Definitions
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Applicant
person applying to be insured under an insurance contract.
The applicant, owner, and insured may be the same or up to three different persons
Application
written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application.
It is the primary source of information used for underwriting purposes.
Beneficiary
One or more "parties" named in the policy to receive the policy's benefits if the insured dies while the contract is in force. The beneficiary cannot be the insured, but can be the owner/applicant.
Insured
individual whose life is covered under the policy. The insured's death results in the payment of the policy proceeds
Insurable Interest
relationship that must ex[ist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a fin
Policyowner
/policy owner
individual who has ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily
Third-Party Ownership
policy owned by a person other than the insured
Issue (Original) Age
Insured's age on the policy issue date
Effective Date
date when insurance coverage begins
Attained Age
Insured's age at any point in time typically used at renewal or conversion
Expiration Date
date when insurance coverage ends
Producer Responsibilities
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Solicitation
Soliciting insurance can be done through traditional forms such as advertising in local print media, on radio or television, or through direct mail. Seeking opportunities to conduct sales appointments with potential clients is also considered solicitation
California Life Policy Illustration (Summary) and Buyer's Guide Requirements
California law requires that the purchaser of life insurance be provided with a copy of the NAIC Buyer's Guide to Life Insurance not later than the time of policy delivery (there are similar Guides for both annuities and long-term care insurance). The Buy
Cost Comparison Indexes
If an agent or insurer makes a presentation comparing the cost of life insurance which does not recognize the time value of money, the agent must present the Life Insurance Surrender Cost Index and the Life Insurance Net Payment Cost Index.
Life Insurance Surrender Cost Index
used to compare the cost of similar policies based on determining the guaranteed cash surrender value, if any, available at the end of the 10th and 20th policy years.
Life Insurance Net Payment Cost Index
also used to compare similar policies, however this index shows the cost based on the death benefit payable after a surrender period of 10 or 20 years rather than the cash surrender value.
The presentation of these indices must be accompanied by an explan
Life insurance illustrations
should be presented to be understandable and not misleading. An illustration is a document that shows the cash accumulation in a life policy over a minimum of 20 years on both a "guaranteed" (maximum cost of insurance, minimum interest credits) and a "non
Policy illustration requirements apply to all group and individual life insurance policies, except:
- Variable life insurance
- Individual and group annuity contracts
- Credit life insurance
- Life insurance policies with no illustrated death benefits on any individual exceeding $10,000
Each insurer marketing policies must notify the Commissioner whether a policy form is to be marketed with or without an illustration. If a policy form is marketed with an illustration, a "basic illustration" showing both guaranteed and nonguaranteed value
- Name of insurer
- Name and business address of producer or insurer's authorized representative, if any
- Name, age, and gender of proposed insured
- Underwriting or rating classification upon which the illustration is based
- Generic name of policy, the
When using an illustration for life insurance, an insurer or agent will not:
- Represent the policy as anything other than a life insurance policy
- Use or describe non-guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead
- State or imply that the payment or amount of non-guaranteed element
A basic illustration must also include all of the following:
- A brief description of the policy being illustrated, including a statement that it is a life insurance policy
- A brief description of the premium outlay or contract premium for the policy
- A brief description of any policy features, riders or options,
California Senior Market and Policy Illustrations
Every insurer and life agent offering for sale individual life insurance policies, or individual annuity contracts that are issued for delivery to senior citizens in California with the use of non-preprinted illustrations of non-guaranteed values must dis
Completing the Application
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Completing the Application and Field Underwriting
An application is a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the producer's responsibility to probe beyond the stated questions, which is known as
Required Signatures
Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application.
Changes in the Application
Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application.
Consequences of Incomplete Applications
1. The producer's primary underwriting role is to make sure the application provides proper information for the insurer.
2. The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with q
Information Required
In California, life insurance applications generally ask for the following types of information:
- Personal
- Ownership
- Product
- Beneficiary
- Business Coverage
- Premium
- Existing Coverage
- Limited Temporary Life Insurance Eligibility
- Nonmedical Questions
Information required: Personal
Includes name, address, driver's license number, Social Security number, income, employment, tobacco use, number of dependents, etc.
Information required: Ownership
Establishes who will actually own the policy and be responsible for paying the premiums.
Information required: Product
The policy, riders, and options for which application is being made.
Information required: Beneficiary
Who will receive the benefit and the payout order (primary vs. contingent).
Information required: Business Coverage
Used only if the policy is being purchased for business uses.
Information required: Premium
How premiums will be paid (direct bill, electronic transfer, etc.) and how often they will be paid (annually, quarterly, etc.)
Information required: Existing Coverage
Any insurance policies already covering the proposed insured.
Information required: Limited Temporary Life Insurance Eligibility
Determines if the proposed insured is eligible for coverage until the policy is issued. If not, no policy will be issued and any payment made will be refunded.
Information required: Nonmedical Questions
Information regarding foreign travel, high risk occupations, and hazardous hobbies. It also determines if the applicant has already applied for coverage, been rejected for coverage, or applied for bankruptcy.
Nonmedical Application
used when a policy requested does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required initially. On the basis of answers provided in a nonmedical a
Collecting the Initial Premium and Issuing the Receipt
Whenever possible, a producer should collect the initial premium and submit it along with the application to the insurer.
The 2 types of receipts that can be issued when a premium is submitted with the application are:
1. conditional receipt
2. temporary insurance agreement
Conditional Receipt
Provides that coverage is effective as of the date of application or date of completed medical exam (if required), whichever is later, as long as the insurer would have issued the policy as standard or better. This receipt provides conditional coverage ev
Temporary Insurance Agreement
receipt that provides immediate coverage during the underwriting period (rather than a specified number of days) until a policy is issued or the application is declined.
Trial Application
submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.
Disclosures and Consent
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Issues Relating to AIDS and HIV Testing
California law established standards that prevent insurers from unfairly discriminating against individuals of the same class when it comes to testing for the presence of HIV, AIDS, and AIDS-related conditions (ARC). Life insurance applications cannot con
Negligent disclosure of HIV results to a third party which identifies an individual may result in a civil penalty of up to $____________
$1,000
Individual Underwriting by the Insurer
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Insurable Interest
Before the process of underwriting begins, the underwriter will make the final determination as to whether insurable interest exists.
In California, every person has an insurable interest in the life and health of:
- Himself/herself
+ Any person...
- on whom he/she depends wholly or in part for education or support
- under a legal obligation to him for the payment of money or respecting property or services, of which death or illness might delay or prevent the perfo
Underwriting is the process of...
Underwriting is the process of selection, classification and rating, determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged. The sources of underwriting include the application, medical exams, an Atten
purpose of underwriting
prevent adverse selection
Information Sources and Regulation
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The Application consists of two parts:
Part 1 contains...
contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance.
The Application consists of two parts:
Part 2 contains...
questions pertaining to medical background, past and present health, any medical visits, medications, height/weight, hospitalizations/surgeries in recent years, and the medical status of immediate family members (includes ages, causes of death, etc).
Medical Examinations
conducted by physicians or nurses who provide results of an examination and information regarding the applicant's present health. Examinations are usually requested by the insurer after determining if the amount of coverage, age of applicant or his/her he
Attending Physician Statement (APS)
used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. The applicant's treating physician will complete this as part of the applicant's medical history. An applicant must sign a wr
MIB, Inc.(Medical Information Bureau) Report
primarily used to collect adverse medical information about an applicant's health (supported by insurance companies) and act as an information exchange. MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Can
Inspection Report
general report of the applicant's finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider. The applicant must be made aw
Agent's Report
personal statement submitted by the producer to the insurer regarding the applicant's financial condition, any personal knowledge of the applicant, etc. This information remains confidential between the producer and the insurer, and it does not become par
Department of Motor Vehicle (DMV) report
may be requested to provide information regarding the applicant's driving history.
If an applicant has engaged in high risk hobbies (skydiving, scuba diving, motorcycle racing)...
a hazardous activity questionnaire will be required to determine, based on the risk and frequency, if those activities will affect insurability
Individual Selection Criteria
The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter's responsibility to determine if an individual meets the underwriting requiremen
Group Selection Criteria
It is important to compare the selection criteria for individual vs. group insurance. Group insurance is issued based on the characteristics of the group as a whole instead of each individual. Having one uninsurable individual in the group will not cause
Classification of Risks
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Rating Applicants
Upon receipt of information such as the application, medical exam, blood and urine test results, etc., underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters then determine the classification
Risk classifications include:
o Standard risks
+ Preferred risks
- Substandard Risks (Higher Risk Exposure)
Standard Risks
Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy.
Preferred Risks
Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy.
Substandard Risks (Higher Risk Exposure)
Individuals who are not acceptable at standard rates because of poor health, bad habits, or occupational hazards.
Substandard risks: rated policies
Individuals in substandard risk/high risk exposure are issued "rated policies" as follows:
Individuals in substandard risk/high risk exposure are issued "rated policies" as follows:
- Graded (Lien) Plan
- Rated-up Age
- Flat Rate
- Tabular Rate
Graded (Lien) Plan
graded death benefit usually provides 50% of the face amount to start and increases to the full face amount over 1-2 years. The substandard premium does not change. This is generally used with senior life insurance plans to provide minimal benefits withou
Rated-up Age
premium for a "rated-up" policy is that of a standard risk, but for an insured 5 to 10 or more years older than the actual age of the proposed insured.
Flat Rate
A flat additional premium may be assessed on a temporary (1 to 5 years) or permanent basis
Tabular Rate
A surcharge is calculated by adding 25% of the base rate to the standard premium for each "Table" number based on the condition causing the substandard rating.
There are 10 standard tables used.
Declined
This is not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. In this case, the applicant is deemed uninsurable. Being declined by one insurance company does not mean a person will be declined b
Premium Determination for Life Insurance
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Assumptions and Calculations:
When calculating premium rates, life insurers assume that all:
- Premiums are paid annually in advance of the period of coverage
- Premiums will be invested and earn interest
- Claims will be paid on the last day of the year
Factors in Premium Determination for Life Insurance
Premiums are based on expected mortality, interest, and expenses, and these factors are used by all insurers to determine premiums.
- Mortality
- Interest
- Expense
Factors in Premium Determination for Life Insurance: Mortality
Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of
Factors in Premium Determination for Life Insurance: Interest
Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. Interest earnings reduce the amount of premium needed to fun
Factors in Premium Determination for Life Insurance: Expenses
The amount charged to cover each policy's share of expenses of operation (salaries, commission, premium taxes, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency.
Premium Concepts
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Net Premium
Excludes the expense component and takes into account interest and mortality factors only. The process of calculating this rate requires:
- The age and sex/gender of the insured and the benefits to be provided
- The mortality rate to be used and the rate
Gross Premium
Additional charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating expenses, commissions, medical examination costs, etc.
Policy Reserves
The net premiums paid plus additional interest earned must be set aside for future claims and possible contract obligations. A Reserve is the actuarial amount needed to cover potential liabilities to policyholders, such as cash surrender and nonforfeiture
Earned vs. Unearned Premium
Premiums are earned for each day the policy is in force. Premiums paid in advance are considered unearned premiums until coverage has been provided, and the insurer has "earned" the right to retain the premium.
Mortality Cost Formula
Mortality Cost
- Interest (investment return)
= Net Premium (pure rate)
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Net Premium (pure rate)
+ Loading (insurer expenses)
= Gross Premium
Premium Payment Mode
Mode is the frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Payment modes other than annual may result in higher premiums to offset the lost interest earnings and increased administration costs. For th
Policy Delivery
When the insurer determines that an applicant is an acceptable risk, the insurer will send the policy to the producer for delivery to the insured. It is the producer's responsibility to deliver the policy and collect any premiums (if not paid at the time
An insurer is required to deliver a life insurance policy to the owner in order to start the free look period. Policy delivery in California will be accomplished by:
- Personal delivery, with a signed receipt of delivery
- Registered or certified mail with a signed receipt of delivery
- First-class mail with a signed receipt of delivery
- Delivery by reasonable means, as determined by the Commissioner
If an insurer do
Replacement of Life Insurance and Annuities:
The requirements for the replacement of life insurance and annuities contracts have been established to:
- Regulate the activities of agents and insurers:
- Protect the interests of life insurance and annuity purchasers from the loss of benefits
- Assure that the purchaser receives enough information to make an informed decision
- Reduce the opportunity for
Replacement
Any transaction in which new life insurance or an annuity is to be purchased and it is known that the existing contract will be:
- Lapsed, forfeited, surrendered, or terminated
- Converted to reduced paid-up insurance, continued as extended term insurance
Conservation includes...
any attempt by the existing insurer or agent to deter a policyowner from the replacement of existing life insurance or an annuity. This does not include late payment reminders or reinstatement offers.
Existing insurer
the insurer whose policy is or will be changed or terminated through a replacement.
Replacing insurer
the insurer that issues a new policy which is a replacement of an existing policy or annuity contract.
Replacement does not apply to:
- Credit life insurance
- Group life insurance or annuities
- Conversion of an existing policy
- Proposed life insurance that is to replace life insurance issued by the same insurer
Duties of all Insurers
Every life insurer must inform its field representatives or other personnel responsible for compliance with the replacement requirements and require a statement indicating whether replacement is involved with each completed application for life insurance
Duties of Replacing Agents
Every life insurer must inform its field representatives or other personnel responsible for compliance with the replacement requirements and require a statement indicating whether replacement is involved with each completed application for life insurance
Notice regarding replacement must include statements:
1. signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction
2. as to whether or not the agent knows if replacement is involved
If a replacement is involved, the replacing agent must:
1. Present to the applicant at the time of application a Notice Regarding Replacement which must be signed by both the agent and the applicant
2. Collect and provide a list of life insurance policies or annuities to be replaced along with the names of the
Duties of Replacing Insurers
When replacement is involved, the insurer must:
1. Require the agent submit a Notice Regarding Application and a list of all existing policies or contracts, including the names of the insurers and policy numbers with the application
2. Send to the existing life insurer within 3 working days of the date
The replacing insurer may request the existing insurer (upon conservation) to furnish it with a copy of the summaries or ledger statement, which must be sent within _____________
5 working days of request.
Since new evidence of insurability may be required, the existing policy should not be terminated until the replacing policy is issued and delivered.
Duties of Existing Insurer
Every existing life insurer that undertakes a conservation will:
1. Furnish the policyowner with a policy or contract summary for the existing insurance or annuity within 20 days from written communication of the replacing insurer.
2. Maintain evidence of policy summaries, contract summaries, or ledger statements used
Violation and Penalties
A violation occurs if an agent or insurer recommends the replacement or conservation of an existing policy by use of materially inaccurate presentation or comparison of an existing contract's premiums, benefits, dividends, and values. This is also known a
Personal Uses of Life Insurance
Life insurance reduces uncertainty, giving a greater peace of mind by replacing the possibility of a larger loss (income) with a known smaller loss (premium). Life insurance does not eliminate risk; it transfers the larger risk from the policyowner/insure
Personal uses of life insurance
include:
- Survivor Protection
- Estate creation
- Estate conservation
- Cash accumulation
- Liquidity
- Pre-need plan
- Charities
- Viatical/life settlements
Survivor Protection
Providing funds for surviving spouses and dependents.
Estate Creation
Life insurance proceeds provide financial assets to create an immediate estate the insured can pass on to survivors.
Estate Conservation
Provides money to pay any estate taxes or loans which must be satisfied upon the death of the insured, preserving the insured's estate.
Cash Accumulation
Life insurance other than term may develop cash value over time, which may later be borrowed or withdrawn prior to the death of the insured.
Liquidity
Immediate funds available upon death to pay creditors, taxes and final expenses, as well as cash values available for policy loans, withdrawals, and full surrenders.
Pre-need Plan
A type of coverage with a small face amount ($50,000 or less), typically purchased to pay the burial expenses of the insured.
Charities
To help fund favorite charitable organizations upon the insured's death, new or existing policies may be donated to charities.
Viatical /Life Settlements
An individual selling an owned insurance policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available.
Stranger Originated Life Insurance (STOLI)
STOLI transactions occur when a person with no insurable interest in the life of another induces that person to purchase a life insurance policy with the sole intent of becoming the beneficiary and profiting upon the death of the insured. The insured assi
Personal Insurance Planning Process: Determining Amount of Personal Life Insurance Needed
Before making a recommendation, it is important to help the client identify the overall financial objective. While life insurance can create an immediate source of income, there may be other objectives that may be met such as paying off debts, providing f
2 of the approaches used to determine the need and amount of life insurance are:
human life value
needs analysis.
Human Life Value
This approach is a measure of the projected future earnings and services of a person at risk in the event of a premature death.
The objective of human life value
provide the proper amount of coverage as determined by the value of the individual to his/her dependents
human life value uses the following factors:
The individual's...
- age
- gender
- occupation
- annual wage
- planned retirement age
+ Inflation
Needs Analysis Approach
This approach determines a need for coverage upon the premature death of an individual.
Needs Analysis Approach
always assumes the death of the individual to be immediate and factors the following steps into arriving at the proper amount of coverage needed:
(1) Calculate all financial needs caused by an immediate death, including debts, medical bills, and final expenses
(2) Provide lifetime income to the spouse
(3) Pay off a mortgage or other debt
(4) Provide funds for children's education
(5) An Emergency R
Group policies
Master policy issued to plan sponsor and typically written as annual renewable term
_
An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors, or members. Group insurance genera
Individual policies
Coverage on one named insured, may be of any classification or type, and the policyowner receives a policy and maintains control
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Individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve a
Permanent Whole Life policy
Premium higher than term when other factors equal, protection continues to age 100 or until surrendered, and provides cash accumulation
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A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term
Term policy
Lowest premium outlay, temporary coverage for short term need , no cash value, and the benefit can be level, increasing, or decreasing
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Lowest of initial premium outlay and designed for someone with a large insurance need, but with limited cash flow. Thi
Participating policy
Issued by mutual insurers; dividends considered return of excess premium
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A class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when it is declared by the board of directors. The co
Nonparticipating policy
Issued by stock insurers and do not pay policy dividends
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A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to
Fixed policy
Specified amount of coverage, benefits and premium with no inflation protection
The policy has a fixed amount of coverage, benefits, and premium. Without riders, future inflationary trends will cause the purchasing power of the policy's benefits to be red
Flexible policy
Universal and Variable Universal Life policies offer the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies have the potential to provide greater cash accumulation than whole life policies.
Variable policy
Uses separate account for cash value accumulation; may help protect against inflation; and an Insurance license and FINRA registration required in order to sell
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A policy that uses a separate account for the cash value accumulation. The separate account