Chapter 2: Life Insurance Basics Flashcards
Define: Adverse Selection
Tendency of individuals with higher probability of loss to purchase insurance more often than those who represent a lower risk.
Define: Death Benefit
The amount paid upon the death of the insured in a life insurance policy.
Define: Cash Value
Equity amount accumulated in permanent life insurance.
Define: Estate
A person’s net worth.
Define: Illustrations
Presentation or depiction of nonguaranteed elements of a life insurance policy.
Define: Life Insurance
Coverage on human lives.
Define: Liquidation
Selling assets in order to raise capital.
Define: Lump-sum
Payment of the entire benefit in one sum.
Define: Minor
A person under legal age.
Define: Solvency
Ability to meet financial obligations (e.g., an insurance company maintains enough assets to pay claims.
What protects against financial loss associated with an insured’s death, and pays a death benefit to beneficiaries upon the death of the insured?
Life Insurance
Who pays premium to an insurance company?
Policyowner
Who issues policies to the policyowner and pays benefit to the beneficiary?
Insurance Company
Who receives benefit upon insured’s death?
Beneficiary
What is Survivor Protection?
When Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured’s death.
What is created with the purchase of life insurance?
Immediate Estate
What does it mean when life insurance policies provide liquidity to the policyowner?
It means the policy’s cash values can be borrowed against at any time and used for immediate needs.
What are 2 basic approaches have insurance companies developed to help producers and buyers to determine the needed amount of protection?
- Human Life Value Approach
- Needs Approach
What is the Human Life Value Approach (HLVA)?
It gives the insured an estimate of what would be lost to the family in the vent of the premature death of the insured.
How does the Human Life Value Approach calculate an individual’s life value?
It looks at the insured’s wages, inflation, the number of years until retirement, and the time value of money.
What is the Needs Approach?
It is based on the predicted needs of a family after the premature death of the insured.
What are some factors considered by the Needs Approach?
- Income
- The amount of debt (mortgage)
- Investments
- Other ongoing expenses
What are Costs Associated with Death (postmortem)?
Taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance.
What is Debt Cancellation (as an alternative to Estate Liquidation)?
Paying off debts of the insured such as home mortgage, or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan).
What are Emergency Reserve Funds?
Paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members.
What are Education Funds?
Paying for children’s education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market.
What is a Retirement Fund?
A source of retirement income
What are Bequests?
Leaving funds to the insured’s church, school, or a charity.
What is Replacing Insured’s Salary or Lost Services?
The surviving spouse who was the caregiver of the children may have to train to enter the job market.
What is Social Security Income “Blackout” Period?
It is the time during which the surviving spouse and/or children do not receive any social security survivor benefits.
What is Liquidation vs. Retention of Capital?
Under the 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 asset (such as a home.)
What is employee benefit?
The most common use of life insurance which serves as a protection for employees and their beneficiares.
What is a buy-sell agreement?
A legal contract that determines what will be done with a business in the event that an owner dies or becomes disables. AKA a business continuation agreement.
Define Cross Purchase:
Used in partnerships when each partner buys a policy on the other.
Define: Entity Purchase
Used when the partnership buys the policies on the partners
Define: Stock Purchase
Used by privately owned corporations when each stockholder buys a policy on each of the others.
Define: Stock Redemption
Used when the corporation buys one policy on each shareholder.
How can a business lessen the risk of suffering a financial loss of the premature death of a key employee?
Getting key person insurance
What is insurable interest?
To purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss. This must exist at the time of application between the policyowner and the insured.
What must exist at the time of application?
Insurable interest must exist. The policyowner must have insurable interest in the life of the insured.
Define: Underwriting
It is the risk selection and classification process. It involves a careful analysis of many different factors to determine the acceptability of applicants for insurance.
What is an agent referred to as?
Field underwriter because the agent is usually the one who has solicited the potential insured.
What are some important responsibilities an agent has?
- Helping prevent adverse selection
- The proper solicitation of applicants
- Completing the application
- Obtaining the required signatures
- Collecting the initial premium and issuing the receipt if applicable
- Delivering the policy
What is the life insurance producer?
The company’s field underwriter
What is the application?
The starting point and basic source of information used by the company in the risk selection process.
What does the general information of an application include?
It includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status and occupation.
What does the medical information of an application include?
It includes the information on the perspective insured’s medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives.
Who must sign the application?
Both the agent and the proposed insured (usually the applicant.)
What does a conditional receipt say?
It says that 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 policy issued exactly as applied for.
According to a conditional receipt how early can the applicant be covered?
They may be covered as early as the date of the application.
What is the unconditional (binding) receipt?
It is used most often with property and casualty insurance. It begins immediately for a specific length of time, until the policy is issued.
When is the notice of information practices required?
It is usually required at the time an insurer or producer first collects personal information from a source other than the applicant or public records, or at policy delivery if the information is collected from the applicant or from public records.
At policy renewal when is the notice given?
It must be provided at the policy renewal date or annually.
What is the key source underwriters use for information about the applicant?
An insurance application.
What allows the agent to communicate with the underwriter and provide information about the applicant known by the agent that may assist in the underwriting process?
The agent’s report
What is an Attending Physician Statement (APS)?
If the underwriter wants to obtain specific medical details, the underwriter will request a statement from the applicant’s physician.
What is a paramedical exam?
An exam which often includes blood work and a urine example usually conducted by a registered nurse or a paramedic.
When would a full medical exam be required for applicants?
It will occur routinely for applicants requesting higher amounts of coverage or if the application raised additional questions concerning the health of the prospective insured, or for applicants beyond a certain age.
What is the purpose of the nonprofit trade organization?
To collect, maintain, and make available to insurance companies important underwriting information on applicants for life and health insurance.
What can only be used as an aid in helping insurers know what areas of impairment they might need to investigate further?
Medical Information Bureau (MIB) report
Can Insurers refuse coverage solely on the basis of adverse information the MIB report?
They cannot refuse
If an insurer request a medical examination who is responsible for the costs of the exam?
The insurer
What must the written Disclosure Authorization notice state?
The notice must state the insurer’s practice regarding collection and use of personal information. It must be written in plain language, and must be approved by the head of the Department of Insurance.
What are the 3 classifications a prospective insured may be rated?
- Standard
- Substandard
- Preferred
What is the rating classification?
Deciding whether or not the applicant should pay a higher or lower premium.
What is higher if the risk is high?
The higher the risk, the higher the premium.
Who are preferred risks?
Those individuals who meet certain requirements and qualify for lower premiums than the standard risks. These applicants have superior physical condition, lifestyle, and habits.
Who are stand risks?
Those individuals who according to a company’s underwriting standards, are entitled to insurance protection without extra rating or special restrictions.
What risk is the representative of the majority of people at their age and with similar lifestyles?
Standard risks
Who are Substandard (High Exposure) Risks?
Those applicants who are not acceptable at standard rates because of physical condition, personal, or family history of disease, occupation, or dangerous habits.
What risks would be issued a premium rated-up resulting in a higher premium?
Substandard risks
Define: Declined risks
Applicants who are rejected
What are some reasons a risk may be declined?
- 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
- Insurance is prohibited by public policy or is illegal.
When are premiums paid?
They are paid in advance
What are 3 primary factors used in premium determination?
- Risk (mortality-rathe of death within a specific group)
- Interest
- Expense
Define: Mortality
The ration of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population.
Define: 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.
What helps insurers reduce the premium rates for policyowners?
Interest earnings
What is the insurer’s largest expense?
The commissions paid to its agents. Other ongoing expenses include payroll, rent, and taxes.
What refers to the frequency the policyowner pays the premium?
Mode
What are an insurance policy’s rates based on?
They are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest for a full year before paying any claims.
When may a premium be paid?
- Annually
- Semi-annually
- Quarterly
- Montly
How can premiums be paid?
Physically (by cash or check) or paid electronically.
Payments submitted electronically are considered what?
Electronic funds transfers (EETs) and are made through the Automated Clearing House (ACH.)
What is the best method of finalizing the insurance transaction?
Personal delivery of the insurance policy but mailing the policy directly to the policyowner is also acceptable.
What is advisable to obtain when the insurer relinquishes control of the policy by mailing it to the policyowner, the policy is considered legally delivered?
A signed delivery receipt.
What does personal delivery of a policy allow for the agent?
Allows the agent an opportunity to make sure that the insured understands all aspects of the contract.
What is the statement of good health?
This statement must be signed by the insured, and verifies that the insured has not suffered injury or illness since the application date.
What happens if there is no premium paid?
No premium, no coverage.
What is backdating (or antedating)?
The policy may be backdated for no more than 6 months before the date of the application or the medical examination, whichever is later.
What is the only allowable reason that an application may be backdated?
To effect a lower premium
What type of report provides information about the applicant’s hobbies, habits, and financial status?
Investigative Consumer Report
In calculating the amount of life insurance needed, what is the needs approach based on?
The predicted needs of a family after the premature death of the insured.
What type of insurance creates an immediate estate?
Life insurance
What does liquidity mean in a life insurance policy?
Availability of cash value
What is the purpose of the agent’s report during the application process?
The agent’s report discusses the agent’s personal observations about the proposed insured that may help in the underwriting process.
Who is the beneficiary on a key-person life insurance policy?
The employer
Who is responsible for the contents of insurance advertisements?
The insurance company
Can insurers advertise the existence of the guaranty association during solicitation and sale of insurance policies?
No, advertising of the existence of the guaranty association for the purposes of solicitation and sale of insurance policies by insurers is an illegal business practice.
When must the policy summary for a life insurance policy by delivered to the policyowner?
At the time of policy delivery
Mortality tables are used by insurance companies to predict what?
Life expectancy and the death rates for specific groups of individuals
A business is the owner and beneficiary of a key-person life policy. When the business collects the policy benefit, how is it taxed?
The benefit is received tax free
What is the term that describes the frequency and the amount of the premium payment?
Premium mode
Who must have insurable interest in the insured?
The policyowner
Who must be a member of insurance guaranty associations?
All insurers authorized to write within a state
If an insured changes his payment plan from monthly to annually, what happens to the total premium?
It will decrease
What term describes the fee a person pays an insurance companion to receive covrage?
Premium
What document describes the specific information about a policy?
Policy summary
What are illustrations in a life insurance policy?
Presentations of nonguaranteed elements of the policy
All other factors being equal, which premium payment mode will require an overall higher premium: monthly or annual?
Monthly
What is the main responsibility of a company’s underwriting unit?
Risk slection
If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter’s main concern?
The existence of insurable interest between the applicant and the insured
What is included in Part 2 of a life insurance application?
Medical information about the prospective insured
When must insurable interest exist in a life insurance policy?
At the time of application
When planning for survivor protection in life insurance, what needs to be considered?
The insured’s current assets, liabilities, and survivor’s needs
What is the purpose of key person insurance?
To minimize the risk of financial loss caused by the death of a key employee
What are the personal uses of life insurance?
Survivor protection, estate creation and conservation, cash accumulation and liquidity.
Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?
Estate conservation
How does the premium mode affect the total premium paid for insurance for the year?
Higher frequency of premium payments will result in higher overall premium
What type of life insurance offers an applicant a cash value element?
Permanent insurance (usually, whole life)
What are the 3 factors that determine the premium for a particular life insurance policy?
- Mortality
- Interest
- Expense
What is insurance underwriting?
The process of risk selection and classification
What is the purpose of insurance guaranty associations?
To protect policyowners, insureds, and beneficiaries from financial losses caused by insolvent insurers.
What are the 3 main instances when insurable interest exists in life insurance?
Insuring your own life, the life of a family member, or the life of a business partners or someone who has a financial obligation to the policyowner.
At what point does coverage begin when an agent issues a conditional receipt for a life insurance policy?
Either on the date of the application or the date of the medical exam (whichever occurs last)
Why should the producer personally deliver the policy when the first premium has already been paid?
To help the insured understand all aspects of the contract
Which is generally true regarding insureds who have been classified as preferred risks?
Their premiums are lower.
An individual applied for an insurance policy and paid the initial premium. The insurer issued a conditional receipt. Five days later the applicant had to submit to a medical exam. If the policy is issued, what would be the policy’s effective date?
The date of the medical exam
What is NOT an example of a valid insurable interest?
Debtor in the life of the creditor
The Medical Information Bureau (MIB) was created to protect
Insurance companies from adverse selection by high risk persons.
What would be the best option that would help the surviving spouse of the insured to put her child through daycare after the insured’s death?
Life insurance proceeds
What is the best reason to purchase life insurance rather than an annuity?
To create an estate.
What would least likely be considered a legitimate need that would be paid by insurance proceeds?
Vacation travel expenses
An insurer receives a report regarding a potential insured that includes the insured’s financial status, hobbies, and habits. What type of a report is that?
Inspection report
As a field underwriter, an agent is responsible for EXCEPT
Issue the policy that is solicited.
What is not true of a key person insurance
The plan is funded by permanent insurance only.
What is true concerning the creditors of the deceased insured?
The creditors have rights to the proceeds if they can show evidence of valid assignment.
What is correct concerning the taxation of premiums in a key-person life insurance policy?
Premiums are not tax deductible as a business expense.
Who makes up the Medical Information Bureau?
Insurers
What are business uses of life insurances EXCEPT
Funding against company’s general financial loss.
An applicant who receives a preferred risk classification qualifies for
Lower premiums than a person who receives a standard risk.
If a life insurance agent wants to affect a savings of premium rates by backdating an application for life insurance, what is the maximum time period that an application may be backdated?
6 months
When J applied for a life insurance policy, the agent informed him that a medical exam would be required. The exam may be completed by
A paramedic or examining physician at the insurer’s expense.
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as
Survivor Protection
The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective?
As of the application date
What is the time period called during which the surviving spouse of the insured does not receive Social Security income benefits?
Blackout Period
In classifying a risk, the Home Office underwriting department will look at all of the following EXCEPT
Applicant’s past income
Which of the following methods of calculating the amount of life insurance needed takes into account the insured’s wages, years until retirement, and inflation?
Human life value approach (HLVA)
Which of the following is NOT true regarding the needs approach method of determining the value of an individual’s life?
Need is predicted using the number of years until the insured’s retirement.
When must insurable interest exist in a life insurance policy?
At the time of application
If an insured changes the premium payment mode from monthly to annually, what happens to the total premium?
Decreases
A corporation is the owner and the beneficiary of the key person life policy. If the corporation collects the policy benefit, then
The benefit is received tax free.
Part 2 of the application for life insurance provides questions regarding all of the following EXCEPT
Other insurance coverages
In terms of Social Security, what is the name for the time period after the youngest child of a family turns 16 and surviving spouse may start receiving retirement benefits?
Blackout period
