CA Life and Health insurance
Terms
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- 3 examples of insurance:
-
Life
Health/disability
Annuities - Define Annuities
-
Not life insurance
retirement product sold by insuarnce companies - Risk
- the uncertainty of loss
- Peril
-
the direct cause of a loss
Fire - Hazard
- increases the chances of a loss occurring
- 3 types of hazards
-
Physical
Moral
Morale - 2 types of risk
-
Pure (insurable)
Speculative - Risk Pooling
-
reduces financial risk among the many insured.
makes predicting losses much easier for insurers - indemnity
- restores an insured to the condition he/she was prior to the loss.
- Private investors protect themselves from ____ by ____.
-
adverse selection
underwriting applications - Insurable interest
- suffering a loss because of death or disability from a personal or financial nature
- 6 elements of an ideally insurable event:
-
predictable
cannot be catastrophic
due to chance
definate and measurable
large loss exposure
loss exposure must be random - risk transfer
- buying insurance
- 4 types of risk management
-
Transfer
Avoidance
Reduction
Retention - 2 tables used to predict future losses
-
Mortality
Morbidity - Driving recklessly is an example of a _____.
- Morale Hazard
- 3 examples of parties who are not competent to enter into a contract.
-
Minors
Mentally infirm
those under the influence. - Tort Law
- Deals with damage done to others.
- Contract law
- Deals with the formation and enforceability of contracts.
- 4 major elements of a contract:
-
Agreement
Competent Parties
Legal Purpose
Consideration - When does consideration occur?
- When both parties give value in exchange for promises.
- Recission
-
Protects insurers against dishonet applicants.
Right to avoid contractual obligations
In effect for the first two years of the policy. - 8 unique features of an insurance contract
-
Aleatory
Adhesion
Unilateral
Personal
Conditional
Valued or indemnity
Insurable interest
Utmost good faith - Aleatory
- unequal exchange of values in a contract.
- Adhesion
-
"Take it or leave it"
Drafted by one party and either accepted or rejected.
Ambiguous - Unilateral
- Contract enforced against one party only.
- Conditional
- Conditional on the happening of the event
- Utmost good Faith
- based on statements or representations that are perceivd to be truthful.
- Warranties
- GUARANTEE material facts in the application
- An intent to deceive
- Fraud
- Failure to communicate information
- Concealment
- A _____ could void a contract if it is material to the risk insured.
- misrepresentation
- Conditional contract
- when the insurer pays a claim for a covered loss
- Penalty for Fraud
-
$150,000 or double to amount of the fraud if over $150k.
And/or, 1 year in jail or 2-5 years in state prison. - _____ is grounds for recsinding a policy.
- Concealment
- Information NOT required in a contract:
-
Known information
Info that should be known
Info about which communication has been waived
Info that is not material to the risk - 6 items in an insurance contract:
-
Paries involved
Property of life insured
Interest of the insured
Risk insured against - peril
Time duration
Premium - Premium
- What the insured pays for coverage
- Who sets the premium rates?
- Actuaries
- Life insurance premium factors
-
Mortality factor
Interest factor
Expense factor
Other premium factors - Mortality table
- helps insureres accurately predict future claims based on classifications (gender and ages) of insureds.
- Loading charge
-
(sales charge)
built into insureds premiums and pays for insurers expenses. - 4 premium Payment modes:
-
Annual (least expensive)
Semiannual
Quarterly
Monthly (most expensive) - Short rate cancellation
- unearned premiums are returned without a penalty.
- Pro Rata cancellation
- all unearned premiums are returned without a penalty.
- Earned surplus
- when the insurer's assets exceed their liabilities.
- Policy dividends (are/are not) guaranteed and taxable.
- are not
- substandard risk pays (higher/lower) premiums because they represent a (higher/lower) risk to the insurer
-
higher
higher - Individual life insurance premiums are/are not tax deductible
- are not
- Premiums paid for business life insurance (key person) (are/are not) tax deductible?
- are not
- Premiums paid by employers in a group life plan (are/are not) tax deductible?
- are
- Cash value
- the savings amount in a whole life policy.
- Death benefit
- face amount or limit of a liability
- Who selects the settlement option during an insured's lifetime?
- only the policy owner
- Who selects the settlement option if the policy owner doesn't?
- beneficiary
- the automatic settlement option?
- lump sum cash (not taxable)
- 1035 exchange
-
like to like transfer of policies
No taxation on any gains
Must exchange entire policy - Rate
-
what the insured pays the insurer for coverage.
Rate X Amount of coverage = premium - Other premium factors
-
Age
Sex
Health
Occupation
Habits - Def underwriting
- Classify, Select and rate risks.
- 3 people in a life insurance contract
-
owner
applicant
insured
(can be same person) - Who represents the insurer
- Agent
- Pre-selector
-
Agent must solicit prospects that represent a good risk for the insurer.
Must take all applications. - 4 Parts to the insurance application
-
General (personal info)
Medical
Agent's report
Attachment to policy - 3 classifications of risk
-
preferred
standard
substandard - Insurer can obtain an Attending Physician Statment APS, provided they have____.
- written permission from the applicant.
- Questions on an application cannont be soley for _______.
- Marketing
- MIB
-
Medical Information Bureau
funded by insurance companies
Purpose is to detect concealment of physical medical conditions - Who can change an application?
- the applicant or the agent with permission from the applicant.
- Beneficiaries may/may not initial changes to an application.
- may not
- All insurers must use the same _____ test.
- HIV/AIDS
- _____ or _______ is not a basis for considering what type of HIV/AIDS test can be adminstered by an insurer.
-
Marital Status
Sexual orientation - Insurers _____ notify an applicant if a test is ____.
-
must
positive - Fair Credit Reporting Act
- protects an individual's right to privacy and access to his/her credit report.
- Required signatures
-
agent and proposed insured
insurer does not sign - binding receipt
- provides immediate coverage
- no physical exam is needed in a _____ application.
- non-medical
- constructive delivery
- when the insurer delivers the policy to someone acting for the insured (agent).
- Return policies in California
-
Under age 60 - 10 days free look.
60 and over - 30 days free look. - Definition of a senior
-
60 or older in life/annuity
65 or older in health - 3 categories of Life insurance - OIG
-
Ordinary
Industrial
Group - Ordinary life insurance (individual policies)
- can be term, whole life, endowments, universal life, variable life.
- Industrial
-
small face amounts
individually issued policies
death benefit - 1k to 10k - Group
-
10 or more employees
employer pays premium
usually term insurance - Term life insurance
-
NO CASH VALUE
Face amount is specified
Temporary insurance
Usually lowest cost
term life periods
term life premiums
Level, increasing and decreasing terms - Family Policy
-
Designed to ensure all family members are covered
Whole policy on the breadwinner, Level term insurance on named family members, additional children have free coverage at day 15 of life - Rights of the owner of the policy
-
Name beneficiaries
Assign the policy
Select the settlement options
Cash value at maturity
Select payment mode
Dividend options
Coversion - Policy Application Riders
-
PAR
Entire contract provision - Insuring Clause
-
Promise to pay benefits
Parties of the contract
Conditions under which claims will be paid
Usually on the first page of the policy - There is/is not a standard life insurance policy
- is not
- Grace period
-
The period during which coverage will cnotinue although premiums have not been paid.
Life and health only. - Automatic premium loan
- Insurer borrows the premium amount from cash value to keep coverage in force. Not found in term insurance.
- Reinstatement
- Keep original premium, cash values, and now new suicide clause.
- Incontestable clause
-
Protects the insured
After 2 years. - suicide clause
- no death benefit if w/in 2 years of the policy
- Collateral Assignment
- when the policy's cash value and/or death benefit act as collateral for a loan.
- Absolute assignment
- transfers ownership of the policy
- Misstatement of age or sex
- face amount is adjusted to correct.
- Policy Exclusions
-
War
Aviation
Suicide
Hazardous hobbies or occupations
Illegal activities - Non-forfeiture options
- allow the owner to keep the cash value if the policy lapses or is surrendered.
- 3 non-forfeiture options
-
Cash surrender or loan value
Reduced paid-up
extended term insurance - ____ provides the most protection, but has no cash value.
- Extended term
- A non-participating policy (non par) is issued by ___.
- a stock insurer
- A participating policy (par) is issued by ____.
- a mutual insurer
- Waiver of premium rider
- In case of disability, all premiums waived and benefits continue.
- Waiver of payors premium rider
- In case of disability of death, premiums will be paid by the insurer until the insured reaches a specified age.
-
Accidental death benefit rider
ADB
"Double Indemnity rider" - Benefits will double or triple if death occurs before a certain age.
- Term rider (cost of living rider)
-
Consumer price index (CPI)
increase in premium due to additional coverage. -
Accelerated Death benefits
"living needs rider" - A portion of the face value can be paid out in advance in the case of the terminally ill.
- Benficiary
- Person named to recieve the policy proceeds at the death of the insured
- Succession levels of beneficiaries
-
Primary
Contingent
Tertiary - Tertiary
- if all primary and contingent beneficiaries are deceased
- Per capita
- Proceeds divided equally among surviving beneficiaries
- Per Stirpes
- Share that would have gone to a beneficiary that died before the insured wil lpass to the deceased beneficiary's children - grandchildren
- Revocable Beneficiary
- has only a passive interest in the face amount of the policy. Can be replaced at any time.
- Irrevocable beneficiary
- has a vested interest in teh cash value and face benefit of a policy.
- Uniform Sinultaneous Death Act
- if sequence underterminable, presumed beneficiary died first.
- Common Disaster Clause
- If beneficiary does not survive the insured by a prescribed # of days, proceeds go to estate.
- Spendthrift Clause
- Protects the policy proceeds from creditor claims of either the beneficiary or the policy owner.
- Facility of Payment provision
- allows the insurer to pay all or part of the proceeds to someone who is not named a beneficiary.
- Human life value approach
- takes into consideration the loss of future earnings if the insured dies.
- Needs analysis approach
- takes all-important facts into consideration: financial and otherwise, in determining insurance needs.
- Individual Uses for Life insurance
-
Final Expense fund
housing fund
edcation fund
survivor fund
emergency fund
retirement income
income if disabled - Key person
- key employee protects the employer in teh event a valuable employee dies.
- Life insurance creates an immediate ____.
- estate
- Buy sell insurance is used to fund a _______.
- Buy sell agreement
- A group may/may not be formed soley for the purpose of obtaining insurance.
- may not
-
Which costs less?
group life insurance
individual insurance - group
- Are there requirements for medical exams for group insurance?
- no
- in group insurnace, the employer receives a ______, the employee recieves a _____.
-
policy (master policy)
certificate of insurance - 8 features of group insurance:
-
Master contract
Certificate of insurance
Medical exam requirements
Selection of coverage
Beneficiary
Low cost
Flow of insureds
Contributory vs noncontributory - In group insurance _______ selects coverage for policy
- employer
- In group insurnace _______ selects beneficiary
- member
- contributory
-
Employees pay part of the premium
requires 75% participation - Noncontributory
-
Employer pays entire premium
Requires 100% participation of eligible employees - Eligible groups that offer group life
-
single employer groups
labor unions
trade association
credit or debitor group
fraternal organizations - size of group for group insurance
- 10
- types of group life plans
-
Group term - no cash value
Group permanent -
a) Group ordinary
b) Group paid up
c) Group universal - How group benefits are determined:
-
Earnings
Employment position
Flat Benefit - Franchise (wholesale) insurance
- reasonably priced individual policies offered in the workplace
- Blanket life
- no name insured's in the policy covers an entire group (college football team)
- Flat benefit
- everyone gets the same benefit
- a group policy may insure dependents of emplyees if at least __% of members select coverage
- 75
- __ days conversion from group to individual coverage
- 31
- Multiple employer trust (MET)
-
Small businesses who do not have enough EEs may form a MET
Also different employers w/in the same related industry - Who must apporove all group life insurance policies?
- IN CA, the commissioner of insurance
- Underwriting factors for group life insurance
-
Size of group
Average age of group
Amount of benefit
Acquisition cost - Common exclusions
-
war
Military
aviation - An annuity is a ______ not an insurance policy
- retirement plan
- A _____ creates an estate and a _____ liquidates an estate through income payments.
-
insurance policy
annuity - annuity
- Lump-sum of money paid out in equal installments over a period of time.
- Annuitant
- Person who receives the income payments
-
Insurability required in annuities?
Medical underwriting required? -
NO
No - Accumulation period
- owner deposits funds with life insurance company; payments and interest accumulate
- Annuitization period
- Annuity contract generates income payments on a regular basis (monthly)
- Funding methods
-
Single payment
Periodic payments - Immediate annuity
- Lump-sum (single premium) deposit begins generating income payments immediately
- Deferred annuity
- Single premium or series of premium payments are allowed to accumulate to generate income payments at some point in future
- Fixed annuity
-
Insurance company bears investment risk - generates interest rate during accumulation period and gurantees fixed payments during annuity period.
Funds are invested in insurance company's account. - Variable annuity
-
Purchased as a hedge against inflation.
Annuity owner bears investment risk.
Funds are invested in a separate account similar to mutual funds.
Accumulation rate will vary, as will income. - Straight life annuity
- Payments for lifetime of annuitant - no other guarantees
- Life with period certain
- Payments for lifetime of annuitant - guaranteed to a beneficiary for a specific time if annuitant should die first.
- Cash refund
-
Guarantees income to annuitant for life.
If annuitant dies before payments have equalled the annuity fund, the balance will be paid to the annuitant's beneficiary in a lump sum. - Installment period
-
Guarantees income to annuitant for life.
If annuitant dies before payments have equaled the annuity fund, balance to beneficiary - a _____ annuity is recommended for conservative investors
- fixed
- a _____ annuity is recommended for investors looking for a hedge against inflation.
- variable
- 2 major periods in an annuity are:
-
accumulation period
annuity period -
Equity indexed annuities
EIAs -
include a minimum guranteed rate of investment
risk borne by insurance co -
Tax sheltered annuities
TSAs
403b - TSAs are deferred annuity contracts that may be used t ofund individual qualified retirement plans
- For a couple over 60, what type of annuity is not allowed
- straight life
- Penalty for early withdrawl from an annuity
- 10% prior to age 59.5
- Most common type of payout
- straight life
- Social security provides a ____ _____ of protection
- basic floor
- Fully insured means a person is elidgable for _________.
-
OASDI benefits
Old Age, Survivors, Disabiliity Insurance - A maximum of ___ credits can be earned per year.
- 4
- to be currently insured, a person must have earned ___ credits durring the ___ quarter period preceeding death
-
6
13 - Black out period
- No benefits payable for period b/w when youngest child reaches age 16 until widowed spouce reaches at least age 60.
- Eligibilities for medicare
- 65 or older, suffering from terminal renal failure, or have been receiving social sec. disabiliity for at least 24 consecutive months.
- Qualifications for disability benefits for SS.
- under age 65, if over 30, must be fully insured, disability must be at least 12 months or lead to death
- Definition of disability
- must be unable to perform the duties of any occupation, cannot perform any substantial gainful work
- Waiting period for disability benefits
- 5 months
- 2 different types of retirement plans
-
qualified
nonqualified -
Tax Sheltered Annuities
TSAs - a retirement plan for scholl district employees
- Contributions to an IRA are/are not generally tax deductible
- are
- ERISA
-
Employee Retirement Income Security Act of 1974
Enforced by the dept of Labor
Governs qualified plans in the private sector
Establishes eligibility requirements for participants