Life Insurance Basics Flashcards
Buy-Sell Agreements and Examples
Agreements made in both life insurance and disability income insurance. Arrangement where major shareholders or other owners purchase the deceased/disabled owner’s share of the business in the event they become disabled/die.
Examples: Stock Redemption, Cross Purchase, No Sell, and Third Party Buy Out
Viatical Settlement
Company (viatical settlement purchaser) purchases your LI policy when disagnosed with an illness for a lump sum of cash. Upon death, LI benefit is paid to viatical settlement purchaser and their investors. Person who sells the LI policy is called the viator and they are represented by the viatical broker.
State Guarantee Association
Association governed by individual state regulations where membered insurers are responsible for paying obligations to policyholders if another member is unable to meet them. This includes cash values, death benefits, etc. Guarantee associations cannot be used as a sales tool for solicitation of insurance business before or during the sale. State guarantee associations do not guarantee variable products; only fixed.
Taxation
Death benefits are paid tax-free but withdrawals from policies with cash value are considered taxable in come. Loans are also tax-free except from MECs.
Prospectus for Variable Life Insurance
Prospectus describes the variable life insured’s investment objectives and securities they are invested in
Graham-Leach-Bliley Act
Includes provisions that govern how private information is disclosed to third parties. Institution must disclose their disclosure process with regards to the protected information.
Cross Purchase Buy-Sell Agreement vs. Entity Purchase
Each owner of a business each purchases a policy on the lives of the other owners. At the triggering even (disability/death/etc), the benefit paid to the other owners is used to purchase the portion of the business owned by the disabled/dead owner.
Entity purchase is when the business is the policy owner; not the individual owners.
Dividends
Overcharges of premium and adjustments to the cost of insurance
Calculation of Premiums
Mortality + Expenses - Interest
Risk on the mortality rates (based on mortality tables) PLUS the company expenses MINUS any interest they can earn on the premiums collected
Executive Bonus Plan
Company increases the salary of executives to pay for a bonus life insurance plan where benefit is payable to beneficiaries (not business) *separates from key person
Agent Report
Contains information such as relationship between the client and agent, personal observations of clients’ habits, and financial information.
Backdating LI Policy
LI policies can be backdated 90 days
What is given by an agent to underwriter?
Patient’s medical information, general information, and agent report which includes relationship, personal observation of habits, and financial information. Attending physician report is not included; it would be requested separately by the U/W.
What is used to underwrite LI applicants?
Application, attending physician statements, examinations, consumer reports, medical questionnaires, and the MIB. Mortality table is used to calculate premiums. Patient does not need to provide proof of age.
Replacement
Replacement is defined as an existing policy being: lapsed, forfeited, surrendered, or cancelled; used as collateral for a loan or series of loans totaling 25% or more of its cash value; reduced in the policy’s face amount; or being continued under one of the non-forfeiture options. Rules and regulation of replacement center around protecting the consumer from illegal or incorrect practices of the agent/company.
Adverse Underwriting Decision
Application is declined, policy issued on a substandard (rated) basis, or agent refused to send an application to the preferred insurance company.
Social Security Benefits and Blackout Period
Social Security benefits are not paid to widower of a deceased worker once all of their children have reached age 16 (known as the blackout period) after they have reached 60 years old. Dependent children will receive benefits up until age 18 (19 if still in HS), or 22 if disabled. Surviving spouses with no dependent children receive benefits until age 60.
MIB
Medical Information Bureau. Applicant is told at the time of application that the insurance company will obtain an MIB report and they sign an authorization saying that this is okay. MIB will help insurance companies detect fraud or misinformation from applications and will send back alerts as “red flags” to more thoroughly investigate the applicant. Information includes pertinent health info from other health insurance applications. Information from an MIB cannot be the sole reason an applicant is denied.
Buyer’s guide
Document of information that the state says is important for life insurance purchasers to know. Must (by law) be issued at the time of application unless the insurer has a 10 day free look period. Buyers guide and proposal summary must be delivered to applicant by agent.
Taxation of Key Employee LI
Company cannot deduct the premium (because it benefits them), but benefits are tax-free
When does coverage on an LI policy begin with a conditional receipt?
Begins the later of 1. the date of the application 2. when all medical exams have been complete. If no conditional receipt, the coverage begins then the agent delivers the policy and collects initial premium. Conditional receipt basically binds the policy and says that the policy is guaranteed and in effect even if person dies during the u.w process.
Stranger Oriented Life Insurance
No insurable interest
Insurable Interest
Only needed at the time of a policy application. Siblings do not have insurable interest on each other, nor does an adult on their parent.
Participating Policy
A policy that shares in a company’s excess funds or surplus. Has to do with dividends (return of overcharged premium)
