2 Life Insurance Basics Flashcards
Beneficiary
person who receives benefits of an insurance policy
Death Benefit
Amount paid upon death of insured to the beneficiary in a life insurance policy
Cash Value
Equity amount accumulated in a life insurance policy
Rating Classification
Used in deciding if application pay requires a higher or lower premium
Estate
A person’s net worth
Illustrations
Presentation or depiction of non guaranteed elements in a life insurance policy
Life Insurance
Coverage on human lives
Liquidation
Selling assets in order to raise capital
Lump-Sum
Payment of the entire benefit in one sum
Solvency
Ability to meet financial obligations. Example: Life insurance maintains enough assets to pay claims
Insurable Interest (when purchasing insurance)
Policy owner faces the possibility of losing money or something or value in the event of a loss *This must exist at the time of application
Again, Pure risk only. The loss and never win
In life insurance, a valid insurable interest may exist between the policy owner and what/who is being insured when the policy is insuring what (3)
- Policy Owner’s own life
- Life of family (blood/spouse)
- Business Partner, key employee who has a financial obligation to the policy owner (debtor to a creditor)
Insurable Interest must exist when?
at the time of application
The ____ must have an insurable interest in the life of the insured
policy owner
The higher the risk, the higher the ____
Premium
True/False and Why/Why Not:
Insurable Interest is required of the beneficiary
False: Insurable Interest is NOT required of beneficiaries. The Beneficiary’s well being is dependent on the insured. The beneficiary is not insured. They do not have to show interest for the policy to be purchased,
Survivor Protection
Provide funds necessary for survivors to maintain lifestyle in the event of the insured’s death
The purchase of Life Insurance creates a ____ estate
immediate
As a result of the cash accumulation feature, some life insurance policies provide ____ to the policy owner
Liquidity (this means policy cash values can be borrowed against at any time and used for immediate needs
A prospective insured may be rated as one of which 3 classifications
Standard
SubStandard (High Exposure)
Preferred
To help producers/agents determine the amount needed for protection: What are the 2 basic approaches Insurance developed
Human LIfe Approach
Needs Approach
Explain Human Life Approach
Gives the insured estimate of what is lost to the family upon premature death.
Calculates life value through their wages, inflation, # of years to retirement, and the time value of money
Example of Human Life Approach
JIm = 40 Years Old and make $50k annually
He plans to retire at 65 (25yrs).
Costs $40K for his family and $10K for personal
25x$40K=$1 Million=Human Life Value
Explain Needs Approach
Predicted needs of the family.
Factors: Income, debt, investments, ongoing expenses
Insurance proceeds paid in a lump-sum may be needed for any of the following reaons. (Lump-Sum Reasons)
- Costs associated with Death (Post mortem like funeral)
- Debt cancellation as an alternative to Estate Liquidation
- Emergency Reserve Funds
- Education Funds
- Retirement Funds
- Bequests
Explain this reason for choosing lump-sum
Cost Associated with death (Post mortem)
taking into account the final medical expenses of the insured, funeral expenses, and day-to-day family expenses
Emergency Reserve Funds (Lump-Sum Reason)
paying for the unexpected expenses following the death of the insured.
Example: travel expenses or lodging for family members
Debt cancellation (as an alternative to estate liquidation) Lump-Sum Reason
Paying off the debts of the insured such as a home mortgage or auto loans.
(Most lenders require a collateral assignment of life insurance as a condition for a loan)
Education Funds (Lump-Sum Reasons)
paring for the children’s education funds to remain in school or spouse who needs additional education to re-enter the job market
Retirement Fund (Lump-Sum Reason)
used as a source of retirement income
Bequest (Lump-Sum Reason)
Leaving funds to the insured’s church, school, or charity
Key Person/Employee is Insured:
Business is considered all of the following in the Insurance process
Applicant (would be)
Policy Owner
Premium Payer
Beneficiary
Key Person Insurance
coverage of person with specialized knowledge skills or business contacts.
*Business suffer financial loss and employee gives permision
Buy-Sell Funding Agreement
Also known as Business Continuation Agreement,
the Buy-Sell Funding Agreement is a legal contract that determines what will be done with a business in the event the owner dies or becomes disabled
What are the Types of the Buy-Sell Agreements used for partnerships and corporations
- Cross Purchase
- Entity Purchase
- Stock Purchase
- Stock Redemption
Stock Redemption Agreement
used when a corporation buys one policy on each of the shareholders
Stock Purchase Agreement
each stockholder buys a policy on each of the others
used by privately controlled corporations
Entity Purchase Agreement
when the partnership buys the policies on the partner’s
Cross Purchase Agreement
partnerships each buy each other a policy on the other (AB example)
used in partnerships
Example of Buy-Sell Agreement (Cross)
AB Partnership has 2 partners. A and B
AB value=$1 Million, A and B have an equal interest
A buys life policy for B, B buys life policy for A
A dies, B takes ownership of the company while A’s heirs get the $500K
Executive Bonus
(Since the employers treats the premium payment as a bonus) an arrangement where an employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee
On Executive Bonus, the amount the premium treated as a bonus is ____
Tax-deductible to the Employer
and
Income Taxable to the employee
The process of Issuing a Life Insurance Policy goes as follows:
- Solicitation and Sales Presentations
- Underwriting: Field and Company
- Premium Determination
- Policy Issue and Delivery
Solicitation and Sales Presentations
an attempt to persuade a person to buy an insurance policy (Step 1)
*Either orally or in writing
Examples of Solicitation and Sales Presentations
- Advertisements
- Illustrations
- Suitability
Advertising must be ____ and not misrepresent the ____
accurate, facts
The ____ is responsible for all of its advertisements whose policies are advertised
Insurance Company
Illustration
a presentation or depiction that includes non-guaranteed elements of a policy of individual/group life insurance over a period of years
A Life Insurance Illustration must do what of the following
- Distinguish between guaranteed and projected amounts
- Clearly state illustration is not part of the contract
- Identify those values that are not guaranteed as such
Unfair Discrimination between individuals of the same class include
age, gender, physical/mental impairment, blindness/partial, genetic characteristics or genetic testing
Suitability
an agent/producer may not recommend an insurance policy/annuity without reasonable belief that the transaction is in the best interest of the insured.
Underwriting
Risk selection and process in which an insurance company determines an applicant is insurable and if so, what premium should they charge
Primary Criteria underwriters use to assess the desirability of applicant
- Health (part/current)
- Occupation
- Lifestyle
- Hobbies/Habits
Field Underwriter
agents or the insurance company’s frontline.
*solicited potential insured
As a field underwriter (agent), what are the important responsilbilities during this process
- Proper solicitation of applicants
- Helping Prevent adverse Selection
- Completing Application
- Obtaining Signatures
- Collecting the initial premium
- Deliver the Policy
All insurance applications must have which 2 basic components
- General Information
2. Medical Information
Examples of General Information on Insurance Application
name, address, age, birth date, income, marital status, occupation
*This part will also identify the type of policy, coverage amount, and information concerning the beneficiary
Medical Information on Insurance Application examples
medical background, current health, medical visits in recent years, death causes of relatives
The _____ must sign the application
The agent and the proposed insured (usually the applicant)
Whenever an agent collects premiums, the agent must issue a ____
Premium receipt
The most common type of receipt is a ____ and is used when?
Conditional Receipt which is used ONLY when the applicant submits a prepaid application.
*If approved by the underwriters is effective on the date of the application or date of medical exam
Conditional Receipt means the applicant may be covered as early as ____
The date of application
An insurance application is the ____ underwriter’s use for information on the applicant
key source
Attending Physical Statement (APS)
When the underwriter sees answers on an application that could indicate a greater risk, they’ll request a statement from the applicant’s physician.
*Insurance company pay the physician (less expensive than an exam)
Paramedical Exam
By nurse or Paramedic which often includes blood and urine samples
*All at the Insurance Company’s expense
Full Medical Exam (Occurs routinely for)
- Applicants requesting higher amounts of coverage
- Application raised additional questions concerning health
- Age and amount of coverage
* Insurance Company expense and can ask additional questions
In addition, to a physician’s report, the underwrier will usually request a _____.
MIB Report
Medical Information Bureau Report
MIB
Medical Information Bureau: a nonprofit trade organization that receives adverse medical information from the insurance company and maintains confidential information on applicants (owned by membered insurance companies)
True or False: Insurance Companies can refuse an applicant coverage solely on the basis of adverse information on a MIB Report.
False
They CANNOT do that shit!
Penis
DIRS
Disability Income Records System
Service provided by the MIB
Disability Income Records System (DIRS): When a membered (of MIB) company received disability application for $300 for 1yr, they send that info to DIRS. How long is it maintained on file
5 years
Requiring HIV Test is NOT considered “unfair discrimination” if:
- Testing required all individuals of the same class
- Proposed Insured is not denied coverage based on testing alone.
- Tests and procedures were approved by the FDA and comply with state and federal laws.
FDA
The United States Food and Drug Administration
A written Disclosure Authorization Notice must ____
- State Insurance Company’s practice regarding the collection and use of personal information
- Be written in plain language
- Approved by the head of the Department of Insurance
True or False: Insurance companies are allowed to ask the propsed-insured whether he/she tested positive for an AIDS-related test
True
When revealing HIV test results, the insurance company must provide counseling regarding the following
- Significance of the Test Results
- Methods for preventing HIV transmission
- Benefits of counseling
- Availability of health care and support services
When insurance companies plan to seek and use information from investigators, they must first provide the applicant/insured with a ____.
written Disclosure Authorization Notice
To ensure proper obtaining and handling of results, and to protect the insureds’ privacy, states have enacted the following laws and regulations for insurers requiring an applicant to submit to an HIV test:
- The insurer must disclose the use of testing to the applicant, and obtain written consent from the applicant on the approved form;
- The insurer must establish written policies and procedures for the internal dissemination of test results among its producers and employees to ensure confidentiality;
- The test must be administered in a manner that meets the protocol of the U.S.Department of Health and Human Services;
- The insurer must disclose the test results as authorized by the applicant in writing;
- If the applicant has not identified a physician to receive test results, the positive test results and the identity of the applicant must be sent to the state department of Health; and
- The reporting of test results must include the name and address of the reporting company.
An applicant who is rejected are considered _____
declined risk
Examples a risk may be declined can be one of the following reasons
- There is no insurable interest;
- The applicant is medically unacceptable;
- The potential for loss is so great it does not meet the definition of insurance; or
- Insurance is prohibited by public policy or is illegal.
Once the company determines that an applicant is insurable, they need to establish an appropriate _____
Policy Premium
Mortality
the ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population
Mortality tables
used by insurers,
indicate the number of individuals within a specified group of individuals (e.g. males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age. In other words, these tables help insurers predict the expectation of life and the probability of death for a given group.
Interest
Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds (invested in bonds, stocks, mortgages, etc.). This interest is a primary factor in lowering the premium rate.
Expense
The expense factor, also known as the
loading charge also affects premium rates. Insurers have various operating expenses, so each premium must carry a proportionate share of these operating costs. The insurer’s largest expense is the commissions paid to its agents. Other ongoing expenses include payroll, rent, and taxes.
net single premium
the mortality and interest components necessary to keep the policy in force until maturity.
Gross annual premium
the one year cost for mortality, plus the cost of operating the company (or expense loading)
Net Premium + Expense (loading) = ?
Gross Premium
? + Expense (loading) = Gross Premium
Net Premium
Mortality - Interest = ?
Net Premium
Net Premium Example
Mortality Cost=$500
Interest=$100
Mortality - Interest = Net Premium
Net Premium=$400
Gross Premium Example
Mortality Cost=$500
Interest=$100
Mortality - Interest = Net Premium
Net Premium=$400
Operating Cost=$200
Net Premium + Expense (loading) = Gross Premium
Gross Premium=$600
In regard to insurance premiums, “mode” refers to ____
the frequency the policyowner pays the premium
When an agent hand-delivers an individual policy or annuity to the policyowner, the agent must obtain a signed ____
delivery receipt
No premium= No what
COVERAGE!
If the initial premium is not paid with the application, the agent will be required to collect ______ at the time of policy delivery.
the premium
*may also be required to get a statement of good health from the insured. This statement must be signed by the insured and verifies that the insured has not suffered injury or illness since the application date.
If the full premium was submitted with the application
and the policy was issued as requested, then what?
the policy coverage would generally coincide with the date of application if no medical exam is required.
Sometimes it is possible to lower the premium rate by ____ an application for insurance
backdating (or antedating)
May not be backdated no more than 6 months before the date of the application or medical exam
The only allowable reason that an application may be backdated is to ____.
effect a lower premium
Companies that use inspection reports are subject to the rules and regulations outlined in what?
Fair Credit Reporting Act
the company underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers what info
financial and moral information
True or False: The MIB can be used only as an aid in helping insurers know what areas of impairment they might need to investigate further.
True: Insurers cannot refuse coverage solely on the basis of adverse information on a MIB report.
Standard Risk
The average Risk
Substandard Risk
Are not acceptable at higher rates. (High Exposure)
These policies are also referred to as “rated” because they could be issued with a premium rated-up, resulting in a higher premium
Substandard Risk (Examples)
Physical Condition, personal or family history of disease, occupation, or dangerous habits (among others)
Preferred Risk
individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits.
What are the 3 primary/key factors used in premium determination
Mortality
Interest
Expense
Mortality
the ratio of the deaths vs living in that population and a certain period of time.
Mortality tables
tables that help insurers predict the expectation of life and the probability of death for a given group (males, females, smokers, non-smokers)
Interest
Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds (invested in bonds, stocks, mortgages, etc.). This interest is a primary factor in lowering the premium rate.
Expense
also known as the loading charge
The insurer’s largest expense is the commissions paid to its agents. Expenses include payroll, rent, and taxes
List the two Premium concepts
Net Single Premium
and
Gross Annual Premium
The higher the frequency, the higher the ____
premium
Ways to prove policy was considered legally delivered
Certificate of Mailing Delivery Receipt (agent obtains a signature from policy owner)
Info: Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and explaining what effect they have on the contract.
In addition, the agent should explain the rating procedure to the client, especially if the policy is
rated differently than applied for, or has been modified or amended in any other way. The agent should also explain any other choices and provisions available to the policy owner that may become active at this time.
If the initial premium is not paid with the application, when does the policy go into effect?
the agent will be required to collect the premium at the time of policy delivery. In this case, the policy does not go into effect until the premium has been collected.
Buyer’s guide and when must it be provided?
generic information about life policies; must be provided at the time of application
Policy summary and when must it be delivered
description of features and benefits of the policy being issued; must be provided when the policy is delivered
