Chapter 2 - Life Insurance Basics

Question 1

Define Solvency

Answer 1

Ability to meet financial obligations

Question 2

To purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss. This is called what?

Answer 2

Insurable Interest

Question 3

When must an insurable interest between the policyowner and the insured exist?

Answer 3

At the time of application.

Question 4

A valid insurable interest may exist between the policyowner and the insured when the policy is insuring any of the following: (3)

Answer 4

1. The policyowner’s own life;
2. The life of a family member (a spouse or a close blood relative); or
3. The life of a business partners, key employee, or someone who has a financial obligation to the policyowner (such as a debtor to a creditor)

Question 5

Who must have an insurable interest, the policyowner or the beneficiary?

Answer 5

The policyowner.

Question 6

What are five personal uses of life insurance?

Answer 6

1. Survivor Protection
2. Estate Creation
3. Cash Accumulation
4. Liquidity
5. Estate Conservation

Question 7

What are the two basic approaches to determining someone’s life insurance needs?

Answer 7

1. Human Life Value Approach

2. Needs Approach

Question 8

What is the purpose of key person insurance?

Answer 8

To lessen the risk of financial loss because of the death of a key employee.

Question 9

Who is the owner and who is the beneficiary on a Key Person Life Insurance Policy?

Answer 9

The employer is the owner and the beneficiary (the employee is the insured)

Question 10

How must a replacing producer respond to an applicant wishing to replace existing life insurance?

Answer 10

The producer must provide the applicant with a Note Regarding Replacement, signed by both the applicant and the producer.

Question 11

When a medical exam is required for a life insurance policy, who may complete the exam?

Answer 11

A paramedic or examining physician at the insurer’s expense.

Question 12

What is the difference between a buyer’s guide and a policy summary?

Answer 12

A buyer’s guide provides generic information on various types of policies. A policy summary provides specific information on the policy being issued.

Question 13

The agent is the company’s front line, and is referred to as a ______ ___________ because the agent is usually the one who has solicited the potential insured.

Answer 13

The agent is the company’s front line, and is referred to as a FIELD UNDERWRITER because the agent is usually the one who has solicited the potential insured.

Question 14

What responsibilities does the field underwriter have during the underwriting process and beyond? (6)

Answer 14

• Proper solicitation of applicants
• Helping prevent adverse selection
• Completing the application
• Obtaining the required signatures
• Collecting the initial premium and issuing the receipt, if applicable, and
• Delivering the policy

Question 15

What is a conditional receipt? (3)

Answer 15

• The most common type
• Used only when the applicant submits a prepaid application.
• It says that the coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and the policy is issued exactly as applied for. (This rule does not apply if a policy is declined, rated, or issued with riders excluding specific coverages.)

Question 16

What is the key source of information that underwriters used for information about the applicant?

Answer 16

The insurance application

Question 17

Insurers cannot refuse coverage soley on the basis of adverse information on the what?

Answer 17

The Medical Information Bureau Report

Question 18

What is the equation for determining Net Premium?

Answer 18

Mortality - Interest = Net Premium

Question 19

What is the equation for determining Gross Premium?

Answer 19

Net Premium + Expense (loading) = Gross Premium

Question 20

What are the four steps of processing an insurance policy?

Answer 20

1. Solicitation and Sales Presentation
2. Underwriting: Field and Company
3. Premium Determination
4. Policy Issue and Delivery

Question 21

What information does a Policy Summary include? (12)

Answer 21

• Agent’s name
• Agent’s address
• Insurer’s full name
• Insurer’s home office address
• General name of the policy
• Premium
• Cash Value
• Dividend
• Death Benefit
• Each rider
• Living benefits
• Surrender values

Question 22

What are the important responsibilities of the agent acting as field underwriters? (6)

Answer 22

• Proper solicitation of applicants
• Helping prevent adverse selection
• Completing the application
• Obtaining the required signatures
• Collecting the initial premium and issuing a receipt
• Delivering the policy

Question 23

What are the parts of the life insurance application?

Answer 23

Part 1 - General Information
Part 2 - Medical Information
Part 3 - Agent’s Report

Question 24

What are the three classifications of risk (for premiums)?

Answer 24

1. Preferred
2. Standard
3. Substandard

Question 25

Insurance agents, brokers or other persons cannot use an advertisement of public announcement in this state if it does any of what? (2)

Answer 25

1. Calls attention to any unauthorized insurer, or

2. Publicizes the financial condition of any insurer

Question 26

Each agent of any insurer and every insurance broker must state the full name of the insurer referred to and the name of the city in which it has its principal office. This rule applies to what? (6)

Answer 26

To all of these that refer to an insurer:

• Advertisements
• Public Announcements
• Signs
• Pamphlets
• Circulars
• Cards

Question 27

What must a policy summary include?

Answer 27

• Name of the agent

- Address of the agent

Question 28

What is an illustration?

Answer 28

A presentation or depiction that includes nonguaranteed elements of a life insurance policy over a period of years.

Question 29

An illustration used in the sale of a life insurance policy must contact what basic information? (9)

Answer 29

1. Name of insurer
2. Name and business address of producer or insurer’s authorized representative, if any
3. Name, age, and sex of proposed insured, except when a composite illustration is permitted under this regulation
4. Underwriting or rating classification upon which the illustration is based
5. Generic name of policy, the company product name (if different) and form number
6. Initial death benefit
7. Dividend option election or application of nonguaranteed elements, if applicable
8. Illustration date
9. A prominent label stating “Life Insurance Illustration”

Question 30

When using an illustration in the sale of a life insurance policy, an insurer or its producer may not do any of what? (7)

Answer 30

1. Represent the policy as anything other than a life insurance policy
2. Describe nonguaranteed elements in a manager that could be misleading
3. Use an illustration that depicts policy’s performance as being more favorable than it really is
4. Provide an incomplete illustration
5. Claim that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact,
6. Use the term “vanish” or “vanishing premium” or a similar term that implies the policy becomes paid up
7. Use an illustration that is not self-supporting.

Question 31

What is Replacement?

Answer 31

A practice of terminating an existing policy or letting it lapse, and obtaining a new one.

Question 32

When using replacement, the existing life insurance or annuity has been or will be any of what? (5)

Answer 32

• Lapsed, forfeited, surrendered, or otherwise terminated
• Reissued with any reduction in cash value
• Converted to reduce paid-up life insurance, continued as extended term insurance or otherwise reduced in value by the use of nonforfeiture benefits or other policy values
• Amended so as to affect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for which benefits would be paid, or
• Used in financing a purchase

Question 33

What are the duties of the replacing producer? (4)

Answer 33

1. Present the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer A copy must be left with the applicant
2. Obtain a list of all existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all companies being replaced.
3. Leave the applicant with the original copy of written or printed communications used for presentation to the applicant, and
4. Submit to the replacing insurance company a copy of the replacement notice with the application

Question 34

What are the duties of the replacing insurance company? (2)

Answer 34

1. Require from the producer a list of the applicant’s wife insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant, and
2. Send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date the application is received in the replacing insurance company’s home office or regional office. A policy

Question 35

Each producer who initiates the application must submit what to the insurance company with or as a part of each application?

Answer 35

1. A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction, and
2. A signed statement as to whether the producer knows replacement is or may be involved in the transaction

Question 36

To ensure suitability, producers must make a reasonable effort to obtain relevant information from the consumer and evaluate what factors? (10)

Answer 36

1. Age
2. Annual Income
3. Tax Status
4. Financial needs and timeline
5. Investment objectives
6. Liquidity needs and liquid net worth
7. Existing assets
8. Intended use of annuity
9. Financial experience, and
10. Risk tolerance

Question 37

When producers or insurers recommend an annuity replacement, they must consider whether the consumer will do what? (6)

Answer 37

1. Incur a surrender charge or be subject to a new surrender period
2. Lose existing contractual benefits
3. Have tax penalties for contract surrender
4. Have increased fees, investment advisory fees or chargers for riders, or
5. Have replaced another annuity in the preceding 36 months, or
6. Benefit from annuity contract enhancements and improvement.

Question 38

An agent is allowed to backdate a policy up to 6 months if it would do what?

Answer 38

Lower the insured’s premium

Question 39

Describe the taxability of the premium and the death benefit in a key-person life insurance policy?

Answer 39

• The business cannot take a tax deduction for the expense of the premium
• if the key employee dies, the benefits paid to the business are usually received tax-free.

Question 40

In terms of Social Security, what is the blackout period?

Answer 40

The time period after the youngest child of a family turns 16 and before the surviving spouse may start receiving retirement benefits.

Question 41

What is the Human Life Value Approach?

Answer 41

Gives the insured an estimate of what would be lost to the family in the event of premature death of the insured. It calculates an individual’s life value by looking at the insured’s wages, inflation, number of years to retirement, and the time value of money.

Question 42

What is the Needs Approach?

Answer 42

Based on the predicted needs of a family after the premature death of the insured. These include the lump sum and income needs. Some of the factors considered are income, debt, investments, and other ongoing expenses.

Question 43

What factors are considered when determining lump-sum needs? (6)

Answer 43

1. Costs Associated with Death
2. Debt Cancellation
3. Emergency Reserve Funds
4. Education Funds
5. Retirement Funds
6. Bequests

Question 44

What factors are considered when determining income needs?

Answer 44

• Replacing Insured’s Salary or Lost Services
• Social Security Income “Blackout” Period
• Liquidation vs Retention of Capital - Retention of capital approach - enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured’s principal assets (such as a home)