L&H Terms Flashcards
Define terms
Insurance
a transfer of risk of loss from an individual or a business entity to an insurace company, which, in turn, spreads the cost of unexpected losses to many individuals
Person
a legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contracts in its own name ; persons include individual human beings, associations, organizations, corporations, partnerships and trusts
Agency Contract
a contract that is held between an insurer and an agent/producer, containing the expressed authority given to the agent/producer, and the duties and responsibilities to the principal. An agent who is in violation of the agency contract may be held personally liable to the insurer
Agent/Producer
a person who acts for another person or entity with regard to contractual arrangement with third parties; a legal representative of an insurance company. The classification of producer usually includes agents and brokers; agents are the agents of the insurer. Insurer is the principal
Applicant/Proposed Insured
a person who requests or seeks insurance from an insurer
Benificiary
the person who receives the benefits from the insurance policy
Death Benifit (face amount/face value/coverage)
the amount paid when a claim is against a policy of insurance
Insurance Policy
a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
A written instrument in which a contract of insurance is set forth
Insured
the person covered by the policy of insurance who may or may not be the applicant or policyowner
Policy Owner
the person who is entitled to exercise the rights and privileges in the policy and who may or may not be the insured
Risk
the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable
Pure risk
refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept
Speculative risk
involves the opportunity for either loss or gain. An example of speculative risk is gambling. These type of risks are not insurable
Perils
are the causes of loss insured against in an insurance policy
Life Insurance
insures against the financial loss caused by the premature death of the insured
Health Insurance
insures agains the medical expenses and/or loss of income caused bu the insured’s sickness or accidental injury
Property Insurance
insures against the loss of physical property or the loss of its income producing abilities
Casualty Insurance
insures against the loss and/or damage of property and resulting liabilities
Hazards
are conditions or situations that increase the probabilility of an insured loss occurring. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring
Physiacal Hazards
are individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness
Moral Hazards
are the tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an applications for insurance, or in the past, have submitted fraudulent claims against an insurer
Morale Hazards
are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries
Legal Hazard
describes a set of legal or regulatory conditions that affect an insurer’s ability to collect premiums that are commensurate with (equal to in value) the exposure to loss that the insurer must bear
Law of large numbers
The basis of insurance is sharing risk among a large pool of people with similar exposure to loss (a homogeneous group). The law of large numbers states that the larger the number of people with similar exposure to loss, the more predictable actual losses will be. This law forms the basis for statistical prediction of loss upon which insurance rates are calculated
Exposure
is a unit of measure used to determine rates charged for insurance coverage. In life insurance, all of the following factors are considered in determining rates:
- The age of the insured
- Medical History
- Occupation
- Sex
Homogeneous
A large number of units having the same or similar exposure to loss. The basis of insurance is sharing risk among the members of a large homogeneous group with similar exposure to loss
Profitable distribution of exposures (or spread of risk)
exists when poor risks are balanced with preferred risks, with “average” or “standard” risks in the middle. The purpose behind distributing risks in this manner is to protect the insurer from adverse selection. This is one of the key principles of insurance
Adverse selection
the insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks.
To protect themselves from adverse selection, insurance companies have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage.
Critical risks
include all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, his or her family, and/or to his or her business
Important risks
include those exposures in which the losses would lead to major changes in the person’s desired lifestyle or profession
Unimportant risks
include those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes
Making a decision for establishing an insurance program
- consider the odds
- don’t risk more that you can afford to lose
- dont risk a lot for a little
Sharing
is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement
Transfer
the most effective way to handle risk. Transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Thought the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.
There are several ways to transfer risk, such as hold harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage
Avoidance
one of the methods of dealing with risk, which means eliminating exposure to a loss. ex. If a person wanted to avoid the risk of being killed in a plane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical
Retention
is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention is:
- to reduce expenses and improve cash flow
- to increase control of claim reserving and claim settlements
- to fund for losses that cannot be insured
Ideally Insurable Risks
The loss mus be due to chance (accidental). In order to be insurable, a risk must involve the chance of loss that is outside the insured’s control
The loss must be definite and measurable. An insurable risk must involve a loss that is definite as to cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable. Since insurance policies are legal contracts, it helps if the conditions are as exact as possible
The loss must be statistically predictable. This enables insurers to estimate the average frequency and severity of future losses and to set appropriate premium rates. (in life and health insurance, the use of mortality table and morbidity tables allow the insurer to project losses based on statistics).
The loss cannot be catastrophic. Insures typically will not insure risks that will expose them to catastrophic losses. Insurer’s need to be reasonably certain that the losses will not exceed certain limits. Typically, insurance policies exclude coverage for loss caused by wars or nuclear events because there is no statistical data that allows for the development of rates that would be necessary to cover these events should they occur
The loss exposure to be insured must involve large homogeneous exposure units. There must be a sufficiently large pool to be insured and those in the pool must be grouped into classes with similar risks so the insurer is able to predict losses based upon the law of large numbers. This enable insurers to properly prdict the average frequency and severity of the future losses and to set appropriate premium rates. In life insurance, mortality tables are used to project losses based on statistics
The insurance must not be mandatory. An insurer must not be required to issue a policy to each applicant applying for coverage. The insurer must have the ability to require certain underwriting guidelines be met
Damnify
cause injury to
Insurable Events
if a possible future event could result in loss or liability to a person, it may be insurable under the insurance code. These insurable events may never occur, but insurance policies can provide protection when those times come. The more predictable a loss is, the more insurable. The less predictable, the less insurable
Insurable Interest
to purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss. In life insurance, insurable interest must exist between the policyowner and the insured at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists
A valid insurable interest may exist between the policyowner and the insured when the policy is insuring any of the following:
- Policyowner’s own life
- The life of a family member (a spouse or a close blood relative)
- The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as debtor to a creditor)
*Not required of beneficiaries since the beneficiary’s well being is dependent upon the insured, and the beneficiary’s life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased
Indemnity (sometimes referred to as reimbursement)
is a provision in an insurance policy that states that in the event of a loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss
ex. will not get $20,000 from a $20k policy when loss equals $15,000
Utmost good faith
this principle implies that there will be no fraud, misrepresentation or concealment between the parties. As is pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured
Contract
a written agreement between two or more parties that is legally enforceable by law
Tort
a private, civil, non-contractual wrong for which a remedy through legal action may be sought.
Or a wrongful act or the violation of someone’s rights that leads to legal liability
Intentional Tort
any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party.. For the purpose of this definition, breach of contract is not considered an intentional tort.
Unintentional Tort
the result of acting without proper care. This is generally referred to as negligence
Four essential elements of a Contract are:
- agreement: offer and acceptance
- competent parties
- legal purpose
- consideration
Agreement
must be a definite offer by one party, and the party must accept this offer in its exact terms. In insurance, the applicant usually makes the offer when submitting the application. Acceptance takes place when an insurer’s underwriter approves the application and issues a policy
Consideration
something of value that each party gives to each other. The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the port of the insurer is the promise to pay in the event of a loss
Competent Parties
requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.
Legal Purpose
The purpose of the contract mus be legal and not against public policy. To ensure legal purpose of a Life Insurance policy, for example, it must have both: insurable interest and consent. A contract without a legal purpose is considered void, and cannot be enforced by any party
Contract of adhesion
insurance contracts are offered on a take-it-or-leave-it basis by an insurer as there is no negotiation. Any ambiguities are in favor of the insured.
Conditional Contract
requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim
Aleatory
when there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss
Unilateral Contract
only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy force
Personal Contract
a contract between the insurance company and an individual. Because the company has a right to decide with whom it will and will not do business, the insured cannot be changed to someone else without the written consent of the insurer, nor can the owner transfer the contract to another person without the insurer’s approval. Life Insurance is the exception tho this rule: A policyowner can transfer (or assign) ownership to another person. However, the insurer must still be notified in writing
Representations
statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application
Misrepresentations
untrue statements given by the applicant on the insurance application, which can void the contract
Material misrepresentation
an untrue statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they are considered fraud
Changed or Withdrawn
a representation may be changed or withdrawn prior to the effectuation of the policy, but not after
Warranty
a statement considered to be guaranteed to be true and becomes part of the contract
Penalty for misrepresentation
- misdemeanor
- maximum fine of $25,000
- maximum 1 year of prison
- or both fine and imprisonment
Materiality
the idea that all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract
Concealment
the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.
Rescission
the revocation of a contract. An injured party is entitled to rescind the contract if there is a false misrepresentation, concealment occurred or a violation of a material warranty or any other material provision of a policy
Six specifications for insurance policies
- the parties to the contract
- the persons or property being insured
- a statement of the insurable interest that exists if the insured is not the owner
- the risks insured against
- time period during which the policy will be in force or continue
- the statement annual, semi-annual, quarterly, or monthly premium or a statement of the manner in which a premium rate and total premium will later be calculated, if it can only be determined at the termination or expiration of the contract
Policy
a contract between a policyowner (often the insured) and an insurance company which agrees to pay for loss caused by specified covered events
Riders
are added to the policy to modify provisions that already exist (usually used in Life and Health Insurance).
Endorsements
are printed addendums to a contract that are used to change the policy’s original terms, conditions, or coverages (usually used in property and casualty insurance)
Cancellation
the act of revoking or terminating one’s insurance policy
Lapsed policy
a policy that is terminated because of nonpayment of premiums
Renewal
the continuance of an insurance policy beyond it’s original term. The renewal or nonrenewal may occur on a date specified in the contract (usually on the policy anniversary or premium due date
Non-renewal
the discontinuance of an insurance policy beyond it’s original term
Grace period
the period of time after the deadline or due date of a premium in which a late premium payment may be made without penalty, or without the policy lapsing
Rate
the price of insurance for each exposure unit
Premium
the payment required by the insured to keep the policy in force. It is determined by multiplying the rate by the number of units of insurance purchased
Earned Premium
the portion of a premium that belongs to the insurance company for providing coverage for a specified period of time.
Unearned Premium
the portion of the premium the insurance company has collected but has yet to “earn” because it has not yet provided coverage for the insured
Family dependency period
the period when, should the insured die prematurely, the surviving spouse will have dependent children to support. The family’s income need will be greatest during this period
Preretirement period
This is the period after the children are no longer dependent upon the surviving spouse for support, but before the surviving spouse qualifies for social security survivor benefits (“blackout period”). The income needs of the surviving spouse lessen during this period; however, until the surviving spouse reaches age 60, social security benefits are not available
Retirement period
during this period, the surviving spouse’s working income ceases and his or her social security benefits begin. Since the surviving spouse’s standard of living does not lessen, he or she will require an income comparable to the preretirement period during this time
The 4 categories that need to be gathered for personal insurance
- debt
- income
- mortgage
- expenses
Debt cancellation
when insurance is used to create a fund to pay off debts of the insured such as home mortgage or auto loans
Emergency reserve funds
Insurance proceeds may be used to assist in paying for sudden expenses following the death of the insured, such as travel expenses and lodging for family members coming from a distance
Education funds
Insurance proceeds may be used to assist in paying for children’s education expenses so they can remain in school, or sometimes a surviving spouse who has worked in the home caring for the children will need to receive education or training in order to re-enter the job market
Retirement funds
Insurance proceeds may be used as a source of retirement income
Bequests
an insured may wish to leave funds to their church, school, or other organization at the time of their death
Creates an immediate estate
estates can take long periods of time to create via earnings, savings, and investments. The purchase of life insurance creates an immediate estate
Human life value approach
gives the estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual’s life value by looking at the insured’s wages, inflation, the number of years to retirement, and the time value of money
Needs approach
based on the predicted needs of the family after premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses
Employee benefit
the most common use of life insurance by businesses, which serves as a protection for employees and their beneficiaries.
Key person insurance
a business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contracts. This policy insures that person. The business is the applicant, policyowner, premium payer and beneficiary. Also, the employee must give permission for this coverage.
Buy-Sell insurance
a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as business continuation agreement
Cross purchase (buy-sell)
used in partnerships when each partner buys a policy on the other
Entity purchase (buy-sell)
used when the partnership buys policies on the partners
Stock purchase (buy-sell)
used by privately owned corporations when each stockholder buys a policy on each of the others
Stock redemption
used when the corporation buys one policy on each shareholder
Business overhead expense insurance (BOE)
is sold to small business owners who must continue to meet overhead expenses such as rent, utilities, employee salaries, installment purchases, leased equipment, etc., following a disability. Does not reimburse the business owner for his or her salary, compensation, or other form of income that is lost as a result of disability. There is a 15 to 30 day elimination period and benefits are usually limited to one or two years. Premiums are tax deductible to the business as a business expense; however, the benefits received are taxable to the business as received
Executive Bonus
is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and therefore has all control. Since the employer treated the premium as a bonus, that amount is tax deductible to the employer and income taxable to the employee
Limit of liability
the face value/amount or death benefit of an individual life insurance policy, subject to any exclusions or riders is applicable, minus any outstanding policy loans and interest payments due to the insurer
Illustrations
a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. A life insurance illustration must do the following:
- distinguish between guaranteed and projected amounts
- clearly state that an illustration is not a part of the contract
- identify those values that are not guaranteed as such
An illustration used in the sale of a life insurance policy must contain this basic information
- name of the insurer
- name and business address of producer or insurer’s authorized representative, if any
- name, age and sex of proposed insured, except when a composite illustration is permitted under this regulation
- Underwriting or rating classification up which the illustration is based
- generic name of policy, the company product name (if different), and form number
- initial death benefit
- dividend option election or application of nonguaranteed elements, if applicable
- illustration date
- a prominent label stating “Life insurance illustration”
When using an illustration in the sale of a life insurance policy, an insurer or its producers may not do any of the following
- represent the policy as anything other than a life insurance policy
- describe nonguaranteed elements in a manner that could be misleading
- use an illustration that depicts policy’s performance as being more favorable than it really is
- provide an incomplete illustration
- claim that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is the fact
- use the term “vanish” or “vanishing premium,” or a similar term that implies the policy becomes paid up
- use an illustration that is not self-supporting
Buyers guide
provides basic, generic information about lif insurance policies that contains, and is limited to, language approved by the department of insurance. Explains how a buyer should choose the amount and type of insurance to buy, and how the buyer can save money by comparing costs of similar policies. Insures must provide a buyer’s guide to all prospective policy applicants prior to accepting their initial premium. If policy’s come with free 10 day look period, then buyers guide can be delivered with the policy
Policy summary
a written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider. Will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. Also, must provide when the policy is delivered
Traditional net cost index
compares the cash values available to buyers if they surrender the policy in 10 or 20 years. Does not take into consideration the time value of money (or investment return on the insurance premium had it been invested elsewhere)
Interest-Adjust net cost index
compares the death benefits that are paid at death in 10 or 20 years, if the insured died at that time, and accounts for the time value of money
Underwriting
is the risk selection process. The purpose of underwriting is to protect the insurer against adverse selection (risks which are more likely to suffer a loss)
Field underwriter responsibilities
- proper solicitation of applications
- helping prevent adverse selection
- completing the application
- obtaining the required signatures
- collecting the initial premium and issuing the receipt, if applicable
- delivering the policy
Application
the starting point and one of the basic/main sources of information used by the company in the risk selection process.
General information (application) - Part 1
included the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation. It will also inquire about existing policies and if the proposed insurance will replace them. Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary
Medical Information - Part 2
includes information on the prospective insured’s medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives. For smaller amounts the agent and the proposed will complete all of the medical information. Would be considered a nonmedical application. For larger amounts, the insurer will usually require some sort of medical examination by a professional
Attachment of application to policy
if an application is taken at the time of purchase and a policy is then issued, the application must be attached to the policy. The policy and the application constitute the entire contract between the parties, and no additional documents may be incorporated into the contract unless endorsed and attached to the policy. Any statements made by the insured in the application are considered representations and not warranties
Agent’s report
provides the agent’s personal observations concerning the proposed insured. It is not part of the contract but is a part of the application process
Required signatures
if the proposed insured and the policyowner are not the same person, such as a business purchasing insurance on an employee, then the policyowner must also sing the application. An exception to the rule is an adult applying for insurance on a child.
Changes on application
Depending of the insurer agents can correct the information and have the applicant initial the change or complete a new application. Agent should never white out or erase information on an application for insurance
Consequences of incomplete applications
if an insurer receives an incomplete application, the insurer must return it to the applicant for completion. If the insurer issues a policy with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer to the question. The insurer will not have the right to deny coverage based on any information that the unanswered questions might have contained
Premiums with the application
collecting the initial premium and submitting it with the application increases the chances that the applicant will accept the policy once it is issued. They must also provide a premium receipt, which determines when coverage will be effective
Conditional vs Binding receipt
conditional receipt is the most common type and is used only when the applicant submits a prepaid application. The conditional receipt says that the coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for. This rule will not apply if a policy is declined, rated, or issued with riders excluding specific coverages
Approval condition receipt
coverage begins only when the pre-paid application is approved by the insurer (but not before the policy is delivered). Therefore, there is no coverage during the initial underwriting process. This type of receipt is rarely used
Unconditional (binding) receipt
is rarely used in life insurance. Is found more in property insurance. When the agent issues a binding receipt, coverage begins immediately for a specific length of time, even if the applicant is later found to be uninsurable. Binding receipts usually stipulate that coverage is effective from the date of the application for only a specific period of time, such as 60 days, or until the company either issues or declines coverage, whichever occurs first
Temporary (or Interim) insurance agreement
an agreement that requires payment of the first premium at the time of application, but does not guarantee that the policy will be issued. This agreement bridges the gap between the applicant’s need for immediate coverage and the insurer’s need for thorough underwriting. The 3 types of agreements are:
- Conditional Receipt (most commonly used)
- 30-day interim term receipt
- acceptance from of receipt
Temporary Term
the protection period offered by binding receipts. During this period, a insurance company is liable for the maximum amount guaranteed under the binding receipt/temporary agreement.
Nonmedical Application
the medical portion of an application which accepts a health questionaire completed and signed by the applicant and the agent and does not require a medical examination
Pre-selection
The agent or broker is able to accomplish good pre-selection by a complete, accurate and thorough completion of the insurance application. The application will ask for all of the legally allowed information which an insurer may gather in order to do effective post-application
Post-selection
The period after an application is submitted but before it is approved? Using the application as a springboard, the underwriter begins an investigation of the client’s complete risk profile. After considering all the information legally available, the underwriter will label the client as standard, substandard or uninsurable
MIB
The medical information bureau is a centralized information database into which insurers provide information from applications and claims. Subscribing insurers are then able to search the MIB database for information regarding any applicant for insurance. MIB is a nonprofit organization. Can only be used to help an applicant and not be used to adversely affect the applicant
DMV
is used by insurers to receive an applicant’s driving record. A poor driving record can result in a rating or even declination
Physician/medical records facility
The APS (attending physician statement) enables the insurer to receive the complete medical treatment history of a client
Additional medical testing/Current physical
The insurer can request that the applicant be examined by a physician and the results submitted for consideration. It is also common to require examination by a paramedical company and the use of blood, urine or saliva samples to check for nicotine or other drug use and the presence of HIV. An EKG (electrocardiogram) may also be required
Financial reports
Using financial inspection reports and/or information from major credit reporting agencies, the insurer can detect whether the client has a history of financial malfeasance (wrongdoing)
Personal Interviews
The underwriter may contact persons with information about the applicant by telephone. These may include coworkers, neighbors, relatives or other acquaintances
Hazardous activity questionnaire
The insurer may also ask the applicant to fill out a separate hazardous activity questionnaire to determent the applicant’s risk classification. The questionnaire may include questions regarding hobby aviation, scuba diving, and auto, boat, or motorcycle racing
Investigative Consumer Report (inspection)
To supplement the application, the underwriter may order an inspection report on the applicant from an independent investigating firm or credit agency, which covers financial and moral information. Companies are subject to the rules and regulations outline in the fair credit reporting act
Fair Credit Reporting Act
established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. The law also protect consumers against the circulation of inaccurate or obsolete personal or financial information
Consumer Report
include written and/or oral information regarding a customer’s credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources
Investigative Consumer Report
are similar to consumer reports in that they also provide information on the customer’s character, reputation, and habits. The primary difference is that the information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer.
- cannot be made unless the consumer is advised in writing about he report in 3 days of the date the report was requested
- consumer must be advised that they have the right to request additional information concerning the report, and the insurer or reporting agency has 5 days to provide the consumer with he additional information
If a person knowingly and willfully obtains info on a consumer from a consumer reporting agency under false pretenses, they may also may be?
fined and/or imprisoned for up to 2 years
An individual who unknowingly violates the fair credit reporting act is liable for?
the amount equal to the loss to the consumer, as well as any reasonable attorney fees incurred in the process
An individual who willfully violates this act enough to constitute a general pattern or business practice will be?
subject to a penalty of up to $2500
The consumer has the right to know what was in the report
If a policy of insurance is declined or modified because of information contained in either a consumer investigative report, the consumer must be advised and provided with the name and address of the reporting agency. The consumer also has the right to know the identity of anyone has received a copy of the report, within the last year.
Prohibited information (consumer report)
Consumer reports cannot contain certain types of info if the report is requested in connection with a life insurance policy or credit transaction of less than $150,000. The prohibited info includes:
- bankruptcies more than 10 years old
- civil suits
- records of an arrest or conviction of crimes
- any other negative information more than 7 years old (delinquencies, late payments, insolvency or any other form of default
Paramedical Report
a report that is completed by a paramedic or a registered nurse at the request of an underwriter
Attending Physician’s Statement (APS)
a statement made by a practitioner who treated the applicant for prior medical problem requested by an underwriter
Disclose the use of testing to the applicant (HIV test)
must obtain written consent from the applicant on the approved form
Establish written policies and procedures (HIV test)
Established for the internal dissemination of test results among its producers and employees to ensure confidentiality. In other words, they must establish a way to keep test results confidential.
Underwriting guidelines (HIV/AIDS)
- If tests were performed correctly, insurers may decline a potential insured for coverage if his/her medical sample comes back “positive for HIV/AIDS” after 2 different tests have been performed. The applicant can also be declined if he/she has already been diagnosed with AIDS/HIV by another medical professional
- tests must be paid for by the insurer, not insured
- If an insurer tests for HIV, it must first obtain from the insured informed, written consent. This often entails a separate disclosure from signed bu all insureds and the agent. A copy of this duplicate form should be left with the client. The information includes written details on the tests performed, their purposes and uses. and how results will be returned to insured. The form often asks for physician’s name and address so that the client’s doctor can get involved should a positive result come back. If the client has no physician, the insurer should urge the client to consult a physician or government health agency
- Informed consent also includes supplying the client with information concerning AIDS/HIV counseling from third-party sources
- The information that is gathered must be handled correctly and in compliance with confidentially requirements by authorized personnel
- If an insured correctly obtains coverage, but later dies due to AIDS or AIDS-related conditions, coverage cannot be limited or denied
Penalty for negligently disclosing confidential results or underwriting information to unauthorized third parties
- may result in a civil fine of up to $1,000 plus court costs
- the fine may go up to $5,000 plus costs for willful violations
- if the violation causes economic, bodily, or psychological harm to the other party, the penalty may included a misdemeanor charge, one year in jail, and/or fa fine of up to $10,000
Genetic characteristics
any scientifically or medically identifiable gene or chromosome that is known to be a cause of a disease or disorder, and that is determined to be associated with a statistically increased risk of development of a disease or disorder. This test cannot be used to determine insurability (except in policies that are contingent on testing for diseases or medical conditions). Must have written consent from the applicant and must notify him/her of the test result directly or through a designated physician
HIPAA
the health insurance portability and accountability act is a federal law that protect health information
Privacy Rule
patients have the right to view their own medical records, as well as the right to know who has accessed those records over the previous 6 years.
Disclosure authorization notice
must be provided from the insurer to the applicant/insured when the insurer plans to seek and use information from investigators. It will state the insurer’s practice regarding collection and use of personal information. Must be written in plain english and mus be approved by the head of the department of insurance
Risk Classification
In classifying a risk, the home office underwriting department will look the applicant’s medical history, present physical condition, occupation, habits and morals. If the applicant is acceptable, the underwriter must then determine the risk or rating classification to be used in deciding whether or not the applicant should pay a higher or lower premium. (standard, substandard, preferred)
Standard Risk
persons who, according to a company’s underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Standard risks are representative of the majority of people at their age and with similar lifestyles. They are the average risk.
Preferred Risks
are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants havea superior physical condition, lifestyle, and habits
Substandard (High Exposure) Risk
applicants that are not acceptable at the standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are also referred to as “rated” because they could be issued with the premium rated-up, resulting in a higher premium
Declined Risks
applicants who are rejected. Risks that the underwriters assess as not insurable are declined. Examples are:
- there is no insurable interest
- the applicant is medically unacceptable
- the potential for loss is so great it does not meet the definition of insurance
- insurance is prohibited by public policy or is illegal
Premium uses
to cover the costs and expenses to keep the policy in force
Three primary factors that are used in determining premiums
risk, interest and expense
Mortality
the ratio of the number of deaths in a specific population over a certain amount of time versus the number of living people in that population.
Mortality Tables
used by insurers to indicate the number of individuals within a specified group of individuals (e.g. males, females, smokers, nonsmokers) staring at a certain age, who are expected to be alive at a succeeding age. In other words, these table help the insurers predict the expectation of life and the probability of death for a given group
Interest
Since premiums are paid before claims are incurred, insurance companies invest the premiums in an effort to earn interest on these funds (invested in bonds, stocks, mortgages, etc.). This interest is a primary factor in lowering a premium rate
Expense
the expense factor, also known as the loading charge, also affect premium rates. Insurers have various operating expenses, so each premium must carry a proportionate share of these operating costs. The insurer’’s largest expense is the commissions paid to its agents. Other ongoing expenses include payroll, rent and taxes
Premium payment mode
mode refers to the frequency the policyowner pays the premium
Monthly premiums goes towards/accounts for
administrative charges and loss of interest premiums by the insurance company
Single Premium
the policyowner makes one lump-sum paymnent to the insurance company to create a policy. A single premium whole life policy will generate immediate cash value due to the size of the lump sum payment that is made to the insurance company. Most companies require a minimum premium of $5,000 or more for a single premium policy
Limited Pay
A level annual premium. The policy is designed so premiums for the coverage will be completely paid up before age 100.
Modified Pay
A lower premium is charged in the first few policy years, usually the first three to five years, and then a higher premium is paid for the remainder of the insured’s life. These policies were developed to make the purchase of whole life insurance more attractive for individuals who, for example, are just starting out and have limited financial resources
Level (Premium)
Most life insurance policies have a level premium, which means that the premium remains the same throughout the duration of the contract
Fixed vs. Flexible (Premium)
With a fixed premium, the same amount is paid periodically; with a flexible premium, the policyowner is allowed to pay more or less than the planned premium
Guaranteed at initial levels (Premium)
Level premium. The premium remains the same throughout the duration of the contract. The insurer “overcharges” the insured in the policy’s early years, and applies that excess in the later years to fund the increased mortality costs
Premium tables
used to determine the cost of insurance based on the insured’s age and other underwriting factors.
Methods of policy delivery
- personal delivery with a signed and dated written receipt of delivery
- Registered or Certified mail (requires a signature)
- First class mail with a signed and dated written receipt of delivery
- any other reasonable means (as determined by the commissioner)
Advantages of personal delivery
- its another opportunity to explain to the policyowner (insured) what he or she has purchased and why
- it reinforces the personal relationship with the agent and the company that the agent represents
- it gives the agent the opportunity to assess future needs of additional insurance or provide other needed products
- If the paperwork or information gathered in underwriting was incomplete or contradictory, the insurer may require the agent to revisit the client when delivering the policy to also get a signed confirmation that a condition does or does not exist in order to properly cover the client
Rated differently
when the contract is modified or amended
Policy title (specification) page
the first page of a life insurance policy. Contains a summary of the benefits and coverages the policy will provide
The following information is provided on the title page:
- the type of policy purchased, the amount of coverage it provides, and the premium amount and modal to be paid by the insured
- The name of the insured, his/her age and gender, and the name of the policyowner
- the date the policy will be effective and the date of termination
- the premium payment period
- if the policy is a term policy, the “renewability” of the policy
- any option provisions or riders attached to the policy and the amount of premium to be paid for each
If the initial premium is not paid with the application
the agent will be required to collect the premium at the time of policy delivery. In this case, the policy does not go into effect until the premium has been collected. The agent may also be required to get a statement of good health from the insured. This statement must be signed by the insured, and verifies that the insured ha snot suffered injury or illness since the application date
Statement of good health
verifies that the insured has not suffered injury or illness since the application date, which must be signed by the insured
If the premium was submitted with the application and the policy was issued as requested
the policy coverage would generally coincide with the date of application if no medical exam is required. If a medical exam is required, the date of the coverage will coincide with the date of the exam
Life settlement
refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash. A life settlement would require absolute assignment of all rights to the policy from the original policyowner to the new policy owner
To the owner understand the benefits and consequences of a life settlement transaction, at a minimum, the following info must be included in the disclosure:
- an explanation of possible alternatives, including accelerated benefits offered by the insurer
- that some or all of the proceeds of a life settlement contract may be taxable
- the proceeds of a life settlement contact may be subject to the claims of creditors
- receipt of the proceeds will be sent to the owner within 3 business days after the life settlement provider has received acknowledgement that ownership of the policy has been transferred and the beneficiary has been designated according to the terms of the life settlement contract
- that entering into a life settlement contract may cause other benefits under the policy, such as conversion or waiver of premium, to be forfeited by the owner
- the total amount paid by the life settlement provider, as well a s the net amount to be paid to the owner
- the date by which the funds will be available
- that the life settlement provider is required to furnish to the owner a consumer information booklet
- that the insured may be contacted by either the provider or the broker to determine the insured’s health status or to verify the address (the provider or broker must also disclose that the contract will be limited to once every 3 months if the insured’s life expectancy is more that 1 year, and no more than once a month if the insured is expected to live 1 year or less)
- the life settlement provider’s name, business and email address, and phone number
- must also disclose that the owner has the right to rescind a life settlement contract within 30 days after the contract is executed by all parties and the owner has received all the disclosures, or within 15 days the receipt of the life settlement proceeds by the owner, whichever is sooner. Rescission by the policyowner is effective only if both notice of rescission is given and the owner repays all proceeds and any premiums, loans, and loan interest paid on account of the provider within the rescission period. If the owner dies during the rescission period, the contract will be deemed to have been rescinded subject to repayment by the owner or the owner’s estate of all proceeds and any premiums, loans, and loan interest to the provider
Stranger-originated life insurance (STOLI)
Fraudulent
is a life insurance arrangement in which a person with no relationship to the issured (a “stranger”) purchases a life policy on the insured’s life with the intent of selling the policy to an investor and profiting financially when the insured dies. In other words, STOLIs are financed and purchased solely with the intent of selling them for life settlements
Must have insurable interest
In regards to STOLIs
anybody purchasing life insurance on another individual must have an insurance interest in that person. If there is no insurable interest, the insurer has a basis for declaring the policy and are void. The state law also prohibits issuing insurance policies as wagers on people’s lives: STOLI arrangements violate these rules illegal in this state
Term Life Insurance
is temporary protection because it only provides coverage for a specific period of time. It is also known as pure life insurance. Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other from of protection. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed
Pure Death Protection
- if the insured dies during the term, the policy pays the death benefit to the beneficiary
- if the policy is cancelled or expires prior to the insured’s death, nothing is payable at the end of the term
- there is no cash value or other living benefits
Three basic types of term coverage
level, increasing and decreasing
Level term insurance
the most common type of temporary protection purchased. The word level refers to the death benefit that does not change throughout the life of the policy
Level premium
provides a level death benefit and a level premium during the policy term. If the policy is renewed at the end of the term, the premium will be based on the insured’s attained age at the time of renewal
Annually renewable term (ART)
is the purest form of term insurance. The death benefit remains level (in that sense, it’s level term policy), and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according the attained age, as the probability of death increases
Indeterminate Level Premium
a policy which contains a provision that provides a current premium scale (nonguaranteed) and a maximum premium scale (guaranteed), beyond which premiums cannot be raised
Decreasing Term
policies that feature a level premium and death benefit that decreases each year over the duration of the policy term. Is primarily used when the amount of needed protection is time sensitive, or decreases over time. Commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely.. a decreasing policy is usually convertible; however, it is usually not renewable since the death benefit is $0 at the end of the policy term
Increasing Term
features level premiums and a death benefit that increases each year over the duration of the policy term. The amount of the increase in the death benefit is usually expressed as a specific amount or a percentage of the original amount. Increasing term is often used by insurance companies to fund certain riders that provide a refund of premiums or gradual increase in total coverage, such as the cost of living or return of premium riders. Would be ideal to handle inflation and the increasing cost of living. Often added to another policy as a rider, such as with return of premium policies
Return of premium (ROP)
is a life insurance policy with an increasing term that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of premiums is paid if the death occurs within a specified period of time or if the insured outlives the policy term
Renewable
allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability
Convertible provision
provides the policyowner with the right to convert the policy to a permanent policy without evidence of insurability. The premium will be based on the insured’s attained age at the time of conversion
Permanent Life Insurance
is the general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium paid. The most common type of permanent life insurance is whole life.
Whole Life Insurance
provides lifetime protection, and included a savings element (or cash value). Whole life policies endow at the insured’s age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100. The policy premium is calculated assuming that the policyowner will be paying the premium until that age. Premiums for whole life policies usually are higher than for term insurance.
Key characteristics of whole life insurance (four)
level premium, death benefit, cash value and living benefits
Level premium (whole life)
the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy
Death benefit (whole life)
the death benefit is guaranteed and also remains level for life
Cash Value
the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. Cash values are credited to the policy on a regular basis and have a guaranteed interest rate
Living Benefits
the policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred
3 basic forms of whole life insurance
straight whole life, limited-pay whole life and single premium whole life
Straight Life (also referred to as ordinary life or continuous premium whole life)
The policyowner pays the premium from the time the policy is issued until the insured’s death or age 100 (whichever occurs first). Of the common whole life policies, straight life will have the lowest annual premium
Limited-pay whole life
is designed so that premiums for coverage will be completely paid-up well before age 100. Some of the more common versions of limited-pay life are 20-pay life whereby the coverage is completely paid for in 20 years, and life paid-up at 65 (LP-65) whereby the coverage is completely paid up for by the insured’s age 65. All other factors equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher. Cash value builds up faster for the limited-pay policies
Single Premium whole life (SPWL)
is designed to provide a level death benefit to the insured’s age 100 for a one-time, lump sum payment. The policy is completely paid-up after one premium and generates immediate cash
Interest-sensitive whole life (current assumption life)
a whole life policy that provides a guaranteed death benefit to age 100. The insurer sets the initial premium based on current assumptions about risk, interest and expense. If the actual values change, the company will lower or raise the premium at designated intervals. Interest-sensitive whole life provides the same benefits as other traditional whole life policies with the added benefit of current interest rates, which may allow for either greater cash value accumulation or a shorter premium-paying period
Modified Life
a type of whole life policy that charges a lower premium (similar to term rates) in the first few years, usually the first 3 to 5 years, and then a higher level premium for the remainder of the insured’s life. The higher subsequent premium is typically higher than a straight life premium would be for the same age and amount of coverage
Graded-premium whole life
somewhat similar to modified life in that premiums start out relatively low and then level off at a point in the future. A graded premium whole life policy typically starts with a premium that is approximately 50% or lower than the premium of a straight life policy. The premium then gradually increases each year for a period of usually 5 or 10 years, and then remains level therafter
Intermediate Premium
a whole life policy that has the premium rate that may vary from year to year. These policies specify two premium rates: a guaranteed level premium stated in the contract (maximum premium),and a non guaranteed lower premium rate that the policyowner actually pays for a set period of time. After the initial period (usually 2-3 years), the insurer establishes a new rate which could be raised, kept the same or lowered, based on the company’s expected mortality, expense and investments. The premium, however, can never be higher than the guaranteed maximum
Mortgage Redemption
a provision that insures borrowers for an amount equal to their mortgages. If the borrower/insured dies, the insurer assumes responsibility for paying the outstanding loan balance to the insured’s creditor
Family Maintenance policy
a life insurance policy based on a family income policy which combines whole life with level term insurance insurance to provide a beneficiary with income over a specific period of time (e.g. 15 years or 20 years) if the insured dies during that time period. If the insured dies within the time period, the level term insurance is sufficient to pay the monthly income portion of the contract. Also, the policy contains permanent life insurance protection to be paid upon the death of the insured. Should the insured survive the specified time period, then the term portion expires without value and contract is left with only the permanent life protection
Family term rider
incorporates the spouse term rider along with the children’s term rider in a single rider. When added to a whole life policy, the family term rider provides level term life insurance benefits covering the spouse and all of the children in the family
Joint life
a single policy that is designed to insure two or more lives. Joint life policies can be in the form of term insurance or permanent insurance. The premium for joint life would be less than for the same type and amount of coverage on the same individuals. It’s more commonly found as joint whole life, which functions similarly to an individual whole life policy with two major exceptions:
- The premium is based on a joint average age that is between the ages of the insureds
- The death benefit is paid upon the first death only
Survivorship Life
Also referred to as “second to die” or “last survivor” policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, than that which is t the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured
Juvenile life insurance
any life insurance written on the life of a minor. A common juvenile policy is known as the “jumping juvenile” policy because the face amount increases at a predetermined age, often age 21. The face amount jumps, but the premium remains level
Payer benefit rider
is primarily used with juvenile policies (any life insurance written on the life of a minor): otherwise, it functions like the waiver of premium rider. If the payer (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21. This rider is also used when the owner and the insured are two different individuals
Return of premium rider
is implemented by using increasing term insurance. When added to a whole life policy, it provides that the death prior to a given age, not only is the original face amount payable, but an amount equal to all premiums previously paid is also payable to the beneficiary. The return of premium rider usually expires at a specified age such as 60
Indexed whole life (or equity index whole life)
is insurance that the cash value is dependent upon the performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. The policy’s face amount increases annually to keep pace with inflation (as the Consumer Price Index increases) without requiring evidence of insurability. Indexed whole life policies are classified depending on whether the policyowner or the insurer assumes the inflation risk. If the policyowner assumes the risk, the premium remains level
Adjustable life
was developed in an effort to provide the policyowner with the best of both worlds (term and permanent coverage). An adjustable life policy can assume the form the form of either term insurance or permanent insurance. The insured typically determines how much coverage is needed and the affordable amount of premium. The insurer will then determine the appropriate type of insurance to meet the insurer’s needs. As the insured’s needs change, the policyowner can make adjustments in his or her policy. Typically, the policyowner has the following options:
- Increase or decrease the premium-paying period
- Increase or decrease the face amount
- change the period of protection
Universal life
also known by it’s generic name “flexible premium adjustable life”, implies that the policyowner has the flexibility to increase the amount of premium paid into the policy and to later decrease it again. In fact, the policy owner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to cover the month deductions for cost of insurance. If the cash value is too small, the policy will expire
