Flashcards in Financial Underwriting Deck (74)
How can someone use the cash value in some life insurance policies?
borrow against in the event of a financial crisis, premiums can be paid in ways to reduce income tax burden on policy payor.
What is the number one financial benefit in owning a life insurance polict?
the payable of death benefir to the policy beneficiaries.
When did life insurance start to u.w financial needs?
after the 1929 stock market crash. a # of death claims ^, d/t murder, accidents and suicide. Theres a direct relationship between poor mortality and applicant who paid out a relatively large percentage of their personal income in life insurance policy premiums.
What does anti-selection mean in terms of finance and u/w?
the tendency of individuals, who believe they have a greater than average likelihood of loss to seek insurance protection to greater extent than do those who believe they have an average or less than average likelihood of loss.
What does an u/w look for, when underwriting a policy? (basic)
the purpose of the insurance being applied for and the relationship between the need for insurance and the amount of coverage being requested.
what is the golden rule when u/w financial need of an application?
Cx should have a substantial financial interest in the continued life of the insured and would suffer a significant financial loss in the event of their death.
Name 3 examples of financial dependencies one may have
1. relationship between young children and adults
2. relationship between a non-working spouse and breadwinner
3. A situation involving business owners who badly need the skills of their top salesperson to keep the company profitable.
What is considered wagering or gambling on the life of the insured?
insurance that covers a nonexistent financial loss- implies lack of insurable interest on the part of the beneficiary.
how is the insurable value measured?
its a measure of the financial consequences and obligations created by the insured's death and determines the upper limits of the acceptable death benefit.
What are the consequence of ignoring insurable interest or exceeding the insurable value limits?
the policy beneficiary will receive a monetary windfall at the death of the insured. A substantial death benefit can serve as an incentive for homicide, suicide or fraudulent claim.
Why are claims involving homicide and suicide difficult?
it could cause the company and the u/w harm in public eyes are providing the motivating factor in the death of the insured. [insurance companies have been sued for providing a motive for murder or suicide by issuing a policy)
what is slayer's rule?
prevents beneficiaries and their heirs or representatives from profiting from murder.
what is slayer's statutes?
Slayer's statues expand upon the slayers rule and address unique siotuations, such as what to do if the beneficiary/murderer is a minor, or insane or kills in self-defence.
how do insurance companies defend themselves against suicide?
a suicide clause, that disallows a claim in the even of suicide for up to two years, after the contract has been put in force.
What is a fraudulent claim>
involved misrepresentation of information relating to the insurability of the insured person, or a falsification of the death of the insured.
What is the incontestable clause and what is it used?
prevent claims due to a deliberate misstatement of information on the application. in the first two years, if misrepresentation is found, the contract is voided, and claim payments are prevented.
What happens to a contact after two years of being in force?
it becomes incontestable and misrepresentation is no longer grounds to deny claims.
what is income replacement insurance?
protect financial relationship between insured and family/heirs. Used to provide for ongoing needs of dependents, as well as cash to cover immediate post death expenses. >> most common reason for buying insurance/
what is the multiple of salary method?
used to calculate income replacement. Maximum death benefit is a multiple of the insures income. (60-80% of insueres' income)
what are the two advantages of multiple salary method?
1. easy to use
2. useful in simple sales situations
what are the 7 disadvantages to salary method income?
1. age of the surviving spouse
2. existence of another family wage earner
3. number of dependants
4. the number of years for which income may be needed
5. any changes in government benefits
6. monetary inflation
7. income growth
What is the human life value method? (basic)
another method in computing income replacement- utilizers the concept of human life value, which is a measurement of the earnings potential in the insured's life. - creates a death benefit equal to the current value of the insures future earning.
what factors are included in the calculations of the value of the insurere, using the human life value method?
1. actual after-tax earnings
2. project rated of earnings growth
3. expected length of career
4. discount rate for future earnings.
what is the needs analysis method?
Computes income replacement, [as part of a more comprehensive financial planning program] identifies specific lump sum and income need of the beneficiaries and traslates them into a proposed death benefit. > satisfies the expenses that will be incurred by the beneficiaries.
What characteristics are included in the death benefits calculated using the needs analysis method?
1. provides larger benefit in the period immediately following the death of the insures to offeset additional expenses
2. satisfies the normal living expenses of surviving dependents
3. provides long-term income for the retired surviving spouse / disabled family members.
whats the pro and con of using the multiple income method?
simple, but not accurate d/t not adjusting to reflect individual circumstances
what is the pro and con of using human life value approach?
sophisticated, but relies on estimates of future inflation/expected income. If inaccurate the insurance needs could be under or over estimated.
what is the pro and con of using the need analysis approach?
comprehensive in its scope, but in complex financial planning situations can require exhaustive amounts of research and computation. (also ignores family earnings, and produces only amounts based on needs, not income)
What method is best used on calculating the need of non-working spouses and why?
needs analysis approach can be adapted for this case. The amount calculated, reflects the funds needed to replace the services of the nonworking spouse. This amount can be substancial.