Chapter 2: Life Insurance Basics Flashcards
1
Q
What can death benefits be used for with a life insurance policy?
A
can help cover the ost of final expenses and funeral costs, pay off outstanding debts such as a mortgage, loss of income to a survivor, and even future education expenses for dependents.
2
Q
Define policyowner
A
the purchaser of a life insurance policy (applicant or person applying for insurance coverage, and is responsible for completing the application)
3
Q
What does the policyowner control?
A
The policy, and they maintain the right to make all decisions regarding coverages
4
Q
Who is the insured in a life insurance policy?
A
the insured is the individual whose life is covered under the policy
5
Q
When are death benefit proceeds payable?
A
upon death of the insured
6
Q
Can a policyowner be the insured?
A
yes
7
Q
Define third-party ownership
A
If the policy is owned by a person other than the insured (for example, policies may be owned by a spouse, parent, or even an employer of the insured)
8
Q
What needs to exist in the agreement for a life insurance contract to be valid?
A
an insurable interest between the owner (applicant) and insured before the policy will be issued
9
Q
What constitutes that insurable interest exists in a life insurance policy?
A
Insurable interest exists if the insured’s death would result in a financial or economic loss by the owner
10
Q
Give examples of insurable interest
A
a spouse, other immediate family members, business partners, or creditors of the insured. A person automatically has an unlimited insurable interest in his or her own self
11
Q
Define beneficiary
A
Someone who will receive the policy proceeds, or death benefit, under the contract if the insured dies while the policy is in force
12
Q
Can the insured be the beneficiary of a life insurance policy?
A
no
13
Q
What must a producer need to do before taking an application for life insurance?
A
- assess the potential client’s financial information
- assess the client’s goals
- assess the client’s objectives to calculate the appropriate amount of insurance needed
- recommend which type of policy should be applied for
14
Q
J is named in a policy as the individual who is entitled to receive the policy proceeds upon the death of T. Which of the following statements best applies to this scenario?
a. J is named as the owner of T’s policy
b. T is the insured in the policy and J is the named beneficiary
c. T is the owner and beneficiary of the policy
d. J is the insured and beneficiary of the policy
A
B. T is the insured in the policy and J is the named beneficiary
Based on the information provided, the only assumption that can be made is that T is the insured and J is the named beneficiary. The owner of the policy is not specified and could either be J or T.
15
Q
A life insurance policy is being applied for on Z’s life. In order for the contract to be valid, all of the following have an insurable interest and could be the owner of the policy, except:
a. Z
b. Z’s spouse
c. Z’s neighbor
d. Z’s business partner
A
C. Z’s neighbor
Insurable interest is defined as having a relationship that would result in a financial or economic loss if the insured dies. A neighbor is not an example of a party that meets this definition
16
Q
Who are the producers?
A
The initial point of contact for most insurance transactions.
17
Q
What can transacting insurance involve?
A
It can involve any of four different phases in the sale of products: solicitation, negotiation, execution of a contract, and handling matters subsequent to a contract
18
Q
What must be provided to the applicant at the time of application or no later than policy delivery?
A
- buyer’s guide
- policy summary
19
Q
What is a buyer’s guide?
A
A generic brochure developed by the NAIC to assist prospective buyers of life insurance. Description of all basic types of life insurance as well as comparative costs of each are included
20
Q
What is a policy summary?
A
A computer-generated illustration detailing the premiums (current and guaranteed) to be paid, current and guaranteed interest rates, guaranteed and non-guaranteed values, and projected dividends, and the producer/insurer’s name and address
21
Q
Under the Fair Credit Reporting Act (FCRA) what must the insurance do?
A
- the applicant must be notified and give written consent for a third party
- This information is disclosed as part of the application
- The signature of the applicant give the insurance company the right to obtain the various investigative, medical, and financial reports needed to complete the underwriting process
22
Q
What does HIPPA require?
A
all individually identifiable health information obtained on an applicant during the underwriting process must remain confidential and the applicant’s privacy must be protected
23
Q
Before an insurer can share any medical information what must happen?
A
- the applicant must be notified of the treatment of the information
- the applicant must be notified of the rights to maintain privacy
- the applicant must be notified of an opportunity to refuse the dissemination of the information
24
Q
What must insurers avoid when working risks of HIV or AIDS?
A
They must avoid making or permitting unfair discrimination between individuals of the same class int he underwriting for the risks of HIV or AIDS.
25
Before testing the applicant for HIV what must the insurer do?
maintain strict confidentiality of personal information of testing and have written consent of the applicant before testing for HIV
26
What does the HIV Consent Form contain?
Explains the purpose of the test, confidentiality, and that test results will only be disclosed to a physician as directed by the applicant
27
What must applications be informed about regarding HIV test results come back positive?
The testing for HIV may determine insurability and insurance companies may refuse to issue a policy to individuals based on positive HIV restuls
28
What is replacement?
any transaction in which a new life policy or annuity is to be purchased, and the producer knows or should know that the existing contract will be:
1. lapsed, forfeited, surrendered, or terminated
2. Reduced in value
3. amended with a reduction in benefit or term
4. Reissued with a reduced cash value
5. subjected to borrowing
29
Define conservation
the act of saving or keeping the existing policy and preventing it from being replaced
30
Define Existing Insurer
the insurer that issued the current policy to be replaced
31
Define Replacing Insurer
the insurer responsible for issuing the new policy that will replace the existing polcy
32
What are the responsibilities of the Producer?
1. completing a Notice Regarding Raplacement which must be signed by the applicant and producer
2. Obtaining information regarding any existing policies, including the names of the existing insurers and policy numbers (this must be provided to the replacing insurer)
3. Providing copies of the Notice Regarding Replacement and any sales proposals to the applicant and replacing insurer
33
What are the responsibilities of the replacing insurer?
1. notifying the existing insurer of the planned replacement upon receiving proper notification with the new application
2. maintaining copies of the information regarding replacement for a specified period of time
34
HIPAA's privacy rules are implemented to:
a. allow an insurer to obtain investigative, medical, and financial reports to complete the underwriting process
b. protect the applicant from providing evidence of insurability
c. require all insurers to perform testing for HIV
d. protect the privacy of all individually identifiable health information
d. protect the privacy of all individually identifiable health information
35
Information from a third party collected by the insurance company in the application for insurance and during underwriting of the policy may be subject to the jurisdiction of which of the following?
a. Unfair Claims Practices Act
b. USA PATRIOT Act
c. HIPAA
d. Fair Credit Reporting Act
d. Fair Credit Reporting Act
The Fair Credit Reporting Act has jurisdiction over information collected through a third-party for underwriting purposes
36
Define application
a written formal request, by an applicant, to an insurer requesting the insurer issues a policy based upon the information contained in the application
Short answer: the consumer making an offer to the insurer
37
Define field underwriting
gathering information beyond the stated questions
38
What is the primary source of information?
the application
39
What signatures are required on the application?
the producer's and the applicant/insured's signatures
40
Who needs to initiate changes in the application after the application is complete?
the applicant
41
Can the producer make changes without the knowledge of the applicant?
No
42
Who's responsibility is it to make sure the application is filled out completely, correctly, and to the best of the applicant's knowledge?
the producer
43
What does the underwriter do?
they will usually reject an incomplete application and return it to the producer for completion by the applicant
44
What is assumed if there is missing information on an application and a policy is still issued?
It is assumed the missing information is not material to the issuance
45
What does the insurer waive the right to if a policy is issued when there is missing information on the application?
The insurer waives the right to challenge a claim based on the incomplete application
46
Will the policy go into effect if the first premium has NOT been paid?
No. In order for the policy to go into effect, the first premium has to be paid.
47
What happens if the premium is paid with a check that is not signed (or does not clear)?
Coverage is not effective and the payment is considered invalid
48
What is a conditional receipt?
The receipt that the producer gives the applicant, if the initial premium is paid at the time of application.
49
What is a conditional receipt?
The receipt that the producer gives the applicant if the initial premium is paid at the time of application.
50
What does a conditional receipt provide?
It provides that coverage will become effective as of either the date of application, or the date of completion of any required medical exam
51
What does the insurer have to prove if a loss occurs prior to the policy's physical issuance?
The insurer would have to prove they would not have issued the policy as requested to avoid paying a claim
52
Give an example of how a conditional receipt works.
A producer provided a conditional receipt to an applicant on May 5th at the time of an application based on a standard risk. The insurer required a routine medical exam, which was completed on May 15th. The policy was issued based on a standard risk on May 20th and the producer hand-delivered the policy on May 22nd. The effective date of coverage in this case was May 15th.
53
What is a Binding (unconditional) receipt?
A binding receipt provides immediate coverage if the premium is paid at the time of application. This type of receipt is usually not allowable in connection to the sale of life insurance
54
What is a trial application?
an application submitted without a premium.
55
Why would an applicant use a trial application?
an insurance applicant may be concerned that he/she will not qualify for a policy and does not wish to pay the premium up front
56
When would an applicant get coverage when they have a trial application?
If the applicant is considered an acceptable risk, coverage would not take effect until the policy is ultimately issued by the insurer, delivered by the agent, and the premium is paid
57
What does C.O.D. stand for?
Collect on Delivery
58
Which of the following is NOT required to sign a completed application?
a. beneficiary
b. producer
c. Applicant
d. Insured or guardian
a. beneficiary
59
An application for insurance is completed and submitted to an insurance company. In order for coverage to be effective immediately, all of the following conditions must be met, except:
a. A medical exam is not required
b. a conditional receipt is issued
c. the policy is issued at a higher risk than the standard risk applied for
d. the initial premium is submitted with the application
c. The policy is issued at a higher risk than the standard risk applied for
60
Define underwriting
the process of selection, classification, and rating. In other words, it is the process of determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged.
61
What is the purpose of underwriting?
to detect adverse selection, unhealthy or high risk applicants, and to insure only those risks that meet certain criteria
62
What are the sources of underwriting?
the application, medical exams, an Attending Physician's Statement, the Medical Information Bureau (MIB), an inspection report, and the agent's report
63
What is the primary source of underwriting?
the application
64
What does the first part of the application include?
Contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance
65
What does the second part of the application include?
Contains questions pertaining to:
1. medical background
2. past and present health
3. medical visits, medication
4. height/weight
5. hospitalizations
6. surgeries in recent years
7. medical status of immediate family members, including their ages and causes of death
66
Who can conduct a medical exam for a life insurance policy?
A licensed medical professional such as a registered nurse or paramedic
67
What do medical exams for a life insurance policy include?
checking vital statistics (height, weight, blood pressure) and lab tests including the collection of blood and urine samples or a cheek swab to detect nicotine. More extensive tests may be requested, such as a stress test or even an electrocardiogram
68
Who pays for the medical exams?
the insurer
69
Attending Physician Statement
Used in cases in which the individual application and/or medical reports reveal conditions for which further information is necessary to determine insurability
70
What is the Medical Information Bureau Report primarily used for?
To collect adverse medical information about an applicant's health and act as an information exchage
71
What do the Medical Information Bureau Report services alert the underwriters to?
fraud, errors, omissions or misrepresentations make on insurance application, and the MIB may help lower the cost of life and health insurance for consumer
72
Give an example of how the MIB report works
The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will then require additional information in the form of an Attending Physician Statement and/or possibly a medical examination. The underwriter may rate or deny the application based on this additional information. The MIB report reveals only past medical concerns and cannot be used as the only source for rating or denying an application.
73
What is an inspection report?
a general report of the applicant's fiances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a consumer investigative report
74
How is an inspection report conducted?
Information is usually collected through a telephone interview of the applicant and may be extended to interview others who may serve as character references. Financial information may be requested and can be completed by a third-party provider if requesting a credit report
75
What is an agent's report?
a personal statement submitted by the producer, to the insurer, regarding the applicant's financial condition, any personal knowledge of the applicant, etc.
One purpose: to provide information in order for the insurer to determine insurability
76
What will be required if the applicant is engaged in high-risk hobbies (skydiving, scuba diving, motorcycle racing)?
A Special hazardous Activity Questionnaire
77
What the individual underwriting factors?
1. age
2. gender
3. tobacco use
4. occupation
5. hobbies (avocation)
6. physical condition (height and weight)
7. health history
78
How are applicants rated?
Upon receipt of the information, such as the application, medical exam, blood and urine test results, etc., underwriter analyze the information and determine if the applicant is an acceptable risk
79
What are the 4 risk classifications?
1. standard risks
2. preferred risks
3. Substandard Risks (Higher Risk Exposure)
4. Declined
80
Who fit in the standard risk classification?
Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in the category have an average life expectancy
81
Who fits into the Preferred risks classification?
Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height, and weight. Individuals in this category have a longer-than-average life expectancy
82
Who fits into the substandard risks (higher risk exposure) classification?
Individuals who are not acceptable at standard rates because of poor health, bad habits, or occupational hazards. Individuals in this category are issues "rated policies", known as surcharges
83
Who fits into the Declined classification?
This is not a rating classification but a decision that the risk is one for which the insurer refuses to issue insurance. In this case, the applicant is deemed uninsurable. Being declined by one insurance company does not mean a person will be declined by all other insurance companies
84
Which of the following is not true about life insurance applications?
a. primary source of underwriting
b. confidential communication between the agent and the insurer
c. may contain all the necessary information to determine insurability
d. contains two parts: general information and health history
b. confidential communication between the agent and the insurer
A copy of the application will be included as part o the policy, and is therefore not confidential
85
All of the following statements regarding sources of underwriting are correct, except:
a. A consumer investigative report may include a credit report
b. the applicant may be denied coverage based solely on the MIB report
c. a medical exam may be requested based on the amount of coverage being applied for
d. the agent's report is confidential between the producer and the insurer
b. the applicant may be denied coverage based solely on the MIB report
the applicant may not be denied coverage based solely on the MIB report. This report is used as an alert for the insurer to gather additional information and to help detect fraud
86
What 3 factors are used in premium determination for life insurance?
1. mortality
2. interest
3. expenses
87
How are mortality tables used?
it shows the life expectancy and the death rate per 1,000 people living in the United States. This table allows the insurer to rate policies using the law of large numbers so accurate mortality predictions are extremely important
88
Who has a higher mortality rate: males or females?
Males: they will usually pay a higher rate than females
89
How are interest earnings used in calculating premium?
Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. Interest earnings reduce the amount of premium needed to fund the future liability of the policy death benefit
90
How are expenses used in calculating premiums?
The amount charged to cover each policy's share of expenses of operation (salaries, commission, premium taxes, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency
91
How often can premium payments be made?
1. monthly
2. quarterly
3. semiannually
4. annually
92
What is a payment mode?
the frequency of payment for a premium
93
What happens when someone has a payment mode other than an annual payment mode?
It may result in higher premiums to offset the lost interest earnings and increased administration costs
94
Which of these modes would result in the insured paying the least amount per year for life insurance?
a. annual
b. semi-annual payroll deduction
c. monthly automatic bank draft
d. quarterly
annual
95
Who's responsibility is it to deliver the policy and collect premiums and also to explain the policy?
the producer
96
When does constructive or legal delivery occur?
only if the premium was paid at the time of the 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 producer, it is considered constructively or legally delivered by the insurer.
97
When does coverage apply for a life insurance policy (when it is not approved as applied for and is issued as substandard)?
When the producer has delivered the policy, explained the policy and the applicant accepts the policy.
98
What must the producer obtain from the applicant/insured at the time of the policy delivery?
A Statement of Good Health that verifies that the insured has remained in the same health status continuously since the time of the application
99
Policy deliver will be accomplished by what 2 things?
1. personal delivery with signed receipt of delivery
2. Registered or certified main with a signed receipt of delivery
100
What basic information does the face page of the policy contain?
1. name of the insurance company
2. name of the insured and policy owner
3. face amount of the policy
4. basic description of the type of policy purchased
5. policy number and anniversary date
6. The insurance company's promise to pay the death benefit (insuring Clause)
7. signatures of the Executive Officers which binds the company to the terms of the contract
101
A producer provided a conditional receipt to an applicant on May 5 at the time of an application based on a standard risk. The insurer required a routine medical exam, which was completed on May 15. The policy was issued based on a substandard risk on May 20 and the producer delivered the policy on May 22. The effective date of coverage is:
a. May 5
b. May 15
c. May 20
d. May 22
D. May 22
Since the policy was not issued as applied for, coverage is not effective until the producer delivers the policy on May 22 and explains the changes in coverage or increased premium due to a substandard risk. The applicant must accept the counteroffer
102
What are the 5 personal insurance needs?
1. survivor protection
2. estate creation
3. estate conservation
4. Cash accumulation
5. liqidity
103
What are the 5 personal insurance needs?
1. survivor protection
2. estate creation
3. estate conservation
4. Cash accumulation
5. liquidity
104
What is survivor protection?
providing funds for surviving spouses and dependents
105
What is estate creation?
life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors
106
What is estate conservation?
Provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner (the insured) preserving the insured's estate
107
What is cash accumulation?
An amount of cash accessible to the policy owner from within permanent life insurance policies
108
What is liquidity?
Immediate funds available upon death to pay creditors, taxes and final expenses as well as cash values available for policy loans, withdrawals, and full surrenders
