Life Insurance Basics

cso683's version from 2016-02-01 22:08

Section Basics

Question Answer
Purpose of Life InsuranceProtects against financial loss associated with an insured's death and pays a death benefit to beneficiaries.
Parties involved in Life InsurancePolicyowner -> pays a premium to the insurer, Insurer -> issues a policy, Beneficiary -> Receives the death benefit
Insurable InterestPolicy owner must face the possibility of losing money or something of value at the time of application (Debtor - Creditor not applicable)
Examples of Insurable InterestPolicyowner's own life, Life of a Family Member, Life of a business partner/key employee/financial obligation
Personal uses of Life InsuranceSLEEC - Survivor Protection, Liquidity (borrow from cash value), Estate Creation (young families), Estate Conservation (pay inheritance tax/estate tax), Cash Accumulation (cash available to the policy owner during the policy term)
Ways to determine amount of personal life insuranceHuman Life Value Approach, Needs Approach
Human Life Value ApproachBased on Recreating the Income of the insured until retirement, taking interest and inflation into account
Needs ApproachBased on Predicted Needs of family after death of insured
Determining Lump-sum NeedsCBREED - Costs of Death, Bequests, Retirement, Emergency Reserve Funds, Education Funds, Debt Cancellation
Planning for Income NeedsRSL - Replacing Insured's Salary or Services, Social Security Income "Blackout" Period (youngest child 18 - surviving spouse age 60), Liquidation vs. Retention of Capital

Section Business

Question Answer
Business Uses of Life InsuranceBEK, Buy-Sell Funding, Executive Bonus, Key Person
Key Person Life InsuranceThe business is the Applicant, Policyowner, Premium Payer, Beneficiary. Premium not tax deductible, benefit not taxed
Buy-Sell FundingLegal Contract that determines what will be done with a business in the event that an owner dies or becomes disabled
Executive Bonus Employer gives employee a wage increase (life insurance premium). Tax deductible to the employer and income taxable to the employee.
Types of Buy-Sell AgreementsCEPR - (C)ross Purchase - Each partner on the other, (E)ntity Purchase - Partnership on the partners, stock (P)urchase - Each Stockholder on each of the others, stock (R)edemption - Corporation on each shareholder

Section Process

Question Answer
Life Insurance ProcessSUPP - Solicitation and Sales, Underwriting, Premium Determination, Policy Issue & Delivery
Exempt from Solicitation rulesCGLAV - Credit life insurance, Group Life Insurance, Life Insurance issued Employee Retirement Income Security Act of 1974 (Federal), Annuities, Variable Life
Advertising limitsAccurate, limited nature clearly identified, limits on superlative words, disclosure requirements
Maintenance of advertising requirements3 years
Solicitation ConsiderationsGRASP BUIC - Guarantee Association, Replacement Procedures, Advertising limits, Suitability, Policy Summary, Buyer's Guide, Use and Disclosure of Insurance Info, Illustrations, Cost comparison methods
Guarantee AssociationProtects against insolvency of agencies
ReplacementNew Life Insurance or Annuity
Duties of Replacing ProducerNOLS - "Notice Regarding Replacement" to applicant, Obtain a list of all existing policies, Leave the applicant with the original or copy of communications, Submit replacement notice with application
Duties of Existing ProducerRL - Retain notifications for 5 years, Letter to Insured informing of rights on existing policy - 5 working days
Time Frames in Replacement(Utah only) PERRN (555-3010) - Printed copy to applicant - 5 business days, notify Existing insurer - 5 business days, Retain materials - 5 years, Right to return policy - 30 days, Notify applicant to retain sales material - 10 business days
SuitabilityPolicy must be in the best interest of the insured
Policy SummaryWritten Statement describing features and elements of the policy
Buyer's GuideBasic, generic information about life insurance policies
Use and Disclosure of Insurance InfoApplicant is given this info about how they will be investigated
IllustrationsIncludes nonguaranteed elements of a policy (retain for 3 years)
Cost comparison methodsIC - Interest-Adjusted Net Cost Method, Comparative Interest Rate Method
Interest-Adjusted Net Cost MethodConsiders the time value of money including interest (if money were invested elsewhere)
Comparative Interest Rate MethodRate of return that must be earned on a "side fund" to be equal to the surrender value of a policy

Section Underwriting

Question Answer
Underwriting DefinitionRisk selection and classification process
Primary Life Insurance Underwriting CriteriaHOLH - Health, Occupation, Lifestyle, Hobbies/Habits
Agent (Field Underwriter) ResponsibilitiesSACOCD - proper Solicitation of applicants, help prevent Adverse selection, Complete the application, Obtain needed signatures, Collect the required premium, Deliver the policy
Parts of Life Insurance ApplicationGM - General Information, Medical Information
Agent's ReportProvides Agent's personal observations concerning the proposed insured
Signatures requiredAgent and proposed insured, policy owner (if a business purchasing insurance on an employee)
Premium collectionAgent should collect premium and issue a premium receipt
Conditional receiptCoverage will be effective on date of premium payment unless coverage is declined or rated (rated up)
Unconditional (Binding) receiptNormally only for property and casualty insurance (usually stipulate 30-60 days)
Sources of Underwriting InformationPAM,AIM! - Producer (Agent) report, Application, MIB (Medical Information Bureau), Attending Physician report (APS), Investigative Consumer Report, Medical Exam & Lab Test
Classification of RisksPSSD - Preferred (Best), Standard (Most people), Substandard (must pay higher premium), Declined (No insurable interest, potential for loss so great, insurance prohibited)
Factors in Premium DeterminationMIE - Mortality (uses tables), Interest (Life insurance invests the premiums), Expense (Life insurance company has operating expenses)
Life Insurance Math 1 (Net Premium)M - I = NP Mortality - Interest = Net Premium
Life Insurance Math 2 (Gross Premium)N + E = GP Net Premium + Expense (Loading) = Gross Premium
Expenses in Life InsuranceCATP - Commissions, Advertising, Taxes, Profit Margin
Premium Payment ModeLife Insurer assumes they will have the annual premium to invest => paying at higher frequency = higher premium
Policy DeliveryCan mail, but hand delivery preferred - get a Delivery Receipt
Policy ReviewExplain riders, rates, and other choices or provisions
Effective Date of CoverageAt application (if paid with application), at time of delivery (Get a statement of good health from the insured)