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Risk retention group - ✔️ ✔️ A mutual company formed to cover a bunch of people in the same occupation.
Other forms of Whole Life Insurance: - ✔️ ✔️ - Modified Whole Life
- Graded Premium Whole Life
- Indexed Whole Life
Fixed Period Option - ✔️ ✔️ - The payout is set over a length of time (requested by the insured)
- The amount paid out each month will be calculated to match the length of time set
Fraternal benefit society - ✔️ ✔️ Membership groups that are created for membership to purchase insurance and gain other benefits.
Home service insurers - ✔️ ✔️ - Sell low dollar value policies (e.g. $1000/$2000 of face amount)
- Paid for by bank draft of check sent in by mail
Insurance is sold through - ✔️ ✔️ Career agents Brokers Aka Producers (independent insurance agents)
*Needs Approach - ✔️ ✔️ Ask yourself:
- How much will be needed at death to meet obligations.
- How much future income is needed to sustain the household.
- Focuses on the financial needs of the family
- Considers final expenses
- Considers disability income
- Consideres monthly income
Main list of private insurance companies - ✔️ ✔️ - Stock insurers
- Mutual insurers
- Lloyd's of London
- Reinsurers
- Risk retention groups
- Fraternal benefit societies
- Home service insurers
Government supplied insurance - ✔️ ✔️ - OASDI (Social Security)
- Medicare
- Medicaid
- Military plans (SGLI & VGLI)
Two methods of determining insurance need: - ✔️ ✔️ - Human Life Approach
Human Life Value Approach~ - ✔️ ✔️ - One of two ways of calculating insurance need.
- By discounting estimated future income
- Calculating the amount of life insurance a family will need based on the financial loss that they will suffer if the insured person were to pass away today
- 10X salary
- Based on age, gender, planned retirement age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.
Lloyd's of London - ✔️ ✔️ - Take greater risks and charge larger premiums.
- A British insurance and reinsurance marketplace
- Come together to pool and spread risk
Reinsurers - ✔️ ✔️ Companies that take part of the risk of insurance companies. (The company that is taking a part of the risk)
Ceding Company - ✔️ ✔️ The company that is transferring the risk
Agent - ✔️ ✔️ - Sells the company's products to the public
- When someone becomes an agent, they become a "field underwriter"
- Develops base for long-term sources of clients by using referrals, occupational, and special-interest groups to compile lists of prospects.
- Approaches potential clients by utilizing mailings and phone solicitation; making presentations to groups at company-sponsored gatherings; speaking publicly to community groups on the subject of financial well-being.
- Determines clients' particular needs and financial situations by scheduling fact-finding appointments; determining extent of present coverage and investments; ascertaining long-term goals.
- Develops a coordinated protection plan by calculating and quoting rates for immediate coverage action and long-term strategy implementation.
- Obtains underwriting approval by completing application for coverage.
- Completes coverage by delivering policy; planning future follow-up visits and evaluations of needs.
- It is not required that the CRA name be disclosed if you are denied coverage
- Outdated information may not be reported.
- Access to your file is limited.
- Your consent is required for reports that are provided to employers, or reports that contain medical information.
- You may choose to exclude your name from CRA lists for unsolicited credit and insurance offers.
- You may seek damages from violators.
Financial Services Modernization Act of 1999 - ✔️ ✔️ Banks can do insurance and insurance companies can do banking
1933 Class Steagall Act - ✔️ ✔️ Required banks to remain in banking and not do insurance and insurance companies to remain in insurance and not do banking.
Pooling the risk - ✔️ ✔️ Distributing the risk over a large number of people.
*Law of large numbers - ✔️ ✔️ Having a large number of people in a pool helps to correctly predict the outcome.
Speculative risk - ✔️ ✔️ Hoping for a gain
Pure risk - ✔️ ✔️ Covering for losses. No gain. So it's insurable.
Underwriters - ✔️ ✔️ Determine if prospective clients fall into the normal category or if they are more risky in one category or another.
- They classify risks and determine which categories the insured should be placed
- Adhesion: categories have been decided and approved in advance by the state in conjunction with the insurance company.
- Categories of risks: Preferred (best premium rate), Standard, Substandard (most expensive)
Peril - ✔️ ✔️ The actual incident happening
Hazard - ✔️ ✔️ - What causes the incident to happen. (e.g. your thoughts, actions, habits?)
Physical Hazard - ✔️ ✔️ - Has to do with the body.
- Is the body going to live a normal length of time?
- Are there negatives due to health issues, hobbies, or profession?
*Moral Hazard - ✔️ ✔️ - Issues resulting from weakness of human behavior
- Does the person follow rules and laws of society?
- Dealing with the difference between right and wrong
*Morale Hazard - ✔️ ✔️ - Focus on hobbies and jobs
- Jump out of airplanes?
- Attitude towards the item insured and to act carelessly about it
4 Treatments of Risk - ✔️ ✔️ - Avoidance
- Reduction
- Retention
- Transference
*Risk Avoidance - ✔️ ✔️ Stopping the behavior all together. (e.g. stop smoking)
Risk Reduction - ✔️ ✔️ (e.g. smoking less cigarettes a day)
*Risk Retention - ✔️ ✔️ Doing nothing and retaining all the risk without any outside assistance.
- "Self insuring" or retaining only a portion of the risk through paying deductibles
Risk Transference - ✔️ ✔️ Transferring the risk to an insurance company
Elements that makes risk insurable - ✔️ ✔️ - Loss must be due to chance
- Loss must be definite and measurable
- Loss must be predictable
- Loss cannot be catastrophic
- Loss exposures to be insured must be large (risk pooling and the law of large numbers)
- Loss exposure must be randomly selected
Four ingredients to make contract - ✔️ ✔️ - Offer and Acceptance
- Consideration
- Legal purpose
- Competent parties (minor under age of 14 or 15)
- It's made up of the policy and when attached, the application
Contract must have consideration. Which includes? - ✔️ ✔️ - The initial premium
At which point does the insurance contract become binding? - ✔️ ✔️ ...
*When does the offer begin? - ✔️ ✔️ When the agents sends the consideration into the company
Characteristics of insurance contracts: - ✔️ ✔️ - Aleatory: the money being put in compared to the benefits received does not work out equally
affiliated insurer. Theoretically, non-captive agents are able to pick and choose the best policy for their clients.
Independent agents - ✔️ ✔️ - Functions like brokers
Principles of Agency Law - ✔️ ✔️ - The acts of the agents are the same as the company
- Contracted completed by the agent is same as company doing it
- Payment made to an agent is same as paying the company
- Knowledge of the agent is the same as the company knowing it
What title as a financial advisor is legally acceptable to use? - ✔️ ✔️ ...
*Express Authority - ✔️ ✔️ - What the contract spells out
- Kind of authority that is expressed within the contract between the agent and the agent's company
*Implied Authority - ✔️ ✔️ - Not written but needed to perform as an agent
- The agent has the right to operate in a business manner doing the things typical of any business
- Implied that an agent can do something that can be done within the normal functioning of a business situation. (e.g. business cards)
- A representation in an insurance contract is an example
*Apparent Authority - ✔️ ✔️ - What the public assures the agent possess
- Authority that is granted to the agent as an employee of the company
*Fiduciary responsibilities - ✔️ ✔️ Being responsible and being careful for the assets and rights of another person. (a fiduciary is a person who has responsibilities of care)
Waiver - ✔️ ✔️ The giving up of a right. (e.g. signing a waiver that you won't sue)
Estoppel - ✔️ ✔️ - What someone or a company is prevented from doing because of the waiver.
- (e.g. the company waives the right to collect premium if client becomes ill. The company is estopped from collecting)
Parol evidence rule - ✔️ ✔️ Whatever is said to the clients by the agent is no longer considered when the policy arrives. The policy takes over for everything.
Void - ✔️ ✔️ Something never happened. (e.g. making the policy invalid)
Voidable - ✔️ ✔️ The client can walk away whenever they wish. (does no get all money back but is entitled to the cash value in the policy)
Fraud - ✔️ ✔️ If death occurs 2 years after the fraud takes place, the benefit of a life insurance policy is still paid.
3 Categories of Life Insurance - ✔️ ✔️ - Ordinary Life
- Industrial Life
- Group Insurance
Ordinary Life Insurance~ - ✔️ ✔️ - Purchased by one person from one agent
Industrial Insurance - ✔️ ✔️ - Aka "home service, debit, burial policy"
- Purchased and issued in low dollar amounts
- Frequent premium payments
- If an insured wants to convert several industrial life policies to a single ordinary life policy, the combined face value of the industrial life policies must be $
Group Insurance - ✔️ ✔️ - Covering a group of people
- The company, association or employer is writing the check and paying for the policy
- 10 people are needed to qualify
Health Insurance vs. Life Insurance - ✔️ ✔️ ...
Term Life Life Insurance~ - ✔️ ✔️ - Does not include a savings plan
- Lasts for only a set amount of time
- An individual with a low income and high insurance needs should buy term insurance. It has lowest cost to benefit ratio
Decreasing Term Life Insurance~ - ✔️ ✔️ - Used for covering mortgages and other financial debts
- The coverage gradually decreases
Increasing Term Life Insurance~ - ✔️ ✔️ - Used to hedge against inflation, increased family responsibility, or increased income expected
- The coverage gradually increases
Level Term Life Insurance~ - ✔️ ✔️ -
Ways Term Life Insurance can be renewed: - ✔️ ✔️ - Guaranteed renewable
- Annually Renewable Term (ART) ~ automatic method
- Reentry option
*Guaranteed Renewable Term Life Insurance - ✔️ ✔️ - Allows clients to renew the policy on an anniversary date
- Premium rises only based on age
- Coverage is guaranteed
Graded Premium Whole Life - ✔️ ✔️ - Premium is reduced the first 5 years but will stair- step up over 5 or 10 years allowing people to get in at a lower starting price
Indexed Whole Life - ✔️ ✔️ - Connected to the Consumer Price Index (government figure generated monthly indicating inflation. The face amount gradually rises as inflation increases)
Special Situation Whole Life Insurance Policies: - ✔️ ✔️ - Family Plans Policies
- Multiple Protection Policies
- Joint Life Policies
- Juvenile Insurance
- Credit Life Insurance
*Family Plans Policies - ✔️ ✔️ - Where all members of the family are in one policy.
- The primary person has a permanent policy and the spouse and children have level or decreasing term riders.
- A policy that is sold in proportioned units to cover an insured, spouse and children
- Child rider: a term insurance. Child riders last until your children are a certain age, then it expires. Depending on the company, it ranges from ages 21-25. After your child rider expires, you have to purchase an individual life insurance policy if you want to continue coverage.
Multiple Protection Policies - ✔️ ✔️ - A mixture of term life and whole life insurance that pays out a multiple of the face value during the term policy's period, and then turn into a whole life policy after the term is over.
- The period known as the 'multiple protection period' is the time during which both policies are in effect.
*Joint Life / First to Die Policies - ✔️ ✔️ - Policies that cover two people but pays only once
- When one spouse dies, the other is the beneficiary
- The surviving person can elect to continue the insurance contract as an individual without proof of insurability.
*Last Survivor / Second to Die Joint Life Policy - ✔️ ✔️ - Benefits are only paid when the second spouse dies (When the first spouse dies, estate taxes don't have to be paid)
- The benefits are used to pay estate taxes
Juvenile Insurance - ✔️ ✔️ - Can be sold up to the age of 14 or 15 to cover the life of the person as a "child"
- Do not have to sign the application
- The policy is usually owned by the applying adult
- The policies may be Ordinary or Industrial types
Jumping Juvenile Insurance - ✔️ ✔️ - At age 21, the insurance coverage increases by 5x the previous face amount without the premium increasing.
*Payor Rider - ✔️ ✔️ - The payor is the adult who's buying the child's policy.
- If the adult is disabled due to accident or sickness, or dies, the company discontinues collecting premiums until the adult gets better or the child turns 25.
*Credit Life Insurance - ✔️ ✔️ - Policy used to cover a financial debt.
- An individual policy covering an individual's death
Non-traditional Life Insurance Policies - ✔️ ✔️ - Adjustable Life
- Universal Life
- Equity Indexed Universal Life
*Adjustable Life - ✔️ ✔️ - A policy made up of a term and whole life insurance combined.
- As a person or family's needs change, it's easy to adjust the payment amounts or payment coverage.
- Gives holders the option to change the characteristics of their policies as their needs change over time.
- Adjustable life insurance policies allow holders to manipulate the period of protection, increase or decrease the face amount, raise or lower the premium amount, and change the length of the premium payment period.
- These policies also incorporate an interest bearing side fund (cash value).
- No requirement to cancel or purchase additional policies as holders' circumstances change.
- Adjustable life insurance is also known as "flexible premium adjustable life insurance".
**Universal Life~~ - ✔️ ✔️ - A major permanent insurance policy.
- Made up of an ART policy and a savings plan (the cash value portion)
- A contract containing a cash value account from which current mortality costs are drawn by the insurer
- The maximum mortality charges against the cash values permitted by the insurer are disclosed in the policy and are based upon industry tables
- The interest rate credited to the cash value is variable, and responds to the fluctuating market rates, but usually is guaranteed for an initial period
- The main difference with whole life is premium schedules
Equity Indexed Universal Life - ✔️ ✔️ A policy where the cash value is hedged again inflation.
*Variable Life Insurance~~ - ✔️ ✔️ - Regulated by the State & SEC
- THe owner may balance the risk of loss with the desire for gain
- The cash values are determined by the value of underlying mutual funds selected by the owner
Consideration Clause - ✔️ ✔️ States what the client is going to do in exchange for the insuring clause: how much they have to pay and how often they have to pay it. (the consideration that the insured is going to give in return)
- It's the amount and the frequency of premium payments
*Grace Period Provision - ✔️ ✔️ - How long can the client still keep their policy without paying their premium.
- If a client has a claim within the grace period, the company pays the client but will subtract for the amount of the premium that should have been paid.
Reinstatement Provision - ✔️ ✔️ - Lapsed policies can be restated even after no payment has been made (typically 3-5 yrs. up to seven years)
- To reinstate the policy, the policyholder must provide evidence of insurability
- The policyholder must provide evidence of insurability; pay all overdue premiums plus interest; and any policy loan must be repaid or reinstated with interest.
Some question about having a rider where you don't need to prove insurability? - ✔️ ✔️ ...
Policy Loan Provision - ✔️ ✔️ - Insurance companies allow clients to borrow from their policies if there is cash value in the policy. The loan does not have to be repaid (but you might want to because the value of the policy will gradually decrease)
- Highest fixed policy loan interest rate is 8%
Incontestable Clause - ✔️ ✔️ - If after 2 years have passed and then the material misstatement, concealment, or fraud was discovered, insurance companies cannot contest the claim.
- It is 2 years from the issue date
- 3 exceptions: Impersonation No insurable interest Murder
Policy exclusions (will not be insured): - ✔️ ✔️ - War: if the insured is killed in a war zone
- Aviation: will not cover death on an airplane
- Hazardous occupation or hobbies
- Commission of a felony: insured committing a felony at time of death
- Suicide: will pay after 2 years of holding the policy
If someone commits suicide within two years of purchasing a policy, the total of all premiums paid will be return and nothing more. - ✔️ ✔️ ...
Non-forfeiture Values - ✔️ ✔️ - Insureds have the right to the cash value of their policy if they stop their policy
- The cash value can come in 3 forms: Cash Surrender Value Reduced Paid Up Extended Term Policy
Cash Surrender Value - ✔️ ✔️ - The amount of accrued cash value in a policy that would be payable to the policy owner at surrender of the policy minus any surrender fees
- Must be available to the insured within 6 months
*Reduced Paid Up - ✔️ ✔️ The face amount will be reduced so that the cash values remaining in the policy will be enough to cover the policy for the lifetime of the insured.
The policy would continue but at a face amount less than the stated amount on the policy. The cash value would be used to purchase a reduced paid up policy based on the amount of cash value available in the policy. No additional premiums would be due for the life of the reduced policy.
*Extended Term - ✔️ ✔️ The policy will continue at the current face amount but the policy will become a term policy and will continue until the cash value runs out due to premium payments.
A provision that would allow the face amount of the policy to remain the same and the cash value would be used by the insurance company to pay the premiums at term rates. The policy would continue until the cash value is depleted by premium payments.
Something about the contract being mailed out is it considered binding from time it left the office, time it was stamped at the post office, or time received - ✔️ ✔️ ...
Two kinds of insurance companies: - ✔️ ✔️ - Stock Companies
Stock Companies - ✔️ ✔️ - The company is owned by stockholders
- Major purpose is to create a profit
- Company does this by selling insurance products to the public with competitive pricing.
- At end of the BOD declares dividends to the stockholders from the profits of the company.
- Dividends are taxable because they are a return on the stockholder's investment
Mutual Companies - ✔️ ✔️ - (not-for-profit) Trying to make a surplus
- Owned by the policy holders
- The company has no stock
- Goal of the company is to reduce the cost for the policy holders
- When they have a surplus, they redistribute part of the surplus back to the policy owners in the form of dividends
*Automatic Premium Loan Rider - ✔️ ✔️ - Used if the insurance company loses the client because the client's checking account was closed and the insured did not notify the company
- First they try to find the client, if they are unable, they take the premium out of the cash value as a loan until they can find the client.
- Does not work with term policies (policy must have cash value to work)
Payor Provision or Rider - ✔️ ✔️ - Mentioned in # 98
Accidental Death Benefit Rider - ✔️ ✔️ - Aka double indemnity
- The beneficiary will receive twice the face amount of the policy if the insured dies in an accident
Cost of Living Rider - ✔️ ✔️ - Allows you to upgrade or purchase additional insurance coverage to cover the increasing cost of living
Actuaries - ✔️ ✔️ People who compute the premiums
3 Factors in Calculating Premiums: - ✔️ ✔️ - Mortality
Mortality - ✔️ ✔️ - Mortality tables indicate how long people are expected to live
- The probability of death
- The average number of deaths that will occur each year in each age group in comparison to the number of living people in that same group
- Mortality tables: probability of death and expectation of life
*What are mortality tables? - ✔️ ✔️ Indicate how long people are expected to live
Interest - ✔️ ✔️ How well the company is doing on their investing
Expense Factor - ✔️ ✔️ Actuaries need to be able to estimate how long people are going to live, how well they're doing on their investing, and what kind of expenses are going to be incurred out into the future as far as maybe 100 years.
5 Other Factors in Calculating Premiums: - ✔️ ✔️ - Age
- Sex
- Health
- Occupation / Avocation
- Habits
*Something about how sex? is illegal to be taken into account when determining insurability? - ✔️ ✔️ Asking for a person's age or sex is NOT discriminatory. But asking for religious beliefs IS discriminatory
Asking about marital status is discriminatory. - ✔️ ✔️ ...
Criterium for Insurability - ✔️ ✔️ - Age and gender of policy holder
- MIB: Medical history/pre-existing conditions (you fill in form, but many companies also use database of Medical Information Bureau - MIB)
- Family medical history
- Results of medical exam
- Smoker or not
- Mental health record
- Occupation
- Lifestyle issues, such as leisure activities that the insurance company considers risky
- Driving record
- Where you travel regularly
- Features, coverages and limits selected
- Credit history
Premiums for 10 Year Term Policy - ✔️ ✔️ Has premiums level for 10 years
Reserves - ✔️ ✔️ Huge pot of money that the companies are required by the states to set aside in order to be able to pay the claims that occur next year.
Cash Vales - ✔️ ✔️ Small tanks of money that are inside each permanent policy
Ways Policy Proceeds are paid When Insured Dies: - ✔️ ✔️ (method chosen when setting up the policy)
- Lump Sum Cash Option
- Interest Only Option
- Fixed Period Option
- Fixed Amount Option
- Life Income Options (6 choices)
Lump Sum Cash Option - ✔️ ✔️ Beneficiary is paid in a single check, a lump sum
Interest Only Option - ✔️ ✔️ - Beneficiary is paid in interest payment until a certain point. Then the remaining balance is paid at that point.
- (The interest is based on how well the company is doing in their investments)
Fixed Amount Option - ✔️ ✔️ - The insured wants a set dollar amount monthly.
- Money will be paid out until it runs out
*Irrevocable beneficiary - ✔️ ✔️ - Nothing can be changed without the consent of the beneficiary
*What is an irrevocable beneficiary allowed or not allowed to do? - ✔️ ✔️ ...
*What is needed for an insurance contract to be a real contract?~~ - ✔️ ✔️ - Signature
*Who has the right to change the beneficiary on insurance policy? - ✔️ ✔️ ...
*Simultaneous Death (Uniform Simultaneous Death Act) - ✔️ ✔️ - When the insured and the beneficiary die at the same time, the insured person died last.
- Even after 14 to 30 days, the Insured is still considered to have died last
- If we know who died last, go to "Common Disaster Provision" where the insured still dies last
- This prevents the proceeds going to the estate of the primary beneficiary
*What is the Common Disaster Provision? - ✔️ ✔️ - When we know who died last but the insured is still considered to have died last.
- When the beneficiary dies 30 days AFTER the insured, the insured is still considered to have died last.
*When does the second beneficiary get to have the proceeds? - ✔️ ✔️ ...
*What if the primary beneficiary dies before the insured? The second beneficiary gets it? - ✔️ ✔️ ...
Underwriting Process: - ✔️ ✔️ - 1st: determine if the applicant is insurable; Application Medical Report MIB (Medical Information Bureau) Special Questionnaires Inspection Reports Credit Reports
**Parts of an Insurance Application: - ✔️ ✔️ - Part One: General (clerical information)
- Part Two: Medical History (not same as medical report) Made up of a list of medical questions
- Part Three: Agent's Report
- Signatures need from: Applicant, Insured, Owner, and agent
*Part One - ✔️ ✔️ General information
- Details of requested insurance
- Beneficiary name
- Additional life insurance pending
- Alcohol
- Drugs
- Habits
- Foreign travels
- Insurer (any person capable of making a contract)
- Plan
- Amount of insurance
- Death benefit
- Riders
- Premiums
- Insured's insurance needs
- Insured's personal history
*Part Two - ✔️ ✔️ Medical information
- Past & current health
- Chronic
- Family info
- What you have or don't have medically
- Primary care provider
*What kind of information is in the agent's report? - ✔️ ✔️ ...
*Know what type of information is considered under each part of the application - ✔️ ✔️ ...
Medical Report - ✔️ ✔️ Made up of:
- APS (Attending Physicians Report)
- The paramedics who obtain blood test, urine test, EKG, and ask questions.
*MIB (Medical Information Bureau) - ✔️ ✔️ - Company owned by the insurance industry
- Gathers information: Every time someone applies Every time someone has a health insurance claim Gets all Medicare records, Medicaid records, and military medical records
- The purpose is "the prevention of misrepresentation and fraud"
- The main purpose is to hold down the cost of insurance
*Know what type of information the MIB gathers and discloses - ✔️ ✔️ ...
*If someone is rejected because of an MIB report, it must be disclosed. They have to be given the contact information, but cannot be told what the report contained. Agents don't get to see it either. - ✔️ ✔️ ...
