facts of life insurance

8/2/2019 Facts of Life Insurance

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Mountain CE, LLC All Rights Reserved Copyright 2009 www.mountainCE.com

Facts of Life Insurance

Course Manual6 credit hours

Online


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Facts of Life Insurance 2

Important Information

Course Intent

Mountain CE, LLC does not render legal services or advice. This course is not intended as an

authority on legal matters. The purpose of this course is to provide continuing education for

insurance agents. We have attempted to provide the most accurate information available. Asrules, regulations, and industry practices change, some aspects of this course may become

outdated. This course will be updated on a periodic basis as deemed necessary.

Terms of Use

The content of this course is the sole property of Mountain CE, LLC. The course material cannot

be duplicated, copied, or reproduced without written consent from Mountain CE, LLC.

For correspondence (non-classroom) courses, you must read and study this course manual and

then pass an exam to demonstrate what you have learned. For further instructions, visit our

web-site at www.mountainCE.com.


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Stranger Owned Life Insurance Overview ............................................................................ 65Stranger Owned Life Insurance Types................................................................................. 66Federal Tax Considerations for Individuals............................................................................... 68


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Fundamentals History

The earliest record of something similar

to life insurance came from ancient

Romeroughly 2,000 years ago. They

had burial clubs. Romans believed that

in order to avoid being a

tortured ghost, a dead

person had to be given

a proper burial.

Therefore, they had

elaborate funeral

ceremonies that

honored the life of the dead person.

Common citizens would join a burial club

and regularly paid dues to fund the club.

When a member died, the club paid for

the burial, and some clubs also paid a

benefit to the deceaseds family.

The Presbyterian Synod of Philadelphia in

1759 sponsored the first life insurance

corporation in America.

Its name was the

Corporation for the

Relief of Poor and

Distressed Presbyterian

Ministers and for the

Poor and Distressed

Widows and Children of

Presbyterian Ministers. That is quite a

long name, so many people just called it

the Presbyterian Ministers Fund. Its name

was later changed to Covenant Life

Insurance Company, and that company

merged with Provident Mutual Life

Insurance Company in 1995.


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Fundamentals Personal Uses

Provide instant cash at death that

is income tax freeand in most

cases not subject to probate

Pay final expenses (medical bills,

taxes, funeral cost, funeral guestexpenses such as travel, lodging,

restaurant, groceries, phone, etc.)

Provide immediate cash to sustain

the survivors during the grieving

period when it may be difficult for

them to earn an income

Estate conservation (liquid cash to

pay estate taxes or other expenses

so family assets do not have to be

liquidated)

Pay for future obligations (child

care, college, weddings of children,

etc.)

Provide funds for long term day-

to-day living expenses of the

survivors

Pay off family debts (credit cards,

mortgages, car loans, etc.)

Cash accumulation that can be

borrowed or surrendered

Leave a legacy to relatives or

friends

Provide a charitable contribution


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Fundamentals Business Uses

Buy/Sell Agreement a contract between business partners to buy out each

others share of the business when one of them dies. Life insurance can be used

to provide the funds for the purchase.

Key Person every business has star employees who are critical to the success

of the organization. If a star employee dies, life insurance can make up for the

loss of earnings and assist in the expense of finding and training a replacement.

Group Term Insurance is often included in the employee benefit package

offered by employers. According to www.lifehappens.org, today 40% of

Americans have life insurance through work.

Deferred Compensation Plan an arrangement where an employer defers a

portion of an employees current income until a later date. Wages earned in one

period are paid at a specified future date. Life insurance can be used for this type

of plan. The deferred income can be used to pay the premiums on a Cash Value

life insurance policywith the employee as the Insured and the employer as the

owner. When the Insured dies, the employees Beneficiary will receive the Death

Benefit. Or, the Cash Value can be used at retirement as supplemental income.

This type of plan can either be nonqualified or qualified.


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Fundamentals Business Uses (cont.)

Executive Bonus Plan with this type of plan the employee applies for a

personal life insurance policy and chooses a Beneficiary. The business pays the

premium to the Insurer, and is able to deduct the premium from its taxable

income (as long as the total compensation is considered reasonable). The

employee has control of the policy and must pay income tax on the premium paid

by the employer. This plan is simple to set up and administer and IRS restrictionsand reporting do not apply.

Split Dollar Arrangement an agreement between employer and employee toshare the cost of life insurance premium payments on the employees life. They

also agree to share the policy benefits (Death Benefits and Cash Value). This plan

provides cash to fund nonqualified deferred compensation plans for an employeeand provide life insurance with a Death Benefit amount that the employee might

not otherwise be able to afford.


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Fundamentals the Actors

Insured Policyowner Beneficiary Producer

The personwhose life the

policy depends

on; when the

Insured dies, the

Death Benefit is

paid to theBeneficiary

Must be a person

The entity whohas control of the

policy and is

responsible for

paying the

premiums

Can be an entity

other than a

person

The entity whoreceives the

proceeds from

the policy when

the Insured dies

Can be an entity

other than a

person

The licensedinsurance agent

who sells the

policy to the

Policyowner

Represents the

Insurer

Yes The Insured can be the Policyowner

of his or her life insurance policy.

The Policyowner can be the

Beneficiary.

Not Recommended The Insureds estate can be the

Beneficiary. However it is usually not a

good idea, since a Death Benefit paid to

the Insureds estate must go through

probate.


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Fundamentals Terminology

Issue Age

Attained Age

Insurable Interest

Premium

Face Amount

Cash Value

Surrender

Surrender Value

The age of the Insured when the policy is first started

The age of the Insured at a specific point in time

A requirement that when someone buys an insurancepolicy on someone elses life, the Policyowner must bea close relative or have a financial need for theInsured to remain alive

An initial or regular payment by the Policyowner tothe Insurer to keep the policy in force

The amount stated on a life insurance policy, to be

paid upon death of the InsuredThe savings portion of a permanent life insurancepolicy which accumulates when the premiumpayments exceed the cost of insurance

Giving up (cancellation) a life insurance policy

The lump sum amount available to the Policyownerwhen he or she gives up a life insurance policy; it iscalculated by taking the Cash Value and subtractingsurrender charges (if any) imposed by the life Insurer


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Fundamentals Terminology (cont.)

Death Benefit

Amount at Risk

Endowment Age

The actual amount paid to the Beneficiary when theInsured dies or the policy endows; it is calculated bytaking the Face Amount and making any necessaryadjustments such as:

Subtracting any outstanding policy loans

Making adjustments such as accidental deathdouble indemnity

Using dividends to purchase paid up additions

Using Cash Value to increase the DeathBenefit as in Universal Life Option B

The difference between the Death Benefit and theCash Value of a life insurance policy

The age at which a whole life policy matures; if theInsured is still alive at that age, the Death Benefit willbe paid; most whole life policies sold today endow at

age 100


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Fundamentals Standard Features

Assignment

Incontestability

Free Look

Grace Period

Allows the Policyowner to sell or give the policy toanother person or entity; the Policyowner does notneed the permission of the Insurer to assign a policy;however, the Policyowner must notify the Insurer inwriting of the assignment; there are two types ofassignment: absolute (permanent) and collateral

(temporary); a collateral assignment may be done tosecure a loan

Prevents the Insurer from denying a Death Benefitclaim due to inaccurate or misleading initialapplication informationafter the policy has been inforce for two years or more

Gives the Policyowner the right to examine and returnthe policy for any reason; in Utah the free look can bedone on or before ten days after the policy isdelivered (30 days if the policy purchased replacedanother policy)

The amount of time in which a life insurance policycan remain in effect even though the premium is pastdue; it is typically at least 31 days


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Fundamentals Standard Features (cont.)

Dividends

Reinstatement

Misstatement

Suicide

Are sometimes paid by mutual companies toPolicyowners of whole life policies and are consideredreturn of excess premium; the Policyowner can electto receive cash, reduce future premiums, or topurchase paid up additional insurance; policies that

pay dividends are known as participating policies

Allows the Policyowner to restore the policy if it wascancelled due to non-payment of premium; thePolicyowner will have to provide evidence of theInsureds insurability and pay overdue premiums withinterest; the maximum time limit for reinstatement

varies from policy to policy (usually three or fiveyears)

Allows the Insurer to adjust the policy premium orbenefits at any time if it is discovered that the age orgender on the application is incorrect

If the Insured commits suicide within two years of theissue date, the amount paid to the Beneficiary will belimited to only the premiums paid


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Types Comparison

Term Permanent

Description Provides temporary protectionfor a specific period of time;pays a Death Benefit uponthe Insureds death if the deathoccurs before the policy expires

Combines life insurancewith a savingscomponent; includeswhole life anduniversal life

Cash Value Accumulation No Yes

Major Advantages Simple; inexpensive for youngadults; provides the greatestamount of coverage for the

premium paid; sometimes canbe converted to a permanentpolicy

Designed to be in forceand pay a Death Benefitwhenever the Insured

dies (or when the policyendows upon theInsured reaching acertain age such as 100)

Major Criticisms A vast majority (approx. 99%)of term policies expire before

death occurs; expensive forolder people; usually notavailable for minor children

Expensive; high fees andcommissions


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Types Term Life

Guaranteed

Renewable up toa certain age,

such as 70 or 90

Premium

increases each

year

Death Benefit

remains level

Annual

Renewable Term

Guaranteed

Renewable up toa certain age,

such as 70 or 90

Premium is the

same for a

specific numberof years, such as

10, 15, 20 or 30

Death Benefit

remains level

Level Premium

Term

Not Guaranteed

Renewablebeyond the term

Premium is the

same for the

entire term

Death Benefit

decreases each

year until it

reaches zero at

the end of the

term

Decreasing

Term


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Types Whole Life

Provides a level,

guaranteed DeathBenefit

Charges a level

annual premium

for the life of the

Insured (or whenthe policy endows

upon the Insured

reaching a certain

age such as 100)

Straight or

Continuous Life

Provides a level,


Charges a level

annual premium

for a specific

number of yearsand then will be

completely paid up

Limited Payment

Life

Provides a level,


One lump sum is

paid into the policy

in return for a

Death Benefit thatis guaranteed to be

paid-up

Single Premium

Life


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Types Universal Life (UL)

* At some insurance companies, Option A is called Option 1 and Option B is calledOption 2.

Combines a cash account with

annual renewable terminsurance

Allows for flexible premiums

Death Benefit remains level

each year

Cash Value increases more

rapidly than Option B

UL Option A *

Combines a cash account with

annual renewable terminsurance

Allows for flexible premiums

Death Benefit increases each

year

Cash Value increases less

rapidly than Option A

UL Option B *


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Types UL Option A

Death Benefit

Pure Insurance

Cash Value

35 40 45 50 55 60 65

$200,000

$150,000

$100,000

$50,000

$0

Since the Death

Benefit stays level, the

Cash Value canincrease rapidly.

Eventually the Cash Value will approach

the Death Benefit. When this happens the

Death Benefit will increase rapidly and

maintain a corridor between the two.This prevents the policy from violating the

IRS rules regarding life insurance and

allows the policy keep the tax advantages

of life insurance.


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Types UL Option B

Death Benefit

Pure Insurance

Cash Value

$200,000

$150,000

$100,000

$50,000

$0

35 40 45 50 55 60 65

The Death Benefit

increases by the

amount the Cash Value

increases.

The Death Benefit is

always equal to the

face amount of the

policy plus the Cash

Value.

The amount at risk

(pure insurance)

always remains the

same.


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Needs Analysis Overview

Methods used to determine the amount of life insurance needed include:

Here are the details of each

How much life

insurance do I need?

Income Factor Approach

Human Life Value Approach

Needs Approach


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Needs Analysis Income Factor & Human Life

Income Factor Approachthis method takes the Insureds current annual earnedincome and multiplies it by a factor such as 10. This method is popular, because itis simple and easy.

Human Life Value Approachthis method calculates the earning capability of theInsured for the rest of his or her expected lifetime. The formula considers the:

a) Insureds after-tax earned annual income

b) Number of years until retirement

c) Estimated rate of return generated on a lump sum Death Benefit

d) Estimated effect inflation will have on income

Caution!

Relying solely on these methods might be inaccurate since:

They do not consider the actual needs of the survivors

They do not consider other sources of income that are available upon

the Insureds death such as social security and retirement savings


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Needs Analysis Needs Approach

The Needs Approach is often the best method to determine how much life insuranceis needed. It considers the following:

a) Final Expenses. This includes costs for funeral, burial orcremation, medical, hospital, attorney, executor, probate,income taxes, and estate taxes; it may also include travel,

lodging, and food expenses for friends and family who attend the funeral;according to the Life and Health Insurance Foundation for Education (LIFE)final expenses are typically the greater of $15,000 or 4% of the Insuredsestate.

b) Grieving Period. Surviving family members usually need time togrieve and handle the deceaseds affairs; therefore, they may be

unable to work for weeks or months and money is needed toreplace this lost income.

c) Debt Cancellation. It is usually wise to have life insuranceavailable to pay off the familys debtsinstead of burdeningthe survivors with them; this may include mortgages, creditcards, and car loans.

d) Emergency Fund. This means preparing for unexpectedmedical, automobile, and home repair expense. At least threemonths of household living expenses is recommended.


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Needs Analysis Needs Approach (cont.)

e) Future Obligations. This may include the following:

College Costs for the surviving spouseand/or children. According to Trends inCollege Pricing 2008 by The CollegeBoard, average published annual tuition

and fees for in-state students at publicfour-year colleges and universities in2008-09 are $6,585 and average totalcharges, including tuition and fees androom and board, are $14,333. Averagepublished annual tuition and fees atprivate four-year colleges and universities in 2008-09 are $25,143 andaverage total charges, including tuition and fees and room and board,are $34,132.

Wedding Costs for the surviving children.A wedding can cost a few hundred dollarsor more than $100,000. A typicalwedding in the United States costsbetween $10,000 and $30,000.


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f) Survivor Living Expenses. This includes currentnecessary household expenses such as groceries, homemaintenance, rent, clothing, automobile gas andmaintenance, utilities, child care and entertainment.Since survivor living expenses are ongoing costs for anindefinite period of time, consideration should be given todetermining the lump sum needed to generate the necessary annualincome.

Lump Sum Needed

To determine a lump sum

needed, take the annual

amount needed and divide it by

the estimated percent return.

Example

If $50,000 is needed annually for survivor living

expenses and a 5% average annual return is

expected, divide $50,000 by .05 to get $1,000,000.

That would allow $50,000 to be generated each

year without having to touch the principal.


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g) Available Assets & Income. These will reduce the amount of lifeinsurance needed.

Bank accounts, money

market accounts, stocks,

bonds, mutual funds,

annuities, etc.

IRAs, 401(k)s, definedbenefit pension plans

IncomeAssets

Surviving spouse

income

Income from income

producing assets

Social Security income


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Needs Analysis Resources

The Life and Health Insurance Foundation for Education (LIFE) is a great resource.

What resources are

available on the Web to help

me do the needs analysis?

Life Insurance Needs Calculatorhttp://www.lifehappens.org/life-insurance/life-calculator

What you need to know about life insurance

http://www.lifehappens.org/pdf/printable-consumer-guide/life-insurance-pcg.pdf

Life insurance needs worksheet

http://lifehappens.org/catalog/pdf/LI-03.pdf


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Presentation Overview

Here are some details of each

As a Producer, what are some

of the regulations I must be

aware of regarding the sales

presentation?

Advertising

Guarantee Association

Illustrations


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Presentation Advertising

According to Utah Insurance Rule R590-130 (Rules Governing Advertisements ofInsurance)

This rule is designed to help assure the clear and truthful disclosure of thebenefits, limitations and exclusions of policies sold as insurance. This is intended

to be accomplished by the establishment of guidelines and standards of conduct

in the advertising of insurance in a manner which prevents unfair, deceptive andmisleading advertising.

The format and content of an insurance advertisement shall be sufficientlycomplete and clear to avoid deceiving or misleading the reader, viewer, or

listener.

Advertisements shall be truthful and not misleading in fact or in implication.

An insurer must clearly identify its insurance policy as an insurance policy. Apolicy trade name must be followed by the words "Insurance Policy" or similar

words clearly identifying the fact that an insurance policy is being offered.

No insurer, agent, broker, producer, solicitor or other person may solicit residentsof this state for the purchase of insurance through the use of a name that isdeceptive or misleading with regard to the status, character, or proprietary or

representative capacity of such person, or the true purpose of the advertisement.

F t f Lif I 30


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Presentation Guaranty Association

According to Utah Insurance Rule R590-155 (Disclosure of Life and Health GuarantyAssociation Limitations)

Insurance companies licensed to sell life insurance in the State of Utah arerequired by law to be members of the Utah Life and Health Insurance Guaranty

Association (ULHIGA). If an Insurer that is licensed to sell insurance in Utah

becomes insolvent (bankrupt), and is unable to pay claims, the law requiresULHIGA to pay some of the Insurers claims.

The maximum ULHIGA will pay under any circumstance is the amount ofcoverage or $500,000 (whichever is lower). More specific life insurance limits

include: $200,000 in net cash surrender values $500,000 in life insurance Death Benefits

Important!

According to Utah Code 31A-28-119, it is illegal for a Producer or Insurerto advertise or make any statement that an Insurers policies are

guaranteed by the Utah Life and Health Insurance Guaranty Association.

Facts of Life Ins rance 31


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Presentation Illustrations

According to Utah Insurance Rule R590-177 (Life Insurance Illustrations Rule)

If a basic illustration is used by an insurance agent, broker or other authorizedrepresentative of the Insurer in the sale of a life insurance policy and the policy is

applied for as illustrated, a copy of that illustration, signed in accordance with

this rule, shall be submitted to the Insurer at the time of policy application. A

copy also shall be provided to the applicant.

The purpose of this rule is to provide rules for life insurance policyillustrations that will protect consumers and foster consumer

education. The rule provides illustration formats, prescribes

standards to be followed when illustrations are used, and

specifies the disclosures that are required in connection withillustrations. The goals of this rule are to ensure that illustrations

do not mislead purchasers of life insurance and to make

illustrations more understandable.

The standards for basic illustrations include (a) the format requirements; (b) anarrative summary; (c) a numeric summary including policy guarantees and non-

guaranteed amounts; (d) the statement requirements; (e) the tabular detail.



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Application Overview

Lets look at each one in more detail

Proposed Insured

Policy Plan

Riders

Replacement

Beneficiary

Underwriting Questions

Conditional Receipt

Signatures

Billing

What information is gathered

on the application?

Agents Report



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Application Proposed Insured

Name, Phone #

Residence Address, Mailing Address

Gender, Date of Birth

Social Security #, Drivers License #

Issuing State, Birth Place

Citizenship, Residency Status, Type of Visa

Occupation, Employer

Information Gathered About the Proposed Insured



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Application Policy Plan

* The most common policy plans are shown above. Not all insurance companies offerall plans.

Annual Renewable Term

Level Premium Term (10, 20, or 30 years)

Decreasing Term

Straight Whole Life to 100

Limited Payment Whole Life (10, 20, or 30 years)

Single Payment Whole Life

Universal Life Option A

Universal Life Option B

* The Policy Plan must be Selected



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Application Riders

Spouse / Child Term

Rider allows the children or

spouse of the Insured to beadded to the policy for alimited period of time.

Accelerated Death

Benefit Rider (or livingbenefit), allows for the

early payment of some orall of the Death Benefit ifthe Insured is diagnosed ashaving a terminal illness orpermanently confined to along-term care facility.

Cost of Living Riderincreases or decreases theface value by an inflationfactor.

Waiver of Premium Ridereliminates the requirement

for the Policyowner to paythe premium if the Insuredbecomes totally disabled.

Term Life Rider can beadded to Whole Life orUniversal Life policies as an

affordable way to increasethe face amount.

Waiver of Cost Rider isfound in some UniversalLife policies; it removes therequirement for the

Policyowner to pay the costof insurance (but not thecost to grow Cash Value) ifthe Insured becomes totallydisabled.

Guaranteed Insurability

Rider allows the

Policyowner to purchaseadditional coverage atspecified future dateswithout evidence ofinsurability.

Disability Income

Benefit Rider providesthat if the Insured becomesdisabled, the Insurer willwaive the policy premiumsand pay a monthly income.

Accidental Death Rider

pays a multiple of the faceamount if death is theresult of an accident asdefined in the policy.

A rider is a provision attached to a policy that mayadd, delete or change the insurance coverage.

A rider is a provision attached to a policy that mayadd, delete or change the insurance coverage.



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Application Replacement

Replacement is a transaction in which a new life insurance policy is being purchased totake the place of another policy that is being lapsed, terminated, surrendered,forfeited, or changed that results in a reduction of coverage. Since it is often in thebest interest of the Policyowner for existing policies to remain in force, insurance lawsand rules regarding replacement ensure the proposed owner of the new policyunderstands the ramifications of replacing an existing policy.

Does the proposed Insured currently have individual life insurance in force withanother Insurer? If so, what is the name of the Insurer, what is the coverageamount, and when was it issued?

Has the proposed Policyowner recently changed, withdrawn, or borrowed againstthe existing life policy, or does he or she intend to do so?

Have a Notice Regarding Replacement signed by the applicant and the Producer

Get a list of all existing life insurance policies being replaced

Submit the Notice Regarding Replacement the Insurer

Questions on the application regarding replacement

Duties of the Producer regarding replacements



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Application Beneficiary

Person

Primary and secondaryBeneficiaries can be named. Morethan one primary and more thanone secondary Beneficiary can be

named. Secondary Beneficiaries donot receive anything if a primary

Beneficiary is still alive at the timeof the Insureds death.

Classes of People

Children are a common class of people named asBeneficiary. It is best to be as specific as

possible, such as, Children of the marriage ofJohn James Jones and Sarah Sandra Smith. It isnot a good idea to directly name minor childrenas Beneficiaries, since it is likely to create legal

issues regarding the control and management ofthe money when the insured dies.

TrustA trust is a legal entity created for

the benefit of a person (e.g.children), place, or thing. Then,once created, a trust can be the

Beneficiary of a life policy.

Corporation or CharityCorporations and charities can be named as

Beneficiaries of a life insurance policy.

To whom can the

Death Benefit be

paid to?



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Application Underwriting Questions

Underwriting questions on the application vary by company, type of policy, andinsurance amount. However, here are some common questions asked about theproposed Insured:

Healthcare

Primary care physician and/or health care facility? Has been hospitalized, taking treatment, or been advised to take

treatment? Had a blood study, urinalysis, electrocardiogram, x-ray, scan, or other

diagnostic test done?

Current Condition

Current height and weight? Has there been a recent weight loss of more than 20 pounds?



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Application Underwriting Questions (cont.)

Family History

Parents or siblings before age 60: death, cancer, or diabetes? Parents or siblings before age 60: mental disorders? Parents or siblings before age 60: heart or circulatory disorders?

Habits, Hobbies, Activities

Alcohol or controlled substance abuse, illegal drug use? Used nicotine in the past three years? Participated in flying as pilot or crewmember?

Involved in racing or climbing? Involved in scuba diving or sky diving? Had drivers license revoked or suspended in last five years? Been convicted of driving under the influence of drugs or alcohol in last

five years? Have ever filed for bankruptcy?

Have ever been convicted of a crime? Have ever been disabled? Ever traveled or intend to travel outside the United States or Canada?



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Application Underwriting Questions (cont.)

Health Conditions or Disorders

HIV or AIDS? Diabetes, stroke, cancer, or tumor? Hormone or thyroid disorder?

Heart, blood, respiratory disorder? Stomach, digestive, lymph gland, or liver disorder? High blood pressure or anemia? Throat, ears, or nose disorder? Loss of hearing or vision? Dizziness, fainting, headaches, paralysis or seizures?

Shortness of breath, coughing up blood, chronic cough? Chronic abdominal pain, indigestion, diarrhea, intestinal bleeding? Frequent or difficult urination, blood in urine? Brain or nervous system disorders? Mental, neurological, or emotional disorders? Complications during pregnancy?

Bladder, kidney, prostate problems? Breast or reproductive organ disorders? Sexually transmitted disease? Blood or high amounts of protein or sugar in urine? Disorder of the muscles, bones, joints, or connective tissue? Chest pain, irregular heart beat, persistent skin lesions?



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Application Agents Report

Although the agents report is a separate document from the application, it is partof the application process. Its purpose is for the Producer to document his or herobservations and knowledge about the proposed Insured and the life insurancetransaction. This information is critical to the underwriting process.

Does the proposed Insured have existing life insurance in force?

Is the life insurance being applied for intended to replace existing life insurance?

Is the proposed Insured a minor? If so, how much life insurance is in force on hisor her parents and siblings?

Is the life insurance being applied for suitable for the proposed owner andconsistent with his or her financial goals?

Have all the necessary reports been ordered and medical exams scheduled?

Have the identities of the proposed Policyowner and Insured been verified?

Information that may be gathered on the agents report may include



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Cash

Check

Money Order

Credit Card

Debit Card

Automated Funds

Transfer (AFT)

Monthly

Quarterly

Semi-Annual

Annual

* Payment

Frequency Options

* Payment Mode

Options

Application Billing

At the time the application is completed, the initial premium should be collected bythe Producer and submitted to the Insurer along with the application. Uponreceiving the initial premium, most Producers issue a conditional receipt (seenext page).

* The most common mode and frequency options are shown above. Not all insurancecompanies offer all these billing options.



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Application Conditional Receipt

The Conditional Receipt is provided by the Producer to the Policyowner at thecompletion of the application. It states that all the necessary requirements must befulfilled before the life insurance coverage is to be effective such as:

The application has been completed

The first premium has been paid

All medical exams and underwriting must be completed

The proposed Insured must be determined to be anacceptable insurable risk to the company

It obligates a life Insurer to provide coverage that is conditionalon the Insured meeting all the requirements. This gives the Insurertime to process the application and to either issue or deny the policy.



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Application Conditional Receipt (cont.)

If the Insurer would haveissued the policy

The Insurer will pay the Death

Benefit

If the Insurer would not haveissued the policy

The Insurer will not pay the

Death Benefit

What if a Conditional Receipt

has been provided, and the

Insured dies before the

policy is issued or denied?



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Application Conditional Receipt (cont.)

If the Insurer issues thepolicy

Coverage will be effective asof the date on the application

or the date of the medialexamwhichever is last.

If the Insurer denies thepolicy

No coverage is in effect.

What if a Conditional Receipt

has been provided, and the

Insured does not die before

the policy is issued or denied?



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Application Signatures

The following signatures are required on the application

Producer

Policyowner

The Insured must also sign if he or she is not the

Policyowner. An exception to this rule is when the

Insured is a minor child. In that case, the Policyowner

signs the application and the Insured does not.



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Information Gathering Overview


Paramedical Report

Attending Physicians Statement

Investigative Consumer Report

Medical Information Bureau

Medical Exams & Lab Tests

Once Ive applied for life insurance, what does the

Insurer do to gather information about me?



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Information Gathering Paramedical Report

A Paramedical (paramed) Report is a common information gathering technique usedby insurance companies. The Paramedical Report is relatively inexpensive and ispaid by the Insurer. It can be completed by a registered nurse or a paramedic afterhe or she conducts a personal interview with the proposed Insured and collectsinformation and items such as:

Medical History

Blood Pressure and Pulse

Height and Weight

Specimens of Blood, Urine, and Oral Fluids

EKG (conducted only in some situations)



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Information Gathering Medical Exams and Lab Tests

Once specimens of blood, urine, and oral fluids have been collected, the Insurer willhave them tested at its expense for the presence of numerous things including:

Medications

Illegal drugs

Nicotine

Hepatitis antibodies

Prostate specific antigen (PSA)

Human immunodeficiency virus (HIV) antigens or antibodies

Immune disorders

High cholesterol and related lipids

Liver or kidney disorder



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Information Gathering Attending Physician Statement

An Attending Physician Statement is usually requested by the underwriter if theamount of insurance being requested is large or concerns about the Insureds healthwere raised during the application process. It is completed by aphysician who has treatedor is currently treatingthe proposedInsured. Since the Insurer must wait for the physician tocomplete the report, it may take weeks or months to receive.

Then once the report is obtained, reviewing and analyzingall the information takes additional time.



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Information Gathering Medical Information Bureau (MIB)

The Medical Information Bureau (MIB) is a nonprofitorganization that is sponsored by member insurancecompanies. Its purpose is to allow insurance companies toshare information with each other about the health historyof life and health insurance applicants to aid theunderwriting process. A proposed Insured cannot be denied

coverage due to information solely obtained through theMIB. However, the Insurer can use the information toprompt further investigation.



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Information Gathering Investigative Consumer Reports

If the underwriter needs information about the proposed Insured inaddition to medical data, an Investigative Consumer Report can beordered from a variety of sources. The use of these reports is subjectto the Fair Credit Reporting Act (FCRA), and the proposed Insuredmust be notified by the Insurer if these reports are requested.They may involve the following types of activities:

Interviews with neighbors and acquaintances

An evaluation of reputation, character, habits, and lifestyle

An assessment of credit and financial history


U d i i O i


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Underwriting Overview


Family Health History

Applicants Current Health

Habits, Occupations, Hobbies

Weight & Height

Age, Gender, Mortality

What information does the Insurer

look at to determine if Im eligible

and how much the premium will be?


U d iti F il H lth Hi t


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Underwriting Family Health History

Underwriting Criteria * Typical Guidelines to Receive the Best Rate

Cancer None in either parent or siblings before age 60.

Heart Problems None in either parent or siblings before age 60.

Diabetes None in either parent or siblings before age 60.

Stroke None in either parent or siblings before age 60.

* Guidelines vary by Insurer


U d iti A li t C t H lth


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Underwriting Applicants Current Health


Blood Pressure Cannot exceed 140/85; no past or current treatment

Total Cholesterol Cannot exceed 220

Cholesterol / HDL Ratio Cannot exceed 5.0

Cancer Noneexcept some types of skin cancer are acceptable

Stroke None

Heart Problems None

Depression & Anxiety No condition requiring treatment in the last two years

Diabetes None

Asthma No condition requiring treatment in the last two years

HIV None



Underwriting Habits Occupations Hobbies


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Underwriting Habits, Occupations, Hobbies


Alcohol Abuse No history in lifetime

Substance Abuse No history in lifetime

Nicotine Use None in the past 36 months

Driving Violations Not more than two in the past three years

Driving Under Influence (DUI) None in the past five years

Hazardous HobbiesNo racing, skydiving, hang gliding, rock climbing, mountainclimbing, scuba diving, etc.

Hazardous OccupationsNo private pilots, professional racing, instruction of hazardoushobbies



Underwriting Weight & Height


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Underwriting Weight & Height

According to the Centers for Disease Control (CDC), Body Mass Index (BMI) is anumber calculated from a person's weight and height. BMI is a reliable indicator ofbody fatness for people. BMI does not measure body fat directly, but research hasshown that BMI correlates to direct measures of body fat. BMI is an inexpensive andeasy-to-perform method of screening for weight categories that may lead to healthproblems. The chart shows the CDC standard weight status categories for adults.

BMI Weight Status

18.524.9 Normal

25.029.9 Overweight

30 and Above Obese

CDC Adult BMI Calculator

http://www.cdc.gov/healthyweight/assessing/bmi/adult_bmi/english_bmi_calculator/bmi_calculator.html

Many Insurers base their height and weight tables

on the BMI. To qualify for the best rate, an

Insured usually cannot be in the obese category.

Facts of Life Insurance 58Underwriting Age Gender Mortality


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Underwriting Age, Gender, Mortality

According to Utah Insurance Rule R590-223, the 2001 Commissioners StandardOrdinary (CSO) mortality table shall be used for calculating life insurance policypremiums and benefits as of January 1, 2009. Life insurance companies look at theage of the Insured and using the mortality rates of the 2001 CSO, calculate how muchmoney must be held in reserves to pay future Death Benefits. The 2001 CSO table isalso the basis for calculating guaranteed Cash Values and other non-forfeiturebenefits.

A woman that is 50 years old

now is expected to live another

33 years. A man that is 50

years old now is expected to

live another 29 years.

Using the 2001 CSO table, lifeInsurers determine how many

more years on average theInsured is expected to live.

A baby girl born today is

expected to live another

81 years. A baby boy

born today is expected

to live another 77 years.


Rating Classifications


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Rating Classifications

To properly classify an applicant, the Insurers underwriting department considersinformation about the applicants family health history, current health, habits,occupation, hobbies, weight, height, age, gender, and mortality.

Applicants that are not eligible are considered to be declined. Very few applicants forlife insurance are declined. Some reasons why someone might be declined include (a)not meeting the age requirement for the type of policy being sold; (b) being terminallyill; and (c) lack of insurable interest.

If the applicant is eligible, he or she will be placed in a rating classification. Ratingclassifications vary by Insurer; nonetheless, here are some common ratingclassifications:

Select Preferred Standard Substandard

Best riskclassification; least

expensive

Above average risk;more expensive

than Select

Average risk; moreexpensive than

Preferred

Higher than averagerisk (e.g. nicotine

users); mostexpensive (referredto as rated risks)

Facts of Life Insurance 60Delivery


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Delivery

Once the Insurer issues the policy, the Insurer will mail it to the Policyowner or itwill be hand delivered by the Producer. Either method is acceptable and legal.

In addition to delivering the policy, the following two documents must be providedto the Policyowner when the policy is delivered:

Once the policy has been delivered, the Policyowner has the right to examine andreturn the policy for any reason. This is called the free look period and the lengthof time varies by state. In Utah the free look can be done on or before ten daysafter the policy is delivered (30 days if the policy purchased replaced anotherpolicy).

Buyers GuidePolicy Summary

Provides basic information about

life insurance and how to

compare the cost of policies

Explains how to choose the type

and amount of life insurance

Generically describes the

policy and its features and

riders

Includes the contact

information of the Producer

and Insurer


Servicing Overview


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Servicing Overview


Loans

What are some opportunities for the

Producer and Insurer to provide

service to customers after the policy

is in force and delivered?

Non-Forfeiture Options

Settlement Options


Servicing Loans


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Servicing Loans

The Policyowner is entitled to borrow from a permanent policy that has CashValue.

The Insurer usually allows mostif not allof the Cash Value to be borrowed.

The loan does not have to be paid back, but the outstanding loan amount andaccrued interest will be deducted from the Death Benefit when the Insured dies.

I need money to pay

for my daughters

college education. Can

I borrow cash from my

life insurance policy?

Automatic Premium Loans

Most permanent policies allow for an

automatic loan to be made against the

Cash Value if the owner does not pay

the premium by the grace period.

Facts of Life Insurance 63Servicing Non-Forfeiture Options


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g p

If I surrender my

permanent life insurance

policy, what guarantees

or options do I have with

my Cash Value?

Extended Term

The Cash Value is converted into term

insurance for the same face amount.

The coverage will last until the CashValue that pays for it runs out.

Cash Surrender Value

The Policyowner can receive

the Cash Value in a lump

sum. This option terminatesall insurance coverage.

Reduced Paid-Up

The Cash Value is used to purchase a

permanent policy that is completely paid up.

The face amount is reduced to the amount the

Cash Value will purchase.

The Insurerautomatically picks this

option if the policy is

surrendered. It can be

changed by the owner.


Servicing Settlement Options


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g p

What methods can

be used to pay the

Beneficiary upon the

Insureds death?

Cash Payment

A lump sum paid to the Beneficiary

is the default if the Policyowner

does not specify an option.

Interest Only

The Insurer temporarily keeps the Death

Benefit and pays interest to the Beneficiary.

This method is normally used when the

Beneficiary needs more time to decide on a

settlement option.

Specified Period

The Beneficiary receives a

series of payments lasting a

specified number of years.

The payments consist of

principal and interest.

Life Income

The Beneficiary receives payments that

are guaranteed for as long as he or shelives. The payment amount is based on

the amount of Death Benefit and the

Beneficiarys life expectancy.

Specified Amount

The Beneficiary receives a

series of payments for aspecified amount. The

payments consist of

principal and interest.


Stranger Owned Life Insurance Overview


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g

The Assignment Clause in life insurance policies allows a Policyowner to sell or give thepolicy to another person or entity for any reasonthe Policyowner does not need thepermission of the Insurer to assign a policy. However, the Policyowner must notify theInsurer in writing of the assignment. The new Policyowner does not need to haveInsurable Interest on the life of Insuredthat requirement is only needed when the

policy is purchased.

Sometimes Policyowners give their policy to a charity or to a relative or trust forestate planning. Recently, however, Policyowners have increasingly sold policies tostrangers for cash. This is known as STranger Owned Life Insurance (STOLI).

Once a stranger owns the policy, he or she immediately names himself or herself asthe Beneficiary. It can be an awkward situation for someone who has no interest forthe Insured to remain alive to be the Beneficiary. Furthermore, there have beensituations where people have been taken advantage of. For these reasons STOLIshave come under scrutiny by insurance companies and state regulators, and laws andrules have been implemented to monitor and standardize their activity.

Is it possible to sell my life

insurance policy?


Stranger Owned Life Insurance Types


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A Viatical Settlement is an agreement in which a third party purchases a life insurancepolicy from the Policyowner for the right to be the legal Beneficiary. This agreement isused when the Insured has a terminal illness, and his or her life expectancy is lessthan three to five years. Viaticals became popular in the 1980s when HIV and AIDSsurfacedpeople diagnosed with HIV or AIDS and desperate for cash looked toinvestors to buy their policies for a fraction of the Death Benefit. Since then, most lifeinsurance companies have added Accelerated Death Benefit riders to their policieswhich have greatly reduced the need for Viatical Settlements.

Similar to Viatical Settlements, a Life Settlement (also known as a Senior Settlement)is an agreement in which a third party purchases a life insurance policy from thePolicyowner for the right to be the legal Beneficiary. However, this type of agreementis normally used when the Insured reaches retirement age and is considered to have ashortened life expectancybut not necessarily a terminal situation. People who need

cash can sometimes find investors who are willing to buy their Permanent Cash Valuepolicies for more than the Surrender Value. Sometimes owners of Term polices arealso able to find buyers willing to pay cash for them.

Viatical Settlement

Life Settlement or Senior Settlement

Facts of Life Insurance 67Stranger Owned Life Insurance Types (cont.)


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Another twist to STranger Owned Life Insurance (STOLI) is STranger Originated LifeInsurance (likewise known as STOLI). With Stranger Originated Life Insurance, astranger approaches a person (usually a senior) with a shortened life expectancy witha proposal similar to this: the stranger asks the person to apply for a life insurance

policy on his or her own life and offers to pay the first premium plus a free gift. Inreturn, the stranger asks to be assigned the policy. Once the policy is assigned, thestranger immediately names himself or herself the Beneficiary. The net result is astranger has purchased a life insurance policy on someone elses life and does nothave an interest in that person to remain alive.

Since STranger Originated Life Insurance violates the Insurable Interest requirementneeded at the time of purchase, insurance companies and state regulators areincreasingly treating this scheme as insurance fraud. In 2007, North Dakota becamethe first state to pass legislation to combat STranger Originated Life Insurance. Sincethen at least 19 more states have enacted similar laws.

Stranger Originated


Federal Tax Considerations for Individuals


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Policy Premiums Not income tax deductible

Cash Value Increases Not income taxable as long as the Cash Value remainsin the policy

Cash Value

Surrenders

If the amount received exceeds the premium paid in,

the excess is income taxable; partial surrenders aretaxed as First-In First-Out (FIFO)

Dividends Not income taxable

Dividend Interest Income taxable

Policy Loans Not income taxable

Death Benefits Not income taxable; if the Death Benefit remains withthe Insurer, any interest paid to the Beneficiary isincome taxable


Federal Tax Considerations for Individuals (cont.)


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If the Insured owned the policy at the time of deathor assigned the policy to a trustor someone else less than three years before deaththe Death Benefit will be includedin the decedents (dead persons) estate.

If the Insureds estate is the Beneficiary at the time of death, the Death Benefit will beincluded in the decedents estate.

Amounts included in the decedents estate could be subject to estate taxesif thevalue of the estate exceeds the exemption amount.

When a Cash Value life insurance policy is surrendered for cash, income tax is owedon the amount received that exceeds the total premiums paid in. However, Section1035 of the Internal Revenue Code allows a Policyowner to exchange a life insurance

policy or annuity for another life insurance policy or annuity without having to payincome tax.

Estate Taxes

Section 1035 Exchanges

Facts of Life Insurance 70Federal Tax Considerations for Individuals (cont.)


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If too much premium is paid into a permanent life insurance policy too soon, itbecomes over-funded and may be considered to be a Modified Endowment Contract(MEC)instead of life insurance. More specifically, it becomes a MEC if the premiumspaid during the first seven years of a life insurance policy exceed the level annual

premiums that would be required to pay up the policy using guaranteed mortalitycosts and interest.

When a life insurance policy becomes a MEC, it loses some of the tax favoredtreatment it would otherwise have at the time Cash Value is surrendered, withdrawn,or borrowed.

With a normal life insurance policy, when Cash Value is surrendered only the amountthat exceeds the total premiums paid in is taxed. When a life insurance policy turnsinto a MEC, however, the first withdrawal dollars received by the Policyowner areimmediately taxedLast-In First-Out (LIFO). Furthermore, if Cash Value distributionoccurs on a MEC before the Policyowner is 59, there is a 10% penalty on the gain.

Even if a policy becomes a MEC, any Cash Value remaining in the policy willaccumulate tax-deferred, and when the insured dies the Death Benefit will be tax-freeto the Beneficiary.

Modified Endowment Contracts

facts of life insurance

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