Insurable Interest
Life insurance is based on this concept
Based on family situation or economics
To buy life insurance on another person you must prove insurable interest to company underwriter at the time of application
1) Prove the family relationship exists
2) Prove you
Third party ownership
Any situation where the insurance owner and the insured are two separate entities
Owner has control of the policy:
1) Can name beneficiary
2) Must pay the premiums
3) Can take a loan or cash surrender of the policy
If third party is an adult, that person'
Insurance regulations
Life insurance is regulated by the state
The McCarran Act states the Fed has the right to regulate insurance only to the extent not regulated by the state
Fixed Insurance Products
Only need insurance license to sell
Includes fixed life and fixed annuities
Guaranteed - you earn a minimum interest on your money
Funded by the insurance company's general account
Regulated by the state
Investment risk is to the insurer
Variable Insurance Products
Money and a portion of the premium are invested directly into the stock market, looking for a higher rate of return to keep pace with inflation
Need an insurance license plus:
1) NASD Securities Series 6 or 7 AND a Series 63 or 66
There are no guarantees
National Association of Securities Dealers (NASD)
NASD regulates its own members
Members are wither Broker Dealers or Registered Representatives
The main purpose of life insurance
To offer protection to your survivors in the event of your death
Personal uses of life insurance
Creation of an estate- life insurance is a creation of an immediate liquid estate upon your death
Cash accumulation
Liquidity
Estate conservation
Viatical settlements
Viatical settlements
You sell your life insurance to an investor
Transfer of ownership to an investor for money
Insured gets less than the death benefit value--the difference is the investor's return on their investment
How to determine the amount of Life Insurance
Human Life Value Approach
Needs Approach
Human Life Value Approach
Valuing someone's life based on their earnings;
Taking earnings and multiplying it by a certain number of years
Needs Approach
More comprehensive than Human Life Value Approach
Takes into consideration other factors, such as:
1) Outstanding debt
2) Survivor
3) Children, if any
4) How old the children are
5) Social Security Blackout Period
6) Where kids want to go to college
7) Ho
Social Security Blackout Period
Social Security allows for survivor benefits until the youngest child reaches 18
After that, benefits stop for both the surviving spouse and children
Spouse will not be eligible for SS benefits until retirement, leaving a "blackout" period
Buy and sell agreements
Life insurance is used to help fund it
Based on legal contracts that set a value on each person's portion of ownership in the business
Another person must purchase the deceased owner's interest in the business (funded through insurance)
Can be used for an
Key Person life insurance
Business owner buys life insurance on a key employee
Business would suffer if key person dies
Death proceeds not taxable; premiums NOT tax deductible
Stock Redemption Plan
A type of buy and sell agreement
If a corporation has an agreement with a shareholder, and that shareholder dies, the corporation will be able to repurchase the outstanding stock the shareholder owned
Executive Bonuses
Some employers use life insurance to fund bonuses (fund deferred compensation plans)
An executive is given a bonus; so the person doesn't have to pay taxes on it, the company uses the bonus to pay premiums on a life insurance policy;
The employee is the o
Group Life Insurance
You go to work for a company,and the company might offer it to you
An Employer provides a group plan for employees
Most inexpensive type of life insurance for company to buy
Sold to employer groups on a payroll deduction plan, which lowers the administrat
Ordinary Life Insurance: Whole Life
Sometimes called Cash Value life
Considered to be permanent
It covers you until you die or until the policy reaches maturity, normally age 100
The policy CANNOT be changed without the client's consent
Never has to be renewed
Premium may be annually or mor
Ordinary Life Insurance: Term
Considered to be temporary
Usually purchased to cover a need, such as a bank loan or a mortgage
Written for a specific period of time
When the term is over, the policy expires
Most term insurance is renewable, but at a higher rate
Grace period of 30 days
Ordinary Life Insurance: Endowment
Similar to whole life, except that endowment policies mature at a predetermined age that is selected by the client upon purchase
Endowments have a cash value that accumulates faster than whole life because it matures earlier, but the premium is more expen
CSO Mortality Table
All ordinary life insurance policies base their premiums and benefits on the 1980 Commissioner's Standard Ordinary Mortality Table, which is based on the Law of Large
Numbers
Table tracks the life spans of 10,000,000 people from newborns through age 100 a
Industrial (Home Service) Life Policies
Also called "Home Service" because producers went to people's homes to collect premiums once a week
Popular in the 1930s and 1940s
Sold by "debit" producers
Grace period 28 days
Small face amounts ($1000 or less)
Used to cover the cost of a funeral
Produc
Nonparticipating Policies
Stock companies issue nonparticipating policies
Company profits may be returned to the stockholders in the form of dividends
Policyholders are not entitled to share in company profits
Dividends are considered to be ordinary income and are taxable
Participating Policies
Mutual insurers issue policies that may participate in dividend distribution
These dividends are a return of premium already paid, so they are NOT taxable
Dividends may never be guaranteed
Gross Annual Premium
The cost of death (mortality) + expenses - interest
Net Single Premium
An initial participating life insurance policy premium minus policy dividends when the insured applies such dividends to pay part of the policy premium
Premium payment mode
How often the premium is paid; monthly, quarterly, semi-annual, annually
Life and Disability Insurance Guaranty Fund
A non-profit entity created to provide insurance coverage to Texas residents when an insurance company fails (found to be insolvent and ordered liquidated). The Texas Guaranty Association keeps the coverage under the insurance policies in force and pays c
Solicitation #1
State law prohibits insurers and producers from engaging in untrue, deceptive or misleading advertising in connection with the solicitation of life insurance
Solicitation #2 -
Buyer's Guide
Insurers shall provide to all prospective life insurance purchasers, (except those buying annuities, credit life, group life or variable life) a Buyers Guide and a Policy Summary (proposal) prior to accepting the applicant's initial premium, unless the po
Purpose of the Buyers Guide and Policy Summary
Disclosure documents
They go over everything related to the policy
Illustration
If the purchaser is considering purchasing a policy where cash values, death benefits, dividends or premiums may vary based on events or situations the company does not guarantee (such as interest rates), he may get an illustration from the producer or co
Interest-adjusted Net Cost Method
(Life Insurance Surrender Cost Index)
Purchasers may utilize one of two methods, as explained in the Buyers Guide, to compare the true cost of life insurance
This index is useful if you consider the level of cash values to be of primary importance. It helps you compare the costs of different
Comparative Interest Rate Method
(Life Insurance Net Payment Cost Index)
Purchasers may utilize one of two methods, as explained in the Buyers Guide, to compare the true cost of life insurance
This index is useful if your main concern is the benefits that are to be paid at your death and if the level of cash value accumulated
Rules of index TIP
It is important to remember that a policy with a small index number is generally a better buy than a comparable policy with a larger index number
Entire Contract Clause
The policy, when its issued, plus the application plus whatever's attached is part of the contract and is contestable in court
When you receive your policy the application is always attached
Producer's Report
Part of the application that contains information regarding the producer's personal knowledge of the applicant, such as financial status, habits and character
Notice Regarding Insurance Information Practices
as required by the federal Fair Credit Reporting Act
The insurance underwriter might request a physical exam, run a credit report, or ask for an HIV test
They must notify the applicant and follow all federal guidelines under the Fair Credit Reporting Act
The insurance application must be signed by
Proposed insured, the applicant (if different from the insured) and the producer
Once completed, the producer may not change anything on the application without the written consent of the applicant
The producer is also responsible for
Collecting the premium at the time the application is
signed
Actuaries calculate
The cost of mortality (death) based on the
Law of Large Numbers
Acquisition costs
Commissions, cost of physical exams, underwriters, etc.
Acquisition costs are usually highest the first year
Insurance load
Certain insurance-company expenses such as
acquisition costs, general overhead expense
(rent), and loading for unforeseen contingencies
Conditional Receipt
Makes the coverage effective on the date of application if the company finds the applicant to have been insurable on that date
The conditional receipt will state either there are no conditions to satisfy - I'm covered immediately; or there are conditions
Backdate
Rate is figured based on the applicant's closest birthday
Companies will allow producers to backdate coverage up to six months in order to help the applicant obtain a younger original age
Twisting
Convincing a client to replace coverage to his/her detriment
A violation of the State Insurance Code
Replacement
Applicants must also indicate on the application, whether or not the new application for life insurance will replace a policy the applicant already owns
If yes, with certain exceptions, the producer must also
give the applicant a Notice Regarding Replacem
Binding receipt
Temporary insurance coverage
Always makes coverage effective on the date of application
Limits the maximum amount the company is liable for until the policy is issued (Temporary Term of Coverage)
Free Look
A refund provision
When you buy your life insurance policy, the free look starts from either the date it's delivered (if hand delivered) or the date it's marked, i.e. 10 days, 30 days, etc.
The only time you can return your policy and get a full refund
Collect on Delivery
If the producer submits an application without premium payment for underwriting consideration, the policy may be issued COD There is no coverage yet, since the premium has not been paid
Upon policy delivery,the producer needs two things:
1) premium
2) swo
Statement of Continued Good Health
A sworn statement by the applicant ascertaining that their health has not changed since the original application was completed
Medical Information Bureau (MIB)
A nonprofit association that maintains medical data on applicants for life insurance
MIB Notice
Disclosures contained in a section of the application, usually located just above the signature line.
MIB procedures require:
1. Written Notice: Issued to the applicant that the insurance company may report health findings to the MIB
2. Authorization: Iss
HIV-related tests
No one may require the performance of an HIV-related test without, first, receiving the specific written informed consent of the applicant
No one who obtains confidential HIV-related information, may disclose that information, except to the applicant or t
Fair discrimination
Insurance companies discriminate based on valid statistical data
Unfair discrimination
When discrimination occurs NOT based on statistical data
Unfair Trade Practice
Making any unfair discrimination between individuals of the same class and equal
expectation of life in the rates charged or benefits payable for any contact of life insurance is considered
to be an Unfair Trade Practice
Contributory Group Participation
Insurance companies require that at least 75% of the eligible employees enroll in a group insurance plan where group premiums are shared by the employer and the employee
Noncontributory Group
nsurance companies require that at least 100% of the eligible employees enroll in a group insurance plan where group premiums are paid by the employer
Loss ratio
A loss ratio is determined by dividing losses by total premiums
received by the producer
Underwriters have 4 choices
Issue the policy
Issue with a surcharge
Issue with an exclusion
Reject the application entirely
Standard risk
Average risk with average premium charge
Individual expected to have average life expectancy
Substandard risk
An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium
Rate-up Age
System of rating substandard risks that assumes the insured to be older than he or she really is and charging a correspondingly higher premium 150
Flat Additional Premium
A specific additional premium is added to the standard rate
Tabular Rating
The company actuary determines what the exact surcharge should be for a client with a particular impairment based on claims history of similar clients
Graded Death Benefits
A policy where the full face value will not be paid until graded time has passed, according to policy terms (often 2 to 3 years) due to a substandard risk
Preferred risk
An insurance classification for applicants who have a lower expectation of incurring loss, and who, therefore, are covered at a reduced rate.