Life Insurance Basics

Question 1

Regulation of Life Insurance and Annuities:

What is an Insurable Interest?

Answer 1

An insurable interest must exist at the time of application for a life insurance policy.

• An insurable interest may be based on a business relationship (e.g., a corporation insuring its key employees) or on a relationship of love and affection (e.g., a husband and wife).
• Nonprofit charitable organizations also have an insurable interest in a person who names the charity as irrevocable beneficiary of a life insurance policy.
• A person always has an insurable interest in his or her own life, health, and bodily safety.

Question 2

What 2 bodies Regulate Variable Life?

Each Variable Life or Annuity Contract must …

• Assets of the separate account must be valued as often as variable benefits are determined, but at least _______ .
• must state the procedures the insurance company will follow to determine the dollar amount of the variable benefits.
• must also contain a statement on the first page that “_______ ____ _____”.

(SEC, FINRA, and New York)

Answer 2

1. Because variable annuities are considered securities, they are regulated by the Securities and Exchange Commission (SEC).
2. They are also considered insurance products, and as such are regulated by the New York Insurance Department.

Each Variable Life or Annuity Contract must …

• Assets of the separate account must be valued as often as variable benefits are determined, but at least monthly.
• must state the procedures the insurance company will follow to determine the dollar amount of the variable benefits.
• must also contain a statement on the first page that “benefits will vary”.

Question 3

4 charactertistics of Life Insurance on Minors

• Minors who are at least ____ years and ____ months old may purchase life insurance on their own lives or on the lives of others in whom they have an insurable interest.
• However, the beneficiary of the policy must be the minor or a _______________-.
• Minors have the ______ ownership rights and privileges with respect to insurance contracts as do other policyowners.
• An insurer may issue a policy on a minor under the age of 14 years and six months if the person applying for the policy has an __________ _________ in the minor or the minor is dependent upon the person for support.

The amount of insurance, together with other policies, may not exceed the greater of:

• $_________
• ____ percent of the amount of insurance in force on the life of the person applying for the policy

Answer 3

• Minors who are at least 14 years and six months old may purchase life insurance on their own lives or on the lives of others in whom they have an insurable interest.
• However, the beneficiary of the policy must be the minor or a related family member.
• Minors have the same ownership rights and privileges with respect to insurance contracts as do other policyowners.
• An insurer may issue a policy on a minor under the age of 14 years and six months if the person applying for the policy has an insurable interest in the minor or the minor is dependent upon the person for support.

The amount of insurance, together with other policies, may not exceed the greater of:

• $50,000
• 25 percent of the amount of insurance in force on the life of the person applying for the policy

An insurer may issue a policy for more than this amount only if the applicant has an insurable interest in the minor, and the minor is not dependent on him or her for support.

Question 4

Group Life Insurance: Conversion to Individual Policy

When can a group insured convert to a separate individual plan?

If a person is no longer a member of an insured group due to ______________ or __________ of the class of insureds to which he or she belonged, then he or she is permitted to convert his or her coverage under the group plan to individual coverage under a separate individual life insurance policy.

1. Without evidence of __________
2. But they must apply for this individual policy and pay the initial premium within ____ days of leaving the group plan.

Answer 4

If a person is no longer a member of an insured group (due to loss of employment or termination of the class of insureds to which he or she belonged), then he or she is permitted to convert his or her coverage under the group plan to individual coverage under a separate individual life insurance policy.

without evidence of insurability.

must apply for this individual policy and pay the initial premium within 31 days of leaving the group plan.

If a person insured under a group policy dies during the conversion period the individual policy will be paid as a death benefit under the group plan, regardless of whether the person applied for the individual policy or paid the first premium.

The conversion privilege is also available

• to a surviving spouse and children upon the death of an employee;
• to an employee’s spouse upon divorce or annulment; and
• to a child who has reached the limiting age stated in the policy.

Question 5

List the 3 primary rules associated with Advertising.

Answer 5

Advertisements that purport to

1. disclose information about an insurer’s financial condition must show the amount of the insurer’s assets, liabilities, reserves, and surplus and must correspond with the last annual or quarterly statement submitted to the Superintendent.
2. Agents and brokers may not use advertisements that call attention to unauthorized insurers.
3. When an advertisement refers to an insurer, agents and brokers must disclose the insurer’s name and the city, town, or village where the insurer maintains its principal office in the United States.

Question 6

Life Insurance Company Guaranty Corporation

DON’T UNDERSTAND THIS ONE

Answer 6

It is an unfair trade practice for anyone to use the existence of the New York Life Insurance Company Guaranty Corporation, or the protections the corporation offers, for the purpose of selling insurance.

Question 7

The main purpose of a Policy Summary is to …

It includes the following information:

1. producer’s ________ and ________ (or a means through which to obtain answers to questions about the summary)
2. insurer’s _______ and ___________ .
3. generic name of the policy and every rider
4. annual ________ for the policy and each optional rider
5. death benefit
6. ___ _________ ______ at year’s end
7. cash dividends payable at year’s end
8. policy loan _______ ______, if applicable
9. the date the summary was prepared

Must provide a policy summary to all prospective buyers ______ accepting the initial premium.

An insurer must also give a policy summary to any prospective buyer upon _______ .

Answer 7

A policy summary is a document that succinctly states the coverage, costs, benefits, limitations, exclusions, and terms of a proposed life insurance policy for the prospective buyer.

It includes the following information:

1. producer’s name and address (or a means through which to obtain answers to questions about the summary)
2. insurer’s name and home office address
3. generic name of the policy and every rider
4. annual premium for the policy and each optional rider
5. death benefit
6. cash surrender value at year’s end
7. cash dividends payable at year’s end
8. policy loan interest rate, if applicable
9. the date the summary was prepared

Must provide a policy summary to all prospective buyers before accepting the initial premium. An insurer must also give a policy summary to any prospective buyer upon request.

Question 8

Who developed the Buyer’s Guide?

What are the objectives of the guide?

Developed by the ________ _________ _________ _________ (NAIC), it does not endorse a particular insurance company or policy.

An insurer is required to provide a Buyer’s Guide to all prospective buyers

• before accepting the _____________ or
• ______ the policy, if a free-look period in effect.

Answer 8

The life insurance Buyer’s Guide helps prospective buyers determine

• what kind of insurance they need,
• how much insurance they should buy, and
• how to find a policy that best suits their needs and objectives.

Developed by the National Association of Insurance Commissioners (NAIC), it does not endorse a particular insurance company or policy.

An insurer is required to provide a Buyer’s Guide to all prospective buyers

• before accepting the initial premium or
• with the policy, if a free-look period in effect.

Question 9

What 5 things must a Policy Illustration clearly show?

What are the rules governing what a producer must do with the illustration, who holds a copy of the illustraton and for how long?

Answer 9

An insurer or producer can use an illustration to explain a life insurance policy to a consumer.

The illustration should be clearly labeled with the

1. name the insurer, the producer, and the proposed insured.
2. name of the policy and its form number
3. specify the initial death benefit
4. note whether the policy will pay dividends
5. a description of dividends and other nonguaranteed payments - must note that they are not guaranteed

• If a producer uses an illustration to sell a life insurance policy, the producer must send a copy of the illustration to the insurer with the policy application and another copy to the applicant.
• if a producer does not use an illustration, the producer is to note this in writing on a form signed by the applicant.
• insurer keeps copies of any illustrations used in selling a policy—for 6 years after the policy expires

Question 10

What are the 8 reasons for a Replacement?

Answer 10

Replacement occurs when a new life insurance policy or annuity contract is purchased

The agent or insurer knows or should know that with the purchase of the new policy, an existing policy or contract is going to be …

1. lapsed, forfeited, surrendered to any extent, assigned to the replacing insurer, or otherwise terminated;
2. converted to reduced paid-up insurance;
3. continued as extended term insurance;
4. reduced in value through the use of nonforfeiture benefits or other policy values;
5. changed to reduce the benefits or the term for which coverage remains in force or benefits are to be paid;
6. reissued with a reduced cash value;
7. assigned as collateral for a loan; or
8. continued with a stoppage of premiums or a reduction in the amount of premiums paid.

Question 11

Suitability in Annuity Transactions

Suitability Standards don’t apply to which 6 situations?

Answer 11

These suitability standards apply to any recommendation that a producer or insurer makes to a consumer concerning the purchase or replacement of an annuity.

They do not apply to a contract used to fund the following:

1. an employee pension or welfare benefit plan covered by the Employee Retirement and Income Security Act (ERISA);
2. a 401(k) or 403(b) retirement plan;
3. a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization;
4. a nonqualified deferred compensation arrangement set up or maintained by an employer or plan sponsor; or
5. a settlement or assumption of liabilities connected with personal injury litigation or any dispute or resolution of a claim or to
6. transactions involving a direct response solicitation where no recommendation is made,

Question 12

What 12 types of suitability information are collected and analyzed when determining replacement suitability?

Answer 12

The replacement of an annuity contract is the purchase of another annuity contract that results in the original contract

• being terminated,
• reduced in value,
• reduced in benefits or term,
• reissued with a reduced cash value,
• assigned as collateral for a loan,
• or continued with a stoppage of premium or a reduction in the amount of premiums paid.

Suitability information is information that is reasonably appropriate to determine the suitability of a recommendation. This information includes:

1. age
2. annual income
3. financial circumstances and needs, including financial resources used to fund the annuity
4. financial experience
5. financial objectives
6. intended use of the annuity
7. financial time horizon
8. current assets, including investments and life insurance
9. need for liquidity
10. liquid net worth
11. risk tolerance
12. tax status

Question 13

One Duty of the Insurers and Producers is to make sure the consumer is reasonably informed about what 11 aspects of an annuity contract?

Similarly the producer must make sure that they have adequately identified and communicated what 6 implications?

Answer 13

When recommending the purchase or replacement of an annuity contract, the producer or insurer must have reasonable grounds for believing that the recommendation is suitable for the consumer.

The producer or insurer must have a reasonable basis for believing that the consumer is reasonably informed about the various features of the annuity contract, such as

1. the potential surrender period and charge,
2. availability of cash value,
3. possible tax implications if the consumer sells, surrenders, or annuitizes the contact,
4. death benefit,
5. mortality and expense fees,
6. investment advisory fees,
7. possible charges for and features of riders to the contract,
8. limits on interest,
9. guaranteed rates of interest,
10. insurance and investment components, and
11. market risk

In the case of an annuity replacement, the producer or insurer must have a reasonable basis for believing that the replacement is suitable after taking into consideration whether or not the consumer will:

1. incur a surrender charge;
2. be subject to the start of a new surrender period;
3. lose existing benefits;
4. be subject to tax implications if the consumer surrenders or borrows from the annuity contract;
5. be subject to increased fees, investment advisory fees, or charges for riders and other product features;
6. benefit or not from the new annuity contract’s features

The Producer must also find out if the consumer has replaced another annuity contract within the last 36 months.

Question 14

When are Duties of Suitability Not Imposed on a Producer?

Answer 14

A producer or insurer is not obligated to perform these duties with respect to determining the suitability of an annuity contract for a particular consumer if:

• the producer or insurer does not make a recommendation;
• the producer or insurer made a recommendation that was later found to have been based on materially inaccurate material information that the consumer provided;
• the consumer refuses to give relevant suitability information
• the consumer decides to buy the annuity or a replacement that is not based on the producer’s or insurer’s recommendation.

Question 15

What 4 things must be documented at the Time of Purchase or Replacement?

Answer 15

At the time of purchase or replacement, the producer or insurer is required to document:

1. any recommendations made;
2. a consumer’s refusal to give suitability information; and
3. that an annuity purchase or replacement is not recommended
4. if a consumer decides to buy or replace an annuity without relying on the producer’s or insurer’s recommendation.

Question 16

List 3 Duties of Insurers with regard to Supervising Producers

Answer 16

An insurer is required to ensure that its producers comply with the suitability requirements.

• The insurer is responsible for ensuring that its producers are sufficiently trained to make recommendations about its annuity contracts.
• A producer must not recommend an annuity product about which he or she has inadequate knowledge.
• The insurer is required to take corrective measures for any consumer who is harmed by the actions of the insurer, its producer, or a contracted third party that violate the suitability standards.

Such violations subject the insurer to penalties or other disciplinary actions imposed by the Superintendent.

Question 17

Prohibited Producer Activities

What 3 things must a Produce never dissaude a consumer from doing?

Answer 17

An insurance producer cannot dissuade a consumer from:

1. responding truthfully to an insurer’s request to confirm suitability information;
2. filing a complaint with the Superintendent; or
3. cooperating with an investigation of a complaint.

Question 18

What 4 things must the producer submit to the replacing insurer?

What 2 disclosures must be read aloud or waived by applicant.

Answer 18

The producer must …

1. Application to insurer must contain a signed “Definition of Replacement” signed by the agent and the applicant confirming it was read aloud by producer and then submit to the replacing insurer.
2. The producer must give the applicant a “Notice Regarding Replacement” form and a completed disclosure statement

Producer must leave a copy of each form with the applicant.

The producer must submit the following to the replacing insurer:

• a list of all policies or contracts to be replaced
• copies of any proposals and marketing materials used
• proof applicant received the notice and disclosure statement, along with
• the reason for recommending the new life insurance policy or annuity contract

The applicant and the producer are to sign these notices, indicating that the producer has read aloud the contents of the notice and disclosure statement to the applicant, or that the applicant did not want to have the documents read aloud.

Question 19

List 7 Duties of the Replacing Insurance Company

Answer 19

When replacement is involved, the replacing insurer must

1. confirm receipt of the required forms;
2. confirm that the required forms are accurate and comply with the insurance code;
3. provide a copy of the proposal, sales material, and disclosure statement within ten days to the existing insurer;
4. submit quarterly reports with the Superintendent disclosing the names of insurers that have failed to provide information needed to complete disclosure statements;
5. keep copies of the Notice Regarding Replacement, disclosure statement, notification to the existing insurer, and any marketing materials used for at least six years or until the next examination report is filed, whichever is later; and
6. correct deficiencies in any forms or
7. reject the application within ten days after receiving inaccurate or incomplete forms

Insurers are required to maintain a system by which their producers will know about and comply with the regulations concerning replacement transactions. Insurers are also required to monitor their producers for compliance.

Question 20

Prohibited Use of Senior-Specific Certifications and Professional Designations in Sale of Life Insurance and Annuities

Answer 20

An insurance producer is prohibited from using a senior-specific certification or professional designation that indicates or implies in a way that misleads a consumer that the producer is specially certified or qualified to advise or render services to seniors in connection with the solicitation, sale, or purchase of a life insurance policy or annuity contract.

Prohibited uses of such a certification or designation include:

• Use by a producer who had not earned or is not eligible to use the certification or designation;
• Use of a nonexistent certification or designation, or the use of one that the producer awarded to himself or herself; or
• Use that indicates or implies a level of occupational qualifications earned through education, training, or experience that the producer does not have.

Furthermore, the producer cannot use such a certification or designation obtained from an organization that

• is primarily engaged in training people for sales or marketing;
• does not have reasonable standards or procedures for assuring the competency of those to whom it awards its certificates or designations;
• does not have reasonable standards or procedures for monitoring and disciplining those to whom it awards its certificates or designations if they engage in improper or unethical conduct; or
• does not have reasonable continuing education requirements to maintain the certificate or designation.

Question 21

Underwriting: Backdating of Policies

What can a producer never do when selling funeral and burial expense policies?

Answer 21

Life insurance policies may not be backdated more than six months before the date of the application if the premium would consequently be reduced.

Individuals and entities that sell funeral and burial expense policies may not

• issue policies that are payable to a funeral director or other person engaged in the funeral business;
• pay death benefits to a funeral director or another person engaged in the funeral business without the beneficiary’s consent; or
• deprive a deceased insured’s family or personal representative from obtaining funeral supplies and services from third parties.

Question 22

List the 5 requirements of the written consent form for Medical Examinations and Lab Tests Including HIV

Answer 22

An insurer may not test an applicant for HIV or HIV-related diseases without first obtaining the applicant’s informed written consent.

An insurer must give an applicant a written consent form before an HIV test is performed that includes:

1. a general description of the test and its purpose;
2. a statement that a positive test result indicates the person may develop AIDS and he or she may want to undergo independent testing;
3. a statement that the person may designate a third party to whom test results will be sent;
4. the Department of Health’s telephone number, which can be called to obtain further information about AIDS, the meaning of HIV-related test results, and the location of HIV counseling services; and
5. the applicant’s signature.

The insurer must disclose an adverse underwriting decision to the applicant and must ask whether the applicant wants to receive test results directly or have them sent to a third party.

If the applicant receives the results directly, the insurer must advise the person to

• call the Department of Health for further information about AIDS and HIV-related test results; and
• consult with a physician about the meaning about HIV-related test results.

Question 23

Key Points

Answer 23

• An insurable interest must exist at the time of application for a life insurance policy.
• An insurable interest may be based on a business relationship or on a relationship of love and affection.
• A domestic life insurance company that issues variable life insurance or annuities must establish at least one separate account to which it allocates funds to provide for life insurance or annuity benefits.
• The assets of the separate account must be valued as often as variable benefits are determined, but at least monthly.
• Variable life and annuity contracts must contain a statement on the first page informing the policyholder that benefits will vary.
• Minors who are least 14 years and six months old may purchase life insurance on their own lives or on others in whom they have an insurable interest.
• If a person loses group coverage, he or she is entitled to convert his or her group coverage to an individual policy.
• The person must apply for an individual policy and pay the initial premium within 31 days of leaving the group plan.
• Advertisements may not call attention to unauthorized insurers and must disclose an insurer’s name and the city, town, or village where the insurer maintains its principal office in the United States.
• Producers cannot use the existence of the New York Life Insurance Company Guaranty Corporation or the protections it offers for the purpose of selling insurance.
• An insurer or producer can use an illustration to explain a life insurance policy to a consumer.
• The Buyer’s Guide helps prospective buyers determine the kinds of insurance they need, how much they should buy, and how they can find the most suitable policy.
• The policy summary states the coverage, costs, benefits, limitations, exclusions, and terms of a proposed life insurance policy for prospective buyers.
• If a life insurance policy is being replaced, the producer must give the applicant a Definition of Replacement, a Notice Regarding Replacement, and a disclosure statement no later than at the time of application.
• Life insurance policies may not be backdated more than six months before the date of the application.
• An insurer must obtain an applicant’s informed written consent before the applicant can be tested for HIV or HIV-related diseases.
• Applicants may designate a person or entity to receive positive HIV test results.

Question 24

Question 25

Question 26

Question 27