Chapter 2 Life Basics Flashcards
Applicant
a person making application for himself/herself or another to be insured under an insurance contract. The applicant may be the insured, owner or both
Application
A document that is used to collect info provided by the applicant/insured for underwriting purposes. After the policy is issued, any unanswered questions are considered waived by the insurer.
Beneficiary
the one or more parties named in the policy to receive the policy’s benefits if the insured dies while the contract is in force.
Insurable interest
The relationship that must exist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid.
policyowner
the individual who has the ownership rights in a policy. the policyowner and insured are usually the same, but not necessarily. Any changes made to a policy must be approved by the policyowner in writing with his/her signature.
Third-party ownership
A policy owned by a person other than the insured
Issue (original) age
insured age on the policy issue date. whole life, disability, and long term
attained age
insured age at any point in time typically sed at renewal or conversion. term and health
effective date
The date when insurance coverage begins
expiration date
The date at which insurance coverage end. term
solicitation
advertising
producers are governed under the rules and regulations (referred to as unfair trade practices) with regard to what they can and cannot say when soliciting insurance.
Do not call registry
call between 8-9 their time. 31 day renewal
Sales presentation: producers are required to provide all prospective buyers the following
buyers guide: a generic brochure developed by the NAIC to assist prospective buyers of life insurance. Describes all basic types of life insurance as well as comparative costs of each are included. Deemed misrepresentation of contract
policy summary: normally a computer generated illustration detailing:
the premiums (current and guaranteed) to be paid along with current and guaranteed interest rates
The guaranteed and nonguaranteed cash value and projected dividends if any. The summary is not required to show the time value of money
The surrender values and other guaranteed data pertaining to the policy that is being shown.
The producer’s name and address, along with the address of the insurance company
State law generally requires that an insurer provides prospective purchasers a copy of the buyer’s guide and policy summary no later than at the time a policy is delivered
Policy replacement
any transaction in which a new life policy or annuity is to be purchased, and the producer knows or should know that existing contracts will be:
lapsed, forfeited, surrendered or terminated
reduced in value
amended with a reduction in benefit or term
reissued with a reduced cash value
subjected to borrowing
conservation
the act of saving or keeping the existing policy and preventing it from being replaced
The producer’s responsibilities include
Completing a notice regarding replacement which must be signed by the applicant and producer
Obtain information regarding any existing policies, including the names of the existing insurers and policy numbers (this must be provided to the replacing insurer)
Providing copies of the Notice Regarding Replacement and any sales proposals to the applicant and replacing insurer (3 working days)
The replacing insurers responsibilities include
upon receiving proper notification with the new app, the replacing insurer must notify the existing insurer of the planned replacement
Maintaining copies of the information regarding replacement for a specified period of time. 3 years for ILL
Application
a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon info contained in the application. The app is the primary source of info
Required signatures
both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the app are true. If the applicant is a minor a guardian must sign the app.
Changes in the app
whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application.
collecting the initial premium and issuing the receipt
a producer should attempt to collect the initial premium and submit it along with the app to the insurer because the policy will not go in affect until the premium is paid
conditional receipt
if premium is paid, coverage will be in effect the date of application or completion of the medical exam, whichever is later as long as the policy would have been issued as applied.
Binding (unconditional receipt)
if premium is paid, coverage will begin immediately for a specific length of time regardless of whether the applicant is ultimately approved by the insurer. this may also be referred to as temporary insurance agreement. 30 days.
Acceptance (approval) conditional receipt
The coverage becomes effective at application approval. If the company doesnt approve the app, coverage was never in effect. long term
Insurers often limit the face amount of coverage provided by
a receipt usually 500,000
Trial application
a trial application is one submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid.
Disclosure at point of sale- issues relating to aids
insurers must
Avoid making or permitting unfair discrimination between individuals of the same class in the underwriting for the risks of AIDS Require the maintenance of strict confidentiality of personal info obtained through testing and to require informed consent before testing for HIV.
Insurance companies may refuse to issue a policy to individuals based on positive HIV test results. However applicants must consent to be tested for HIV and be informed that testing for HIV may determine insurability.
Errors and Omissions
Insurance covering the liability of a producer or agency
typically written with a deductible to reduce claims frequency. Claims are filed due to client reports (complaints) and for a number of reasons
Two common complaints are
inadequacy: failing to obtain proper type or amount of coverage for a client
Negligence: quoting inflated info, misrepresenting a plan of coverage or neglecting to reveal the effect information might have on the client at a later date. The producer may be guilty of negligence whether the mistakes are intentional or unintentional.
underwriting is the process of
selection, classification, and rating: determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged
Information sources and regulations
the app consists of two parts
Part 1
contains general questions about the applicant, such as gender/sex, marital status, residence, DOB, occupations, and past and present life insurance. most important source of underwriting
part 2
contains questions pertaining to medical background, past and present health, any medical visits, hospitalizations or surgeries in recent years, medical status of immediate family members including their ages and causes of death
MID
collect adverse medical info about an applicants health (supported by insurance companies) and acts as an info exchange.
Inspection report
is a general report of the applicants finances, character, morals, work, hobbies, and other habits.
agents report
is personal statement submitted by the producer to the insurer regarding the applicant’s financial condition, any personal knowledge of the applicant, etc. does not become apart of the contract- only one
nonmedical application
a policy requested when the applicants age, medical history or amount of coverage does not require a medical examination for underwriting.
Classification of risk Lien plan (graded)
initially the premium would be refunded in case of death. The death benefit increases over time with the full face amount eventually becoming payable. Generally used with senior life insurance. death incurs in first 2 years
flat rate
a constant dollar amount added to the standard rate per 1,000 of coverage. additional premium is charged because of hazardous hobby. 30 dollar premium instead of 25
Tabular rate
classified to the extend of impairment according to a table used
when calculating premium rates, life insurers assume that all:
premiums are paid in advance of the period of coverage
Premiums will be invested and earn interest
Claims will be paid by the end of the year
Premiums are based on
expected mortality, interest, expenses.
Mortality table used to determine the average life expectancy and how much money in death claims.
Interest: companies invest premiums in stocks, bonds, mortgages, real estate
expenses of operating the company. the amount charged to cover each policy’s share of expenses of operations is called expense loading
Premium concepts
net premium
takes into account interest and morality factors only. The process of calculating this rate requires:
The age and sex of the insured and the benefits to be provided
The mortality rate to be used and the rate of interset assumed
Gross premium
addition charges (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating expenses, commissions, medical examination, costs, etc.
reclassifications
when reviewing an application, the underwriter may find it necessary to reclassify the risk. this could either increase or decrease the premium.
policy reserves
The net premiums paid plus interest earned; reflect possible contract obligations. a reserve is an amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is treated as a liability.
Mortality cost
mortality cost- interest= net premium (pure rate) Net premium (pure rate) + loading (insurer expenses)= gross premium
premium payment mode
annual least expensive
monthly most expensive
constructive or legal delivery
occurs only if the premium was paid at the time of application. once the insurer issues the policy, a legal contract has been formed since the policy becomes the acceptance. Once the insurer mails the policy to the agent it is considered constructively or legally delivered by the insurer. It is still the agents responsibility to obtain delivery signatures and explain the policy benefits to the policyowner/insured
When the initial premium is not paid with the application,
some insurers require that the producer sent a transmittal notice, verifying the date the premium was received. The producer must also get a Statement of Good Health from the applicant/insured at the time of policy delivery that verifies that the insured has not suffered injury or illness since application date. if applicant is not in good health, the policy should be returned to the insurer for further underwriting.
policy delivery will be accomplished by
personal deliver with signed receipt of delivery (when free look begins)
registered or certified mail with a signed receipt of delivery
deliver by reasonable means, as determined by the commissioner, director, or superintendent of insurance
the two approaches used to determine the amount of life insurance needed are human life approach and needs analysis life value approach. human life approach =
this approach is a measure of the projected future earnings and services of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his dependents using the following factors: Individuals age and gender occupation annual wage and employment benefits planned retirement age inflation
needs analysis approach
this approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following items into arriving at the proper amount of coverage needed:
calculate all financial needs caused by an immediate death including debts, medical bills, and final expenses
Provide lifetime income to the spouse
Pay off a mortgage or other debt
Provide funds for children’s education
An emergency reserve fund could be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured.
Subtracts any assets available to fund financial needs after death.
Income objective
to analyze the needs in either approach, the producer must also take into consideration the income objective of the proposed insured. The producer can use two methods of income objectives to arrive at the amount of insurance needed to fill the human life value or needs analysis requirements: capital liquidation and capital retention/conservation
capital liquidation
assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents. When income is paid out under capital liquidation, the account balance will decrease as each payment is distributed.
Capital retention/conservation
assumes the desired income will be generated by the interest only, thus retaining or conserving the principal
Group life insurance
an insurance plan normally owned by an employer, creditor, or association, under which coverage is provided for the employees, debtors or members. over 40% of all life insurance in force in the US is group insurance. presently 85% of the group coverage is employer-employee.
group insurance generally provides protection for an employees
named beneficiary, typically their spouse if married. The coverage may be changed only within the confines of the master policy
The coverage is normally written on a
renewable term basis providing no cash value or living benefits as found in cash value policies. The amount of coverage can be limited to a fixed dollar amount such as 50,000 or multiple of earnings. Some group plans allow for purchase of additional coverage which may be partially or fully underwritten. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability.
Individual
the greatest difference between group and individual life is the full latitude of ownership. Unlike group policies, individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which can end upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of keeping the policy on the policy owner.
ordinary life insurance
any type of life insurance that is not group, industrial, or governmental insurance. a large number of people are insured with an ordinary life policy making this the larger portion of the life insurance in force today.
industrial (home service)
synonymous with debit life insurance makes up about .03% of the life insurance today. These small policies, normally to $250 to $1000 were originally sold to pay funeral expenses.
Permanent
a life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting actors are equal. this policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner as will be described later in the text
Term
Lowest of initial premium outlay and designed for someone with a large insurance need but with limited cash flow. This coverage is often referred to as temporary as it is usually written to cover a short period of time. This policy does not build cash values and benefit will either remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples with one or more children.
participating
a class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when they are declared by the board of directors. The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However once all premiums have been recovered any further dividends are taxable.
nonparticipating
a policy marketed by a stock insurer. a stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder.
Fixed
the policy has a fixed amount of coverage, benefits, premium. Without riders, future inflationary trends will cause the purchasing power of the policy’s benefits to be reduced.
Flexible
Universal and Variable universal life policies have given the policyowner more flexibility in terms of premiums, investments objectives and other policy benefits. These policies assist the insured during inflationary periods with the changing needs of the policyowner and insured.
Variable
A policy introduced in the 1970s that uses separate accounts for the cash value accumulation. The separate accounts are similar in nature to mutual funds, and a securities and life insurance license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy’s overall death benefit can increase along with the cash values but there is no guarantee of return and down markets can cause significant loss of policy value.
