Life Insurance Basica

Question 1

Insurable Interest

Answer 1

To purchase insurance, the policvowner must face the possibility of losing monev or something of value in the event of loss. This is
called insurable interest. In life insurance. insurable interest must exist between the policvowner and the insured at the time of
application; however, once a life insurance policv has been issued. the insurer must pav the policv benefit. whether or not an insurable
A valid insurable interest may exist between the policvowner and the insured when the policy is insuring any of the following:
1. Policyowner’s own life;
2. The life of a family member (a spouse or a close blood relative); or
The life of a business partner, key employee,
or someone who has a financial obligation to the policyowner (for example, a debtor
has a financial obligation to a creditor, so the creditor has a valid insurance interest in the life of the debtor).
Insurable interest is not required of beneficiaries. Since the beneficiary’s well-being is dependent upon the insured, and the
beneticlary S life is not the one being insured, the beneficiary does not have to show an insurable interest for a policv to be purchased
Know This! Insurable interest must exist at the time of application.
Know This! The policvowner must have insurable interest in the life of the insured.

Question 2

Survivor Protection

Answer 2

The death of the primary wage-earner will usually stop the flow of income to a family. The death of a nonearning spouse who cares for
minor children can also cause great financial hardship for the survivors. Life insurance can provide the funds necessary for the
survivors of the insured to be able to maintain their lifestvle in the event of the insured’s death. This is known as survivor protection
Planning for survivor protection requires caretul examination of current assets and liabilities as well as determining what survivors
needs mav be.

Question 3

Estate Creation

Answer 3

Estate Creation
A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a
significant period of time. The purchase of life insurance creates an immediate estate. Estate creation is especially important for
young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance
policy, they will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which
an immediate estate can be created at such a small cost

Question 4

Cash accumulation

Answer 4

3. Cash Accumulation
   Life insurance mav be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be
   available when needed. For example, some life policies (those that provide permanent protection, such as whole life) accumulate cash
   value that is available to the policyowner during the policy term.

Question 5

Liquidity

Answer 5

As a result of the cash accumulation feature,
some life insurance policies provide liquidity to the policyowner. That means the policy’s
casn values can be borrowed against at any time and used for immediate needs

Question 6

EState conservation

Answer 6

Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries
to sell off the assets

Question 7

C. Determining Amount of Personal Life Insurance

Answer 7

C. Determining Amount of Personal Life Insurance
Individuals seeking to buy life insurance may need assistance trying to establish how much coverage is appropriate, based on their
ability to pay the premium, serve their needs, and protect their survivors. Insurance companies have developed 2 basic approaches to
help producers and buyers to determine the needed amount of protection: human life value approach and needs approach.

Question 8

Human Life Value Approach

Answer 8

Human Life Value Approach
The human life value approach (HLVA) gives the insured an estimate of what would be lost to the family in the event of the premature
death of the insured. It calculates an individuals life value by looking at the insured’s wages, inflation, the number of years to
retirement, and the time value of monev.
Example:
Lets assume that a 40-year-old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. Out
of his annual income, $40,000 is spent on family needs, and the remaining $10,000 goes to the insured’s personal expenses. This
means that the human life value of this insured to his familv is $1.000.000 ($40.000 a vear spent on family needs x 25 years to
retirement). Based on this assumption, and taking interest and inflation into consideration, the insurance company will determine the
right amount of insurance to produce the same annual amount of income for the family if the insured were to die.

Question 9

Needs approach

Answer 9

Needs Approach
The needs approach is based on the predicted needs of a family after the premature death of the insured. Some of the factors
considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses
Determining Lump-sum Needs
Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:
Costs Associated with Death (postmortem) - taking into account the final medical expenses of the insured, funeral expenses,
and day-to-day expenses family maintenance;
• 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.;
Emergency Reserve Funds - paying for unexpected expenses following the death of the insured, such as travel expenses and
lodging for family members

Education Funds - paying for childrens 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;
Retirement Fund - as a source of retirement income;
• Bequests - leaving funds to the insured’s church, school. or a charitv.

Question 10

Planning for Income Needs

Answer 10

Planning for Income Needs
Besides taking care Of immediate expenses after the death of the insured, the family may need to plan for an income source long
term, so the needs approach to life insurance will factor in the following concerns:
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. If the spouse works outside the home, a new expense for day care must be considered.
Social Security Income “Blackout” Period - Social Security blackout period is the time during which the surviving spouse and/or
children do not receive any social security survivor benefits. Blackout period begins when the youngest child reaches the age of
16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. (Unmarried children under the age of
18 or up to 19 if they are attending secondary school full time can also receive benefits. Technically, the social security check will
be made payable to the surviving spouse until the youngest child is 16, and directly to the child between the ages of 16 and 18.)
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).
Need Help

Question 11

Business Uses of Life Insurance

Answer 11

Business Uses of Life Insurance
Businesses use life insurance for the same reason individuals use life insurance: it creates an immediate pavment upon the death of
the insured.
The most common use of life insurance by businesses is as an emplovee benefit. which serves as a protection for employees and
their beneficiaries. There are also other forms of life insurance that can serve business owners and their survivors, and even protect
the business itselt. I hese include funding business continuation agreements, compensating executives, and protecting the business
against financial loss resulting from the death or disability of key employees.

Question 12

Key person

Answer 12

A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge
skills or business contacts. A business can lessen the risk of such loss by the use of kev person insurance. Key person insurance may
be issued as term or permanent life, with whole life and universal life policies being used most often
With this coverage, the key employee is the insured, and the business is all of the following:
• Applicant;
Policvowner
Premium aver: and
Beneficiary.
In the event of death of a key employee, the business would use the monev for the additional costs of running the business and
replacing the emplovee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee
dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the
emploveels would need to give permission for this coverage

Question 13

Buy-sell funding

Answer 13

A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge
skills or business contacts. A business can lessen the risk of such loss by the use of kev person insurance. Key person insurance may
be issued as term or permanent life, with whole life and universal life policies being used most often
With this coverage, the key employee is the insured, and the business is all of the following:
• Applicant;
Policvowner
Premium aver: and
Beneficiary.
In the event of death of a key employee, the business would use the monev for the additional costs of running the business and
replacing the emplovee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee
dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the
emploveels would need to give permission for this coverage

Question 14

Business continuation

Answer 14

Business continuation plan is an arrangement between business owners that provides for shares owned by any one of them who dies
or becomes disabled to be sold to, and purchased by, the other co-owners or the business.

Question 15

Classes of life insurance policies

Answer 15

There are many types of life insurance products available for consumers. Although all life insurance products offer death protection,
each toe also includes its own unique features and benefits and is designed to serve different insureds needs.
You will study different types of policies in greater detail later in this course. For the purposes of this chapter, however, you need to
understand some basic definitions and characteristics of different classes of life insurance policies.

Question 16

Permanent bd temp

Answer 16

Regarding the length of coverage, all life insurance policies fall into 2 categories: temporary and permanent protection.
Term life insurance is temporary life insurance provided for a specific period of time. It is also known as pure life insurance
Permanent life insurance is a general term used to refer to various forms of whole life insurance policies that remain in effect to age
100, as long as the premium is paid. Permanent insurance provides lifetime protection, and includes a savings element (or cash value).

Question 17

Participating vs nonparticipating

Answer 17

2. Participating vs. Nonparticipating
   A participating (mutual) life insurance policy refers to any policy that distributes its dividends to policyowners by cash payments,
   reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance. A nonparticipating policy
   does not pay dividends to the policvowners.
   Know This! Onlv participatine policies distribute dividends to policvowners

Question 18

Group vs individual

Answer 18

life insurance is written on a single life. The rate and coverage are based upon the underwriting of that individual.
Group life insurance is written as a master policy covering the lives of more than one individual covered under the single policy.
Individuals covered do not receive a policy but instead receive certificates of insurance. The rate and coverage are based upon group
underwriting, with all individuals covered for the same amount and rate.

Question 19

Fixed vs variable

Answer 19

Fixed life insurance or annuities are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract.
Variable life insurance or annuities are contracts in which the cash values accumulate based upon a specific portfolio of stocks
without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing

Question 20

Solicitation and sales represeantion

Answer 20

The process of issuing a life insurance policy begins with solicitation. In simplest terms, solicitation of insurance means an attempt to
persuade a person to buy an insurance policy, and it can be done orally or in writing. This includes providing information about
available products, describing the policy benefits, making recommendations about a specific type of policy, and trying to secure a
contract between the applicant and the insurance company.
Any sales presentations used by insurers or their agents in communication with public must be accurate and complete.
Before starting a life insurance sales presentation. an agent or broker must inform a prospective purchaser that he or she is acting as
a life insurance agent or broker, and provide the full name of the insurer the agent represents. In transactions in which an agent or
broker is not involved. the insurer must identify its full name

Question 21

Advertisement

Answer 21

First and foremost, advertising must be accurate and not misrepresent the facts. Advertising rules apply to any insurance
advertisement intended for presentation, distribution, dissemination or other advertising use when used or made either directly or
indirectly by or on behalf of the insurance company.
Every insurance company must establish and maintain a system of control over the content, form, and method of dissemination of all
advertising of its policies. The insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote,
created. presented. or distributed them.
Insurance agents, brokers or other persons cannot use an advertisement or public announcement in this state if it does any of the
following: Calls attention to any unauthorized insurer; or
Publicizes the financial condition of an insurer
Every agent of any insurer and every insurance broker must state the full name of the insurer referred to and the name of the city in
which it has its principal office. This rule applies to all advertisements, public announcements, signs, pamphlets, circulars and cards
that reter to an insurer.

Question 22

Buyers guide

Answer 22

A buyers guide provides basic information about life insurance policies. It explains how a buyer should go about choosing the amount
and type of insurance, and provides a cost comparison for similar policies. It must contain only the language approved by the
Superintendent. The buyer’s guide must be provided prior to or at the time of application. When an insurer solicits a policy by mail,
without the use of an agent, each initial solicitation must include a copy of the buyer’s guide. If a policy offers a 30-day period for
policy refund (free-look, the buyer’s guide may be provided at the time the policy is delivered.

Question 23

Policy summary

Answer 23

Policy Summary
A policy summary is a written statement describing the features and elements of the policy being issued. It must include the name
and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the
basic policy and each rider. A policy summary will also include premium, cash value, dividend, surrender value and death benefit
figures for specific policy years. The policy summary must be provided when the policy is delivered.
Know This! A buver’s guide provides generic information on various types of policies. A policy summary provides specific
intormation on the policy being issued
Illistrations
The term illustration means a presentation

Question 24

Illustration

Answer 24

Illistrations
The term illustration means a presentation or depiction that includes nonguaranteed elements of a life insurance policy over a period
or vears.

Question 25

General rules

Answer 25

An illustration used in the sale of a life insurance policy must contain the following basic information:
Name of insurer,
Name and business address of producer or insurer’s authorized representative, if any;
Name, age, and sex of proposed insured, except when a composite illustration is permitted under this regulation;
• Underwriting or rating classification upon which the illustration is based;
• Generic name of policy, the company product name (if different), and form number:
• Initial death benefit;
• Dividend option election or application of nonguaranteed elements, if applicable
Illustration date; and
• A prominent label stating “Life Insurance Illustration.”
Prohibited Practices
When using an illustration in the sale of a life insurance policy, an insurer or its producers may NOT do any of the following:
• Represent the policy as anything other than a life insurance policy;
Describe nonguaranteed elements in a manner that could be misleading;
Use an illustration that depicts policy’s performance as being more favorable than it really is;
Provide an incomplete illustration;
Claim that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits,
unless that is the fact;
Use the term “vanish” or “vanishing premium,” or a similar term that implies the policy becomes paid up; or
Use an illustration that is not self-supporting
?
Need Help
MacBook

Question 26

Use of Senior-Specific Certifications and Professional Designations

Answer 26

The purpose of this regulation is to establish standards to protect consumers from misleading and fraudulent marketing practices
with respect to the use of senior-specific certification and professional designations in the solicitation and sale of life insurance
policies and annuity contract.
Producers are not permitted to use senior-specific certifications or professional designations in such a way that may mislead an
applicant, or imply that the producer has special training or certification in advising or providing services to seniors. Producers are
prohibited from using titles or acronyms that imply designations that are not actually earned, nonexistent or self-conferred
Special consideration must be given to the use of terms such as senior, retirement, elder, and their combination with terms such as
certified, registered, chartered, advisor, specialist, or similar (e.g. certified senior advisoror certified elder planning specialist)
Designations and certifications are permitted if an organization or certification has been accredited by The American National
Standards Institute (ANSI), the National Commission for Certifying Agencies, or any organization that is on the US Department of
Education’s “Accrediting Agencies Recognized for Title IV Purposes” list.

Question 27

Replacement

Answer 27

Replacement is a practice of terminating an existing policv or letting it lapse, and obtaining a new one. To make sure that replacement
is appropriate and in the best interests of the policyowner. insurance producers and companies must take special underwriting
measures to help policvowners make informed decisions.
Replacement means any transaction in which new life insurance or a new annuity is purchased and, as a result, the existing life
insurance or annuitv has been or will be anv of the following
• Lapsed, forfeited, surrendered, or otherwise terminated;
Reissued with any reduction in cash value;
• Converted to reduced paid-up insurance, continued as extended term insurance or otherwise reduced in value by the use of
nonforfeiture benefits or other policy values;
Amended so as to affect either a reduction in benefits or in the term for which coverage would otherwise remain in force or for
which benefits would be paid; or
• Used in a financed purchase
Replacing insurer is the company that issues the new policy.
Xisting insurer is the companv whose policv is being replaced

Question 28

Duties of

Answer 28

Duties of the replacing producer:
Present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer. A copy must be
left with the applicant;
Obtain a list of all existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all
companies being replaced:
Leave the applicant with the original or a copy of written or printed communications used for presentation to the applicant; and
Submit to the replacing insurance company a copy of the replacement notice with the application
Each producer who initiates the application must submit the following to the insurance company with or as part of each application:
A statement signed by the applicant as to whether replacement of existing life insurance or annuity is involved in the transaction;
and
• A signed statement as to whether the producer knows replacement is or mav be involved in the transaction.
Duties of the replacing insurance company:
Require from the producer a list of the applicant’s life insurance or annuity contracts to be replaced and a copy of the
replacement notice provided to the applicant; and
Send each existing insurance company a written communication advising of the proposed replacement within a specified period
of time of the date that the application is received in the replacing insurance company’s home or regional office. A policy
summary or ledger statement containing policy data on the proposed life insurance or annuity must be included.

Question 29

Exemptions

Answer 29

Exemptions
Replacement regulations do not apply to the following types of transactions
• Group life insurance or group annuity contract;
Individual life insurance policy or annuity contract whose cost is fully covered by the applicant’s employer;
• Individual life insurance or annuity covering emplovees of an emplover. debtors of a creditor. or members of an association if the
policv is distributed on a mass merchandising basis and administered by group-type methods;
• The application for insurance is made to the same insurer that issued the existing insurance and a contractual policy change or
conversion privilege is being exercised:
Existing life insurance is a nonconvertible term policy with 5 years or less to expire and which cannot be renewed.

Question 30

Suitability in Life Insurance and Annuities

Answer 30

Suitability in Life Insurance and Annuities
An insurance producer may not recommend the purchase, sale, or exchange of an insurance policy or annuity contract without the
reasonable belief that the transaction is in the best interest of the insured.
It is a producer’s responsibility to make sure that annuity transactions address consumers’ needs and financial objectives. To ensure
suitability. producers must make a reasonable effort to obtain relevant information from the consumer and evaluate the following
tactors.
• Age
Annual income;
Tax status;
• Financial needs and timeline:
• Investment objectives;
Liquidity needs and liquid net worth;
Existing assets;
Intended use of annuity:

Intended use of annuity;
Financial experience: and
Risk tolerance.
When producers or insurers recommend an annuity replacement, they must make sure the replacement is suitable for the consumer,
and must consider whether the consumer will:
Incur a surrender Charge or be subject to a new surrender period:
• Lose existing contractual benefits;
Have tax penalties for contract surrender;
• Have increased fees, investment advisory fees or charges for riders; or
Have replaced another annuity in the preceding 36 months; or
Benefit from annuity contract enhancements and improvement.
nsurers must make sure that producers are adequately trained to make recommendations and must supervise producers’

Question 31

Field Underwriting

Answer 31

Field Underwriting
Underwriting is the risk selection and classification process. It involves a careful analysis of many different factors to determine the
acceptability of applicants for insurance. In other words, underwriting is the process in which an insurance company determines
whether or not a particular applicant is insurable, and if so, what premium to charge.
The primary criteria an underwriter will use in assessing the desirability of a particular candidate for life insurance are the applicant’s
health (current and past), occupation, lifestyle, and hobbies or habits. The underwriter will use many different sources of information
in determinine the insurabilitv of the individual risk.
The agent is the company’s front line, and is referred to as a field underwriter because the agent is usually the one who has solicited
the potential insured. As a field underwriter, the agent has many important responsibilities during the underwriting process and
bevond. including the following
• Proper solicitation of applicants;
Helping prevent adverse selection;
• Completing the application;
Obtaining the required signatures;
Collecting the initial premium and issuing the receipt, if applicable; and
Delivering the policy.
Know This! A life insurance producer is the company’s field underwriter.

Question 32

Application

Answer 32

The Application is the starting point and basic source of information used by the company in the risk selection process. Although
applications are not uniform and may vary from one insurer to another, they all have the same basic components: Part 1 - General
Information and Part 2 - Medical Information.
Part 1 - General Information of the application includes the general questions about the applicant, such as name, age, address, birth
date, gender, income, marital status, and occupation. It will also inquire about the existing policies and if the proposed insurance will
replace them. Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning
the beneficiary.
Part 2 - Medical Information of the application includes information on the prospective insured’s medical background, present heal

insurance is relatively small, the agent and the proposed insured will complete all of the medical information. That would be
considered a nonmedical application. For larger amounts, the insurer will usually require some sort of medical examination by a
professional.
It is the agent’s responsibility to make certain that the application is filled out completely, correctly, and to the best of the applicant’s
knowledge. The agent must probe beyond the stated questions in the application if he or she has any reason to believe the applicant
is misrepresenting or concealing information, or does not understand the specific questions asked. Any information that is
misleading, inaccurate or illegible may delay the issuance of the policy. If the agent feels that there could be some misrepresentation,
he/she must inform the insurance company. Some insurers require that the applicant complete the application under the agents
watchful eye, while other insurers require that the agent complete the application in order to helo avoid mistakes and unanswered
questions.

Question 33

Agents report

Answer 33

Agent’s Report
As à field underwriter, the agent (or producer) can be considered the most important source of information available to the company
underwriters. The agent’s (producer’s report provides the agents personal observations concerning the proposed insured. The
insurer may inquire whether the agent knows of any adverse information about the applicant, or ask the agent to express an opinion
about the applicant’s character, financial standing, and environment. The agent’s report does not become a part of the entire contract,
although it is a part of the application process
Signatures Required
Both the agent and the proposed insured (usually the applicant) must sign the application. If the proposed insured and the
policyowner are not the same person, such as a business purchasing insurance on an employee, then the policyowner must also sign
the application. An exception to the proposed insured signing the application would be in the case of an adult. such as a parent or
guardian, applying for insurance on a minor child.
Changes on the Application and Amendments
When an answer to a question on the application needs to be corrected, agents have the option, depending on which insurer they
represent, of correcting the information and having the applicant initial the change, or completing a new application. An agent should
never erase or white out any information on an application for insurance

Question 34

Premiums and application

Answer 34

Most agents attempt to collect the initial premium and submit it along with the application to the insurer. In addition, collecting the
initial premium at the time of the application increases the chance that the applicant will accept the policy once it is issued. Whenever
the agent collects premiums, the agent must issue
a premium receipt. The type of receipt issued will determine when coverage will be
effective.
The
most common type of receipt is a conditional receipt, which is used only when the applicant submits a prepaid application. The
conditional receipt 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 is issued exactly as applied for.
This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages
Example:
If an agent collects the initial premium from an applicant and gives the applicant a conditional receipt, and the applicant dies the next
day, the underwriting process will proceed as though the applicant were still alive. If the insurer ends up approving the coverage, then
the applicant’s beneficiary will receive the death benefit of the policy. If, on the other hand, the insurer determines that the applicant
was not an acceptable risk and declines the coverage, the premium will be refunded to the beneficiary, and the insurer is not required
to pav the death benefit

Question 35

Investigative Consumer Report (Inspection)

Answer 35

To supplement the information on the application, the underwriter may order an inspection report on the applicant from an
independent investigating firm or credit agency, which covers financial and moral information. They are general reports of the
applicant’s finances, character, work, hobbies, and habits. Companies that use inspection reports are subject to the rules and
regulations outlined in the Fair Credit Reporting Act.

Question 36

Medical I formation bureau

Answer 36

In addition to an attending physician’s report, the underwriter will usually request a Medical Information Bureau (MB) report.
The MB is a membership corporation owned by member insurance companies. It is a nonprofit trade organization which receives
adverse medical information from insurance companies and maintains confidential medical impairment information on individuals. It
is a systematic method for companies to compare the information they have collected on a potential insured with information other
insurers may have discovered. The MIB can be used only as an aid in helping insurers know what areas of impairment they might need
to investigate further. An applicant cannot be refused simply because of some adverse information discovered through the MiB.
Know This! Insurers cannot refuse coverage solely on the basis of adverse information on an MB report.
Medical Examinations and Lab Tests Including HIV
Medical examinations, when required by the insurance company, are conducted by physicians or paramedics at the insurance
company s expense. Usually such exams are not required with regard to health insurance, thus stressing the importance of the agent
in recording medical information on the application. The medical exam requirement is more common with life insurance underwriting
If an insurer requests a medical examination, the insurer is responsible for the costs of the exam.
It is common among insurers to require an HIV test when an applicant is applying for a large amount of coverage, or for any increased
and additional benefits. To ensure proper obtaining and handling of results, and to protect the insureds’ privacy, states have enacted
the following laws and regulations for insurers requiring an applicant to submit to an HIV test:

Prior to testing, the insurer must disclose the use of testing to the applicant, and obtain written consent from the applicant on
the approved form;
• The insurer must establish written policies and procedures for the internal dissemination of test results among its producers and
emplovees to ensure confidentiality:
• The test must be administered in a manner that meets the protocol of the U.S. Department of Health and Human Services;
The insurer must disclose the test results as authorized by the applicant in writing
• If the applicant has not identified a physician to receive test results, the positive test results and the identity of the applicant
must be sent to the state Department of Health: and
• The reporting of test results must include the name and address of the reporting company.
Requiring an HIV test is not considered unfair discrimination as long as the following conditions are met:
• The testing is required for all individuals in the same class;
Proposed insured is not denied coverage on the basis of such testing alone (if no other conditions specified in the Insurance
Code apply); and
The tests and testing procedures have been approved by the United States Food and Drug Administration (FDA) and otherwise
comply with applicable state and federal laws

Insurers are permitted to ask a proposed insured whether he or she has tested positive on an AIDS-related test.
In New York, written informed consent to an HIV-related test must be signed and dated and include the following: a general
description and purpose of the test, and a statement that a positive test result is an indication that the individual may develop AIDS
and may wish to consider further independent testing. The authorization form may also need to include the person to whom the test
results may be disclosed in the event of an adverse underwriting decision (this can be the prospective insured, a physician or other
person to be determined by the individual proposed for insurance).

Question 37

Use and Disclosure of Insurance Information

Answer 37

Use and Disclosure of Insurance Information
When insurers plan to seek and use information from investigators, they must first provide the applicant/insured with a written
Disclosure Authorization Notice. It will state the insurer’s practice regarding collection and use of personal information. The
disclosure authorization form must be written in plain language, and must be approved by the head of the Department of Insurance

Question 38

Selection Criteria & Unfair Discrimination

Answer 38

Selection Criteria & Unfair Discrimination
Information the companies obtain relating to risk factors aid the underwriters in determining the extent of the risks involved. In order
to avoid adverse selection, the company will discriminate in favor of good risks and against poor risks. However, insurance companies
cannot unfairly discriminate between individuals of the same class and equal life expectancy in the rates, benefits, or any terms and
conditions of the contract.
The following are examples of underwriting practices in life and health insurance that would constitute unfair discrimination between
individuals of the same class:
• Discriminating in policy rates and benefits based solely on
• Age or gender:
Physical or mental impairment;
Blindness or partial blindness; or
• Genetic characteristics or genetic testing
• Investigating as part of the underwriting process a proposed insured’s sexual orientation.

Question 39

3. Classification of Risks

Answer 39

In classifying a risk, the Home Office underwriting department will look at the applicant’s past medical history, present physical
condition, occupation, habits and morals. If the applicant is acceptable, the underwriter must then determine the risk or rating
classification to be used in deciding whether or not the applicant should pay a higher or lower premium. A prospective insured may be
rated as one of the three classifications: standard. substandard. or preferred.
Know This! The higher the risk, the higher the premium

Question 40

Standard

Answer 40

Standard
Standard risks are persons who, according to a company’s underwriting standards, are entitled to insurance protection without extra
rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. Thev
are the average risk.

Question 41

Substandard

Answer 41

Substandard
Substandard (High Exposure) risk applicants are not acceptable at standard rates because of physical condition, personal or family
history of disease. occuaton.
or dangerous habits. These policies are also referred to as “rated” because they could be issued with
the premium rated-up. resulting in a higher premium.

Question 42

Preferred

Answer 42

Preferred risks are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These
applicants have a superior physical condition, lifestyle, and habits.

Question 43

Decline

Answer 43

Declined
Applicants who are rejected are considered declined risks. Risks that the underwriters assess as not insurable are declined. For
example. a risk may be declined for one of the following reasons:
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; or
Insurance is prohibited by public policy or is illegal.

Question 44

Prwmimun determination

Answer 44

H. Premium Determination
Once the company determines that an applicant is insurable, they need to establish an appropriate policy premium. The premium will
De used to cover the costs and expenses to keep the policy in force. Premiums are paid in advance

H. Premium Determination
Once the company determines that an applicant is insurable, they need to establish an appropriate policy premium. The premium will
De used to cover the costs and expenses to keep the policy in force. Premiums are paid in advance
1. Factors in Premium Determination
There are three primary factors that are used in premium determination: risk (mortality - rate of death within a specific group), interest
and expense.

Question 45

Investment Return

Answer 45

Investment Return
Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these
funds (invested in bonds, stocks, mortgages, etc.). This interest is a primary factor in lowering the premium rate.

Question 46

Expense

Answer 46

The expense factor. also known as the loading charge, also affects premium rates. Insurers have various operating expenses, so each
premium must carry a proportionate share of these operating costs. The insurer’s largest expense is the commissions paid to its
agents. Other ongoing expenses include payroll, rent, and taxes

Question 47

Net single premium

Answer 47

The net single premium includes the mortality and interest components necessary to keep the policy in force until maturity.
Mortality - Interest = Net Premium
Gross Annual Premium
Gross annual premium is the one-year cost for mortality, plus the cost of operating the company (or expense loading). Loading
includes commissions, taxes, advertising, and while not an expense, includes the amount added to a pure or basic rate to provide for a
profit margin to the insurer.

Question 48

Primium payment mode

Answer 48

regard to insurance premiums, mode refers to the frequency the policyowner pays the premium. An insurance policy’s rates 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 ear before paving any claims. If the policvowner chooses to pav the premium more frequently than
annuallv. there will be an additional charge because the companv will have additional expenses in billing the premium. However, the
premium may be paid annually, semi-annually, quarterlv. or monthlv.
Higher Frequency = Higher Premium
Monthly > Quarterly > Semi-Annual > Annual

Question 49

Policy issue and delivery

Answer 49

I. Policy Issue and Delivery
Once the underwriting process has been completed and the company issues the policy, the agent will deliver it to the insured
Although personal delivery of the insurance policy is the best method of finalizing the insurance transaction, mailing the policy
directly to the policyowner is acceptable. When the insurer relinquishes control of the policy by mailing it to the policyowner, policy is
considered legally delivered. However, it is advisable to obtain a signed delivery receipt.

Question 50

Policy review

Answer 50

1. Policy Review
   Personal delivery of the policy allows the agent an opportunity to make sure that the insured understands all aspects of the contract.
   Review of the contract with the insured involves pointing out provisions or riders that may be different than anticipated, and
   explaining what effect they have on the contract. In addition, the agent should explain the rating procedure to the client, especially if
   the policy is rated differently than applied for, or has been modified or amended in any other way. The agent should also explain any
   other choices and provisions available to the policvowner that mav become active at this time.

Question 51

Effective date of coverage

Answer 51

If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In
this case, the policv does not go into effect until the premium has been collected. The agent may also be required to get a statement
of good health from the insured. This statement must be signed by the insured, and verifies that the insured has not suffered injury or
illness since the application date.
If the full premium was submitted with the application and the policy was issued as requested, the policy coverage would generally
coincide with the date of application if no medical exam is required. If a medical exam is required, the date of the coverage will
coincide with the date of the exam.
Know This! NO premium. No coverage.

Question 52

Terms

Answer 52

Adverse selection - tendency of individuals with higher probability of loss to purchase insuranc
Death benefit - the amount paid upon
the death of the insured in a life insurance policy
Cash value - equitv amount accumulated in permanent life insurance
Estate - a person’s net worth
Illustrations - presentation or depiction of nonguaranteed elements of a life insurance policv
Life insurance - coverage on human lives
- selling assets in order to raise canital
Lump-sum - payment or the enure penettin one sum
Minor - a person under legal ase
Solvency - ability to meet financial obligations (e.g., an insurance company maintains enough assets to pay claims)