years. The purpose of this rider is to provide the insured with the necessary funds to take care of necessary medical and nursing home expenses that incur as a result of the terminal illness. Many insurance companies do not charge for this rider since it is simply an advance payment of the death benefit. The remainder of the policy proceeds are payable to the beneficiary at the time of the insured's death.

Renewable

provision allows the policy owner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured's current age.

Suicide

provision in life insurance policies protects the insurers from individuals who purchase life insurance with the intention of committing suicide. Insurance policies usually stipulate a period of time during which the death benefit will not be paid if the insured commits suicide. If the insured commits suicide within 2 years following the policy effective date (issue date), the insurer's liability is limited to a refund of premium. If the insured commits suicide after the 2-year period, the policy will pay the death proceeds to the designated beneficiary the same as if the insured had died of natural causes.

convertible

provision provides the policy owner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured's attained age at the time of conversion.

Pure risk

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Quarter of Coverage (QC)

system to determine whether or not an individual is qualified for Social Security benefits. The type and amount of benefits are determined by the amount of credits or QCs a worker has earned. Anyone working in jobs covered by Social Security or operating his/her own business may earn up to a maximum of 4 credits for each year of work. The term fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, Medicare, and survivor benefits. An individual can attain a currently insured status (or partially insured), and by that qualify for certain benefits if he or she has earned 6 credits (or quarters of coverage) during the 13-quarter period ending with the quarter in which the insured: • Dies; • Becomes entitled to disability insurance benefits; or • Becomes entitled to old-age insurance benefits.

In classifying a risk,

the Home Office underwriting department will look at the applicant's past medical history, present physical condition, occupation, habits and morals. If the applicant is acceptable, the underwriter must then determine the risk or rating classification to be used in deciding whether or not the applicant should pay a higher or lower premium. A prospective insured may be rated as one of the three classifications: standard, substandard, or preferred.

If the initial premium is not paid with the application

the agent will be required to collect the premium at the time of policy delivery. In this case, the policy does not go into effect until the premium has been collected. The agent may also be required to get a statement of good health from the insured. This statement must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date.

level benefit payment amount

the annuitant knows the exact amount of each payment received from the annuity during the annuity period. A disadvantage to fixed annuities is that the purchasing power that they afford may be eroded over time due to inflation.

entity plan

the business itself is obligated to buy out the ownership interest of any deceased or disabled partner.

Under the Fair Credit Reporting Act, if a policy of insurance is declined or modified because of information contained in either a consumer or investigative report

the consumer must be advised and provided with the name and address of the reporting agency. The consumer has the right to know what was in the report. The consumer also has a right to know the identity of anyone who has received a copy of the report during the past year. If the consumer challenges any of the information in the report, the reporting agency is required to reinvestigate and amend the report, if warranted. If a report is found to be inaccurate and is corrected, the agency must send the corrected information to all parties to which they had reported the inaccurate information within the last 2 years.

Option B (Increasing Death Benefit option),

the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expenses of this option are much greater than those for Option A, thereby causing the cash value to be lower in the older years (all else being equal).

Option A (Level Death Benefit option),

the death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years. Notice that the pure insurance is actually decreasing as time passes, lowering the expenses, and allowing for greater cash value in the older years. The reason that the illustration shows an increase in the death benefit at a later point in time is so that the policy will comply with the "statutory definition of life insurance" that was established by the IRS and applies to all life insurance contracts issued after December 31, 1984. According to this definition, there must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. The percentages that apply to the corridor are established in a table published by the IRS and vary as to the age of the insured and the amount of coverage. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance.

Policy owner

the person who is entitled to exercise the rights and privileges in the policy and who may or may not be the insured.

When insurers plan to seek and use information from investigators,

they must first provide the applicant or insured with a written Disclosure Authorization Notice. The notice will state the insurer's practice regarding collection and use of personal information. The disclosure authorization form must be written in plain language, and must be approved by the head of the Department of Insurance.

Adjustable life

was developed in an effort to provide the policy owner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insured's needs. As the insured's needs change, the policyowner can make adjustments in his or her policy. Typically, the policyowner has the following options: • Increase or decrease the premium or the premium-paying period; • Increase or decrease the face amount; or • Change the period of protection.

It is common among insurers to require an HIV test

when an applicant is applying for a large amount of coverage, or for any increased and additional benefits. To ensure proper obtaining and handling of results, and to protect the insured's privacy, states have enacted the following laws and regulations for insurers requiring an applicant to submit to an HIV test: • ***The insurer must disclose the use of testing to the applicant, and obtain written consent from the applicant on the approved form;*** • The insurer must establish written policies and procedures for the internal dissemination of test results among its producers and employees to ensure confidentiality.

Medical examinations

when required by the insurance company, are conducted by physicians or paramedics at the insurance company's expense. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent in recording medical information on the application. The medical exam requirement is more common with life insurance underwriting. If an insurer requests a medical examination, the insurer is responsible for the costs of the exam.

The most common type of receipt is a conditional receipt

which is used only when the applicant submits a prepaid application. The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for. This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages.

pure death protection:

• If the insured dies during this term, the policy pays the death benefit to the beneficiary; • If the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term; and • There is no cash value or other living benefits.

key characteristics of whole life insurance.

• Level premium: the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy. • Death benefit: the death benefit is guaranteed and also remains level for life. • Cash value: the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. (Remember: the insured and the policyowner do not have to be the same person.) Cash values are credited to the policy on a regular basis and have a guaranteed interest rate. • Living benefits: the policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.

Group underwriting differs from that of individual insurance

• Purpose of the group - The group must be created for a purpose other than to obtain group insurance. • Size of the group - The larger the number of people in the group, the more accurate the projections of future loss experience will be. This is based on the Law of Large Numbers of similar risks. • Turnover of the group - From the underwriting perspective, a group should have a steady turnover: younger, lower-risk employees enter the group, and older, higher-risk employees leave. • Financial strength of the group - Because group insurance is costly to administer, the underwriter should consider whether or not the group has the financial resources to pay the policy premiums, and whether or not it will be able to renew the coverage.

taxation rules apply to contributions made to traditional IRA plans:

• Tax-deductible contributions for the year of the contribution (based on the person's income); • Contributions must be made in "cash" in order to be tax deductible (the term cash includes any form of money, such as cash, check, or money order); • Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; • Tax-deferred earnings (the money that accumulates in the account) are not taxed until withdrawn.

The annuity income amount is based upon the following:

• The amount of premium paid or cash value accumulated; • The frequency of the payment; • The interest rate; and • The annuitant's age and gender.

3 main characteristics of variable annuities:

• Underlying Investment: the payments that the annuitant makes into the variable annuity are invested in the insurer's separate account, not their general account. The separate account is not part of the insurance company's own investment portfolio, and is not subject to the restrictions that are applicable to the insurer's own general account. • Interest Rate: issuing insurance company does not guarantee a minimum interest rate. • License Requirements: a variable annuity is considered a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. An agent selling variable annuities must hold a securities license in addition to a life insurance license. Agents or companies that sell variable annuities must also be properly registered with FINRA.