Chapter 5 Flashcards
why do life insurance u/w analyze an applicants financial condition?
to determine if the insured
- needs the coverage
- among applied for is reasonable for the reason
- premiums are affordable.
The underwriters assessment of the proposed risk based on financial factors is known as what?
financial underwriting.
What is overinsurance
?
the amount of insurance applied for, when combined with the inforce coverage, is excessive in relation to the need for which coverage is being purchased.
Financial u/w focuses on 4 potential sources of financial risk. What are they?
- lapse
- anti-selection
- speculation
- money laundering
Define the term lapse
policy terminated as a result of nonpayment of premiums
the primary goal of most insurers is to maintain an excellent persistency rate. What is this?
the percentage of a specified group of contract that remain in force during a specified period, such as a year.
How do uw assess for antiselection
making sure the amount is justified for the clients needs
what is “speculation”
the unethical purchase of insurance to make a profit on the proceeds rather than to protect agasingt the risk of financial loss.
how do you avoid speculation?
theres an insurable interrest between the owner and the life of the proposed insuyred.
What are the two types of life insurance arrangements that involve third parties that may involve speculation?
- life settlements
2. Stranger-originated life insurance
What is a life settlement?
the sale of a life insurance policy to a third party for more than its cash surrender benefit and less than its face amount.
usually a large faceamount policy is assigned to a company in return for cash payement.
What is stranger-oriented life insurance policy?
STOLI
A life insurance for which an investor acting a sa htird partyu, instigates the purchase of a policy on the life of a person in whom the invester has no insurance interest.
The policyowner transfers ownership to the investor.
What are some warning signs of a STOLI policy?
- > age 65
- high faceamount
- no previous coverage
- inspection report shows previous coverages not disclosed on app
- listed beneficiary seems unusual,
- premiums are to be paid by someone other than the policyowner
- premium are paid by someone else
- premium payments are financed bya a loan and the policy is collateral
Insurers are required to comply with federal laws designed to detect and prevent money laundering. What is this?
the practice of engaging in financial transactions to hid the identity, source, and/or destination of money associated with criminal activity.
What is the USA patriot act of 2001>?
federal law designed to strengthen the federal goverments ability to investigate, prosecute and sezie the assets of terrorist.
What is the AML?
antimoney laundering requirements are in place for all fianncial institutions.
Everyone is required to take training and monitor transactions
What is the Financial Crimes enforcement Network? (FinCEN)
a bureau of the U.S. treasury department that requires fianncial institutions that sell covered products to have AML programs in place.
What are AML program requiremnts?
- policies, prodecures and internal controls are in place to monitor for money laundering
- designate a compliance officer responsible for the implementation and maintenance of the AML program
- provide ongoing training for AML compliance
- Use independent testing to confirm that the company;s AML program complies with federal law.
What is a Suspicious Activity Report (SAR)?
a form that a financial institution must prepare and file with FinCEN whenever the institution detects evidence of a questionable financial transaction.
Who is the Office of Foreign Assets Control (OFAC)
an office of the U.S. treasury department that maintains a list of countries that participate in or sponser terrorism and other illegal acts.
What are some money laundering red flags?
- applicant applies for product inconsistent with their needs
- desire to use an unusual method of paying premiums (cash)
- shows little concern for the financial performance of a product but a large concern for termination features
- reluctant to provide identifying information
What are some sources for the client’s financial information?
- application
- the financial professional
- the inspection report
What is included in . a person’s financial status?
- current income
2. Net worth
define Net worth
an amount representing the difference between all a person’s assets and liabilities.
What is a W-2 form?
an IRS tax form used by employers in the UW to report wages, taxes - annual.
What information is included on a person’s income tax return?
source of income, alimony paid or received business income and expenses unemployment compensation Social security benefits medical or dental expenses Charitable giving.
How can an applicant authorize the insurer to retrieve past tax returns directly?
complete a 4506-T form.
What would an insurance company want to know if an applicant is applying for estate tax liability?
- total value of assets
- composition of the estate
- estimated value and the dates of all gifts made from the estate.
- estimated amount of estate tax payable
- name of the person who will be responisble for paying the estate tax at the time of the insured’s death
What must an UW consider when assessing financial statements?
- hx trend of profit/loss in the business, typically for a period of 3+ years. prior to date of application
- financial obligations to which the business is or will be committed
- Evidence of plans to expand, restructure or sell the business
NAme examples of financial statements used by Underwriters.
- statement of owner’s equity-
- balance sheet
- income statement
- cash flow statement
- Annual report
what is a statement of owner’s equity?
fianncial statement that shows the changes in owner’s equity in a business during a specified period.
What is equity
the current value of the funds invested ina business by its owners.
What is a blance sheet?
financial statement that shows a business financial position at a specific point
includes information about the 1) assets (iteams of valye the business owns. 2) liabilities, which as thedebts and future obligations, 3) business equity.
What is an income statement
profit and loss statement, is a financial document that reports a business’s revenues and expenses during a specified accounting period. Explains if business has +ve or -ve net income.
what is a cash flow statement
financial statement that provides infomration about a company;s cash receipts, cash bursements, and the net change in cash during a specified accounting period.
What is an annual report?
a financial document that a corporation issues to its stockholders and potential investors to report on the company’s business activities and financial performance during the preceding year.
What are some examples of needs for life insurance?
- family income protection
- estate settlement.
- charitable contributions
What is calculated in someones estate?
total of networth, owned assets and liabilities
cash/stock/investments/hoiuses/land/auto/jewlery/art
cc debt, mortgage, bills, business debt, loads.
What is NOT usually calcualted in someones total inforce coverage?
- business life insurance covered by employer
- death benefits of pension and social security
- group life insurance
When evaluating fianncial status, UW needs to review current income, potential income, networth and the impact of any bankruptcies. explain each.
- annual income received by an individual during a given year.
- potential income: think small starting business
- Net worth - (assets - liabilities)
- bankruptcy- determine if premiums are attainable
What are examples of unearned income and earned income
- earned: salary, bonusus, commissions, and stock options
- unerned: passive income, income that may continue after the insured dies. ie: interrest income, dividends, capital gains on investments.
UW may use a factor table to determine the need’s for income replacmenet. what is this tool?
a chart that shows the max amount of insurance by multple so fa persons salary- that insueres typically approves in each several age ranges.
In order to determine an applicant’s ability to pay premiums, some insurers use a “percentage-of-income rule”. What is this?
calculation of the amount of money the porpsed insured can afford to spend annually as aspecified percentage of the person;s curren gross earned and unearned income.
usually 6-20%
How do you calculate future estate needs?
Take the current estate multiple by 6% for estimate estate rate, then multiple by estimated remaining year of estate growth.
You can then apply the anticipated estate tax rate to detmine the tax liability,.
What is the numerical rating system?
a risk clasification method where the UW calculated a numerical value for the degree of risk a proposed insured presents oF the insurer.
True or False
medical and personal and finanical risk are all used in the numerical rating system?
No, Financial risk factors are not used but may lean an UW to decrease the Faceamount or decline.
ie: think Money Laundering risk
What numbers are used in a numerical rating system?
- debits +25 for medical unfavourable effects
- credits +25 for medical favourable factors.
based on total 100 score, if less than 100 can look at preferred, if 100 its std, if more its substandard or possible dec,
The information an insurer uses for numerical rating is contained in a document known as underwriting mannual. What is this?
guide for assigning numerical values to risk, describing impairments, and outlining underwritting actions.
also includes:
- index listing synonyms and derivative terms
- list of basic lab test data
- glossary of sxs, medical terms, and medical abbreviations
UW use table taing method when individuals classified as substandard risks possess extra mortality risks. What is the table rating method?
adjust individual life insurance premium rates to compensate for extra mortality by dividing substandard risks into broad groups - or tables- according to the values assigned by the numerical rating system.
*SLF method of UW
Additional tables (debits) added per associated risk, final mortality rating is a mutiple of the premium rate
ie: 200%, is 2 times the premium rates.
What is the flat extra premium method?
charging substandard risk in which the addition to the premium is a specific dollar amount.
- usually used when mortality risk is considered constant or decreasing with the insured’s age. (cancer/occupation/avocation)
There are temporary and permanent flat extra premiums. Can you differ the two?
- temporary: amount is added to the premium for a risk factor for which the extra mortality risk is expected to decrease and eventually disappear over a limited time period. (cancer. heart condition)
- permanent: added where risk is expected to remain constant throughout the life of the policy. (driving, occupation, avocation)
