Insurer
Another name for an insurance company
Agent/Producer
An state-licensed individual who is to solicit and sell insurance for one or more IC. Must be authorized by an insurer (known as principal) to act on its behalf.
Applicant
The individual who applies for insurance
Insured
An individual who is insured or has taken out on or for them or a specific interest.
1. Named insured - person(s) listed as an insured in the declarations page.
2. First named insured - the first insured listed and the person to whom the insurer sends cor
Policyowner
a. Applies for a policy
b. Takes responsibility for premium payment
c. has the right to cash values, dividends, and policy proceeds
d. has the ability to change beneficiaries and other particulars
Insurance
a. A contractual coverage binding the insurer to idemnify the insured against a specified loss in return for money(Premiums) In exchange for the premium payments from the insured, the insurer agrees to pay the policyholder in case of the the occurrence of
Indemnification
a. The concept of restoring individuals to the same financial position they were at before loss occurred
b. the central idea behind the concept of insurance
Maslow's Hierarchy of Needs
The 5 primary needs that every individual strives to satisfy (in ascending order) .
Self -Acutualization
esteem
affiliation
security
physiological needs
Risk
The probability or uncertainty that a loss will occur. Financial or non-financial. The greater the risk, or chance for loss, the greater the premium.
Pure Risk
Involves the probability or possibility of loss with no chance for gain. EX: a homeowner who wants to guard against a possible house fire. Pure risks are generally insurable.
Speculative Risk
A risk for which it is uncertain whether the final outcome will be a gain or a loss. Gambling is a speculative risk...generally not insurable.
Exposure
a measure of vulnerability to loss, usually expressed in dollars or units, to which an insurance rate is applied.
Hazard
Conditions that increase risk or the chance of loss occurring. 4 types:
1. Physical-material or structural problems such as damaged steps or worn auto tires.
2. Moral-the insured's habits, such as dishonesty or criminal activity
3. Morale-careless attitud
Peril
The cause of possible loss, or the event insured against. Ex: fire, lightning, theft, etc
a. Named peril - the perils specifically listed in policy
b. Open Peril/All Risk-protects against all physical loss risks, except perils specifically limited or excl
Perils include
a. Life insurance - the peril insured against is death
b. Health insurance - perils included sickness and accidental injury
Loss
The happening of the event for which insurance pays. Loss is the unintentional decline, or disappearance of value due to a contingency.
Direct Physical Loss
A loss in which the covered peril is the immediate or proximate cause of damage to property, such as hail damage to the roof of a house
Indirect/Consequential Loss
A loss in which the covered peril is not the direct cause of damage. If a restaurant suffers a fire, the fire is the direct cause of loss. The loss of income from the business while closed for repairs, is an indirect loss
Methods of Handling Risk
Risk avoidance - not engaging in the action tht gives rise to the risk.
Retention - nothing is done about the risk; the individual will be totally responsible for paying losses. Most common method
Transfer - Shifting the risk from one party (the insured)
Elements of Insurable Risks
a. Due to chance
b. measurable/predictable
c. based on a large enough pool that the law of large numbers allows for the accurate prediction of loss
d. selected from a diverse, randomly selected pool of insurable risks. Insurance deals with financial and p
Adverse Selection
The tendency of poorer risks to seek or continue insurance to a greater extent than normal risks. Normal risks may be unable to get insurance elsewhere, possibly at a lower cost. If a person becomes sick, they may be unable to get insurance elsewhere and
Law of Large Numbers
The bigger the observed sample, the more accurate predicted results. Life insurance allows transfer of his or her financial risk of premature death in a defined amount to an IC. It is scientifically calculated pooling grown and distribution of money to sa
Reinsurance
Reinsurers insure other ICs against catastrophic losses such as earthquakes. The company transferring some of their loss potential to the reinsurer is called the "ceding" co.
4 types of reinsurance treaties
A. Facultative -ceding insurer offers individual risks to a reinsurer, who may choose to accept or reject each risk.
B. Automatic-The insurer cedes those parts of a specified class of risks in excess of the retention limits set by contract (treaty) with t
Multi-Line IC
These are insurers that write more than one line of insurance.
Captive IC
A company whose business is primarily supplied and controlled by the one interest or group of related interest that set the company up to insure their assets and operations. In this type of situation, coverage can usually be provided at a lower cost than
Stock Companies
Insurers organized under the laws of the state in which they are incorporated. The co. is owned by the SHAREHOLDERS who elect the officers and directors and shire in profits through stock growth and development.
Mutual Companies
These co.'s have no capital stock and are owned by POLICYHOLDERS who share profits through dividends and can attend and vote at co. meetings. Further divided into:
a. Assessment Mutual insurers-share losses among group members. In a pure assessment group,
Fraternal Benefit Societies
Membership is based on religious, ethnic, or national lines and the societies are noted primarily for social and charitable functions. FBS's are societies, orders or supreme lodges with no capital stock that may or may not be incorporated. These fraternas
Reciprocal Companies
Groups that exchange insurance on each other are reciprocal companies.
a. members appoint and empower an attorney-in-fact that legally binds members to insure each other.
b. members share in any profits through lower premiums, or losses by assessments.
Lloyd's Associations/Syndicate Insurers
Not really IC's, syndicates provide a place for members to meet and individually or as groups (thru a syndicate manager) transact the business of insurance
a. provide assistance in gathering underwriting information and in handling claims and disputes amo
Risk Retention Groups
Types of mutual companies that insure people in the same profession, business or occupation.
Self-Insurers
These do not transfer their share of a loss to an IC, but instead establish their own pool of reserves to cover losses that may arise.
Home Service/Debit Insurers
These insurers specialize in individual and industrial insurance with low face amounts-normally $1,000 or less(benefit can be higher) Premiums usually collected by agents on a weekly basis at insured's home or place of employment. Home service agents work
Surplus/Excess Lines Insurers
These types of companies that offer insurance not offered through admitted insurers.
a. The full amount or type of insurance must not be available through admitted insurers.
b. Financial consideration cannot be a decidinig factor
c. If a surplus lines ins
Private vs. Govt Insurers
While private insurers offer coverage for more common risks, some situations are unacceptable to them. If potential for special, great or catastrophic risks, those possibilities are usually indemnified by state govt & federal govt.
Governmental Insurance and Residual Market Insurance
These plans cover certain types of insurance that private insurers cannot or will not insure. Insurers in all states are required to participate in involuntary markets that provide coverage for high-risk insurance applicants who do not meet normal underwr
State FAIR plans
provide insurance to property owners in inner city and other high-risk areas who are unable to obtain insurance through normal market channels because of property location or other situations over which they have no control. If turned down in the normal m
Admitted (Authorized) Insurer
An insurer authorized by a state's insurance department to transact business in that state is an admitted insurer.
Non-admitted (Unauthorized) Insurer
IC's that are not authorized to transact business in a state, because they either didn't seek admission to the state or failed to comply with state requirements, are non-admitted.
Financial Status-Independent Rating Services
A. Independent evaluation services provide information on companies such as financial strength, management caliber, and efficiency of operation
B. They review underwriting results, management, adequacy of reserves for liabilities that are not discharged,
Types of agents.marketing (Distribution) Systems
Exclusive/Captive Agents - Agents appointed by an insurer to represent the company be selling and servicing policies on its behalf, representing only one company.
Independent Agents or Brokers - Agents that represent several insurers and can, therefore of
The Insurer as Principal
IC's are principals of the insurance agent, which means that the insurer empowers agent to act as representative of the company. Legally, the acts of the agent are considered to be acts of principal
Producer/Insurer Relationship
Defined in agency agreement. This contract details the responsibilities of both parties. In return for commission or salary paid by the company, and the authority to represent the insurer in conducting business on company's behalf, the agent:
a. is first
Professionalism & Ethical Conduct
When acting as representative of their companies, agents are expected to have and exhibit professional competence that can be shown by:
a. Having a broad education and background
b. strong insurance-specific knowledge and continued education in the insura
The Fiduciary Relationship
An insurance agent is an agent to a principal-the IC. As such, the agent stands in a special position of trust, confidence and responsibility in his relationship to the insurer. An agent also represents his or her client, though first responsibility is to
Agents & Extended Liability of the Insurer
Agent is a representative of the insurer and acts for the insurer. As such, the insurer becomes partially liable for the actions of the agent. It is the insurer's responsibility to monitor the compliance of its agents in order to verify that they follow r
Authority and Powers of Producers
An agent represents the company through several directives:
EXPRESS DIRECTIVE - authority expressly given the agent in his contract (Selling policies, collecting initial premiums)
IMPLIED DIRECTIVE - Unwritten authority to perform incidental acts that the
Responsibilities to the Applicant/Insured
The producer has responsibilities that are owed to applicants and/or insureds. He or she will:
a. act only in the best interest of his or her clients
b. only provide accurate and up-to-date information and advice to customers about policies and coverages
Insurance Contract
A contract in which an insurer indeminifies the insured for losses in return for a consideration or premium.
Elements of a Legal Contract
These 4 concepts are principle elements of a legal contract
1. Offer and Acceptance - an insurance policy is the written statement of the agreement to the terms of the contract.
a. Offer - the applicant submits the application along with the correct premi
Distinct Characteristics of an insurance Contract
Contract of adhesion - only one party to the contract, the insurer, prepares and submits it to the other party, the insured, for acceptance. The insured CANNOT make any changes to contract.
Contract of Utmost Good Faith - It is understood that both partie
Legal Interpretations Affecting Contracts
Ambiguities in a contract of adhesion - any doubt or ambiguity found in an insurance policy will be found in favor of the party that did not draw up the contract - the insured.
Reasonable expectations - The reasonable expectations of policy owners or bene
Insurable Interest
The concept of insurable interest is an underwriting test for an application of insurance that demonstrates the person purchasing a policy has a legal interest in the continued longevity of the insured. In life insurance, the owner must have insurable int
Stranger-Originated Life Insurance(STOLI)
Also referred as stranger initiated life insurance. STOLI arrangements are typically promoted to consumers between the ages of 65 and 85 and include:
*allowing someone to purchase life insurance on your life in exchange for an immediate lump sum payment o
Personal Uses of Life Insurance
Survivor Protection - This provides income for spouses, children and other dependents after the death of the policyowner.
Estate Creation- is the establishment of trusts or purchase of annuities to provide for dependents.
Cash Accumulation - The proper ki
Human Life Value Approach
Calculates the capitalized value of an individual's earning ability into the future. (Current income is multiplied by the number of years until retirement.)
Needs Approach
Attempts to determine how much life insurance will be needed by surviving dependents to cover their needs and expenses, and also any expenses that result from the death of the policyowner.
Types of Information Gathered
There are 3 steps in this needs approach technique:
a. identify the needs that arise or continue to exist after the death of the policyowner
b. identify any existing available resources (savings, employer life insurance, social security, etc.)
c. calculat
Determining Lump-Sum Needs
Lump-sum needs (or immediate cash needs) might include:
a. funds for last expenses-funeral costs, applicable taxes, outstanding debts, medical costs, etc.
b. an emergency fund to help with unexpected expenses, especially in the period immediately followin
Planning for Income Needs
Income needs would include a readjustment fund to maintain the family's lifestyle while adapting to life without the deceased, income during the period when children are dependents, and a source of income for the lifetime of the spouse.
Coordination with Social Security, Employee Benefit Plans, and Other Assets
If there are sources of income available, such as Social Security, an employee life insurance policy, pension payments, investment, etc., those amounts should be considered when computing the amount of a life insurance policy. If those sources are not fig
Business Life Insurance
Provides capital needed to keep a business running through the economic impact of an owner or major employee's death. If the company pays premiums as an expense and deducts the premium cost from taxable income, the death benefit will be subject to income
Business Continuation Insurance
A. Helps a business continue to operate when the death of the owner might otherwise cause the company to go out of business.
B. Protects assets of the business from forced liquidation by making funds available to surviving family members and/or partners.
Buy-Sell Agreements/Cross-Purchase Plans
Arrangements between partners or associates in which surviving members agree to purchase the ownership interest in the company from the deceased owner's estate at a pre-determined price.
a. life insurance is the funding vehicle
b. a licensed attorney draw
Corporate-Owned Life Insurance
A corporation might purchase a life insurance policy to cover key people in order to indemnify the business against the loss of knowledge and experience, and to assist in financing the cost of employee benefit plans such as deferred compensation plans.
Split-Dollar Life Insurance
Allows employees to buy life insurance at reduced costs, "Splitting" premium costs with employers.
a. The employer pays the cost of the insurance that will be applied to the cash value of the policy. The policy's cash value can be entered as an asset on t
Key Employee Life Insurance
a. Protects the business owner when an individual or a small group of people is essential for the business's continued operation.
b. Employer buys life insurance on the life of the key employee, usually equal to one to two year's salary.
c. The employer i
Executive Bonuses
In an executive bonus life insurance plan, the company pays the executive a bonus so that that individual can purchase cash value life insurance with him or her as the owner, insured and designator of the beneficiary.
Deferred Compensation Plans
a. an arrangement in which an employee agrees to defer some of their current income until a future date, such as retirement.
b. The employer uses the deferred income to purchase cash value life insurance
c. The cash value of the insurance is used to help
Section 303 Stock Redemption
a. PURPOSE - to keep the stock of a closely held company from being sold to outsiders upon the death of one of the shareholders.
b. WHAT IS IT? A corporation buys its own stock from the estate of a stockholder to pay death taxes, funeral expenses and the
Change of Insured Provision
Allows a company to maintain a key person policy for a succeeding person. If the original individual leaves the company, without the need to cancel the policy and issue a new one.
Viatical or life settlement purchase agreement
The contract or agreement in which the viatical or life settlement buyer agrees to buy all or part of a life insurance policy on the life of someone with a critical or terminal illness. This gives the buyer access to the policy's death benefit.
VIatical Settlement Broker Authority & Licensing
Life and annuity agents must obtain a license before selling viatical agreements by submitting he proper application and paying the appropriate fee.
Chronically Ill
a. being unable to perform at least two activities of daily living, or ADLs, (eating, toileting, transferring, bathing, dressing or continence)
b. requiring substantial supervision by another person to protect the individual from threats to health and saf
Terminally Ill
Having an illness or sickness that can be reasonably be expected to result in death in 24 months or less
Fraudulent Viatical Settlement Act
Due to widespread fraud in some segments of the viatical settlement industry, many states have developed Fraudulent Viatical Settlement Acts to detail the legal conduct of these types of policy contracts. Provisions:
a. requiring and defining the licensin
Viator
A. the owner of a life insurance policy or a certificate holder under a group policy who enters or seeks to enter into a viatical settlement contract
B. A person with a catastrophic or life-threatening illness who has a life insurance policy and sells or
Viaticated Policy
A life insurance policy or certificate that has been the subject of a completed viatical settlement contract or viatical loan contract.
Viatical Loan Contract
A written agreement through which a life insurance policyholder or a person covered under a group policy who has a catastrophic, life-threatening or chronic illness or condition secures a long from a viatical loan provider by using the policy as collatera
Viatical Loan Borrower
The owner of a life insurance policy or the certificate holder under a group life insurance contract insuring the life of a person with a catastrophic, life-threatening or chronic illness or condition who enters into a viatical loan contract with a viatic
Viatical Settlement Contract
A written agreement entered into between a viatical settlement provider and a viator. The agreement shall establish the terms under which the viatical settlement provider will pay compensation or anything of value, which compensation or value is less than
Viatical Settlement Broker
A person that on behalf of another and for a fee, commission or other valuable consideration introduces viators to viatical settlement providers, or offers or attempts to negotiate viatical settlement contracts between a viator and one or more viatical se
Viatical Settlement Provider
A person, other than a viator, that enters into or effectuates a viatical settlement contract.
Viatical Settlement Purchaser
a. a person who gives $ as consideration for a life insurance policy or an interest in the death benefits of a life insurance policy.
b. A person who owns, acquires or is entitled to a beneficial interest in a trust that owns a viatical settlement contrac
Disclosure to Consumers
A disclosure statement must be given to each viator or insured before the individual is asked to sign any documents and at the time the viatical settlement is signed by all parties. The disclosure statement must be signed and contain the following:
a. pos
What Must be Disclosed
a. Any affiliation between the viatical settlement provider and the issuer of the insurance policy to be viaticated
b. The name, address and phone number of the viatical settlement provider
c. the dollar amount of the current death benefit payable to the
Examinations, Record Retention, Invesigations
a. The department may examine or investigate any person or business that is necessary or material to the examination of a licensee.
b Records may be kept for 5 years
c; any costs incurred during an exam of a provider or broker will be charged to the provi
Fraudulent Acts & Prohibited Practices
it is prohibited to enter into a viatical settlement withing 2 years of the insurance policy's issue unless:
a. The policy was issued as the result of the viator's conversion from a group policy so that coverage has been in effect for 24 months or more
b.
Individual Policies
Single policies written on or for a particular individual who receives a copy of the policy. The policy can be one of a great number of types.
Group policies
written on a group of people under a single master policy usually issued to their employer or another trustee. Individual group members are usually issued certificates of coverage rather than copies of the policy.
a. The master policyholder or sponsor ass
Group & Individual Life Insurance Underwriting Difference
a. Exposure to claim payment is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group because of this reduced adverse selection-everyone is getting in.
b. Underwriters look more closely at speci
Ordinary vs. Industrial (Home Service)
a. Ordinary life insurance polices normally have face value amounts of more than $1,000 and have a variety of structures and benefits.
b. Industrial life policies are simple policies with:
a. benefits of $1,000 or less (but may be more)
b. premiums that a
Permanent vs. Term
Term life offers coverage for a specific and predetermined period of time, and its only benefit is a death benefit. Time life insurance:
a. Temporary insurance protection
b. low cost
c. no cash value
d. usually renewable
e. conversion (depending on the po
Permanent life
Permanent life offers a death benefit and the accumulation of cash value, 3 examples of which are whole, universal and variable life policies
Permanent life insurance:
a. permanent insurance protection
b. more expensive to own
c. builds cash value
d. loan
Participating vs. nonparticipating (par vs. non-par)
A mutual life insurer may issue policies on both a participating (sharing the profits of the company) and nonparticipating basis, provided that the right or absence of participation is related to the premium charged. The policy must clearly state whether
Fixed vs. Variable Life Insurance
A FIXED life insurance policy has a set, guaranteed interest rate. A VARIABLE policy has an interest rate that changes along with a set of mutual funds or other stock market performs well the cash value in the variable products increases. If the value of
General Account vs. Separate Account
a. money invested in a fixed policy goes into the GENERAL ACCOUNTS of the company, and consequently the of such an investment may be affect by the stability and strength of company
b. a SEPARATE ACCOUNT is held by an IC for the investments made through va
Regulation of Variable Products
The state securities and regulated industries bureaus enforce uniform securities acts. Primary focus is on cases involving securities fraud and sale of illegitimate products including boiler room sales activities. These bureaus enforce an anti-fraud, secu
Morbidity
The likelihood of illness or accident happening with a particular group of people. Accident and health insurance policies are concerned with morbidity and actuarial tables help to show that morbidity. These statistics are then used to help determine the p
Mortality
The likelihood of death among members of a group. Life insurance policies deal with mortality. Mortality tables use individual health factors along with age and sex to help predict longevity.Ex: an overweight person's life expectancy may be less than that
Pre-Existing Conditions
a. Health conditions the applicant has at the time of policy application.
b. Health conditions that the insured has had may affect if a policy will be issued with exclusion riders for those conditions or if the application will be declined.
Interest Earnings
Premium dollars are invested in various investments-stocks,mutual funds, real estate, etc. - and the returns on these investment,including earned interest,help to keep the overall cost of life insurance premiums down.
Insurer Operating Expenses
The costs of doing business, including building, salaries, agent commissions, technology, and supplies can raise or lower premium amounts equal to the insurer operating expenses.
Contribution to Surplus/Policy Reserves
These are the liquid cash reserves insurers must maintain to meet expected death benefit payments and cash value payouts from canceled policies.
A. A certain amount of each premium payment must go toward the build-up of the monetary reserves set aside for
Net Premiums
Gross policy premium minus agent's commissions; the premium available to pay anticipated losses, prior to any loading for other expenses.
Other Contributing Individual Factors
A. Age
B. Gender
C. Tobacco Usage-smoking, chewing etc. will have a higher premium. If the insured stops using for a period of 1 to 2 years or longer, they may be able to requalify for a non-tobacco user premium
D. Occupation
E. Avocations/Hobbies
Avoiding Adverse Selection
Adverse selection is too heavily insuring of those needing coverage the most (the sick and elderly) without the balanced insuring of those that do not need it as much (the young and the healthy)
a. It is major part of the underwriters job to avoid adverse
Premium Concepts
When an insurer charges a net single premium for a life insurance policy, the policyowner pays one large premium at the policy's inception. This cash along with interest that will accrue on it, will be sufficient to cover all insurer expenses associated w
Gross Annual Premium
As opposed to a net single premium, the gross annual premium is a pay-as-you go policy. The insurer charges charges the policyowner the cost of maintaining the policy that year, though this cost is generally evened out to stay the same over the life of th
Premium Payment Modes
Premiums can be paid:
a. Annually
b. Semiannually
c. Quarterly
d. monthly
e. through a Bank Check Plan in which the premium is deducted on a monthly basis from the insured's bank account.
The mode in which premium is paid affects the actual amount paid.
a
Solicitation & Sales Presentations
a. A producer must state that he or she is a life insurance producer and provide the name of the company they represent, prior to commencing a life insurance presentation
b. Terms such as estate planner, financial planner, investment advisory, financial c
Advertising
An advertisement can be:
a. printed material and descriptive literature produced by an insurer to be used in newspapers, magazines, radio and television scripts, billboards, and other publications and displays.
b. sales aids of all types produced by an in
Advertising Regulations
a. Advertising, including the use of statistics and testimonials, cannot be misleading or deceptive. It must be truthful, clear, and complete.
b. words or phrases which require familiarity with insurance terminology must not be used.
c. Regarding preexist
Life and Health Guaranty Association
Most states have a Life and Health Insurance Guaranty Association (the Association), which protects insureds against an insurer's inability to meet contractual obligations due to impairment or insolvency. The association provides coverage for people with
Guaranty Association Disclosure
In most cases, it is prohibited for a producer to use a state's Life and Health Guaranty Association for the sale or solicitation of insurance
Policy summary
The policy summary includes the:
*title
STATEMENT OF POLICY COST AND BENEFIT INFORMATION
*name and address of the insurance producer and name and home office address of the insurer
*generic name of the basic policy and each rider
*following amounts, where
Buyer's Guide
Is a guide for consumers to help them make an informed life insurance purchase. The buyer's guide describes types of policies and information about replacement of policies, and has been recommended for use by the National Assoc of Insurance Commissioners
Illustrations
An illustration is a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years and that is one of the 3 types below:
BASIC ILLUSTRATION: a proposal used in the sale of a life insurance policy that
Illustration Requirements
An illustration must be clearly labeled "life insurance illustration" and contain the following basic information:
*name of insurer
*name and business address of producer or insurer's authorized representative if any
*name, age and sex of proposed insured
Illustration DO NOT's
an insurer or its producer MUST NOT DO any of the following:
*represent the policy as anything other than a life insurance policy
*state or imply that the payment or amount of non-guaranteed elements is guaranteed
*use an illustration that shows policy pe
Unfair Financial Planning Practices
An insurance producer, agent, broker or consultant may not:
*present himself as a financial planner, investment advisor, or any other type of specialist engaged in the business of financial planning or giving financial advice if only certified to sell pol
Life Insurance Policy Cost Comparison Methods
Insurers are normally required to give a copy of the Insurance Buyer's Guide to applicants at the time of application and policy delivery. This briefly informs the individual of the various types of insurance and ways to compare the cost of policies. Insu
Cost Comparison Methods
The different formulas that IC's use to show prospects the cost of various insurance policies. Insureds should compare index numbers only for similar policies-those that provide essentially the same benefits with premiums payable for the same length of ti
Guaranteed or Fixed Cost Method
Many policies provide on a more favorable basis than the minimum guaranteed basis in the policy by paying dividends, or by charging less than the maximum premium specified. Or, they may do this in other ways such as providing higher cash values or death b
Currently Illustrated Method
Show's the company's current scale of dividends, premiums or benefits. This scale can be changed after the policy issued so that the actual dividends, premium or benefits over the years can be higher or lower than those assumed in the indexes on the curre
Company Retention Method
A method in which the present value of premiums, cash values and dividends is calculated by weight each item each year by the probability that it will be paid.
Interest-adjusted Net Cost/Surrender Cost Index Method
The IANC or Surrender Cost Index 100 method weights dividends and cash values according to how far into the future the various amounts are payable. Under this method, 3 amounts are calculated: the interest-adjusted cost, the interest-adjusted payment, and
Replacement
Refers to when a new policy or contract takes the place of an existing contract that is or will be:
*lapsed, forfeited, surrendered, or otherwise terminated
*converted to reduced paid-up insurance, continued as extended term, or otherwise reduced in value
Replacement Exemptions
Replacement regulations do not apply to:
*group life policies, including credit life and pension, profit sharing, group annuities, and other plans with tax-deductible premiums.
*variable life policies
*proposed policy changes with the same insurer; for ex
Direct-response Sales
These are solicitation that take place:
*through the mail
*by telephone
*via the internet
*through other mass communication media
Existing Insurer
This is the IC whose policy will be changed or affected by the replacement
Existing Policy or Contract
This is an individual life insurance policy or annuity contract in force, including binders or policies/contract withing unconditional refund periods.
Replacing Insurer
This is the IC that issues or proposes to issue a new policy or contract that replaces an existing policy or contract
Duties of Agents
Every life insurance application must contain statements signed by both the agent or broker and the applicant as to whether the sale involves replacement. If it does, the agent and applicant must sign a notice regarding replacement of life insurance or an
Duties of Insurers that Use Agents
Each insurer must:
*require from the agent or broker-
>a list of all the applicant's existing insurance or annuities to be replaced, containing the name of the insurer, the insured and the contract numbers
>a copy of the replacement notice provided to the
Conservation
Is any attempt by the existing insurer or its agent to dissuade a policy owner from replacing the existing life insurance or annuity. The agent must:
*keep a notice regarding the replacement, the policy statement, and any ledger statement used must be kep
Duties of Insurers with Respect to Direct Response Sales
*If a replacement is involved with a DRS, and a replacement is not proposed by the insurer, the applicant must be sent a replacement notice by the insurer
*if the insurer proposed the replacement, it must-
>provide a replacement notice to applicants
>requ
Replacement Violations
*A violation of replace regulations occurs if an agent, broker, or insurer recommends the replacement or conservation of an existing policy through the use of a substantially inaccurate or incomplete presentation or comparison of-
a. premiums
b. benefits
Use & Disclosure of Insurance Information
The insurer must provide a buyer's guide and a policy summary to all prospective buyers at least 7 days prior to accepting the applicant's initial premium, unless the policy or policy summary contains an unconditional refund provision of at least 10 days.
Notice of Information Practices
An insurer or agent must provide a written notice of information practices to all applicants or policyholders which includes:
*whether personal information may be collected from persons other than the individual(s) proposed for coverage
*the types of pers
Application Procedures
An IC requires much information about the insured's background before they will issue a life insurance policy. The agent must begin the collection of this information at the time of application for the policy. The application is the basic and initial sour
General information - Application
This part of the application records simple information items about the applicant, including:
*name
*address
*date of birth
*age
*sex
*marital status
*occupation
*income
There are also basic details about the policy-
-the type of policy
-the amount of ins
Medical Information - Application
Information about the present health and the health history of the applicant is essential to the insurer's decision about policy issue. Family health history is also vital to the process. Depending on the type of policy and the policy amount, a medial exa
Agent Report - Application
The agent report details the agent's observations about:
*the character and condition of applicant
*the means of contact (mail solicitation, contact of the agent by the insured, etc.)
*the purpose of the sale
*any policy replacement information
One of the
Backdating of Policies
Some states do not allow backdating, but for those that do insurers may compute premiums back to an applicant's previous birthday (6 months, 1 year, 2 years - depending on the prescribed time frame), resulting in a slightly lower premium. If a policy is b
Changes/Modifications in the Application
*Any changes made in the application must be signed by both the applicant and the agent to signify that each is aware of the change.
*The IC may not make any changes to an application once it is received unless those changes are signed by the applicant.
*
Consequences of Incomplete Application
Underwriting requires information from the applicant, gained through either the agent or a mailed questionnaire. The policy may be held up and possibly declined if not returned within the prescribed time frame. If an application is incomplete, the insurer
Warranties
Specific, guaranteed statements made by an insurance applicant in answer to specific questions (in regard to medical history, nicotine use, dangerous recreational or occupational questions) asked in life insurance application. Making false statements, (fa
Representations
Statements believed to be true by the applicant. An individual could represent that no one in their family has had a heart attack before age 50, for instance, but may be unaware that his father and grandfather bot had one in their late 40's.
* the INSURED
Signatures
*The signature of all insureds is required on the application unless the insured is a minor child, in which case the child's parent or guardian's signature is required.
*State laws usually require that all adults that are to be insured must sign the appli
Fraud
A deception deliberately practiced in order tosecure unfair or unlawful gain, e.g., making false or misleading statements or concealing circumstances in relation to a claim or on an application.
Delivery
Policy delivery is an important part of the agent's job. Agents need to do several things when delivering the policy to their client, and those responsibilities are:
Policy review, Explanation of changes, signatures, Statement of Continuing Good Health, P
Policy Review
Agent must review the reasons the policy was originally purchased, what type of policy it is, and other riders/benefits that are included in the policy. Any necessary disclosures should be made and the insured furnished with the appropriate related policy
Explanation of Changes
An agent must provide explanations of any changes made to the policy during the underwriting process, such as a table rating due to the individual's health, or the change from a non-nicotine to a nicotine policy due to factors uncovered in the medical exa
Signatures
Any changes made to the policy during the underwriting process must be acknowledged by the policyholder with their personal signature.
Statement of Continuing Good Health
The agent must also have the insured sign this statement acknowledging that the insured's current physical health is the same quality as when application was completed.
Premium Collection
An agent must collect any earned premium from application to time of policy issue-if enough premium is not collected at the time of application, or if the policy is issued after the second premium payment is due, the producer needs to collect the payment
Effective Date of coverage
No coverage is in effect until the initial premium is paid in full to the IC.
* a CONDITIONAL RECEIPT is given at time of application and receipt of initial premium acknowledging that the insurance is in force from the date of receipt or medical exam if r
Delivery Receipt
Is given to the applicant at the time of policy delivery for 2 reasons.
1. if the insured needs to pay additional premium (due to policy alterations required by underwriting)
2. to affirm that the policy was received in order to start the free-look period
Consumer Information Privacy Act
This act requires any companies that compile consumer lists and that subsequently sell those list to other companies for marketing purposes to so notify the consumer about whom the information is collected. The consumer must be given the opportunity to op
Do Not Call List
Many agents use telemarketing as a means to contract prospective consumers to determine interest and set appts.
Underwriting Information Sources
APPLICATION - provide the age, sex, occupation, nicotine use, dangerous recreational activities, and other information about the applicant as well as the agent report.
MEDICAL RECORDS - These include the health questionnaire, paramedical report, physician
Agent/Producer Report
The producer report consists of any relevant information the producer knows of that is not included in the application. For ex: an individual who exercises a lot could appear to be heavy or obese if weight and height alone are taken into consideration, bu
Insurance Privacy Acts
Most states have privacy acts that require that applicants be given notice of certain activities the insurer will perform in gathering information about them for underwriting purposes, such as credit reports or investigative inspection reports. They must
Selection Criteria and Unfair Discrimination
Insurers cannot:
*discriminate against individuals who are blind or partially blind
*refuse an insurance application on the basis of a genetic condition, development delay, or development disability
*discriminate against individuals based on information t
Classifications of Risks
Insurance applicants are classified in one of 4 ways:
STANDARD RISKS-Individuals who have normal risks will have standard premium rates
PREFERRED RISKS-Insureds who have better than average health may consequently have lower premiums
SUBSTANDARD RISKS-Tho
USA Patriot Act/Anti-money laundering
Money laundering occurs when criminals attempt to characterize the proceeds from illegal activities as funds derived from a legitimate enterprise. the USA PATRIOT ACT amends 2 existing statutes. The first statue is the Money Laundering Control Act of 1986
Term Life Insurance
Is purchased for a specific term, or time period.
*There is no cash value in the policy
*Higher amounts of insurance can be purchased for less initial premium because no money goes toward the cash value
*CONVERTIBLE - A term policy is usually convertible
Level Term
There is a level or constant face value from date to issue to date of expiration.
*Premiums often increase each year or period of years because of increased probability of death.
*Often renewable to a certain age, such as 60 or age 65
*Usually convertible
Renewable Term
The most basic form of life insurance in which the policy is a 1 year contract that provides the right to renew at the end of the term(s) without evidence of insurability.
*Premium rates increase at each renewal, depending on the age of the insured.
*Usua
Level Premium Term
A type of term life insurance for which the premiums remain the same throughout the duration of the contract. the premium paid on this type of policy will be higher at the beginning of its life but lower towards the end of its life as compared to term pol
Decreasing Term
The policy face value decreases each year over a state period of time.
*Premiums are low and remain level over the duration of the policy.
*Purchased as a single contract or as a rider to another type of policy.
*Not renewable, though it may be convertibl
Increasing Term
This coverage is usually sold as a rider to another policy rather than as a separate policy itself
*The policy has a death benefit that increases over time-the increases may be made on a straight line, in increments, or according to some index (such as th
Uses for Term Insurance
CREDIT LIFE
*issued through a lender to cover payment of a loan or installment purchase
*Underwriting guidelines are usually not as strict as with individually bought policies, so they may be easier to obtain.
*Examples include coverage for mortgages, aut
Maturity
Generally, maturity is reached at an agreed-upon date when a policy ends and the proceeds are payable. For term insurance, there is true maturity date-policy does not accumulate cash value and so does not really mature. The policy ends with:
1. the policy
Characteristics of Whole Life
Level (Continuous) Coverage & Premiums
PREMIUMS - The face value(coverage/death benefit) stays level through the policy, projects to be a permanent policy, ending upon the insured's death.
*A level and continuous premium is pad to age 100, at which time t
Guaranteed Growth of Cash Value and Policy Loans
Some of the money paid into a whole life policy accumulates as guaranteed cash values. Upon surrender of the policy, these guaranteed cash values are available to the insured. As long as the policy is in force, the insured may borrow against the cash valu
Maturity
An agreed date when a policy ends. The cash value equals the policy face amount and the proceeds are payable. For permanent life insurance, maturity is reached when the cash value of the policy accumulates to an amount equal to the death benefit of the po
Cash Surrender Value
The amount available in cash if the policy is terminated by its owner before payable at death or maturity. There is usually a 7 to 9 year period in which early surrender of the policy has penalties associated with it that will cause the surrender value to
Taxation
INCOME TAX-
*Interest within a cash value policy accumulates on a tax-deferred basis.
*Income tax on the interest is payable at a furture date when the money is effectively received by the owner, as is the case when a policy is canceled and the cash value
Single Premium Whole Life
One lump sum payment at the time of application funds the entire policy in this type of whole life insurance.
Limited Payment Whole Life
*Permanent life insurance in which premiums are payable for only a specified number of years, or end after the insured reaches a certain age.
*Cash values grow to equal the face amount at policy maturity (endowing at age 100). Premiums will be higher than
Intermediate Premium Whole Life
A specialty policy that has an initial period in which premiums are set at a guaranteed amount. After this period expires, the company can review its situation (investment earnings, expense costs, mortality costs, etc.) and adjust the premiums accordingly
Modified Whol Life and Graded Premium/Stepped Premium Whole Life
*Variations of Whole Life Insurance
*As with other whole life policies, coverage stays level throughout the insured's life and cash values accrue to equal the face value when the policy endows at maturity.
*MODIFIED PREMIUMS-Are low initially and increase
Interest Sensitive/Current Assumption Whole Life
In a Whole Life isurance policy, the policyowner knows every step of the way what the policy's cash value is. It's spelled out in the contract. The IC takes the investment risk and guarantees those cash values. INTEREST SENSITIVE INSURANCE PRODUCTS, howev
Equity Index Whole Life
This contract is tied to a market index such as the S&P 500 or the Dow Jones. The policy does not actually invest in securities, but instead follows the movement of the index. The policy credits interest when the market is up, ad guarantees a minimum inte
Felxible Enhanced Ordinary Life
*Introduced to compete with Universal Life
*Involves compex combinations of whole life, term, and paid-up additions in proportions allowing favorable premium leves and adjustable face amounts
*Policy dividiends, addtional premiums and "dump-ins" are all u
Life Expectancy Contract
The average nuber of years of life remaining for individuals of a certain age according to a particular mortality table. While a whole life contract assumes all individuals die at age 100, an individual may choose to take out a life expectancy contract th
Adjustable Life Insurance
*Combines term and whole life into a single plan
*The policy can be converted from term to whole life or whole life to term
Premiums and face amounts can be increased or decreased at the policyholder's request, subject to limitations as stated in the poli
Adjustable Life - Advantages/Disadvantages
ADVANTAGES
*Face amounts, protection periods, premium amunts, and premium payment periods may be increased or decreased by the policyholder (after the payment of the initial premium).
*Many options are available:
>policyholders can specify the desired fac
Universal Life
This is permanent life insurance in which the timing and amount of premiums as well as the death benefit can be changed by the policyonwer.
*Premiums are put into the policy account. Mortality charges are deducted and interest is creditied to the balance
Annual Management Fee
Unlike the fixed insurance policy premiums, these fees are applied to the total investment account or separate account value, and reduce the total net return of the policy. These fees can be several percent per year and must be stated in every policy.
Death Benefit Options
There are 2 death benefits that are called:
Option #1 - Level Death Benefit - a level death benefit equal to the Basic Amount of life insurance.
Option #2 - Increasing Death Benefit - A death benefit thatvaries with the policy account value. The death ben
Premium Payment Options
*SINGLE PREMIUM UL is paid for by a single, substantial, initial payment. The policy remains in force as long as the cost of insurance (COI) charges do not deplete the account.
*FIXED PREMIUM UL is paid for by periodic premium payments. Generally these pa
Cash Accumulation Options
*CASH VALUE GROWTH ON AN INTEREST SENSITIVE BASIS-The premium payments above the cost of insurance are credited to the cash value. The interest, determined by the insurer and often pegged to a financial index, is credited each month to the cash value. Bec
Taxation
*The death benefit is income tax-free if premiums are paid with after-tax dollars
*Tax-free policy loans (non MEC policies)
*The cash values would be available on a tax-free basis in the form of refunds of premiums paid in and policy loans (which would be
Equity Indexed Universal Life
Policies include interest credits that are a combination of a guarantteed interest rate and an interest rate based on a percentage of the increase in an equity index, such as S&P 500.
Joint Life Insurance
A life insurance policy on the lives of 2 individuals.
*Death benefit is payable upon the death of the FIRST TO DIE.
*Uses-Funding of business buy-sell agreements, or to make money available for teh 2nd person when there is no estate to worry about.
Survivorship Life Insurance
A life insurance policy on the lives of 2 individuals.
*Death benefit is payable upon the death of the 2nd to dies (the flip-side of Joint Life)
*Use - to make money availalbe for estate taxes that will be owed after the death of the second spouse. An ind
Prearrangements/Pre-Need Plans
These are life insurance plans that provide for payment of funeral and burial expenses through life insurance. These plans are often sold throught funeral homes or cemetary associations, with the associaiton the benficiary of the policy.
Juvenile Life Insurance
Is that written on children up to 15 years old. A parent or guardian's signature is required.
*Usually written as a rider to the application of the child's parent or guardian.
*Amount of insurance thatcan be written on a child is limited in some states un
Characteristics of Group Plans
Written on a group of people under a single master policy usually issued to their employer or another trustee. Invidivual group members usually issued certificates of coverage rather than copies of the policy.
*The master policyholder or sponsor assist in
Group and Individual Life Insurance Underwriting Differences
*Exposure to claim payment is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group because of this reduced adverse-selection everyone is getting it.
*Underwriters look more closely at specific
Experience Rating vs. Community Rating
EXPERIENCE RATING/EXPERIENCE MODIFICATION - The process of using a group's own premium and claims experience to calculate premium rates. If the previous years' experience was favorable premium rates for the coming year could be reduced-or increased if the
Purpose and Eligibility Requirements
Members of the group must have a common affiliation of interests other than the purpose of obtaining insurance and must meet eligibility requirements. (Such as 90 days of employment) Groups that may be eligible for a group life insurance policy include em
Multiple Employer Trust (MET) or Multiple Employer Welfare Association (MEWA)
These are self-funded insurance plans where several employers fund the program to provide benefits for their employees. Employees often pay the entire premium, but the association is able to qualify for group benefits for which the businesses individually
Enrollment Period
New group members must meet eligibility requirements and then have 31 days to apply for coverage without health questions and cannot be denied coverage during this period. If they do not enroll during this period health questions could be asked and covera
Policy Provisions
Group polices may be either non-contributory or contributory.
>Non-Contributory-The employer pays the full premium, all eligible members participate automatically by being part of the group.
>Contributory-The employee pays all or a portion of the cost. 75
Turnover
Members joining or leaving the group. Members leaving the group may be eligible for continued coverage for up to 18 months under COBRA.
Administrative Costs
There is usually a savings on a group policy over the same coverage provided by separate policies, since one master policy reduces administrative costs.
Termination and Conversion Privileges
There is a 31-day conversion period when an individual leaves a group during which they can convert the coverage to a personal policy.
*Conversion amount can be up to the face amount of the group benefit.
*If the individual dies during the conversion peri
Other Types of Group Insurance
INDUSTRIAL INSURANCE/DEBIT INSURANCE
*Life insurance issued in amounts usually less than $1,000-$2,000 with premiums payable weekly or monthly
*Premiums are usually collected at the insured's home or business by the agent.
*Newer policies allow for larger
Credit Life Insurance (Individual vs. Group)
*Credit life insurance pays off the indebtedness of the policyholder if that person would happen to die during the term of the loan. Policies are usually sold as decreasing term contracts, with the specifics of the policy matching the life and balance of
Fixed vs. Variable Life Insurance
A "fixed" life insurance policy is one that has a set, guaranteed interest rate. A "Variable" policy has an interest rate that changes along with a set of mutual funds or other stock market indicator. When the stock market performs well, the cash value in
Variable Life
A variant of a whole life policy in which the policy's cash value may vary in relation to the investment experience of the stock or index fund(s) in which the cash value is being invested as selected by the policyowner.
*Death benefit and premiums are usu
Variable Universal Life
Similar to UL, but the policyowner directs in which investment options (stocks, money market, etc.) the cash value funds are invested, and cash value vaires as investments incur profits or losses.
*Bothe the death benefit and premium may be changed by the
Fixed Premium
Payment amounts and dates are set and scheduled.
Flexible Premium
Premium payment amounts and times can be altered or even skipped according to the wishes of the investor. This also depends on the contract (in some cases, the policy must be in force for 1 year before changes can be made.)and the performance of the inves
Face Value vs. Death Benefit
The face values it the policy amount outlined in the contract, representing the actual amount of insurance purchased. The death benefit is the actual amount to be paid out in the event of the insured's death-there is usually a guaranteed policy minimum th
Contract Charges and Fees
Contract charges and fess (for the management of the policy's investments) are deducted from the cash value of the policy, and consequently affect the death benefit of the contract.
Regulation of Variable Products
The state securities and regulated industries bureaus enforce uniform securities acts. Primary focus is on cases involving securities fraud and sale of illegitimate products including boiler room sales activity These bureaus enforce anti-fraud, securities
Combination Plan/Blended Policies
*Combined Policy Types - combine term and permanent insurance plans to offer higher amounts of insurance at lower costs than whole life insurance for the same amount of death benefit.
*Combined Policy with Side Auxiliary Funds - combine life insurance wit
Family Insurance Plans
Premium Factors - there is usually a savings over the same coverage provided by separate policies for each family member, since one master policy reduces administrative costs.
Family Policy
Provides insurance on all or several family members in one contract.
*Whole life on the principal insured, smaller amounts of term insurance on the spouse and children ages 15 days and older including those born after the policy is issued. Children born o
Family Income Policy
*Combines ordinary whole life with decreasing term insurance.
*Whole life insurance portion of the policy is usually payable upon the death of the insured, but is sometimes held until the end of the term insurance payout.
*Term insurance is sold as monthl
Family Maintenance Policy
Similar to the Family Income Plan, the maintenance policies have a level term policy that begins an income payment for the specified number of years from the date of the insured's death, with a whole life policy's death benefit paid out after the specifie
Deposit Term Insurance
*First year premium is substantially higher than subsequent years, which have a lower level premium.
*A partial endowment is typically paid at the end of the term period. This endowment is often used to help purchase a new term or whole life policy.
Accidental Death & Dismemberment
The AD&D policy can be a separate contract on its own or can be an optional rider to a life policy.
*Provides payment of additional amount usually equal to the policy face value (called double indemnity) if the insured is killed or dismembered in an accid
Endowment Policies
Provided the death benefit if the insured dies before the policy's term or it pays the face amount to the policyowner if the insured lives until the end of the policy term. This type of policy is designed to mature or endow before the insured's 100th birt
Social Security
BENEFITS AND TAXES - a federal program started in 1935 to provide financial security for U.S. citizens upon their retirement or the premature death of the family breadwinner. About 95% of the workers in the USA are covered by Social Security.
*Pays $255 t
Insured Status
An individual must be insured under the Social Security program before retirement, survivors, or disability benefits can be paid to his or her family.
Fully insured status
Usually 40 quarters or 10 years of Social Security-covered work.
Currently insured status
To be considered currently insured, the person had at least 6 Social Security credits during the full 13 quarter period ending with the calendar quarter in which he or she:
*died
*most recently became entitled to disability benefits
*became entitled to re
Blackout Period
Under Social Security Guidelines, it is the period of time between a surviving spouse's last child's benefit payment (at child's age 16) and the spouse's eligibility for their first retirement income check at the spouse's age 60.
Workers Retirement Benefits
Covered workers may retire at age 65 with a full Social Security benefit, or at age 62 with a permanently reduced benefit, or at an age older than 65 with a slightly higher income benefit. The retirement age has been recently indexed to increase depending
Primary Insurance Amount (PIA)
Is the benefit a person receives if they elect to begin receiving retirement benefits at their normal retirement age.
Spouse's Old Age Benefit
The spouse (at the spouse's age 65) of a worker covered by Social Security is eligible for 50% of the working spouse's benefit, or for a reduced benefit if they file before what their full retirement age would be. The retirement age is on the same sliding
Servicemen's Group Life Insurance (SGLI)
this program allows service men and women to purchase life insurance
*Active military personnel cannot purchase life insurance through regular means.
*The federal goverment purchases a $250,000 5-year term policy when an individual enters the military and
Veteran's Group Life Insurance
Upon release from the military, the individual has a 120 -day free extension during which they can convert their SGLI coverage to an individual 5-yr renewable term VGLI policy without evidence of insurability, or to a permanent plan with a participating c
Entire Contract
There are 4 parts to a life insurance policy that constitute what is called the entire contract:
1. The policy itself
2. The application
3. Any supplemental applications (such as additional insureds)
4. any riders and endorsements
No changes to the policy
Insuring Clause/Agreement
This part of the contract contains the insurance company's promise to pay.
Consideration Clause
A legal requirement that both parties to the policy, the insured as well as the IC, exchange something of value. The insured pays a premium, in exchange for which the company promises to pay benefits as stipulated in the policy.
Premium Payment
All premiums are due in advance.
PREMIUM PAYMENT MODES
Premiums can be paid:
*annually (generally the least expensive)
*semiannually
*quarterly
*monthly
*through a Bank Check Plan (also known as an Automatic Monthly Payment Program) in which the premium i
Net Single Premium
When an insurer charges a net single premium for a life insurance policy, the policyowner pays one large premium at the policy's inception. This cash along with interest that will accrue on it, will be sufficient to cover all insurer expenses associated w
Gross Annual Premium
Is a pay-as-you-go policy. The insurer charges the policyowner the cost of maintaining the policy that year, though this cost is generally evened out to stay the same over the life of the policy. Over time the cost for the annual premium policy will excee
Grace Period
The period of time, usually 31 days, following the premium due date during which the insurance remains at full benefit and payment of the premium may be made without penalty. If the insured dies during this period, the premium will be deducted from the de
Reinstatement
*The policy, unless surrendered for its cash value, may be reinstated at any time within 3 years after date of default because of premium non-payment.
*The policyholder must show evidence of insurability and pay past due premiums and loans with interest.
Incontestability
The provision prevents the insurer from declaring a policy invalid or refusing to pay a claim due to misstatement or concealment in the application after a set period of the policy has been in force, usually 2 yrs.
Contestable Period.
*A period (usually 2 years) after the policy is issued during which the company has the right to cancel the policy because of the insured's material misrepresentation, fraud, etc.
*The IC does not have the right to contest the policy's validity and refuse
Suicide Clause
*A standard disclaimer excluding payment of benefits if death is result of suicide.
*Most states limit this exclusion to a suicide occurring within the first 2 years of the policy's issue.
*If suicide occurs within the time limit, benefits paid are limite
Misstatement of Age or Gender
Is basically lying on the application. If an insured's age or sex was stated incorrectly on an application ,the amount payable under the policy will be the amount which would have been purchased (and paid for through the premiums) for the correct age and
Statements of the Insured
A life insurance policy is required to provide that statements made by or on behalf of the insured (unless fraudulent) will be considered representations and not warranties.
Legal Action
A life insurance policy may not have any provision which limits the time of legal action to less than 2 years after the event or claim.
Payment of Claims
Claims for life insurance policies must be paid out in a timely fashion once the insurer receives satisfactory proof, such as a death certificate. The time frame for the payment is usually 60 days. The proceeds from the policy's death benefit will earn in
Free Look
Or "right to examine" is the contractual right of the insurance applicant to examine the policy after delivery for a given period of time, usually 10 days, and return it for a full return of premium if dissatisfied. In most state there is a 20 day free lo
Owner's Rights
The owner of a life insurance policy is entitled to the following rights:
*assign or transfer ownership of the policy
*choose and change beneficiaries
*select and change the payment schedule
*receive cash values and dividends and borrow against those valu
Assignment
Is the transfer by the policyowner of all or some of the rights under and/or interest in the policy to another individual through written notice to the IC.
Modifications
SIGNATURES
*no policy will be issued without the applicant's (insured's or owner's) signature
*No changes to the policy are valid unless signed by an officer of the company. The agent is not allowed to make changes to the contract.
CONSENT
When an applica
Medical Examination at the time of Application
An applicant may undergo a medical examination at the time of the application, depending on his or her age and the type and amount of insurance applied for. The examination will usually include a basic physical, a urine specimen, blood work, and may inclu
Medical Examination at the time of a Claim
An insurer may examine an insured's body when and as often as it reasonably requires during the processing of a claim, and may perform an autopsy in case of death if it is reasonably necessary and not forbidden by law.
Interest on Insurance Proceeds
If the proceeds from an insurance policy are left in the trust of the insurer, or if there has been no payout, interest must be paid on the funds from the date of the insured's death to the date of payment.
Exclusions
Discretionary provisions (also known as exclusions) are specified conditions or circumstances for with the policy does not provide benefits.
1. War exclusion - this clause is usually included if the country is at war at time of policy issue and, if includ
Beneficiaries Designations
INDIVIDUALS - An individual can be selected to be the sole beneficiary, or more than one individual is chosen to each be a proportional beneficiary.
OWNER - The person or institution that applies for the policy, signs the application stipulating the infor
Classes
Class designations can include specific unnamed groups of individuals, such as "the children of the insured".
Estates
If the insured does not name any beneficiaries to the life insurance policy the death benefit will enter his estate at the time of his death. The death benefit will also enter the insured's estate if all beneficiaries to the policy predecease the insured.
Minor Beneficiaries
Minors may also be designated as beneficiaries, but no moneys would be paid directly to them. Instead, payment would be made on their behalf to the executor or administrator of the insured's estate or to a trust.
Trusts
An arrangement in which property is held by a person or corporation (the trustee) for the benefit of others (beneficiaries). The person establishing the trust (the grantor) gives the trustee title to the trust assets that are called the corpus, subject to
Revocable/Irrevocable Beneficiaries
A REVOCABLE BENEFICIARY provision allows the owner of a policy to revoke or change the beneficiary, surrender the policy, or make loans against the cash value, without consent from the current beneiciary.
If there is an IRREVOCABLE BENEFICIARY, that perso
Per Stirpes and Per Capita
Legal terms specifying how benefits will be distributed to a person's descendants. PER STIRPES refers to any branches, and proceeds designated to a particular named beneficiary on a per stirpes basis would be passed on in equal shares to that beneficiary'
Succession
Deals with the order in which beneficiaries receive benefits under a life insurance or annuity policy. First is the beneficiary (sometimes called primary beneficiary), followed by the contingent beneficiary. If both the primary and contingent beneficiary
Common Disaster Clause
Also called the "uniform Simultaneous Death Act", the common disaster clause is a life insurance policy provision that states the primary beneficiary must survive the insured by a specified period, such as 60-90 days, in order to receive the policy procee
Spendthrift Clause/Spendthrift Trust
This clause protects the proceeds received by a beneficiary from being confiscated by any creditors to whom the beneficiary owes money. The clause imposes legally binding restraints on transfers-voluntary or involuntary-of assets from the trust so that on
Facility of Payment Clause
At times it may be difficult for an insurer to clearly ascertain who the correct beneficiary is under a particular policy. This clause was developed to allow an insurer to pay benefits to someone other than the insured or a beneficiary under certain speci
Settlement Options
The policyowner has the right to select a settlement option. If the insured dies before a settlement option has been selected, the beneficiary has the right to choose the option. The face value of a policy and any other proceeds such as dividends, acciden
Cash Payment Settlement
*the cash payment, (or lump sum) settlement is the AUTOMATIC SETTLEMENT OPTION
*the entire amount of the insurance proceeds due or still owed is payable to the beneficiary in one sum.
*If there are any policy loans outstanding or if any viatical payments
Interest Only (Capital Conservation)
With this option the death benefit is deposited into an annuity and the interest from the annuity is the only thing the beneficiary receives. This method keeps the full principle amount intact forever, as no money is taken from the principle. Long-term tr
Fixed Period Option
The fixed period option guarantees the payment of level installment amounts at patterned intervals over a fixed period of years (usually 5 to 20 years), and after that time payments stop. Payments include the annuity proceeds and also any earned interest.
Fixed Amount Option
Principal plus interest are paid to the beneficiary at regular intervals in fixed installments under the fixed amount option. The length of time that payments are made is dependent upon the amount of money that exists to be paid out-single payment amounts
Life Income
SINGLE LIFE - Payments are made in equal installments over the remainder of the annuitant's life, and then all payments will cease.
JOINT & SURVIVOR - Payments guaranteed for the lifetime of two or more annuitants. If either person dies, the payments cont
Non-Forfeiture Options
Purpose - Historically, if a policy lapsed any excess premium payments and cash values were lost to the policyholder. The insurer kept all monies. Laws have since been passed to protect the consumer's rights to cash value within the policy.
Used by most s
Cash Value
This is the value of a cash fund within a permanent life insurance policy that is part of the death benefit and owned by the policy owner for purposes of cash surrender or policy loans.
Cash Value and Policy Loans
Some of the money paid into a whole life policy accumulates as guaranteed cash values. Upon surrender of the policy, these guaranteed cash values are available to the insured. As long as the policy is in force, the insured may borrow against the cash valu
Automatic Premium Loan
An elective policy feature that borrows money from the policy's cash value to pay any premium not paid by the end of the grace period. Helps reduce cancellations because of a policyowner's neglect or forgetting to pay the premium on time.
Partial Surrender/Withdrawal
Also known as withdrawal, this is the payout of a partial amount of the cash value without the necessity of paying the money back. The face amount of the death benefit can be reduced or the premium may need to be increased to keep the policy in force.
>Ta
What are Policy Dividends?
Dividends are the return to the policyholder of part of the premium paid for a policy issued on a participating basis by the insurer. They represent an excess of premiums over expenses, actual mortality, and investment experience during a period of time.
Life Insurance Dividends and Taxes
Dividends are not subject to income tax, but interest received on the dividends is subject to income tax.
Dividend Uses
There are a variety of methods a policyholder may choose to use the dividends
CASH PAYMENT - The insured can get a check for the dividend amount.
REDUCTION OF NEXT YEAR'S PREMIUM - The dividends can be used to pay down the premium of the policy for the ne
Disability Riders
Riders/endorsements are optional attachments to an insurance policy that modify its conditions by expanding or restricting benefits or excluding certain conditions for coverage.
Disability Waiver of Premium Rider
Provides that premiums no longer need to be paid if the policyowner becomes permanently disabled.
*Permanent disability is usually one lasting longer than six months.
*Premiums are payable through the 6-month "waiting period" from the date of the disabili
Disability Income Rider
*Pays a monthly income benefit to the insured in the event he or she becomes disabled.
*Pays benefits for life or until a disability ends once a waiting period has passed from the date of the insured's disability.
Waiver of Premium with Disability Income Rider
Combines the disability waiter of premium and adds a monthly income benefit to the policyholder in the event he or she becomes disabled.
Waiver of Cost of Insurance
If the owner becomes disabled, the "waiver" of cost of insurance rider" will pay only that portion of the premium that is for the cost of insurance, not any extra that was paid into the policy for investment purpose.
Death of Payor Rider/Payor Death Benefit Rider/Payor Benefit Clause
Waives premiums on a juvenile policy until the insured reaches ag 25, if the premium payor dies before the insured's 25th birthday, at which time the insured may take over payment of the premium or surrender the policy.
Accelerated (Living) Benefit Provision/Rider
Allow for payment of partial policy benefits while the insured is yet alive. These benefits are generally added as optional riders to the policy and must have the approval of the policy owner and any irrevocable beneficiary before they can be used. Reduce
Conditions for Payment
Insurers may include in their life insurance policies a provision for accelerated payment of benefits to the insured during the insured's lifetime, if a qualified health care provider or court determines that the insured:
*is no longer able to perform TWO
Effect On Death Benefit
Any accelerated payments made to the insured will decrease the death benefit, and, as stated earlier, any death benefit remaining after payment of the living benefits will be distributed at the time of the insured's passing.
Types of Accelerated Benefits
LONG TERM CARE ACCELERATED BENEFIT RIDER -The insured receives monthly income benefits for payment of long-term nursing care expenses. This decreases the policy's death benefit.
TERMINAL ILLNESS RIDER - Pays a partial benefit if the insured is diagnosed w
Riders Covering Additional Insureds
Also known as other insureds riders, are usually offered as another form of term rider, covering a family member other than the insured and attached to the policy covering the insured.
Spouse/Other-Insured Term Rider
Covers the spouse or some other designated individual such as a business partner.
Children's Term Rider
Covers the children
Family Term Rider
This rider provides the coverage for all other family members other than the insured.
Accidental Death Benefit Rider
*Pays an extra amount usually equal to the policy's face value if the insured dies under certain conditions in the policy (double indemnity)
*Accidental death does not include any accident that is the result of any illness or physical disability that the
Guaranteed Insurability Option
*A rider to a policy allowing the purchase of additional insurance at specified age (such as 18, 21, 25, 30 and 35) without evidence of insurability
*Must be purchased at the time of application and will be taken into consideration during the underwriting
Guaranteed Convertible Option
The promise that a policy may continue at the current face value under another form of insurance at the current premium for the attained age of the new policy, without underwriting by the company.
Cost of Living Adjustment (COLA)
An increase in the policy's face amount is tied to the cost of living index on an annual basis and limited to a maximum, such as 5% in any one year. Premiums are adjusted at the time of coverage change. The insured does not need to provide proof of insura
Return of Policy Premium
The amount payable at death is the death benefit plus all or some of the premiums paid. Premiums paid are higher than for a policy that does not return any of the premium.
Accumulation Period
The period of time when premiums are paid into an annuity and interest is accruing to the account.
Annuity (Payout) Period
The time when the annuity is annuitized and the cash value is paid out to the annuitant, either as a lump sum or over a period of time.
Annuity
Is a contract that provides the systematic liquidation of a principal sum of money over a specified period of time, either for a set number of years or for the life of the annuitant. The annuity owner pays money to the IC. The company accumulates the mone
Owner
The person who controls and has the rights of ownership to the cash that is in the annuity.
Annuitant
The person receiving the stream of income from an annuity after it has been annuitized.
Annuitizing
The transferring of ownership of the cash in the annuity to the IC in exchange for a stream of income from the accumulated sum.
Beneficiary
The named individual who receives the full sum of the annuity or the continued stream of income from the payout option chosen in the event of the death of the owner/annuitant.
Insurance Aspects of Annuities
Life insurance policies and annuities share some of the same qualities:
*both employ the technique of pooling
*premiums are computed through the use of mortality tables
*both offer a guaranteed death benefit
*management and contract fees
Beyond that, they
Immediate Annuity/Single Premium Immediate Annuity (SPIA)
The first payment of the annuity commences one payment period after the initial payment of funds to purchase the annuity from the IC, or at least within 1 year of payment to the insurer. Since most annuities pay on a monthly basis, the typical SPIA begins
Deferred Annuities
Income payments of deferred annuities begin at some future date, more than 1 year after money is invested with the IC.
Premium payment Options
Deferred annuities can be Single Premium Deferred Annuities (SPDA) or Flexible Premium Deferred Annuities (FPDA). SPDAs have only one payment made by the owner at the beginning of the contract and then collect interest until the policy is annuitized, at l
Non-forfeiture
In the past, any excess premium payments and cash values were lost to the policyholder if a policy lapsed. Today, the STANDARD NON-FORFEITURE LAW used by most states requires that all cash values or their equivalent must be made available to the policyhol
Surrender Fees
A sliding scale of charges, diminishing over time, that allows the IC to recoup expenses if surrenders or exchanges are made within a short time (usually 7 yrs or less) after the contract is made. For example, the fee may be 7% the first year of the contr
Death Benefit
This provision pays the beneficiary either the total value of the contributions paid in or the current value of the contract in the event of the annuitant's death.
Pure Life vs Life with Guaranteed Minimum
*A pure life annuity (also know as a life annuity or straight life annuity) provides the annuitant with a guaranteed income for life. When the annuitant dies, no other payments are made-if the annuitant dies only one month after annuitizing, the IC keeps
Single Life versus Multiple Life
*SINGLE LIFE - Payments are made in equal installments over the remainder of the annuitant's life, and then all payments cease.
*JOINT and SURVIVOR - Payments guaranteed for the lifetime of two or more annuitants. If either person dies, the payments conti
Annuities Certain (Types)
1. Period certain annuity - the insurer pays the annuitant an income for a specified amount of time (5 years, 10 years, 20 years, etc.)
2. Pure Life Annuity - No payments are made after the death of the annuitant (discussed earlier)
3. Life annuity with P
Fixed Amount Option
Principal plus interest are paid to the beneficiary at regular intervals in fixed installments under the fixed amount option. The length of time that payments are made is dependent upon the amount of money that exists to be paid out-single payment amounts
Interest Only (Capital Conservation)
With this option the death benefit is deposited into an annuity and the interest from the annuity is the only thing the beneficiary receives. This method keeps the full principle amount intact forever, as no money is taken from the principle. Lon-term tru
Systematic Distribution Option
With this option an annuitant will receive payments of a fixed amount until the account is depleted.
Fixed Annuities
Investors make a deposit into the annuity, and the IC guarantees the principal along with any gains made over the life of the investment, similar to a bank certificate of deposit. The interest rate is set on a period (usually annual) basis and the investm
General Account Assests
Money invested in a fixed annuity goes into the GENERAL ACCOUNTS of the company, and consequently the safety of such an investment may be affected by the stability and strength of the company.
Interest Rate Guarantees (Minimum Vs. Current)
*Annuities have a guaranteed minimum interest rate that is set by the company and disclosed in the policy. A typical minimum rate is 3%.
*The current interest rate is linked to:
>the reserves and interest the insurer earns on its investments
>an external
Level Benefit Payment Amount
Fixed annuities offer the annuitant a lifetime payout with a guaranteed level payment amount. However, because the amount is fixed, annuitants may find that the purchasing power of the payments diminish over time.
Variable Annuities
These investments are tied to a stock index and will gain or lose according to that index. They are akin to mutual funds, as they invest in a variety of instruments.
*A separate account is held by an IC for the investment made through variable annuities.
Equity Indexed Annuities
A fixed annuity with interest rates linked to an index like the S&P 500 or the Dow Jones average. Principal and accumulated interest are typically protected against index declines--there may be a minimum interest rate.
Market Value Adjusted Annuities
These provide a guaranteed interest rate for a specific period of time. If withdrawals are made or the contract is surrendered before the end of the guaranteed period, a market value adjustment (positive or negative) is applied to the cash value of the co
Refund Life Annuities
1. Full Cash Refund - Pays back the full purchase price as a guaranteed minimum benefit. If the annuitant dies before receiving benefits equal to the purchase price, the annuity beneficiary receives the difference.
2. Installment Refund - Annuity payments
Two-Tiered Annuities
These annuities were sold primarily from the early 1980's to the mid-1990s.
*Called "two-tierred" because there is a permanent difference in the amount received if the product is annuitized instead of transferred to another account.
*Investors pay one rat
Lump-Sum Settlement
*the cash payment (or lump sum) settlement is the automatic settlement option.
*If there are any policy loans outstanding or if any viatical payments have been made, these amounts will be subtracted from the cash payment.
*If the annuity owner dies before
Qualified Retirement Plans
Is one that meets IRS guidelines and that receives favorable tax treatment such as deducting money from current income for income tax purposes.
Variable annuities purchased as part of a qualified retirement plan-such as an IRA, 401(k), TSA-403(b), or Defe
Group Retirement Annuities
These are defined contribution retirement plans designed for employees in the education field as well as other non-profit organizations such as hospitals. These plans are administered by the employer and can be paid for in whole or in part by the employer
Individual Retirement Annuities
Require the individual to pay all monies into the fund by himself or herself. The owner invests funds in the investment vehicles of his or her choice within the funds operated by the investment company.
Individual Retirement Annuities (IRAs)
*during the accumulation phase, interest grows income tax-deferred
*premature distributions-if money is withdrawn before age 59 1/2, there is a 10% penalty and current-year taxation of the withdrawn amount unless the money is rolled over to another qualif
Tax-Deferred Growth
Interest on the cash values in annuities grows on a tax-deferred basis. No tax is paid on these amounts until they are withdrawn. In the case of a qualified plan, such as an IRA, if cash is withdrawn before age 59 1/2, there is a 10% early withdrawal pena
Tax Deferred A
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