Insurable Interest
The relationship that must exist 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
Controlled Business
Possessing a license solely for the purpose of writing business on one's own self, immediate family, relatives, employer, and employees.
Third-Party Ownership
A policy owned by a person other than the insured.
Principal of Life Insurance
It spreads out the result of financial loss caused by a death among many persons, so the cost for each individual is small.
Replacement
Any transaction in which a new life policy or annuity is to be purchased, and the producer knows, or should know, that existing contract(s) will be:
Lapsed, forfeited, surrendered or terminated
Reduced in value
Amended with a reduction in benefit or term
The Producer's responsibilities include:
Completing a Notice Regarding Replacement which must be signed by the applicant and producer
Obtain information regarding any existing policies, including the names of the existing insurers and policy numbers (this must be provided to the replacing insure
The Replacing Insurer's responsibilities include:
Upon receiving proper notification with the new application, the replacing insurer must notify the existing insurer of the planned replacement
Maintain copies of the information regarding replacement for a specified period of time
See the state insurance
Collecting the Initial Premium and Issuing the Receipt
A producer should attempt to collect the initial premium and submit it along with the application to the insurer. The policy will not go into effect until it has been delivered and the first premium paid unless the producer issued a receipt. Evidence show
Conditional Receipt
If premium is paid, coverage will be in effect the date of application or completion of the medical exam, whichever is later, if the policy would have been issued as applied for, unless it is declined within a stipulated period of time.
Binding Receipt
If premium is paid, coverage will begin immediately for a specific length of time regardless of whether the applicant is ultimately approved by the insurer. This may also be referred to as a temporary insurance agreement.
Acceptance (Approval) Conditional Receipt
the coverage becomes effective at application approval. If the company doesn't approve the application, coverage was never in effect.
Trial Application
A trial application is one 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.
Fair Credit Reporting Act
is the only one in the list which may have jurisdiction over information gathered for underwriting purposes.
sources of underwriting
include the application, medical exams, an attending physicians exam, the medical information bureau, an inspection report, and the agent's report.
Part 1
contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance. This is an important source of underwriting information.
Part 2
contains questions pertaining to medical background, past and present health, any medical visits, hospitalizations, or surgeries in recent years, medical status of immediate family members, and age and causes of their death.
Inspection Report
is a 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 ma
Agent's Report
is a personal statement submitted by the producer to the insurer regarding 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 pa
Test Tip
The results of the Medical Examination is the only report that might be copied and made part of the policy.
Rating applicants
Upon receipt of the necessary information, such as the application, medical exam, blood and urine test results, etc., the home office underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters th
Standard Risks
individuals who bear the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table (average life expectancy).
Preferred Risks
Individuals who meet certain requirements and qualify for lower premiums, such as ideal health, height and weight.
Substandard Risks (Higher Risk Exposure)
Individuals who are not acceptable at standard rates because of bad health, bad habits, at risk hobbies or at risk occupations and are issued "rated policies" as follows:
The Lien Plan (Graded)
Initially, only the premium would be refunded in case of death. The death benefit increases over time with the full face amount eventually payable. This is generally used with Senior Life Insurance plans to provide minimal benefits without a medical exami
The Flat Rate
A constant dollar amount added to the standard rate per $1,000 of coverage. If the standard premium is $25 annually for $1,000 of insurance, with a flat rate of $5/$1,000 added to the standard premium the new total premium per $1,000 is now $30. A student
The Tabular Rate
Classified to the extent of impairment according to the tables used.
Actuary
a person trained in the technical aspects of insurance and related fields, particularly in mathematics and probabilities. Determines the probability of loss and sets the premium rates for the insurer. In other words, they crunch the numbers.
When calculating premium rates, life insurers assume that all:
Premiums are paid in advance of the period of coverage
Premiums will be invested and earn interest
Claims are paid at the end of a year
Factors in Premium Determination for Life Insurance
Premiums are based on expected mortality, interest, and expenses. Premiums will be invested and earn interest. Interest earned on premiums assists in premium rate reduction.
Mortality
Life insurance is based on the sharing of the risk of death by a large group of people. The amount at risk must be known to predict the cost to each member of the group. Mortality tables are used to give the company a basic estimate of how much money it w
NOTE:
The mortality rate is the rate developed from studying and interpreting statistics developed from the deaths of millions over long periods of time.
Interest
The second factor used in calculating the premium is interest earnings. Companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of interest on these invested funds.
Expense
The third consideration is the expenses of operating the company. The company estimates such expenses as salaries, producers' compensation, rent, legal fees, postage, etc. The amount charged to cover each policy's share of expenses of operation is called
Net Premium
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 of interest assumed.
Gross Premium
include Operating Expenses (Load). Net premiums do not include operating expenses at all.
Policy Reserves
The net premiums paid plus interest earned; reflect possible contract obligations. A Reserve is an amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.
Mortality Cost Formula
The rate developed from studying and interpreting statistics developed from the deaths of millions over long periods of time.
Mortality Cost - Interest (investment return) = Net Premium (pure rate)
Net Premium (pure rate) + Loading (insurer expenses) = Gr
Estate Conservation
Provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner, (the insured) preserving the insured's estate
Cash Accumulation
(Living Benefits)
An amount of cash accessible to the policyowner from within permanent life insurance policies
Viatical Settlements
A terminally ill insured/owner selling his/her 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)/Investor Originated Life Insurance (IOLI)
The life settlement industry has increased the awareness of these terms. The terms describe investors, producers, or brokers with absolutely no personal or business connection with a person, who induce a purchase of a life insurance policy with the sole i
Human Life Value Approach
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 is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents us
Needs Analysis Approach - Aka: An Itemized List
This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following items into arriving at the proper amount of coverage needed:
Capital Liquidation
Assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents
Capital Retention/Conservation
Capital Retention/Conservation - Assumes the desired income will be generated by the investment earnings only, thus retaining or conserving the principal or capital invested
Group
An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors or members.
Premiums are based on the average age of the group. The grace period is 31 days for group insurance.
Individual
The greatest difference between group and individual life insurance is the full latitude of ownership. Unlike group policies, individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an est
Industrial (Home Service)
Synonymous with debit life insurance and makes up only about .03% of the life insurance today. These small policies, normally $250 to $1,000, were originally sold to pay funeral expenses. Some states require the face amount to be less than $2,500. The Hom
Permanent
A life insurance policy that remains in force to age 100 or beyond. It does not require to be renewed. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting factors are equal. This policy provides
Term
Lowest of premium outlay and designed for someone with a large insurance need but with limited cash flow. This coverage is often referred to as temporary, as it is written to cover a short time period. This policy does not build cash values and the benefi
TEST TIP
Know the difference between term and permanent insurance. Cash value is only available in permanent insurance.
Fixed
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 reduced .
Flexible
Universal and Variable Universal Life policies have given the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies assist the insured during inflationary periods with the changing needs of the
Variable
A policy introduced in the 1970s that uses separate account(s) for the cash value accumulation. The separate accounts are similar in nature to mutual funds, and a securities license is required to sell this policy. The policyowner takes on the investment
The following are unique to Variable Stock Market products:
Uses separate accounts in the stock market.
Requires 2 licenses to sell - life insurance and
securities license (FINRA registered).
Insured bears ALL investment risk.
Considered a hedge against inflation.