Life Basics. 2.1 Definitions LEARNING OBJECTIVES OVERVIEW

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1 2 Life Basics LEARNING OBJECTIVES Upon the completion of this chapter, you will be able to: 1. Distinguish between a policyowner and an insured 2. Identify the receipts used when collecting premium 3. Recognize the primary information sources for underwriting 4. Differentiate between standard, preferred and substandard risks 5. Identify the personal uses of life insurance 6. Compare the methods of determining the amount of life insurance needed OVERVIEW The purpose of this chapter is to outline the process of completing the application, underwriting, and delivering the life insurance policy. This chapter will acquaint the student with personal uses of life insurance and methods of determining the appropriate amount of life insurance to purchase. It will also provide an overview of the classes of life insurance policies that exist, and the concept of third party ownership. 2.1 Definitions Applicant Term Application Beneficiary Insurable Interest Policyowner Third-Party Ownership Issue (Original) Age Attained Age Definition A person making application for himself/herself or another to be insured under an insurance contract. The applicant may be the insured, the owner or both. A written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the primary source of information used for underwriting purposes. One or more parties named in the policy to receive the policy proceeds, or death benefits, if the insured dies while the contract is in force. The relationship that must exist between the applicant and insured, at the time of application and policy issuance, in order for the contract to be valid. An individual has an insurable interest in his or her own self. Insurable interest also exists if a financial or economic loss by the owner results in the event that the insured dies. Examples of insurable interest include a policy taken out on a family member, business partner, or debtor of the policyowner. The individual who has ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily. Any changes made to a policy must be approved by the policyowner in writing with his/her signature. A policy owned by a person other than the insured. Insured s age on the policy issue date. Insured s age at any point in time, typically used at renewal or conversion. A.D.Banker&Company 23

2 CHAPTER TWO Term Effective Date Expiration Date Definition The date when insurance coverage begins. The date when insurance coverage ends. Retention Question 1 All of the following are examples of a third-party ownership, EXCEPT: a. J is named as the owner and beneficiary of G s policy b. S applies for a policy on herself and names her husband as the beneficiary c. T applies for and owns his 2-year-old son s policy, but names his wife beneficiary d. J applies for his life insurance policy and names his trust as the owner and beneficiary Retention Question 2 A business owner buys a life policy on his own life. He may be all of the following, EXCEPT: a. Owner b. Applicant c. Beneficiary d. Insured 2.2 Producer Responsibilities Solicitation Advertising Producers are governed under the rules and regulations (referred to as Unfair Trade Practices) with regard to what they can and cannot use or say when soliciting insurance. Do Not Call Registry The Federal Trade Commission amended the Telemarketing Sales Rule to give consumers a choice about whether they want to receive most telemarketing calls. It is prohibited under the Telephone Consumer Protection Act (TCPA) for most telemarketers or sellers to call a number listed on the National Do Not Call Registry. Companies must update their list at least once every 31 days. Telemarketers and sellers are required to search the registry at least once every 31 days and drop from their call lists the phone numbers of consumers who have registered. Telephone solicitation calls to your home before 8 a.m. or after 9 p.m. are prohibited. Anyone making a telephone solicitation call to your home must provide his/her name, the name of the entity on whose behalf the call is being made, and a telephone number or address at which you may contact that entity. Sales Presentation Producers are required to provide all prospective buyers the following: Buyer s Guide A generic brochure developed by the NAIC to assist prospective buyers of life insurance. Descriptions of all basic types of life insurance as well as comparative costs of each are included. Policy Summary Normally, a computer-generated illustration detailing: The premiums (current and guaranteed) to be paid along with current and guaranteed interest rates. The guaranteed and non-guaranteed cash value and projected dividends, if any. The summary is not required to show the time value of money. 24 A.D.Banker&Company

3 LIFE BASICS The surrender values and other guaranteed data pertaining to the policy that is being shown. The producer s name and address, along with the address of the insurance company. The state law generally requires that an insurer provides prospective purchasers a copy of the Buyer s Guide and Policy Summary (illustration) not later than at the time a policy is delivered. Policy Replacement Replacement Any transaction in which a new life policy or annuity is to be purchased, and the producer knows, or should know, that existing contract(s) will be: Lapsed, forfeited, surrendered or terminated Reduced in value Amended with a reduction in benefit or term Reissued with a reduced cash value Subjected to borrowing Replacing Insurer The insurer responsible for issuing the new policy. Existing Insurer The insurer who issued the policy to be replaced. Conservation The act of saving or keeping the existing policy and preventing it from being replaced. The Producer s Responsibilities Include: Completing a Notice Regarding Replacement which must be signed by the applicant and producer. Obtain information regarding any existing policies, including the names of the existing insurers and policy numbers (this must be provided to the replacing insurer). Providing copies of the Notice Regarding Replacement and any sales proposals to the applicant and replacing insurer. The Replacing Insurer s Responsibilities Include: Upon receiving proper notification with the new application, the replacing insurer must notify the existing insurer of the planned replacement. Maintaining copies of the information regarding replacement for a specified period of time. See the state insurance chapter for additional state-specific information regarding replacement. Retention Question 3 At the time of a life insurance policy delivery, a producer must provide which of the following? a. A copy of the insurance company s most recent annual report b. A copy of the fact finding data collected on the initial sales appointment c. A copy of the Buyers Guide to Health Insurance, if interest was expressed in buying health insurance d. A copy of the illustration that matches the policy for which was approved A.D.Banker&Company 25

4 CHAPTER TWO 2.3 Completing the Application Completing the Application and Field Underwriting An application is a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the consumer making an offer to the insurer. It is the producer s responsibility to probe beyond the stated questions, which is known as field underwriting. The application is the primary source of information for an insurer underwriting a potential risk. In fact, a copy of the application if attached to the policy becomes part of the entire contract. Required Signatures Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor a guardian must sign the application. Changes in the Application Whenever an answer to a question needs to be corrected, the applicant or producer makes the correction and the applicant initials the change, or the producer can complete a new application. Consequences of Incomplete Applications It is the producer s responsibility to make certain the application is filled out completely, correctly, and to the best of the applicant s knowledge. The producer s primary underwriting role is to make sure the application provides proper information for the insurer. The underwriter will return an incomplete application to the producer for completion by the applicant. If a policy is issued with questions unanswered, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application. Collecting the Initial Premium and Issuing the Receipt A producer should attempt to collect the initial premium and submit it along with the application to the insurer, because the policy will not go into effect until the first premium has been paid. If the premium is paid with a check that is not signed (or does not clear), it is not considered paid and coverage is not effective. The types of receipts that can be issued when premium is submitted with the application are: Conditional Receipt If premium is paid, coverage will be in effect the date of application or completion of the medical exam, whichever is later as long as the policy would have been issued as applied for. Example If a producer provides a conditional receipt at the time of application when the premium is paid, coverage will become effective as of the date of the application or date of requested medical exam as long as the policy is issued as applied for. If a loss occurs prior to the policy issuance, the insurer would have to prove they would not have issued the policy as requested to avoid paying a claim. Binding (Unconditional) Receipt If premium is paid, coverage will begin immediately for a specific length of time regardless of whether the applicant is ultimately approved by the insurer. This may also be referred to as a temporary insurance agreement. Acceptance (Approval) Conditional Receipt The coverage becomes effective at application approval. If the company doesn t approve the application, coverage was never in effect. Trial Application A trial application is one submitted without a premium. The policy would not take effect until the policy is issued by the insurer, delivered by the agent and the premium is paid. 26 A.D.Banker&Company

5 LIFE BASICS Notice of Information Practices and Disclosure Fair Credit Reporting Act (FCRA) The insurance company must meet requirements under the FCRA when gathering information from a third party to use during underwriting. The applicant must be notified and give consent for information to be received by a third party. This information is disclosed as part of the application. The signature on the application by the applicant serves as the notice of information practices. This gives the insurance company the right to obtain the various investigative, medical, and financial reports to compete the underwriting process. If the insurer declines coverage, the applicant will have the right to obtain a copy of all reports from the reporting agency. This is referred to as a post application consumer review. Disclosure at Point of Sale Issues Relating to AIDS Insurers must: Avoid making or permitting unfair discrimination between individuals of the same class in the underwriting for the risks of Acquired Immune Deficiency Syndrome (AIDS). Require the maintenance of strict confidentiality of personal information obtained through testing and to require informed consent before testing for HIV. (The HIV Consent Form specifies which individuals may receive the test results.) Insurance companies may refuse to issue a policy to individuals based on positive HIV test results. However, Applicants must consent to be tested for HIV and be informed that testing for HIV may determine insurability. Errors and Omissions Insurance covering the liability of a producer or agency, typically written with a deductible to reduce claims frequency. Claims are filed due to client reports (complaints) and for a number of reasons. Two common complaints are: Inadequacy Failing to obtain proper type or amount of coverage for a client. Negligence Quoting inflated information, misrepresenting a plan of coverage, or neglecting to reveal the effect information might have on the client at a later date. The producer may be guilty of negligence whether the mistakes are intentional or unintentional. Retention Question 4 Who is required to sign a completed application? a. The producer b. The beneficiary c. Any insurance company officer d. The producer s manager A.D.Banker&Company 27

6 CHAPTER TWO Retention Question 5 An applicant for life insurance realizes several days later that she may have answered a question about a health issue incorrectly. She should do which of the following? a. Nothing. Answers in the application must only be true to the best of her knowledge at the time she submits the application b. Wait to find out if she is approved for the insurance first, and then she can let the company know she may have made a mistake c. Contact either her agent or the insurance company and make sure they have the correct information d. Hope that nothing happens in the first year after the policy is issued, because after that it won t matter if the answer was or wasn t correct Retention Question 6 Information from a third party collected by the insurance company in the application for insurance and during underwriting of the policy may be subject to the jurisdiction of the: a. Unfair Claims Practices Act b. Deceptive Trade Practices Act c. Fair Claims Reporting Act d. Fair Credit Reporting Act 2.4 Individual Underwriting by the Insurer Underwriting is the process of selection, classification and rating: determining if someone is insurable, classifying the risk, and determining the rate or premium to be charged. The sources of underwriting include the application, medical exams, an Attending Physician s Statement, the Medical Information Bureau (MIB), an inspection report, and the agent s report. Information Sources and Regulation The Application consists of two parts: Part I contains general questions about the applicant, such as sex/gender, marital status, residence, date of birth, occupation, and past and present life insurance. Part II contains questions pertaining to medical background, past and present health, any medical visits, hospitalizations, or surgeries in recent years, medical status of immediate family members, including their ages and causes of death. Medical Examinations are conducted by physicians or nurses who provide results of an examination and information regarding the applicant s present health. It is usually requested by the insurer after determining if the amount of coverage, age of applicant, or health history warrant the examination. It is more frequently requested due to the higher amounts of insurance applied for coupled with the high degree of cardiovascular concerns, high cholesterol and enzyme levels, as well as the prevalence of the HIV virus. Medical exams are at the insurer s expense. The results of the Medical Examination is the only report that may be copied and made part of the policy. 28 A.D.Banker&Company

7 LIFE BASICS Attending Physician Statement (APS) is used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. The applicant s treating physician will complete this as part of the applicant s medical history. An applicant must sign a written release to enable a release of the APS. The insurer pays for this. The primary purpose of the Medical Information Bureau (MIB) is to collect adverse medical information about an applicant s health (supported by insurance companies) and act as an information exchange. MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Canada. MIB s Underwriting Services are used exclusively by MIB s member life and health insurance companies to assess an individual s risk and eligibility during the underwriting of life, health, disability income, critical illness, and longterm care insurance policies. These services alert underwriters to fraud, errors, omissions or misrepresentations made on insurance applications, and the MIB may help lower the cost of life and health insurance for consumers. MIB s coded reports represent general medical information and other conditions (typically hazardous hobbies and adverse driving records) affecting the insurability of the applicant. If the coded reports are inconsistent with the information provided by the applicant, underwriters are required to conduct a further investigation to obtain more information about the reported medical histories or conditions prior to making an underwriting decision. Because the MIB information is general, the MIB cannot solely be used to decline an applicant for insurance. An Inspection Report is a general report of the applicant s finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider. The applicant must be made aware of any information gathering and has rights provided under the FCRA. An Agent s Report is a personal statement submitted by the producer to the insurer regarding the applicant s financial condition, any personal knowledge of the applicant, etc. This information remains confidential between the producer and the insurer, and it does not become part of the entire contract. These reports have only one purpose: to provide information in order for the insurer to determine insurability. Individual Selection Criteria The insurer uses information collected by the field underwriter and other sources to determine the insurability of an individual. It is ultimately the home office underwriter s responsibility to determine if an individual meets the underwriting requirements of the insurer. Example The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will require additional information in the form of an Attending Physician Statement (APS) and/or possibly a medical examination. The underwriter may rate or deny the application based on additional information. The MIB report reveals past medical concerns and cannot be used as the only medical report for rating or denying an application. Nonmedical Application An application used when a policy requested does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required. A.D.Banker&Company 29

8 CHAPTER TWO Classification of Risks Rating Applicants Upon receipt of the information, such as the application, medical exam, blood and urine test results, etc., underwriters analyze the information and determine if the applicant is an acceptable risk. If acceptable, underwriters then determine the classification to be used in the calculation of the premium. Classifications Standard Risks Individuals who have the same health, habits, sex/gender, and occupational characteristics as those reflected in the mortality table. Individuals in this category have an average life expectancy. Preferred Risks Individuals who meet certain requirements and qualify for lower premiums because of ideal health, height and weight. Individuals in this category have a longer than average life expectancy. Substandard Risks (Higher Risk Exposure) Individuals who are not acceptable at standard rates because of poor health, bad habits or occupational hazards. Individuals in this category are issued rated policies, known as surcharges, as follows: Graded (Lien) Plan Initially, only the premium would be refunded in case of death. The death benefit increases over time with the full face amount eventually payable. This is generally used with Senior Life Insurance plans to provide minimal benefits without a medical examination. Rated-up Age Rates an insured at older than actual age. Flat Rate A constant dollar amount added to the standard rate per $1,000 of coverage. If the standard premium is $25 annually for $1,000 of insurance, with a flat rate of $5/$1,000 added to the standard premium the new total premium per $1,000 is now $30. A student pilot or someone who has a hazardous hobby would be flat rated. Tabular Rate A surcharge is calculated using a table showing past claims history of individuals with similar impairments. Declined This is not a rating classification, but a decision that the risk is one for which the insurer refuses to issue insurance. In this case the applicant is deemed uninsurable. Retention Question 7 Which of the following is not true about life insurance applications? a. The application more fully identifies the insured b. The application is confidential communication between the agent and the insurer c. The application may contain all the information underwriting needs to approve the insured d. Applications for life insurance are typically divided into two parts: General Information and Health History 2.5 Premium Determination for me Assumptions and Calculations When calculating premium rates, life insurers assume that all: Premiums are paid in advance of the period of coverage Premiums will be invested and earn interest Claims will be paid by the end of a year 30 A.D.Banker&Company

9 LIFE BASICS Factors in Premium Determination for Life Insurance Premiums are based on expected mortality, interest, and expenses and these factors are used by all insurers to determine premiums. Mortality Mortality Tables are used to give the company a basic estimate of how much money it will need to pay for death claims each year. By using a Mortality Table, a life insurer can determine the average life expectancy for each age group, based on the year of birth. The mortality rate is taken from the Mortality Table that shows life expectancy and the death rate per 1,000 people living in the United States. This table allows the insurer to rate policies using the law of large numbers so accurate mortality predictions are extremely important. The higher the age group, the higher the mortality rate - translating to a higher premium. The Mortality Table also show that males have a higher mortality rate than females. Based on this statistic, males will pay a higher rate than females. Interest Interest earnings are also used in calculating premium. Insurance premiums are paid in advance and insurance companies invest these premiums and assume a certain rate of interest will be earned. The earned interest reduces the amount of premium paid. Expense The amount charged to cover each policy s share of expenses of operation (salaries, commission, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency. Mortality - Interest + Expenses = Total premium paid to the insurer Premium Concepts Net Premium Takes into account interest and mortality factors only. Mortality Interest = (Net Premium) Gross Premium Additional charges (expenses) are added to the net premium rate to enable an insurer to meet all costs under the contract. Net Premium (Mortality - Interest) + Expenses = Gross Premium Reclassifications When reviewing an application, the underwriter may find it necessary to reclassify the risk. This could either increase or decrease the premium. Policy Reserves The net premiums paid plus interest earned; reflect possible contract obligations. A Reserve is an amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability. Premium Payment Mode Mode reflects frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Additional charges are included in modes other than annual to offset the lost interest earnings and increased administration costs. For this reason, the annual mode results in the lowest premium outlay. The more frequently the premiums are paid, the more expensive the mode of payment. A.D.Banker&Company 31

10 CHAPTER TWO Retention Question 8 Which of the following statements correctly describes the difference between gross premium and net premium? a. Net premium is the cost per $1,000 of insurance; Gross premium excludes insurance company expenses b. Gross premium is what the insured pays to the insurance company each month; Net premium is what the agent s commission is based on c. Gross premium is the total amount paid for the policy. Net premium does not include the insurance company s cost of doing business, such as paying claims and other expenses, or the interest the company earns on invested policy reserves d. Net premium is the total paid to the insurance company each month; Gross premium is described in terms of the number of dollars per $1000 a person pays for his/her insurance Retention Question 9 Which of these modes would result in the insured paying the least annual outlay for life insurance? a. Annual b. Semi-annual payroll deduction c. Monthly automatic bank draft d. Quarterly 2.6 Policy Delivery When the insurer determines that an applicant is an acceptable risk, the insurer will send the policy to the producer for delivery to the insured. It is the producer s responsibility to deliver the policy and collect any premiums (if not paid at the time of application). The producer should explain the policy to ensure the policyowner/insured understands the benefits, including any ratings, endorsements, exclusions, and riders. Constructive or legal delivery occurs only if the premium was paid at the time of application. Once the insurer issues the policy, a legal contract has been formed since the policy becomes the acceptance. Once the insurer mails the policy to the producer, it is considered constructively or legally delivered by the insurer. It is still the producer s responsibility to obtain delivery signatures and explain policy benefits to the policyowner/insured. If a policy is not approved as applied, the insurer may make a counteroffer to the applicant. The insurer may issue a policy with a surcharge (higher rating) or exclusions to the policy. The producer must hand-deliver the policy to the applicant to collect any additional premium, explain the changes in coverage and premium, and reinforce the value of the contract. When the initial premium is not paid with the application, the producer must collect the premium before coverage can begin. The producer must also get a signed Statement of Good Health from the applicant/insured at the time of policy delivery that verifies that the insured has not suffered injury or illness, had any surgeries or been admitted to a hospital since the application date. If the applicant is not in good health, the policy should be returned to the insurer for further underwriting. Policy delivery will be accomplished by: Personal delivery, with signed receipt of delivery Registered or certified mail with a signed receipt of delivery 32 A.D.Banker&Company

11 LIFE BASICS 2.7 Personal Uses of Life Insurance There are many personal uses and advantages to purchasing life insurance, including: Survivor Protection Estate Creation Estate Conservation Cash Accumulation Liquidity Pre-need Plan Charities Security Exemption from Creditor Claims/Probate Viatical Settlements Providing funds for surviving spouses and dependents. Life insurance proceeds paid in a lump sum provide financial assets to create an immediate estate the insured can pass on to survivors. Provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner (the insured) preserving the insured s estate. An amount of cash accessible to the policyowner from within permanent life insurance policies. Immediate funds available upon death to pay creditors, taxes and final expenses as well as cash values available for policy loans, withdrawals, and full surrenders. A type of coverage with a small face amount, typically purchased to pay the burial expenses of the insured. To help fund favorite charitable organizations upon the insured s death. Peace of mind knowing that future insurability is not an issue, and benefits will be in place as long as the required premiums are paid. The policy s values are normally exempt from any creditor claims, unless the policy was assigned as collateral for a loan that still exists at the time of the insured s death. A terminally ill insured/owner selling his/her policy to a third party for less than the death benefit but more than the cash values in order to obtain funds when no other sources are readily available. Life insurance reduces uncertainty, giving a greater peace of mind while replacing the possibility of a larger loss (income) with a known smaller loss (premium). Life insurance does not eliminate risk; it reduces the loss by transferring the larger risk from the policyowner/insured to the insurance company. Stranger Originated Life Insurance (STOLI)/ Investor Originated Life Insurance (IOLI) The life settlement industry has increased the awareness of these terms. The terms describe investors, producers, or brokers with absolutely no personal or business connection with a person, who induce a purchase of a life insurance policy with the sole intent of selling that policy to institutional investors for an amount less than the death benefit, but greater than the policy s cash value. Essentially, the insured is selling their mortality. After the investors have paid for the policy, they will change the ownership and beneficiary designations. The investors will also have to pay premiums to keep the policy in force. Upon death of the insured the investors will file a claim for the death benefit. The practice of STOLI and IOLI has resulted in fraudulent abuses causing many states to outlaw STOLI and IOLI policies due to a lack of insurable interest. Retention Question 10 A personal use of life insurance does which of the following? a. Creates an insurable interest b. Creates an immediate estate c. Provides protection against living too long d. Compensates a business for the death of a key person A.D.Banker&Company 33

12 CHAPTER TWO 2.8 Determining Amount of Personal Life Insurance Needed Two of the approaches used to determine the need and amount of life insurance are human life value and needs analysis. Human Life Value This approach is a measure of the projected future earnings of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents using the following factors: The individual s age and gender The individual s occupation The individual s annual wage and employment benefits The individual s planned retirement age Inflation This method takes inflation into consideration when determining the amount of insurance coverage needed. Needs Analysis This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following items into arriving at the proper amount of coverage needed: Calculate all financial needs caused by an immediate death, including debts, medical bills and final expenses. Provide lifetime income to the spouse. Pay off a mortgage or other debt. Provide funds for children s education. An Emergency Reserve Fund or lump-sum needs may be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured. Subtracts any assets available to fund financial needs after death. Income Objective To analyze the insurance needs in either approach, the producer must also take into consideration the income objective of the proposed insured. The producer can use two methods of income objectives to arrive at the amount of insurance needed to fill the human life value or needs analysis requirements: Capital Liquidation Assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents. When income is paid out under capital liquidation, the account balance will decrease as each payment is distributed. Capital Retention/Conservation Assumes the desired income will be generated by the interest only, thus retaining or conserving the principal. 34 A.D.Banker&Company

13 LIFE BASICS Retention Question 11 When determining an appropriate amount of life insurance, a producer takes into consideration the existing mortgage and other debt, future education expenses for the client s children and continuing income for his surviving spouse. This approach is known as: a. Human life value b. The DIME method of insurance planning c. Needs analysis d. The NAIC Model 2.9 Classes of Life Insurance Policies Group An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors or members. Group insurance generally provides protection for an employee s named beneficiary, typically their spouse if married. The coverage may be changed only in the Master policy. The coverage is normally written on a renewable term basis providing no cash value or living benefits as found in individual cash value policies. The amount of coverage can be limited to a fixed dollar amount such as $50,000 or a multiple of earnings (for example, 2 times annual salary). Some group plans allow for the purchase of additional coverage which may be partially or fully underwritten. Upon retirement, group coverage can be converted to an individual permanent life insurance plan without having to prove insurability. Individual The greatest difference between group and individual life insurance is the full latitude of ownership. Unlike group policies, individual policies may be of any classification or type of insurance. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill. Unlike group insurance, which can end upon separation of service or the employer choosing to discontinue the plan, individually owned policies leave the decision of keeping the policy to the policyowner. Ordinary Life Insurance Any type of life insurance that is not group, industrial or government insurance. A large number of people are insured with an ordinary life policy making this the larger portion of the life insurance in force today. Industrial (Home Service) Synonymous with debit life insurance and makes up only about.03% of the life insurance today. These small policies, normally $250 to $1,000, were originally sold to pay funeral expenses. Permanent A life insurance policy that remains in force to age 100 or beyond. The premium is always higher than that on a term policy at issuance when the amount of coverage and underwriting factors are equal. This policy provides for living benefits for the policyowner or insured by way of its cash values. It also has many options available to the policyowner as will be described later in the text. Term Lowest of initial premium outlay and designed for someone with a large insurance need but with limited cash flow. This coverage is often referred to as temporary, as it is usually written to cover a short time period. This policy does not build cash values and the benefit will either remain level, increase, or decrease depending on the type of policy. It is typically used to cover mortgages, short term obligations, or for younger couples with one or more children. Participating A class of policy marketed by a mutually owned company. The word participating means a dividend may be paid to the policyowner when they are declared by the board of directors. A.D.Banker&Company 35

14 CHAPTER TWO The company is not required to issue only participating policies, but only participating policies will be eligible for dividends. Participating policy dividends are treated as a refund of premium for tax purposes initially. However, once all premiums have been recovered, any further dividends are taxable. Nonparticipating A policy marketed by a stock insurer. A stock insurer is a company under the control of the stockholders who would receive a share of any profits in the form of a corporate dividend, as opposed to a policy dividend. Stock dividends are treated as ordinary income for tax purposes. A policyholder does not have to be a stockholder. Fixed The policy has a fixed amount of coverage, benefits and premium. Without riders, future inflationary trends will cause the purchasing power of the policy s benefits to be reduced. Flexible Universal and Variable Universal Life policies have given the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies assist the insured during inflationary periods with the changing needs of the policyowner and insured. Variable A policy introduced in the 1970s that uses separate account(s) for the cash value accumulation. The separate accounts are similar in nature to mutual funds, and a securities and life insurance license are required to sell this policy. The policyowner takes on the investment risk of the policy. The policy s overall death benefit can increase along with the cash values with positive investment performance coming from the separate accounts selected, however, there is no guarantee of return and down markets can cause significant loss of policy value. Retention Question 12 Which of the following describes group life insurance? a. A single policy issued to an individual covering husband, wife and children b. Multiple policies issued to an employer to cover a specific group of executives c. A single policy issued to a group of individuals who have formed an alliance to obtain life insurance at reduced rates. d. A single policy issued to a business to cover the lives of employees Chapter Two Lightning Facts 1. The applicant is the person submitting the application for insurance, either for himself or another person. The applicant may be the insured, the owner or both The insured is the person whose death results in the payment of the policy proceeds The policyowner is the person who has control of all policy decisions. The policyowner and insured are usually, but not necessarily the same person The beneficiary is the person(s) who will receive the policy proceeds following the death of the insured The insured cannot be the beneficiary, but the beneficiary could be the applicant and/or the owner Third-party ownership occurs when a life insurance policy is owned by anyone other than the insured The application for life insurance is the primary underwriting document. All questions must be answered on the application All applications must be signed by the applicant and the producer. If the applicant is a minor, a guardian must sign the application The producer is responsible for making sure the application is completely filled out. An incomplete application may delay the underwriting process A.D.Banker&Company

15 LIFE BASICS 10. A conditional receipt provides coverage from the date of the application, or the date of a completed medical exam (if required), whichever is later. There is no coverage under a conditional receipt if the insured is found to be a substandard risk or is declined for insurance The Fair Credit Reporting Act (FCRA) governs the collection of information about an applicant from a third party Insurance producers should have Errors & Omissions (E&O) liability insurance. E&O provides protection against acts of negligence or claims of inadequacy. Criminal acts are always excluded from coverage The application for life insurance is the primary underwriting tool and consists of two parts. Part 1 contains general information about the applicant and Part 2 contains questions of medical background and health history. They are attached to the policy and become part of the entire contract The Medical Information Bureau (MIB) compiles data supplied by life and health insurance companies obtained through applications and underwriting for individual insurance An inspection report (or consumer investigative report) is a detailed look at a person for lifestyle matters as well as prior bankruptcies, criminal convictions, and civil judgments. The applicant must be made aware of any information gathering and his rights under the FCRA Applicants approved for coverage will be rated according to their risk profile as preferred, standard, or substandard Preferred risks have ideal health, height / weight, and will be charged a lower rate. Substandard risks have poorer health, riskier habits or occupation and will issued rated policies Life insurance premiums are calculated using the formula: Mortality Interest + Expenses Gross premium is the total paid to the insurer. Net premium is the Mortality less Interest value (pure cost of insurance), and does not include any loads or other expenses. 20. Mode is the frequency of scheduled premium payments. There are four standard modes: Annual (1 payment), Semiannual (2 payments), Quarterly (4 payments), and monthly (12 payments) An annual premium is the least expensive mode of premium payment. The more frequently premiums are paid, the more expensive the payment mode is Once a policy is approved and issued, it must be delivered to the policyowner. Delivery may be made in person, by certified or registered mail, or by any other means approved by the state insurance regulator. The insurer has the burden of proof to show that a policy was delivered If a policy is issued without the initial premium, the policyowner must sign a statement of good health acknowledging information on the application is still accurate When determining what constitutes a reasonable amount of life insurance for a person, agents typically use one of two common methods: (1) Human Life Value, and (2) Needs Analysis Approach Human Life Value is the measure of a person s projected future earnings and services. It is based upon age, gender, occupation, annual wages / benefits and planned retirement age A Needs Analysis looks in greater depth at the insured s goals and objectives, family/household size, income, debt, mortgage, education funding requirement, and other cash uses for life insurance Industrial insurance policies have very small death benefit amounts and were originally sold to pay funeral expenses Life insurance policies must be identified as either participating or nonparticipating. A participating policy is issued by a mutual insurer and offers a policyowner the ability to receive policy dividends if declared. 2.9 A.D.Banker&Company 37