Producer Responsibilities Flashcards
Comparing Policies:
The traditional net cost method, also called the __________________________, identifies the cost of funding the pure insurance portion of a life policy over a specified study period (typically 10 or 20 years).
What are the 4 steps in calculating the cost?
The end result is the net cost of $_________ of protection per year.
Since interest rates vary, this method does not provide an accurate projection of a policy’s true cost and its use is _______________ today
The traditional net cost method, also called the surrender cost index method, identifies the cost of funding the pure insurance portion of a life policy over a specified study period (typically 10 or 20 years).
In simplified form, the formula for calculating the traditional net cost has four steps:
- Total the premiums that are projected to be paid over a specified period of time (e.g., 10 years and 20 years).
- Subtract any anticipated policy dividends and the cash value at the end of this period.
- Divide the net result in step 2 by the policy face amount (in terms of thousands). For example, if the policy has a $50,000 face amount, the net result would be divided by 50.
- Divide the result in step 3 by the number of years under study (e.g., 10 or 20 years).
The end result is the net cost of $1,000 of protection per year.
Since interest rates vary by insurer and are an important element in a life policy’s ultimate cost, this method does not provide an accurate projection of a policy’s true cost and its use is diminishing today.
Premium x years = $100 x 12 x 10 years = 2. Subtract dividends and final cash value = 3. Divide by face value in terms of 1000’s = 50,000 is 50 4. Divide by number of years = The end result is the net cost of $1,000 of protection per year.
Comparing Policies:
Interest-Adjusted Net Cost Method, also called the ________________________, the interest-adjusted net cost method factors in the interest rate credited to the policy.
List the 5 steps of formula for calculating.
Also called the net payment cost index, the interest-adjusted net cost method factors in the interest rate credited to the policy.
Because it accounts for the time value of money, the interest-adjusted net cost method is more widely used today than the traditional net cost method.
The interest rate used in the calculation is the rate credited by the insurer to its cash values.
The simplified formula has five steps:
- Total the premiums that are projected to be paid over a specified period of time (e.g., 10 years and 20 years) and apply an assumed interest rate of growth to those amounts (e.g., 3 percent or 4 percent).
- Total the policy dividends (if applicable) that are projected to be paid over the study period and apply an assumed interest rate of growth to those amounts (e.g., 3 percent or 4 percent). It is assumed dividends are retained in the policy during the study period.
- Subtract the projected cash value and accumulated dividends at the end of the study period.
- Divide the net result by the policy face amount (in terms of thousands). For example, if the policy has a $50,000 face amount, the net result would be divided by 50.
- Divide the result by the number of years under study.
The end result is the interest-adjusted net cost of $1,000 of protection per year.
List 10 valid reasons for Replacement Insurance
List 4 consequences of getting a replacement policy.
Replacement occurs when an applicant is about to buy a new life insurance policy or annuity and, as a result of the purchase, an existing life insurance policy or annuity will be
- lapsed
- surrendered
- forfeited
- terminated
- otherwise compromised
- converted to reduced paid-up insurance;
- continued as extended term insurance;
- reduction in value by the use of nonforfeiture benefits or other policy values;
- amended with a reduction in benefits or term of coverage; or
- reissued with a reduced cash value.
Producers must be careful to avoid improper replacement and generating commissions on the sale of replacement policies when replacement is not in the applicant’s best interest.
Potential consequences of a life insurance policy replacement include:
- The applicant must give new evidence of insurability.
- The new policy may have terms that are less favorable to the insured than those of the existing policy.
- The applicant will need to satisfy a new contestability period (usually two years from the effective date of coverage).
- The new policy will usually not have current cash values.
If a life insurance or annuity transaction will include replacement, the producer or insurer has a duty to inform the applicant of the real and potential consequences of replacing the policy.
States regulate these disclosures in different ways, but all require the producer and insurer to act only in the best interests of the applicant.
Replacement Insurance - converted to reduced paid-up insurance
Under the reduced paid-up insurance option, the policyowner may request that the cash value of the policy be used to pay for the policy itself.
This action would not terminate the policy, but would keep a reduced amount of paid-up insurance in force under the same policy.
What is a ‘Nonforfeiture Clause’ and what does it guarantee?
A nonforfeiture clause is an insurance clause stipulating that an insured party can receive full or partial benefits or a partial refund of premiums after a _________ due to ______________-.
A nonforfeiture clause is an insurance clause stipulating that an insured party can receive full or partial benefits or a partial refund of premiums after a lapse due to non-payment.
Duties of the Producer and Insurer in a Replacement
- List all …
- Give the applicant a ________________ ________________ signed by the producer;
- Gives the applicant a “__________ ____ _____________ _____________ _____________ ___ _______________”
Copies must be left with the _______________.
A __________________ is required to notify the insurer whose policy is about to be replaced about the pending transaction.
Replacing insurer is required to maintain records of each replacement tranaction for _____ years. NY is _____ years?
Duties of the Producer in a Replacement Producers must determine whether or not the sale of a life insurance policy or annuity will replace an existing policy or annuity, and obtain a signed statement from the applicant in either case.
This statement is sent with the application to the insurer. In cases where replacement is involved, the producer must also
- Lists all existing life insurance policies that will be replaced;
- Gives the applicant a comparison statement signed by the producer;
- Gives the applicant a “Notice to Applicants Regarding Replacement of Life Insurance.”
Copies of all forms used in the transaction are to be left with the applicant.
Duties of the Insurer in a Replacement
A replacing insurer is required to notify the insurer whose policy is about to be replaced about the pending transaction. This gives the existing insurer an opportunity to conserve (preserve) the policy. If the existing insurer requests them, the replacing insurer must provide copies of the policy cost comparison and proposals used in the transaction.
The replacing insurer is required to maintain records of each replacement transaction for several years (usually 3 to 5) or until the next regular examination by the insurance department. What is NY’s time requirement?
What is HIPAA?
The insurer has a duty to notify the applicant of his or her right to _______ and to give the applicant a chance to either consent to the disclosure or to refuse.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposed strict requirements on those who collect, transfer, and exchange health and medical information about consumers.
The law particularly affects health care providers, who are required to protect the confidentiality of their patients’ health and medical information.
However, insurers are also subject to HIPAA’s privacy requirements because they collect and use this information from applicants and insureds.
The insurer has a duty to notify the applicant of his or her right to privacy and to give the applicant a chance to either consent to the disclosure or to refuse the sharing of this information with other parties.
This is especially true when dealing with information about HIV tests and their results.
Notice of Information Practices
Producers also inform consumers about the _________ that companies use during the review and underwriting processes.
This process includes giving the applicant a “___________________________“ statement.
Some of the sources that insurance companies use for information about their applicants include: List 4.
Producers also inform consumers about the practices that companies use during the review and underwriting processes.
This process includes giving the applicant a “Notice of Information Practices” statement.
It explains in writing that the insurer may seek information from sources other than the application to get details about the proposed insured.
Some of the sources that insurance companies use for information about their applicants include
investigative agencies, credit agencies, and the Medical Information Bureau.
Which 3 agencies regulate and enforce the National Do Not Call Registry?
When a consumer registers a telephone number, businesses have up to ___ days after the date of registration in which to stop calling that number.
The insurer can call the consumer for ___ months after the inquiry or application.
If the consumer has an existing relationship with a business, the business can call for up to ___ months after the consumer’s last purchase, delivery, or payment.
Businesses that violate the prohibitions of the registry are subject to stiff penalties, including a fine of $_________ per violation.
The National Do Not Call Registry contains telephone numbers that consumers have registered to limit the telemarketing calls they receive.
It applies to any campaign or program to sell or market goods or services through interstate commerce, including the sale and marketing of insurance products and services.
When a consumer registers a telephone number, businesses have up to 31 days after the date of registration in which to stop calling that number.
The Federal Trade Commission (FTC), Federal Communications Commission (FCC), and state governments regulate and enforce the provisions of the registry.
While registering a telephone number in the registry is intended to limit the placement of telemarketing calls to that number, certain calls are still permitted. These include calls from businesses that have the consumer’s express written permission.
The insurer can call the consumer for 3 months after the inquiry or application.
If the consumer has an existing relationship with a business, the business can call for up to 18 months after the consumer’s last purchase, delivery, or payment.
Businesses that violate the prohibitions of the registry are subject to stiff penalties, including a fine of $16,000 per violation.
The activities a producer performs when seeking applications for insurance is called ________ ____________.
While insurers rely on their underwriters to determine if an applicant is insurable, the process of helping insurers judge an applicant’s insurability actually begins with the producer.
The activities a producer performs when seeking applications for insurance is called field underwriting.
This includes requesting information about prospective insureds and helping people fill out applications for coverage.
The producer is also responsible for disclosing information about the insurer’s underwriting and policy issue practices.
Application Procedures
What 2 groups of information are collected on an application?
The application for insurance is the insurer’s single most important source of information about the proposed insured.
It is filled out by the producer and the applicant.
The first part of the application contains all the personal information about the applicant. Such personal information includes: name, address, date of birth, occupation, beneficiary information, other non-medical information the insurer may require.
The second part of the application covers the applicant’s medical history. While the application is a key source of underwriting information, it also plays an important legal role. A life insurance policy is a contract, enforceable at law, between the policyowner and the insurer. The application is the basis of the applicant’s offer, and a binding contract is formed on the basis of information provided on the application.
Accordingly, the producer must do everything possible to make sure that the application is complete and accurate.
Backdating the Application
Insurers normally allow an applicant to backdate a policy by up to ___ months.
Because the policy is issued at a younger age, the policyowner pays a _________ premium.
Since coverage is made retroactive to the backdated date, premiums for the backdated period typically must be _______with the first premium payment.
Insurers normally allow an applicant to backdate a policy by up to 6 months.
This backdating qualifies the applicant to have the policy issued at a younger age (another name for this practice is to save age). Because the policy is issued at a younger age, the policyowner pays a lower premium.
Since coverage is made retroactive to the backdated date, premiums for the backdated period typically must be paid with the first premium payment.
Premium Receipts
Premium receipts provide ________ coverage while the application is being approved and before the policy is issued.
There are two common types of premium receipts: ___________ and __________.
Because it represents a key part of the applicant’s consideration for the contract, the payment of the premium has a direct impact on when coverage becomes effective.
If paid with the application, it is possible for coverage to commence when the application is signed.
The details of this immediate coverage are spelled out in the premium receipt given by the producer.
- Premium receipts provide interim coverage while the application is being approved and before the policy is issued.
- Premium receipts are given only when the applicant submits the first premium payment with the application.
If a life insurance policy is issued COD, no interim coverage is provided, and the policy’s effective date is the date the underwriter at the home office approves the application for issue. In those cases, coverage does not commence until the policy is delivered and the initial premium paid.
There are two common types of premium receipts: conditional and binding.
Conditional Receipt (for interim coverage)
With this type of receipt, if the insured were to die after the date of the application (or medical exam), and if the insurer would have issued the policy, then the coverage takes effect _______________.
Insurers usually limit the amount of coverage provided under a conditional receipt, for example, $_____________.
A conditional receipt provides for conditional coverage that begins on the date of application or on the date of a medical exam, if required, whichever is later.
The receipt is made on the condition that underwriting determines the insured is insurable.
Coverage is then issued in the amount applied for.
With this type of receipt, if the insured were to die after the date of the application (or medical exam), and if the insurer would have issued the policy, then the coverage takes effect as of the date of the application.
A death benefit would be paid. If the applicant proves to be uninsurable (or insurable only as substandard) as of the date of application (or medical exam), then no coverage takes effect and the insurer would refund the premium payment.
Insurers usually limit the amount of coverage provided under a conditional receipt, for example, $100,000. This amount may be less than the amount for which the applicant applied.
Binding Receipt
A binding receipt guarantees coverage from the time the applicant completes the application (or the insured completes the medical exam), even if the insured is later found to be ______________.
Usually it is limited to a set period such as ___ days.
A binding receipt guarantees coverage from the time the applicant completes the application (or the insured completes the medical exam), even if the insured is later found to be uninsurable.
Usually it is limited to a set period (such as 60 days) and to a set amount (such as $100,000).
Though binding receipts are rarely permitted with life insurance, the closely related temporary insurance receipt (or agreement) may be offered by the insurer.
Temporary Insurance Receipt
A related alternative to the binding receipt is the temporary insurance receipt. For the receipt to provide temporary coverage, the proposed insured does not need to be insurable for the coverage he or she applied for. Instead, the application generally asks three to six questions about the proposed insured’s medical history. The applicant must answer all of these questions with a “no” for a temporary insurance receipt to be issued. The questions typically ask whether the proposed insured had been admitted to a hospital or other facility or had surgery performed or recommended within the previous six months; been treated for various named diseases or conditions; and ever had an insurance application modified, declined, or rated. The insurance coverage provided under a temporary insurance receipt is a form of term life insurance. This temporary coverage normally ends at the end of the 90-day period following the date of application. The maximum amount of life insurance coverage provided by the conditional receipt or temporary insurance receipt varies by insurer. It may be as high as, but never more than, the amount of coverage being applied for. The maximum coverage limit generally declines as the proposed insured’s age increases.
Conditional receipt are for …
presented with the first premium to assure intermit coverage that begins immediately
