Key Terms Flashcards
Legislative Law - CH1
enacted by legally constituted governmental bodies w/ power and authority to enact laws
legislatures enact statutes while agencies issue regulations
Life Insurance Law - CH1
form of legislative law
**LI law derived from general contract law
LI regulated by states; vast differences in laws/interpretation of law
Case Law - CH1
also called common law
settles disputes b/t parties
**flexible in form and application
**American case law derived from the common law of England
Federal Constitution - CH1
gives fed gov power to act; no powers can be exercised by fed gov unless exist in fed constitution
**states retain all rights not granted to the federal government
**Supremacy Clause - as the supreme law of the land, the federal law = higher authority than any state constitution or law; states are supreme where the fed constitution is silent
Federal Legislation - CH1
**Treaties - agreements w/ foreign governments; treaties take precedence over state constitutions or statutes
**Federal Statutes (laws) - fed law holds a higher authority than any state constitution or law (supremacy clause); states regulate where the fed constitution is silent
**Federal Executive Orders & Administrative Regulations - orders of the president are legislative in form in that they prescribe general rules of conduct; Fed agencies (IRS) create legislative laws (regulations) to carry out the administration of laws
State Legislation - CH1
**State Constitutions - states are sovereign powers over residents for powers not delegated to the federal gov or not prohibited or limited by the state constitution
**State Statutes - have all powers not denied by fed or state constitution, fed statutes, or treaties; control the life insurance industry
**State Administrative Regulations - state executive powers to create administrative case
Judicial Decisions - CH1
**Common Law (England) - *basis of American legislative and case law; courts seek legislative answers or prior cases (precedents); if none exists they make an original ruling (case law); rooted in the law of England
**Civil Law (Rome) (Also Basis of Louisiana Law) - enactment of comprehensive code (general principles of law) applied to facts of a case; little influence by precedent (flexible and limited); will exert little influence on similar cases arising in the future
Legal Remedy - CH1
**an attempt to seek monetary damages for failure to perform a contract as written (ex civil suit); heard before jury
Equitable Remedy - CH1
**enforces performance in a contract, modifies its terms, or excuses performance of a contract that is in dispute; makes things right; heard before judge
Examples: Rescission, Restitution, Reformation of contract, Bills of interpleader
U.S. Supreme Court - CH1
**ultimate court of appellate jurisdiction
**superior to state constitutions, laws, etc.
Types of Jurisdiction - CH1
Original - where case is first heard
Appellate - reviews cases heard by a lower court
State Courts - CH1
**all states have one or more courts of original jurisdiction and one or more courts of appeal
Conflict of Laws, Place of Making Rule - CH1
where contract was made, brought into existence, delivered, or performed
Domicile - some states have laws that all policies are governed by where the insured/policyowner resides
Incorporation (home office) - in some states, the home office state determines policy interpretation
Conflict of Laws, **Center-of-Gravity Theory - CH1
gives emphasis to the law of the state that has the most significant contracts (connections) w/ the matter in dispute
Requirements for a Contract (5) - CH2
- Offer - willingness to enter bargain
- Acceptance - mutual assent
- Consideration - something of value
- Competent Parties - capacity to contract
- Legality of Form - follow legal requirements
Life Insurance Contracts (5) - CH2
an informal contract
- Aleatory (unequal transfer)
- Unilateral (only 1 party makes an enforceable promise the insurer; if bilateral then policyowner would make promise as well but no promise by insured that premiums will be paid)
- Contract of adhesion (offered by 1 party)
- Subject to conditions precedent (certain conditions)
Aleatory Contract - CH2
- unequal exchange, uncertain event, element of chance
- Aleatory is NOT commutative where benefits are of approximately equal value; for the insurer the present value of future benefits is equal to the present value of future premiums
Conditional Contract - CH2
*Conditions Precedent - an act or event that must occur before duty is imposed and a right exists
Ex. Premium payments (first and subsequent), Completed Application, Medical and other reqs to put policy into effect
*Conditions Subsequent - an act or event that will terminate an existing right
Ex. Death by policy exclusion (military flight, suicide)
file death claim
*Contract of Adhesion - CH2
Not negotiated, accepted, or rejected; not amended by non-drafting party
Any ambiguity in terms favors the policyowner or beneficiary
Policyowner accepts or rejects the contract; cannot alter contract
*Parties to the Contract - CH3
*Policyowner and Insurer
Third party beneficiary is not a party to the contract
Assignees:
Collateral assignee: transfer of a right or interest to a third party; does not become a party
*Absolute assignee: DOES become a party (as the new owner) to the contract
Competency of Insurer - CH3
Unauthorized Insurer
1) public cannot be expected to know if statutory requirements complied w/
2) contract may be enforceable by policyowner
*Mutual Assent - CH3
offer and acceptance must be present for a contract to exist
*Parol Evidence Rule - CH3
all preliminary oral statements are superseded by the written contract (policy); once a policy is issued, the entire contract is in the policy; no “inclusion by reference” is allowed
*Entire Contract Provision - CH3
the application is attached to the policy to create the entire contract
No Cash w/ Application (no consideration) - CH3
- is only an “invitation to offer”; the policyowner does not make the offer
- the company makes the offer by issuing and delivering the policy
first full premium must be paid before coverage becomes effective
paying the premium is acceptance
Cash w/ Application - CH3
Application and first premium - the applicant only “invites an offer”
Conditions Precedent for Coverage - CH3
*statement of Good Health of applicant at time of delivery; the burden of proof is on the insurer
Actual Delivery - CH3
manual delivery in person
Constructive Delivery - CH3
policy is properly stamped and addressed to agent by mail and intended to be delivered unconditionally
Inspection Receipt - CH3
Used if cash is not paid; policy is not delivered but left for examination only
Delivery in Good Health Clause - CH3
*change in health after application or after medical exam to protect company
NOT only in cases where insured misrepresented or concealed health status
Actual health not the intent of the policyowner is key
Conditional Receipt - CH3
binds coverage w/out reference to policy delivery
Effective Date (policy date) - CH3
with receipt, the later of the date of application or the date of medical exam; if no cash, date of issue
controls anniversary (CV/dividend), premium due date, and date of extended term
Operative Date (date of issue) - CH3
controls contestability and suicide clauses
*Backdating - CH3
*to lower insurance age, premium, and medical requirements; policyowner pays for coverage not received
maximum 6 months in most states
*Unilateral - CH4
LI contracts are unilateral; only the company makes an enforceable promise; consideration is exchanged for a promise to pay the DB (insuring clause)
*Company Consideration - CH4
“promise to pay” the DB, plus other policy promises (nonforfeiture, reinstatement, APL, etc.)
*Promisee (policyowner) Consideration - CH4
application and first premium (not renewal premiums)
Condition - CH4
one event is contingent on the occurrence of another (for the benefit of the promisor)
*Condition Precedent - CH4
one event must occur before another duty or right exists
ex initial premium, application, “good health”
Condition Subsequent - CH4
an event that terminates an existing duty or right
renewal premiums (considered conditions precedent to continued coverage)
if the renewal premium is not paid the company is released from its promise
Consideration - CH4
any condition that benefits the promisor or is a detriment to the promisee
Forms of Consideration - CH4
Cash - normally acceptable
Check - treated as conditional payment (must be honored by bank)
Promissory Note - written promise to pay; not normally allowed by a company
*Services - restrictions in most states (considered rebating and discriminatory)
A contract must have a legal purpose: - CH4
an unlicensed insurer-issued contract is illegal
the law permits the policyowner, but not the insurer, the option to void or enforce the contract
- W/out safeguards, life insurance could become speculative and socially harmful
- Fear of speculation and socially harmful policies lead to insurable interest laws
- There is a requirement that the insured is aware of insurance on their life and gives consent
- Life insurance is seen as beneficial to society and worthy of favorable legislative treatment
Wagering - CH4
speculation is to be controlled by an insurable interest, which is required in all jurisdictions
an aleatory contract offers a potential large return for a small premium (moral hazard)
Murder of Insured by Beneficiary - CH4
proceeds paid to contingent beneficiaries or insured’s estate; murderer cannot receive proceeds
killing must be wrongful and intentional
Suicide - CH4
2 yr maximum exclusion period from date of issue (optional provision, not required)
*if there is no suicide exclusion clause, the DB is payable even if there was intention to commit suicide at the time of application
*Insurance Interest - CH4
Partnership
Divorced Spouse
Creditor/Business Relationship
Assignments
Restricted to those closely related to the insured by blood, love and affection, or sentimental interest or those who possess a financial interest (pecuniary interest) that they stand to gain more by the insured’s continued life than by the insured’s death
- It must exist at the inception of contract but it need NOT be present at the time of the insured’s death
- A partnership can collect on a key EE policy of a partner who has left the partnership
- A divorced spouse can receive proceeds at the death of an ex-spouse if the policy was kept in force
- If a creditor takes out a policy and pays the premium, they may retain all death proceeds even if the amount exceeds the debt or if the debt has been paid
- Assignments - there is no requirement for insurable interest; life insurance is property and is freely transferable; a few states require the assignee to have an insurable interest
*Warranty - CH5
*a statement guaranteed to be true in all respects; violation in any respect can void the contract
important where breach of warranty is discovered during the contestable period and it increases risk, contributes to loss, occurs w/ fraudulent intent
Representations - CH5
An oral/written statement at the time or before the making of the contract
Representations are not part of the contract in general contract law
- Some statements may be statements of fact or opinion, such as “I’m in excellent health”
- Statements are not guaranteed to be true; they must be only substantially true when they are made
Entire Contract, Entire Contract Statutes & Warranties - CH5
*Policy and attached application:
The applicant’s statements are representations, NOT warranties
Oral/written statements not in application are not a part of the contract under the entire contract provision
In life insurance contracts, only written statements become a part of the entire contract
Material Misrepresentation - CH5
Statement is false: burden of proof on insurer
- Material = influences insurer into contract it would not have made or would have made on different terms if it had known the truth
- The aggrieved party (the insurer) can sue to recover damages or rescind the contract
*Rescission - CH5
- Termination of contract (void from start)
- W/in reasonable time after discovery of misrepresentation
- Rescission requires adjudication (court hearing)
*Voidable - CH5
The offended party can disaffirm the contract and thus terminate the agreement, or they can affirm and enforce the contract (such as an illegal contract issued by an unauthorized insurer)
*Void - CH5
The contract does not exist; unenforceable by either party; void from the start; never happened; no “meeting of the minds”; insurer returns all premiums paid; neither party can enforce or defend; the contestable clause is irrelevant
*Materiality - CH5
*Reflects the insurer’s decision to accept risk it would not have made had it known the true statement of material fact or the terms under which the insurer made the decision
A few states require that the misrepresentation contribute to loss
To obtain a rescission, the company must prove the following: - CH5
Statements of Fact - the insurer must prove statements were both false and material
*Statements of opinion must be false, material, and fraudulent; insurer must prove they were intentional, seldom leads to litigation and is difficult to prove
Tests of Materiality, UW Standards in Court (2) - CH5
- Prudent Insurer Standard = outside experts provide objective standards; uses judgement of industry experts; used in majority of jurisdictions; presupposes a uniformity of opinion and practice that does not exist
- Individual Insurer Standard = uses the insurer’s own practices in terms of how it decided on similar cases; difficult for the beneficiary to object since the information comes from company files and testimony
*Concealment - CH5
*Nondisclosure; failure of an applicant to communicate knowledge of a material fact that the insurer does not possess
In general contract law, an intentional act to hide a material fact
*Misrepresentation by silence in insurance law
Must be material and fraudulent
Most difficult defense to prove; more difficult than breach of warranty or misrepresentation
*Bad Faith Suit - CH5
*An insurer may be subject to a bad suit if it:
Creates unfair claim processing procedures
Uses abusive tactics
Improperly delays
Fails to investigate
*Waiver - CH6
*A voluntary and intentional giving up of a known right
Failure to demand an answer to an unanswered question in the application
A waiver is treated as an assent (agreement) to something or an abandonment of some right
Situations leading to a waiver of an insurer’s right to deny a claim: (3) - CH6
1) Breach of Condition Precedent = valid life insurance policy contingent on payment of first premium, statement of good health, no change of heath b/t application and delivery, the agent having no actual or apparent authority to extend credit
2) Misrepresentation in Application = collusion of applicant and agent
3) Waiver Subsequent to Policy Issue = explicit statement by company or by inconsistent actions
ex: consistently accepting premiums after the grace period expires
Estoppel - CH6
*A party loses the ability to assert a defense d/t prior actions inconsistent w/ that defense
Virtually interchangeable w/ Waiver
The purpose is to correct a wrong and prevent unfair treatment to another d/t one’s actions
Limits a person’s right to change their mind if it impinges on another’s right based on reliance on that person’s representations or promises
*Equitable Estoppel - CH6
Representation of past or present actions or facts relied upon by another party so that changing one’s position would be unfair
*Legal, or Promissory, Estoppel - CH6
Involves future conduct (promise); one person reasonably relied on a statement of future conduct (promise); it would be unfair to allow the first person to change their conduct (promise); if you make a promise you can’t change your mind
*Election - CH6
*The act of choosing b/t two mutually exclusive alternative rights or privileges
Similar to waiver; choosing one alternative waives the other
The company accepts premium after discovery of a material misrepresentation
*Incontestable Clause - CH7
*Limits time (2 yrs max) for company to rescind policy based on misrepresentation of material facts; waives company’s rights to dispute the validity of the contract after a certain period
Developed to overcome prejudice against LI by skeptical public
*Required policy provision by law in all states
It may benefit dishonest persons, but the benefits to honest policyowners make it worth the cost
Protects beneficiary
Gives company reasonable period of time to investigate
**Contest is about the validity of the contract, NOT terms w/in the contract
Situations NOT protected by the incontestable clause (no time limit) - CH7
- A lack of insurable interest
- Impersonation at physical exam
- The applicant intended to murder the insured
Incontestable clause is meaningless if the contract is invalid and void; no contract, no clause
What constitutes a contest within the meaning of the incontestable clause? - CH7
Merely refunding premium is not sufficient
There must be a contest (court action taken) during the contestable period that challenges the validity (not the terms) of the policy as a contract
Suit to rescind by insurer (equitable remedy, heard by judge)
Defense by insurer in court of a lawsuit by the beneficiary to enforce the contract (jury)
*Once the contest is started, the contestable period stops running
Monahan Decision - CH7
- The Monahan case decided that an action to deny a claim must occur w/in the contestable period
- The contestable period does not end at the insured’s death but continues for the benefit of the beneficiary until the contestable time period ends
The policy never becomes incontestable if the insured dies during the incontestable period
Incontestable Clause Exclusions - CH7
Nonpayment of premiums; no premium no contract
Disability and accidental DBs may or may not be included in contestability; included in contestable clause unless specifically excluded
Excepted hazards (conditions subsequent) - the company may limit risk it does not want to cover; adjustments and exclusions can be made after the contestable period
Not subject to contestability - Terms of the contract, not a question of contract validity (*flying/military service in time of war and piloting aircraft as a hobby)
Suicide Clause - the exclusion usually coincides w/ the contestable time period but it is independent of the incontestable clause
- Misstatement of Age and Sex
- Amount payable adjusted to what it would have purchased for correct age or sex by premium actually paid; adjustments can be made at any time; it is not contestable
- Incorrect age/sex does not invalidate the contract, unless fraud is proven; if so, it must be contested w/in the contestable period
*Reinstatement - CH7
Generally (majority opinion), the policy is only contestable regarding information provided in the reinstatement application for the same period as in the original clause (2 years)
Information in the original application retains the original contestable period
Reformation - CH7
*Reissue the policy correctly when a clerical error or substantial but obvious mistake is discovered
Done to make the policy represent the actual agreement b/t the company and the applicant and the intention of the parties
*A reformation CANNOT be made if fraud was involved in the contract
Reformation is NOT subject to the incontestable clause
The majority of reformations occur w/out controversy or litigation
Policy Face Page Information (5) - CH8
1) Name of insurer
2) Policy details: insured, policyowner, face amount, policy #, policy date, date of issue, and type of insurance provided
* 3) Free-look provision: 10 days, no reason required to cancel policy, full refund
4) Insuring Clause - insurer’s promise to pay
5) Signature of company officer
Required Policy Provisions (9) - CH8
Provisions may be more favorable to policyowners but not less favorable
- Grace Period
- Policy Loan
- Incontestable Clause
- Divisible Surplus (participating policies only)
- Entire Contract (no incorporation by reference)
- Reinstatement
- Misstatement of Age/Sex
- Nonforfeiture Provisions
- Settlement Options
** SUICIDE PROVISION IS NOT A REQUIRED PROVISION
*Grace Period - CH8
Usually 31 days; required policy provision
Grants policyowner additional time to pay premium after it is due
If insured dies during grace period, the company can deduct the premium from proceeds
The offer does not extend coverage; this offer allows the policyowner to avoid reinstatement requirements
*Policy Loan - CH8
Required policy provision
Advancement; no obligation to repay
*Incontestable Clause - CH8
Required policy provision; required in all states
After the policy has been in effect for a period of time (normally 2 years), the insurer cannot declare the policy invalid
- Three General Exceptions:
1. Lack of insurable interest at the inception of policy
2. Policy purchased w/ the intent to murder the insured
3. Medical exam taken by someone other than the proposed insured (fraud)
*Divisible Surplus - CH8
Required policy provision
*Participating policies only
Participating policy dividends
Return of unearned premium
*Entire Contract - CH8
Required policy provision
*No incorporation by reference
Prohibits incorporation by reference
Parol Evidence Rule - The insurer cannot use any statement unless in application, to contest or void the contract, or to deny a claim
*Reinstatement - CH8
Required policy provision
*Generally 3 years but varies
Allows a policyowner to reacquire coverage under a policy that has lapsed
Requirements: Provide evidence of insurability Pay overdue premiums plus interest Repay or reinstate any outstanding loans A policy surrendered for cash surrender value cannot be reinstated
*Misstatement of Age/Sex - CH8
Required policy provision
Not contestable
Adjust policy premiums or benefits to reflect true age or sex; not excluded by incontestability clause; contestability deals w/ policy validity rather than enforcement of provisions
*Nonforfeiture Provisions - CH8
Required policy provision
Based on level premium concept (pay in advance)
Cash surrender
Extended term insurance
Reduced paid up insurance
*Settlement Options - CH8
Required policy provision
Optional methods of distribution of proceeds by policyowner or beneficiary
Prohibited Provisions (3) - CH8
1) Agent cannot be made the agent of the insured for the purpose of filling out the application
2) Cannot settle a claim for less than the DB
3) Nonpayment of premium cannot cause a forfeiture of CV as long as CV exceeds the total indebtness
Optional Provisions (5) - CH8
1) Suicide = 2 years; return premium; if not in policy then company must pay claim for suicide at any time
2) Ownership = all rights in policy
3) Assignment = right to assign exists w/out this provision
4) Plan Change = subject to company rules regarding evidence of insurability and policy changes
5) Accelerated Benefits = limited life expectancy
Common Provisions (2) - CH8
1) Riders = Accidental Death Benefit, Guaranteed Purchase (insurability) Option, Waiver of Premium (WP)
2) Policy Filing and Approval = if a required provision is not included, courts will treat the policy as if it did include the provisions required by law
Payment of Premium - CH9
Paying premiums does not give that person any rights if they are not a party to the contract (if the person is not the policyholder)
Presumption of Premium (2) - CH9
- 1) Conclusive Presumption = if policy is delivered the policy is presumed to be in effect; it cannot be rebutted; if the insured dies, there is no premium but the insurer must pay
- The insurer can collect the premium but cannot challenge the validity of the contract
- The agent must take care in only delivering policies if conditions precedent are met
*2) Rebuttable Presumption = if policyowner possesses the policy, it is presumed that the premium was paid but this can be rebutted if the insurer can provide evidence the premium has not been paid; if evidence is provided, the presumption is overcome and the policy is void
Payment of Renewal Premiums - CH9
- The policyowner has no obligation to pay renewal premiums
- In majority of states, paying renewal premium is a condition precedent to continue the insurer’s promise
- A payment to an authorized agent is the same as a direct payment to the company
- If the agent refuses to accept payment, the insurer cannot lapse the policy
Payments to an unauthorized agent may be effective if apparent authority exists
Payment to the policyowner’s agent (broker) is NOT payment to the insurer
Mailbox Rule - CH9
**If a renewal premium is mailed and properly stamped by a date such that the owner could “reasonably expect the post office to deliver it before the premium due date” …. it will NOT be considered late, even if the post office delivers it late or not at all
*Property - CH10
The exclusive right of ownership; the right to possess, enjoy, transfer, or dispose of a thing or an interest
*Real Property - CH10
Real estate; land and those things that are part or attached to the land
*Personal Property - CH10
Property that is NOT land or attached to land
Two Types of Personal Property - CH10
- 1) Tangible Personal Property = clothing or jewelry; something that has physical characteristics
- 2) Intangible Personal Property = ownership right is evidenced by a legal document, such as ownership in a corporation (stock certificate); ownership interest is a right independent of a physical document; the right itself cannot be seen or touched
Transfer of Ownership - CH10
A person may freely transfer any property interest they possess by assignment, gift, or sale
Property Rights in Life Insurance - CH10
*Intangible property is referred to in law as a chose (pronounced “shows” or “show-zah”), or “THING” in action
The law provides the right to sue if the intangible property right is infringed upon
Represents a right in the law, normally evidenced by a legal document and enforceable by the law
Tangible property is a chose in possession; capable of physical possession and transfer by delivery
**Life Insurance is a chose in action and represents the intangible personal property rights in the policy
**Life Insurance Policy Owner Rights (7) - CH10
- Surrender the policy
- Assign the policy
- Designate and change the beneficiary
- Obtain a policy loan (if CV present)
- Select and change dividend options (if participating)
- Select and change investment options (if variable)
- Select a settlement option
**Common Law Property & Marital Status - CH10
Based on English Common law developed through case law by English courts
Used in 41 states; basis of U.S. legal system
Marital status has no direct effect on ownership interest, including life insurance, in common law states
Proceeds pass by will, intestacy, joint ownership, or operation of law
**Community Property Law & Marital Status - CH10
Laws exist only where they have been enacted into law by state legislature
Based on France’s and Spain’s law
Used in 9 states
Property acquired in marriage is community property; each spouse has undivided 1/2 interest
Exceptions = Gifts, property owned before marriage, inheritance, and property acquired by separate funds
**Life Insurance in Community Property States (Example) - CH10
*Example: A common law couple from NJ is unaffected by traveling to a community property state CA and buying property, and a couple from a community property state CA is unaffected by traveling to a common law state NJ and buying property
Property acquired by separate funds is separate property; property acquired by community funds is community property regardless of how it is titled
**Exoneration Statutes - CH10
*Protect the INSURER from paying proceeds or other policy benefits twice
Insurer not relieved from all liability
If an unknown community property right emerges and insurer had no previous knowledge
If insurer pays proceeds under terms of contract, they will not be held liable to community property interests
*Derived from civil law and applies only in community property states
**Legal Remedy - CH10
*Money damages for failure to perform required duties under contract; pay a specified sum to the plaintiff
Lawsuit (action at law) where someone injured by another person
*Decided by a jury
**Equitable Remedy - CH10
*Action in equity to fix the problem
Puts parties in the position they were in before the breach of contract or the injustice was committed
*Decided by a judge
Wrongful Killing of Insured - CH10
A beneficiary who kills the insured may not collect DB
Killing must be wrongful and intentional
*If proceedings are delayed, the insurer may pay proceeds to the court through an interpleader action, which is used when there is a conflict or lack of clarity on who is entitled to the proceeds
Equitable Remedies (4) - CH10
- 1) Declaratory Judgment = declares obligations and rights of parties when rights and duties are in bout; parties can then move forward to resolve the dispute
- 2) Interpleader = has a court decide who is entitled to funds when property is claimed by 2 or more people; purpose is to avoid paying proceeds to more than 1 party
- 3) Reformation = discover the intent of parties and rewrite or reform the contract to express actual intent; two grounds: mistake (there is a difference b/t the intent and the written agreement) and misrepresentation (an error misrepresents the intention of the parties)
- 4) Rescission = cancel the contract d/t material misrepresentation in the contract
**Three Requirements for Equitable Remedy - CH10
- 1) No Adequate Remedy at Law = goal is to put parties in the position they were in before the contract was breached or the injustice was committed
- 2) Clean Hands = court case must not be an attempt to defraud the other person or use the court as a tool to cheat another person; there must be attempts to do what is right b/t the parties
- 3) No Unnecessary Delay = there are time limits or statutes of limitations for bringing problems to court; plaintiffs must bring cases quickly, not wait to the last minute
Proof of Death - CH11
normally, the death certificate is required
**Mysterious Disappearance of the Insured, Presumption of Death (4) - CH11
- 1) Missing for a fixed period of time, usually 7 years
- 2) No reasonable explanation for the absence
- 3) Total absence of communication
- 4) Diligent and unsuccessful search has been conducted
**Release Settlement - CH11
Intentional giving up of right for a consideration
Insurer requires a release from the beneficiary as part of a negotiated settlement of claim
To be enforceable, there usually must be an exchange/consideration
**Compromise Settlement - CH11
The existence of a right to proceeds is in dispute
Insurer may use this when the insured disappeared and the presumption of death is not fully satisfied
**Reappearance of Missing Insured - CH11
A person who had previously been declared dead is discovered alive
If proceeds were paid in full: insurer can recover the proceeds plus interest
If a compromise settlement was paid: there is no recovery of the amount paid
Reasonable Expectations Doctrine, **Majority View - CH11
If language is clear, the contract is enforced as written
If there is ambiguity, the benefit of the doubt goes to the non-drafting party (policyowner)
Reasonable Expectations Doctrine, **Minority View - CH11
Reasonable expectations of the non-drafting party (policyowner) in a contract of adhesion will control contract interpretation even if contract language is clear and unambiguous
Extremely favorable to the policyowner in an effort to impose liability on the insurer
**Estate of Insured (As Beneficiary) - CH12
Paid by will or per laws of intestacy for purposes of paying estate expenses
Generally it is unwise to name the estate as a beneiciary:
No protection from creditors
Subject to estate administration and settlement costs
Delays distribution to intended beneficiaries
If used, should be only in the amount of anticipated estate expenses
**Clearly Specified Beneficiary - CH12
Person (name and relationship, DOB, etc.) or organization entitled to proceeds
Needs to be reviewed and updated regularly
**Class Beneficiary - CH12
Can present complications to insurer in paying claim as members may be difficult to identify and locate
Typically, proceeds are paid equally to all members of a group unless specified in the beneficiary designation on the application or policyholder change form
**Primary Beneficiary - CH12
*Can have more than one, different percentages
Owns proceeds at death of insured
**Contingent Beneficiary - CH12
- First-Taker = has claim once the primary beneficiary is removed, or their claim ripens/matures on the death or removal of the primary beneficiary
- Second-Taker = takes unpaid installments beyond the death of the primary beneficiary, such as a fixed period option, in the same manner as the primary beneficiary
Revocable Beneficiary - CH12
Can be unilaterally changed by the policyowner
*Has a mere expectancy (defeasible interest) of proceeds
Policyowner can change the beneficiary or exercise any policy right w/out the revocable beneficiary’s consent
Any interest in the policy terminates at the beneficiary’s death
*Change of beneficiary may not be allowed (is precluded) if the policy is collaterally assigned or when a court order in a divorce case requires the former spouse as the beneficiary
Irrevocable Beneficiary - CH12
- Conditionally vested - must survive the insured
- Beneficiary must consent to any change that affects the DB
- Policyowner does NOT have the unilateral right to change the beneficiary (like joint owners)
- Owner cannot act in any way that will diminish proceeds w/out the consent of the irrevocable beneficiary
- No loan, no dividend, no assignment w/out the beneficiary’s consent = limited ownership rights
Situations where there is more than one beneficiary in a class and a beneficiary predeceases the insured (2) - CH12
- 1) Per capita (New York Rule) = surviving named beneficiaries share equally, per head
- 2) Per stirpes (Connecticut Rule) = heirs of deceased beneficiary take that beneficiary’s share; “by the trunk” or “through the root”
**Prematurity Rights - CH12
Rights available to policyowner during insured’s lifetime
Surrender options
Dividend options
Policy loans
Assignment
Change of beneficiary
**Incidents of Ownership, Ways of preventing inclusion of proceeds in estate (3) - CH12
- Owner not the insured
- Transfer policy to another person or trust (3 year rule)
- Absolute assignment (3 year rule)
5 Possible Outcomes of Death Claim - CH12
- Insurer pays claim
- Insurer denies claim
- Insurer denies, and beneficiary takes matter to court
- Interpleader - insurer pays claim to court to determine proper recipient
- Insurer denies claim, but compromise settlement is paid
**Simultaneous Death (Common Disaster Clause) - CH13
If the order of death of the insured and beneficiary is unclear/unknown, the insured will be presumed to have survived the beneficiary; proceeds are payable to the insured’s estate or named contingent beneficiary
**Uniform Simultaneous Death Act - CH13
Life insurance proceeds are distributed as if the insured survived the beneficiary if the order is unknown, the same as in a common disaster clause
If the order of death is known, the order cannot be changed
**Delayed Payment Clause - CH13
The beneficiary must survive the insured by a specified period of time such as 10, 14, or 30 days
Used to avoid problems of short-term survivorship of beneficiary after insured’s death (proceeds paid in lump sum would have to pass through two estates, delay and estate administrative expenses are charged twice resulting in estate shrinkage)
Changing Beneficiaries (6) - CH13
- Policyowner may change to anyone
- No insurable interest required
- Must be in writing
- Policy normally does NOT need to be endorsed
- If there is an irrevocable beneficiary, they must consent to the change
- Collateral assignment and divorce court orders may limit the policyowner’s ability to change beneficiaries
**Minor Beneficiaries - CH13
*A minor lacks the legal capacity; the insurer requires minors to have a guardian
A minor cannot give binding release to the insurer when receiving proceeds
Upon attaining majority, the minor might repudiate the release and demand payment again
A minor cannot give release to change an irrevocable beneficiary
Age 18 is the age of majority in 44 states
Trust as Beneficiary - CH13
*A trustee may be a natural person or a corporation
The trustee administers proceeds according to the terms of the trust agreement; trust agreement spells out the trustee duties and responsibilities
*The trust agreement must exist at the time the trustee is named beneficiary in case the insured dies
Assignment - CH14
- If the beneficiary is revocable, the owner may assign proceeds; a revocable beneficiary is not vested; they merely have an expectancy of receiving the proceeds
- If the beneficiary is irrevocable, the owner may not assign proceeds w/out the irrevocable beneficiary’s permission
The insurer is not responsible for the validity of the assignment
Some companies may require an endorsement (a notice of assignment stamped on the policy); insurers require any assignment to be made in writing and filed w/ the company
Absolute Assignment - CH14
- All rights transferred permanently and absolutely to another (a change of policy ownership)
- Assignee is new owner
- Divests policyowner of incidents of ownership
Beneficiary’s interest is extinguished (unless named beneficiary by absolute assignee)
Assignment (transfer) is a right of any property owner, and no provision is needed, but normally the policy includes this provision
Collateral Assignment - CH14
Partial and temporary transfer of rights as collateral
- Transfers the right only to the extent of protecting a loan
- Assignment terminates and policyowner rights are restored when loan or lien is paid in full
Assignment is an ownership right; only the owner may assign the policy
Assignment and Insurable Interest - CH14
If an applicant has insurable interest, the assignee needs no insurable interest at the inception of the contract or at death
- If the policy is assigned “for/as security for debt” (consideration), the assignee may retain only the amount of their financial interest (The creditor-assignee must have an insurable interest at the time of assignment and at the time of death)
- If the policy is assigned to the creditor “in satisfaction of debt” (not as security for it), the creditor is allowed to keep all the proceeds, even though they may greatly exceed the amount of the debt canceled
American Bankers Association (ABA) Assignment Form - CH14
Clearly sets forth the rights transferred and not transferred to the assignee
*Rights include surrendering the policy for cash value and right to exercise all surrender options
Effects of Assignment on Beneficiary’s Rights (4) - CH14
- The beneficiary’s interest will be extinguished to the extent of the assignee’s interest
- The claims of the assignee prevail over the insured’s estate
- The collateral assignee may pay premiums to keep the policy in force and add them to the indebtedness
- Upon repayment of the loan, the assignment terminates
**Creditors of the Insured - CH15
Creditors of the insured may seek to satisfy claims from the cash value while the insured is alive or from proceeds after death
Courts and insurers do NOT support forcing surrender
Insurers are under no obligation to pay creditors
Proceeds payable to the owner/insured or the insured’s estate are not exempt in most states; protection is mostly for 3rd party beneficiaries/dependents
**Creditors of the Beneficiary - CH15
A beneficiary’s (revocable or irrevocable) creditors cannot get the insured’s policy CV
*A beneficiary’s creditors can get proceeds after the insured’s death since the proceeds are now the beneficiary’s property
If the beneficiary is an irrevocable beneficiary, the policyowner’s rights cannot be defeated by the creditor of another person
**After Maturity of Contract - CH15
Proceeds paid to the insured’s estate are available to estate creditors as any other unrestricted assets
Proceeds paid to a third party beneficiary (revocable or irrevocable) are vested in (owned by) the beneficiary and are free from claims of the policyowner’s creditors
Bankruptcy Reform Act of 1978 - CH15
Exempts life insurance from claims of creditors when the policyowner is filing for bankruptcy:
Most states (34) have opted out of federal rules, so the policyowner is protected by state statutes
Some states (16) allow citizens to choose state or federal rules, but not both
If a policyowner is bankrupt and a trustee is appointed, the policy transfers to the trustee, who can surrender the policy for its cash value
Federal Tax Lien Act of 1966 - CH15
The federal government can override state exemption laws to get taxes owed from the policy’s cash value
The federal government can attach proceeds to the extent of debt if a lien was attached before the insured’s death (United States v. Bess, 1958)
Statutory Protection Against Creditors - CH15
All states provide protection of life insurance from claims of creditors; not all states protect cash values
Generally, proceeds are exempt from the claims of the insured’s creditors as long as they are identifiable as proceeds
Proceeds often are NOT protected once they are in the hands of the beneficiary
Cash values and death proceeds are not exempted from federal tax liens
Distributive Statute - CH15
State Exemption Statute
Proceeds (generally not cash values) payable to the insured’s estate will pass to their spouse and children free of the claims against the estate; seldom protects against the claims of the beneficiary’s creditors
Procedural Statute - CH15
State Exemption Statute
Provides protection from the insured’s and the beneficiary’s creditors; the amount of insurance is limited, and typically protection for cash values is not provided
**New York Statute - CH15
State Exemption Statute
*Protects cash value and proceeds from claims of the insured’s creditors but NOT the beneficiary’s creditors; the majority of states have enacted similar legislation
Comprehensive Statute - CH15
State Exemption Statute
All benefits exempt, w/out limitation, from claims of the creditors of the insured, beneficiary, third party owner, or any other person or organization; unlimited protection of all benefits payable to anyone from all creditors
**Spendthrift Statute - CH15
State Exemption Statute
*Only protects the proceeds held under a settlement agreement (installment payout) from claims of the beneficiary’s creditors
Insurer and insured can agree that proceeds will not be subject to assignment or attachment by the beneficiary’s creditors; this agreement must be part of a policy or settlement agreement, and the beneficiary cannot be a part to it
Capacity to Be a Principal - CH16
*Capacity = legal qualification, competency, power, and fitness to accept authority or responsibility
Principal MUST have the capacity to execute a contract
Minors and adults w/ limited capacity cannot be the principal or appoint agents, but they can be agents if they understand their assignments
Corporations have the capacity to the the principal and to appoint agents
Capacity to Be an Agent - CH16
A contract signed by an agent is the contract of the principal, NOT the agent
An agent must be licensed (appointed) w/ each company that they represent as an agent; states require a company to appoint an agent so that the state is informed of which companies producers represent
An agent is not a party to the contract they negotiate b/t a third party and the principal
Law of Agency - CH16
*Agency = a fiduciary relationship where one person agrees to act on another person’s behalf and be subject to control of that person that they have the authority to represent
The person granting the agency authority is the principal; the person receiving is the agent
The agent is engaged in the business of the principal and has a duty of loyalty
*The agent is a fiduciary of the principal and has an obligation to act in the best interest of the principal
**Principal - CH16
A person who employs another to act for them; can be a person or a corp; the insurer must meet state requirements to be the principal (admitted insurer)
**Agent - CH16
A person who acts for another; Fiduciary of principal; must act in principal’s best interest; agent must be licensed
**Fiduciary - CH16
A person who acts in the best interest of another; must exercise good faith, a high degree of trust, and a duty of loyalty
**Broker - CH16
A person who acts or aids in negotiating insurance on behalf of a client or a beneficiary; an agent of the insurer for purposes of delivery and collecting first premium
An agent has a duty to act solely for the benefit of the principal and under the principal’s directions
The agent occupies a special position of trust that imposes a duty of loyalty to the principal
*Agents and principals may be “natural persons” (people) or “artificial persons” (corps as legal entities)
No one can unilaterally make themselves the agent of another person
**Agents Vs. Brokers - CH16
- Agents
1. Represent the insurer and the principal
2. Agent’s knowledge is considered knowledge of the insurer - Brokers
1. May be individuals, corps, and partnerships
2. Represent the policyholder/insured/beneficiary
3. Represent insurer for purposes of delivery and collecting first premium
General Rules of Agency Law (3) - CH16
- Presumption of Agency
- There can be no presumption that one person acts for another
- There must be tangible evidence of the agency relationship
- Apparent Authority of Agents
- The agent acts for the principal and is subject to the principal’s control
- Apparent authority must be created by principal
- Responsibility for Acts of Agents
- The agent must consent to the agency relationship
**Express Authority - CH16
*Contract
Powers specifically given to the agent by the principal orally or in writing, most often in a contract and/or manual
**Implied Authority - CH16
*Incidental
Powers not specifically given by the principal to the agent but that are necessary to exercise powers expressly given; it is implied that the agent has authority to perform incidental acts to those expressly given
Example: the agent accepts the check for the first premium
**Apparent Authority - CH16
*Reasonable Belief
The public reasonably believes the agent possesses authority based on the actions of the principal; but none actually exists?
Example: the agent repeatedly grants permission for the policyowner to pay the premium late
Agent Duties and Powers and Limits (6) - CH16
Agent contract confers and limits powers; agents denied power to:
- Create, alter, or discharge a life insurance policy/contract
- Extend time limits on premium payments
- Waive or extend conditions/obligations
- Accept predated/postdated checks
- Deliver policies to applicants not in good health
- Limits expressed in non-waiver clause in application and policy
**3 Duties of an Agent to the Principal - CH16
- Duty of Loyalty = full disclosure to the principal and act in principal’s best interest
- Duty to Obey = follow principal’s directions
- Duty to Exercise Reasonable Skill, Care, and Diligence
**Agent is liable for damages for acts that violate duties to principal
Principal’s Duties (6) - CH16
- Give the agent opportunity to work
- Provide goods for the agent to sell
- Pay the agent for services rendered
- Reimburse the agent for authorized expenses incurred
- Indemnify the agent for liabilities incurred
- Keep accurate account of finances
Agent’s Duties (State/Insurer/Clients - 3) - CH16
To State:
Follow the insurance laws of the state
To Insurer:
Duty of Care
Not to exceed scope of authority
*Levels of Duty to Clients:
*1. Generalist Level
Skill, care, good faith, and diligence
*2. Dual-Agency Level
Fiduciary duty to principal-agent of the insurer (application and premium) and insured (delivery of policy)
*3. Expert
Expertise and high level of professionalism; producer representations of expertise may induce client reliance on that expertise; must make suitable recommendations
Principal-Agent Relationship - CH16
Principal is bound by the agent’s actions if actual express authority exists
The law presumes the principal has control over its agents
Principal is liable if the agent’s wrongful acts w/in scope of the agency injure a third party
The knowledge of the agent is deemed to be the knowledge of the principal
Ratification - CH16
Validation of an unauthorized act; only relevant to unauthorized acts beyond scope of express or implied authority
Occurs if the principal fails to repudiate an act w/in a reasonable time; ratification must occur w/in a reasonable time
Ratification binds the principal and relieves the agent of liability to the principal or a third party
Ratification occurs if the principal accepts the benefit of the unauthorized activities of an agent or imposter agent (one claiming to be an agent)
**Life Insurance Agent Requirements (6) - CH16
- Must be licensed by the state and appointed by a company
- Must have contractual capacity
- Must agree to agency representation
- Must satisfy state-imposed minimum age
- Is subject to principal’s control
- Maintains files of business-related materials
**Securities Act of 1933 - CH17
*full and fair disclosure
Prospectus requirement = summary of important information from registration statement; it must accompany any sales literature and be delivered prior to or at the time of solicitation
**Investment Company Act of 1940 - CH17
*registration, holding out, advertising and sales literature
Defines investment advisor engaged in business of giving advice to others about investing for compensation
**Prospectus - CH17
Applies to variable life and annuity products
Discloses detailed information about the investment and the company issuing the contract
It must accompany sales literature and be delivered prior to or at the time of the investment sale
Regulated by the SEC through the Securities Act of 1933; NOT state insurance departments
**State Blue Sky - Uniform Securities Laws - CH17
Licensing and regulation of securities by states
Requires filing of sales and advertising literature
Federal Insurance Advertising Laws (3) - CH17
- McCarren-Ferguson Act
Established the federal government will regulate insurance only to the extent that such business is not regulated by state law - Federal Trade Commission (FTC)
Regulates interstate direct response mail insurance advertising - U.S. Postal Service (USPS) and Federal Communications Commission (FCC)
The postal service can take action when mail is used for false advertisements or to defraud people
**The NAIC - CH17
National Association of Insurance Commissioners
Provides minimum standards and guidelines, to create uniformity b/t states, and it models laws and regulations suggested to be adopted by each state
**NAIC Model Unfair Trade Practices Act - CH17
Prohibits false advertising = untrue, deceptive, or misleading advertising; focus is on misrepresentation
The act prohibits unfair trade practices such as:
- Unfair settlement practices
- Unfair claims practices
- Rebating
**NAIC Model Rule Definition of Advertisement - CH17
Written or oral communication intended to create favorable opinion about insurance or to induce the sale of insurance; includes all sales literature and training material
The accuracy and truthfulness of producer-created sales materials is the responsibility of the insurer
The insurer must at all times have in place a system of control over the content of all advertising
Fair Credit Reporting Act - CH17
Established procedures to safeguard information; releasing out of date information is prohibited
Act enforces privacy rights by controlling activities of consumer reporting agencies
Insurer’s investigative practices fall under this law
A person must request information or give permission for another to obtain it
Agency must disclose the nature and substance of information it has collected and make corrections
Gramm Leach Bliley Act - CH17
Specific compliance rules designed to protect consumer information; applies to banks and insurance companies
Telephone Consumer Protection Act - CH17
Gave the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC) the authority to establish the Do-Not-Call Registry
**Invasion of Privacy Torts - CH17
Violation of one’s right to be left alone
**Four Torts (Personal Injury) Under Invasion of Privacy Law - CH17
- Misappropriation of another’s name or likeness
- Unreasonable intrusion into one’s private space
- Public disclosure of private facts
- Words or actions places another person in a false light in the eyes of the public
**Defenses for Invasion of Privacy (2) - CH17
- Consent
= Complaining party consented to the release of private information, such as authorization for MIB or Inspection Report - Privilege
= Certain parties have the right to seek out and investigate private information, such as a prospective employer
NAIC Model Privacy Act - CH17
State law focused solely on the insurance industry
Balances the need of the insurer for private personal information and the consumer’s need for privacy
Gives consumers right to gain access to information and dispute accuracy; consent must be given before an investigation is conducted
Limits how information can be disclosed and prohibits pretext interviews, investigations in which the interviewer misrepresents their identity to obtain information about someone
Insurers must reveal the source and reason for adverse underwriting
Intestacy - CH18
Dying w/out a will; state laws control distribution of property and vary by state
Legal Capacity - CH18
Gained by reaching the age of majority, generally 18; for life insurance it is commonly age 15
**Competent - CH18
Having sufficient capacity and possessing requisite physical, mental, or legal qualifications
The testator is competent if they understand:
- The general nature and extent of their property
- Their relationship to people named or disinherited in the will
- What their will is
- The transaction of simple business affairs
**Incompetence - CH18
- can be temporary or permanent
- Temporary: Intoxication or duress
- Permanent, NOT temporary: Alzheimer’s or insanity
**Will - CH18
Indicates how property is to be distributed after death; appoints guardian of minor children if both parents die, executor, and trustees
**State Laws of Intestacy - CH18
Dying w/out a will; state laws control distribution of property, custody, and other decisions; intestacy laws vary by state
**Power of Attorney - CH18
- All powers of attorney terminate on death
- Powers can be limited or general
- A general power of attorney cannot delegate the power to create or alter a will on behalf of the principal
- A competent principal can terminate existing or springing powers at any time
- A power of attorney prevents interference from another party
Used by a person to appoint another party to make decisions for them as their agent; persons creating the power (principal) can make very specific or general powers
**Uses of Powers of Attorney (2) - CH18
- Estate Planning = desirable for a durable POA to specify that it delegates the power to make gifts, implement retirement plans, and execute property transactions
- One can create different powers of attorney for property management and health care, w/ different agents for different functions
**Simple Power of Attorney - CH18
Can specify powers (notary); terminates if principal becomes disabled or incompetent
Principal decides who can act on their behalf under a POA
**Durable Power of Attorney - CH18
Remains in effect if principal becomes incompetent; no need for court intervention
Principal or attorney-in-fact can terminate at any time
Springing Durable Power of Attorney - CH18
Becomes effective only after the occurrence of specified events, such as the loss of physical or mental competency:
Creates powers when they are needed and not before
Agent can carry on necessary transactions regarding property management and health care w/out waiting for competency hearings or the appointment of a guardian
Living Will (4) - CH18
Declares and individual’s intent to avoid prolonging life w/ artificial life support
Expresses an individual’s medical wishes if they become incapacitated
- States have variations in rules and definitions, such as what constitutes a terminal condition
- It is advisable to draft a living will that conforms to the applicable law in the person’s state of domicile; it may not be honored in other states
Durable POA for Health Care (4) - CH18
*The attorney-in-fact can make medical decisions if the principal is unable to do so
They can make physicians aware of the living will and advocate compliance w/ the living will
Many physicians consider a living will to be direct conflict w/ their duty to prolong life
Physicians are also concerned that they may be subject to civil or criminal liability for not initiating artificial life support
**Ethics - CH19
*The pillar of professionalism
Education/ethics are “high bars”; following the law and meeting compliance are NOT
The industry is build on trust:
=The only real product is the promise to pay
=Faith is the real commodity w/ which we deal
=W/out commitment to ethical integrity to foster our trust, our industry would not survive
**Top-Rated Ethical Concerns (2) - CH19
- Failure to identify a customer’s needs and recommend products that meet those needs has been rated as a top ethical concern by life insurance agents
- Lack of knowledge or skills to competently perform one’s duties is also a top rated ethical concern
**Ethical Issues (2) - CH19
*1. Indexed Products
= There is a concern that the public is unsure of what these products are or that they are investment products
*2. Annuities
= The suitability of annuities, especially variable annuities to older adults, has become a concern to regulators
Regulation of Financial Planners - CH19
Investment Advisers Act of 1940
= Financial planners who meet the definition of an investment adviser under this act must register as an investment advisor w/ the SEC and FINRA
Client entitled to all relevant information about the purchase they are considering: (6) - CH19
- Financial strength
- Current earnings/surplus relative to prior years
- Extent of junk bonds and real estate investments
- Percentage of troubled assets and derivatives
- Historical performance and accuracy of prior predictions
- Recent changes in participating dividend levels
**Sources for Evaluating Insurers (3) - CH19
*1. NAIC
=Ex IRS ratios (stress tests); NAIC offers satisfactory ranges of ratios on financial strength; ratios outside the usual ranges are a warning sign that state regulatory inspection should be done
*2. Rating Services (A.M. Best, Standard and Poor’s, Fitch, Moody’s)
= Ex historical information; indicates how a company performed based on projections versus actual performance
*3. Insurer annual Reports
= Ex some measures of profitability are surplus, the company’s capital, and equity
Ethical Conduct (4) - CH19
- Ethical behavior is a core value
- Ethical codes exist to elevate human behavior
- Earning professional designations exemplifies professionalism
- The American College’s Code of Ethics
- Eight Canons
- Professional Pledge
