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LOMA 301 I*STAR > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Define supplemental benefits

A

benefits or additional coverage added to the coverage specified in a basic insurance policy.

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2
Q

Name 3 common niche policies

A

multi-life polciies
Juvenile insurance policies
direct-to-consumer (D2C) policies

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3
Q

What is a multi-life policy

A

contract that is written on two or more lives.

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4
Q

What are two examples of multi-life insurance.

A
  1. joint life insurance policy (first to die) - policy proceeds when the first two or more covered persons dies.
  2. Last survivor life insurance policy (second to die) which pays policy proceeds only after all people insured by the policy have died.
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5
Q

How does an UW evaluate multi-life?

A

individually, then they base the premiums n the average age of the proposed insured and their risk assessment.
* UW for risk of benefit payout and premium selection. first to die, last to die.

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6
Q

What is a juvenile policy? How is the face amount calculated?

A

insurance policy issued on the life of a child but owned and paid by an adult.

purpose: pay final expenses in the evenmt of the insured child’s death.
- early headstart.
- FA based on parents/owners income and personal coverage.

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7
Q

Juvenile applications tend to be UW as adult applications, but do not require a physical examination. Why?

A
  1. mortality rate of children are very low

2. smaller faceamount and therefore dont justify medical exam expense.

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8
Q

What are signs of anti-selection

A
  1. parents with no coverage and a large faceamount request

2. siblings insured for different amounts.

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9
Q

Some insurance application include a waiver of premium for payor benefit. what is this

A

a supplemental life insurance benefit that provides that the insurer will wave its right to collect premiums if the payor- does or becomes totally disabled for the the insured reaches the a specified age, usually 21.
- usually requires the adult to be underwriter.

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10
Q

What are direct-to-consumer (D2C) sales?

A

non-face-to-face distributions programs directed by the insurance company.
A product is encouraged through marketing directly to consumers or the consumer can recognize their needs on their on own and contact the company directly
- limitted UW questions.
- usually pass/fail assessment.
- risk of antiselection
- higher premiums.

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11
Q

What is a guarenteed-issue policy?

A

no UW takes place, eligible application who meets the specified conditions is automatically issed a policy.
- max faceamounts
- graded benefits (limited initially and fully payable once policy has been in force for years)
-

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12
Q

Define business insurance

A

insurance that serves the needs of a business organization rather than those of a person.
- includes, life, property and liability insutrance.

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13
Q

In terms of protect its long-term interest, a business would request life insurance coverage for what purpose (3)

A
  1. ensure business conitnuation
  2. attract and retain quality employees
  3. reassure creditors that a loan will be paid
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14
Q

what is a business continuation insurance plan.

A

plan designed to ensure the continued financial viability of a business after the death or disabiulity of an owner or other person important to the business.

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15
Q

Business continuation plans take one of two forms. Buy-sell agreements and key persons. Define buy-sell.

A

a contract between two or more parties in which one party agrees to purchase the financial interest that a second partry has in the business following their death or disability and the secont party agrees to direct his estate to sell his interest in the business to the purchasing party.

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16
Q

Business continuation plans take one of two forms. Buy-sell agreements and key persons. Define key person.

A

A key person is a person whos continued participation in a business is vital to the sucess of th ebsuiness and whos death or disability would cause sig financial loss to the business.
- KP insurance, life insurance plan that a business purchases on a KP with the benefit payable to the business.

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17
Q

What is an employee benefit plan?

A

program under which an employer provides its employees with various benefits in addition to their wages.
think: KP- split dollar, group insurance,

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18
Q

What is a split-dollar life insurance plan?

A

legal arrangement between an employer and employee that describes 1) how each party to the arrangement will contribute to the premium payements and 2) the nature of each party entitlement to the policy’s cash value and payoiut.

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19
Q

Creditors typically want assurance that a loan will be repaid in the event of the purchaser’s death. Define Creditor Insurance

A

coverage designed to pay for the exconomic loss suffered by a creditor when a KP of a debtor business dies before the debt is paid. the proceeds of the death benefit are paid to the loaner, and never greater than the amount of the debt.

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20
Q

Underwriters assess the value and financial well-being of a business to ensure what?

A
  1. a legitimate need for the insurance exist
  2. the amount of coverage requested is appropriate
  3. the business will be able to pay the premiums.
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21
Q

Name some sources of financial information for business valuation

A
  1. application
  2. financial professional’s statement
  3. inspection report
  4. business income tax returns
  5. business financial statements
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22
Q

What is a business financial supplement?

A

a document that requests information about the type of business, the current financial condition of the business and the purpose for which the insurance is being requested.

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23
Q

What are some signs of financial stress in a business?

A

1, -ve cash flow
2. excessive debt,
3, unusual financing arrangements,
4. dependence on only a few projects/ clients
5. trend of declining sales
6. hx of fraud or default loans,
7. unexplained sale of substantial assets
8. bankruptcy
9. labour strife
10. recent or substantial litigation
11. large losses that insurance did not cover

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24
Q

What are the warning signs of Commercial Fraud

A
  1. , evidence that the ownership of a company is being concealed
  2. Partner or Kp has worked for a number of companies no longer in business.
  3. partner or Kp is unable to provide info oncerning his business hx
  4. overly complex organization/partner structure or condusing web of subsidaries and coglomerates
  5. trade, bank or business references that appear fraudulent or unbelievable positive 6
  6. Financial statements that have been issued at irregular intervals, list assets that cannot be confirmed by other sources, use round figures instead of specific amounts.
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25
Q

What approaches can an UW use to value a business?

A
  1. asset-based approaches - calculate book value of business
  2. income-based approach - earning capacity
  3. market approach - selling prices of comparable business.
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26
Q

What are some factors that are considered when assessing the value of a business?

A
  1. tangible assets
  2. intagible assets
  3. historic trends of profit or loss,
  4. performance of the business relative ot its industry during the valuated period
  5. current economic conditions and future outlook of the business sector
  6. ability of qualified employees and customers
  7. current price and recent sales of the company’s stock and if the divident-paying capacity
  8. financial obligations to which the business is or will be commited
  9. evidence of plans to expand, restructure or sell the business.
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27
Q

Calculate a business’ financial condition by looking at solvency, liquidity and profitability. > simplified by using ratios. what is this?

A

comparison of two numeric values that results in a measurement expressed as a percentage or fraction.

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28
Q

What is a financial ratio analysis?

A

calculating the relationship between various pair of financial statement values for the purpose of assessing a company;s financial condition.

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29
Q

What is solvency?

A

a company’s ability to meet its financial obligations on time.

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30
Q

what is debt-to-equity ratio

A

a measure of solvency

calculated by dividing company’s debt by its owners’ equity.

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31
Q

What is liquidity?

A

company’s ability to easily convert its assets to cash for an approximation of their true value.

32
Q

Solvency is to a company its ability to stay in business over time, as liquidity is to a company ___

A

its ability to meet short-term needs for cash

33
Q

How is a company’s liquidity measured?

A

current ratio- which is calculated by dividing current assets by current liabilities.

34
Q

define the term current assets

A

assets that can be readily converted to cash within one year.

35
Q

define current liabilties

A

debts expected to be paid within the following 12 months.

36
Q

What is quick ratio?

A

comapnies ability to liquidate debt immediately.

= liquid assets/ current libailities

37
Q

Define profitability

A

the overall degree of success oa business has in generating positive returns for its owners, including the company;s ability to generate profits and increase the value of the company.

38
Q

One reutrn-on-equity (ROE) ratio

A

measures the return to a company;s owners by relating profits to owner’s equity.
= net income/ owner’s equity.

39
Q

What must an UW do in order to u/w Buy-Sell agreements?

A
  1. evaluate the applicant’s medical, personal, financial factors
  2. estimate the business value and the prosposed insured’s financial interest in the business.
  3. confirm that the insurance is being purchase to continue the buisness
  4. verify the ability of the prospective purchaser to run the business.
40
Q

Life insurance can be sued to fund buy-sell agreemtns for who?

A
  1. sole proprietorships,
  2. partnerships
  3. small corporations
41
Q

What is solve proprietorship?

A

business owned and operated by one person.

42
Q

define partnership

A

type of company that is owned and operated by two or more people who jointly earn all company profits and are responsible for all company debts.

43
Q

What is a cross-purchase agreement?

A

type of buy-sell in which each partner agrees to purchase a share of a decreased partner’s interest in the partnersihp by funding the agreement with an insurance policy on the life of each of the other parners.

44
Q

What is an entity agreement?

A

type of buy-sell agreement under which the partnership-rather than the individual partners- agree to purchase the share of any partner who dies and to distribute a proportionate share of that ownership interest to each of the surviving partners.

45
Q

define “corporation”

A

legal entity, separate from its owners, that is created by the authority of a government and that continues beyond the death of any or all of its owners.
st

46
Q

what do you call the entity method of funding a buy-sell?

A

stock redemption agreement. The insurance coverage provides the remaining stockholders of a company with money to buy back the stock of a deceased stockholder rather than redistributing the shares to the surviving stockholders.

47
Q

When would an UW investigate a keyperson and its insurable interrest into a company. ie what are some “red flags”

A
  1. proposed insured is nearing retirement age, and has not been insured previously/
  2. company applies for large amount of coverage on an employee who has only moderate importance ot the company.
  3. business appears to have other equally valuable employees who are not being proposed for key-person coverage.
48
Q

How does an UW assess a split-dollar life insurance plan?

A

same as individual - review medical, personal and financial factors in assessing the risk that a proposed insured represents.
Also analyze employer’s financial condition,

49
Q

What are some typical questions an underwriter would ask when underwriting for creditor insurance?

A
  1. does the borrower have any means other than life insurance to repay the debt?
  2. when will the loan be repaird.
  3. How long has the loan been in existance ?
  4. is there any overlap between credirot insurance and key-person insurance?
50
Q

Why do clients replace insurance policies? (typical reasoning)

A
  1. the same face amount for a lower premium
  2. higher face amount for the same premium
  3. obtain new features, suhc as interest rates/cash values
51
Q

Replacements can be internal or external replacements. Define the difference

A

Internal: new policy is purchased from the same insurer
external: new policy is purchased from an insurer other than the one who issued the original policy.

52
Q

What are examples of innappropriate sales practices such as twisting or churning?

A
  1. twisting a prohibited practice that occurs when a financial professional misrepresents the features of a policy to indue a client to replace an existing policy,
  2. Churning: unfair sales practice that occurs when a financial professional induces a client to replace one policy after nother, multiple times, so they can ear first-year commissions
53
Q

To preventunethical professional policy replacements, most states have adopted some version of the NAICs “replacement of Life insurance and annuities model regulation” What is this>

A

This was a Model designed to ensure that insurers and financial profesisionals follow certain procedures and provide consumers with fair and accurate information about policies and procedures and provide cx with fair and accurate information about policies so they can make fair judgements.

54
Q

What are the duties of the financial professional once the policy is being replaced

A
  1. provide applicant with a notice to applicants regarding replacements
  2. obtain life of current inforce policies and send notice to the companies of the replacement
  3. submit the replacing insurer the completed and signed notice regaring the replacement
  4. leave the applicant copies of all sales materials.
55
Q

What are the two options for a policyowner who wishes to replace a permanent llife app?

A
  1. surrender the existing policy and receive the policy cash surrrender values
  2. initiate a section 1035 exchange as allowed under section 1035a of the US internal revenue code Avoids taxable gain on the transactions.
56
Q

What is cost basis?

A

represents the amountinvested in the policy and is euqal to the sum of all premiums paid less withdrawals, dividens, and o/w policy loans

57
Q

What is the Section 1035 exchange?

A

a tax-free replacement of an insurance policy for another policy insuring the same person and meeting conditions specified in the U.S. Tax code .

58
Q

What are the most populate supplemental benenfits?

A 
disability benenfts
family benefits
cuaranteed insurability benefits
accidental death benefits
accelerated death benefits.
59
Q

what are the 3 main types of disability benefits?

A
  1. disability income benefit
  2. waiver of premium for disability benefit
  3. waiver of premium for payor benefit
60
Q

What is the disability income benefit?

A

benefit that provides a monthly incom ebenfit if the insured becomes totally disabiled while the policy is in force.

61
Q

What are the different definitions of “disability”

A

total disability - unable to perform the essential duties of his own occupatoin or any occupation for whjich they are edicated/experienced.

62
Q

What is the waiver of premium for disability benefit?

A

benefit under which the insurer promises to give up the right to collect premiums that become due while the insured is disabled according to the policy or rider’s definition of a disability.

63
Q

What is the waiver of premium for payor benefit?

A

waives the insurer’s right to collect a policy’s renewal premiums if the payor- dies or becomes totoal disabied.
- found in third party

64
Q

What is a family benefit?

A

supplemental term life insurance benefit that can be added to an individual cash value life insurance policy to insure the lives of the insurefd’s spouse and children.

65
Q

What is a guaranteed insurability (GI) benefit.

A

Supplemental life insurance benefit thatgives the poilcy owners the right to purchase additional insurance of the same time - and on specified option dates during the life of the policy without supplying evidence.

66
Q

What is an important underwriting factor wiht Gi benefit?

A

age. may age for issuing is usually 40-45, and most cannot continue to exercise the option past this age.

67
Q

What is an Accidental death benefit (ABD)?

A

benefit requires the insurer to pay a specified amount of moany in addition ot the policy’s basic death benefit if an insured dies as a results of an accident.

  • amount depends on base plan amount. if equal amounts its called double indemity benefit.
  • tend to expire around age 65-70
68
Q

What is an accelerated death benefit?

A

a supplemental life insuance policy benefit that provides a policyowner may elect to receive all or part of the policy’s death benefit before the insured death if certain conditions are met.
- the death benefit payout is reduced to the early amount paid out.

69
Q

What are the 4 most common types of accelerated death benefits?

A
  1. terminal illness benefit
  2. critical illness benefit
  3. long-term care insurance benefit
  4. chronic illness beneift
70
Q

What is a terminal illness benefit/.

A

the insurer pays a portion of the policy’s death benefit to a policy-owner if the insured suffers from a terminal illness and has a physician-certified life expectancy of less than 12-24 months.
- usually amount is a percentage of the death benefit

71
Q

What is a cirtical illness benefit?

A

the insurer agrees to pay a portion of the policy;s death benefit to a policyowner if the insured suffers from one of a number of specified diseases.

72
Q

What diseases/illness are usually included on a CI benefit?

A
  1. life threatening cancer
  2. AIDS
  3. end-stage renal (kidney) failure
  4. MI
  5. Stroke
  6. CABG
  7. Organ transplant
73
Q

What is the long-term care (LTC) insurance benefit?

A

the insurer agrees to pay monthly benefits to a life insurance policyowner - if the insured requires constant care in his home or facilityt for a specified medical condition.

  • amount is usually a percentage of the FA.
  • 90 day wiating period.
  • remaining is paid out when insured’ dies.
74
Q

What is the chornic illness benefit?

A

insurer pays a portion of the policy’s death benefit to the poliycowner if the insured permanently cannot perform at least 2/6 ADLs.

75
Q

What are the 6 ADLs?

A 
Bathing
dressing
transferring
toileting
continence
eating
76
Q

Whats the difference between Chornic illness benefit and Long-term care benefit?

A
  1. chronic illness, applies only if the insured’s inability to perform a specified number of ADLs is permanent.
  2. LTC insurance, benefit is payable for temporary or permanent conditions requiring constant care.

LOMA 301 I*STAR (12 decks)

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