exam fx basics chapter 2

Death benefit

-the amount paid upon the death of the insured in a life insurance policy

Cash value

-equity amount accumulated in permanent life insurance

Estate 

-a person's net worth

Illustrations

-presentation or depiction of nonguaranteed elements of a life insurance policy

Life insurance

-coverage on human lives

Liquidation 

-selling assets in order to raise capital

Lump-sum

-— payment of the entire benefit in one sum

Minor

-a person under legal age

Solvency

-ability to meet financial obligations (e.g., an insurance company maintains enough assets to pay claims)

Insurable Interest

--To purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss.

-In life insurance, ““ must exist between the policyowner and the insured at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an “ '“ exists.

exist between the policyowner and the insured when the policy is insuring any of the following:

1. Policyowner's own life;

2. The life of a family member (a spouse or a close blood relative); or

3. The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (for example, a debtor has a financial obligation to a creditor, so the creditor has a valid insurance interest in the life of the debtor).

   -not required from beneficiaries

Survivor Protection

-The death of the primary wage-earner will usually stop the flow of income to a family. The death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death.

-Planning requires careful examination of current assets and liabilities as well as determining what survivors' needs may be.

Estate Creation and Conservation

-A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time. The purchase of life insurance creates an immediate estate. Estate creation is especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, that creates an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost.

Liquidity

-That means the policy’s cash values can be borrowed against at any time and used for immediate needs.

Asset Protection

-is the use of life insurance to guard one's wealth against creditor claims without engaging in practices that are ultimately illegal, such as concealment or fraudulent transfer.

An insurance contract is between the policyowner and the insurer. When the insured dies, the contractual arrangement is between the insurer and the beneficiary, and the proceeds of the life insurance belong to the beneficiary. The insured’s creditors have no right to the proceeds or the cash value. The following conditions apply:

• If the insured has filed a petition of bankruptcy within 2 years, the proceeds and cash value are only exempt under certain circumstances;

• The amount of premiums paid with intent to defraud creditors is not exempt; and

• A creditor possessing a valid assignment from the policyowner may recover the amount secured by the assignment with interest from either the cash surrender value or the proceeds of the life insurance policy.

Viatical settlements

-allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds when they are most needed: before their death.

-they are separate contracts in which the insured sells the death benefit to a third party at a discounted rate. There are several important concepts you need to understand about viaticals:

-Viatical producers represent the providers; and

• Viatical brokers represent the insureds.

• viators usually receive a percentage of the policy’s face value from the person who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit.

Chronically ill

-means a condition in which a person is unable to perform at least 2 activities of daily living or that requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

Terminally ill

-means a condition (illness or sickness) that can reasonably be expected to result in death within 24 months.

Viator

-means the owner of a life insurance policy who enters into or seeks to enter into a viatical settlement contract.

Viatical Settlement Broker

-means a licensed person that, for a fee, negotiates viatical settlement contracts between the viator and viatical settlement providers. The viatical settlement broker represents the viator.

Viatical settlement provider

-means a person (other than a viator) who enters into or effectuates a viatical settlement contract. This term does not include a bank, financing entity, or the issuer of a life insurance policy providing accelerated benefits.

Viatical Settlement Purchaser

means anyone who gives a sum of money as consideration for a life insurance policy or interest in the death benefits of a life insurance policy. It also means a person who owns, acquires, or is entitled to a beneficial interest in a trust that owns a viatical settlement contract or is the beneficiary of a life insurance policy which is or will be the subject of a viatical settlement contract.

This term does not include the following:

• A viatical settlement licensee;

• An accredited investor, qualified institutional buyer, or qualified purchaser who purchases a viaticated policy from a viatical settlement provider;

• A financing entity;

• A special purpose entity; or

• A related provider trust.

Fraudulent viatical settlement act

means an act or omission committed knowingly or with intent to defraud for the purpose of depriving another of property or for monetary gain by a person who commits or permits employees or agents to do any of the following:

• Present or prepare false information in support of or concerning a fact material to one of the following, with the knowledge that such will be presented to others:

  • An application for a viatical settlement contract or insurance policy;

  • The underwriting of a viatical settlement contract or insurance policy;

  • A claim for payment under a viatical settlement contract or insurance policy;

  • Premiums paid on an insurance policy;

  • Payments and changes in ownership or beneficiary of a viatical settlement contract or insurance policy;

  • Reinstatement or conversion of an insurance policy;

  • Solicitation, effectuation, offer, or sale of a viatical settlement contract or insurance policy;

  • Issuance of written evidence of a viatical settlement contract or insurance policy; and

  • A financing transaction;

• Destroy, remove, conceal or change assets or records of anyone engaged in the business of viatical settlements, with the purpose of furthering or hiding fraud;

• Misrepresent or conceal the financial condition of a licensee or insurer;

• Transact viatical settlements without a license, certificate of authority, or other necessary legal authority;

• File false information with or conceal information about a material fact from an insurance regulatory official;

• Knowingly present or prepare a fraudulently obtained insurance policy;

• Embezzlement, theft, misappropriation or conversion of moneys, funds, premiums, or other property of anyone engaged in the business of viatical settlements of insurance; or

• Attempt to commit, assist, aid or abet in, or conspire to commit any of the acts mentioned above.

General Rules

• A witness document which contains the following:

  • The insured (viator) consents to the contract;

  • The viator has a full and complete understanding of the contract and the benefits of the policy;

  • The viator entered into the contract freely and voluntarily;

  • The insured is terminally or chronically ill and was diagnosed after the life insurance policy was issued; and

  • The viator is of sound mind and under no constraint or undue influence;

• A document giving the insured's consent to the release of medical records to the viatical settlement provider, broker, and insurance company; and

• A document giving the insured's consent to the tolling of the running of the policy's contestable period until after the insurer completes its good faith investigation, if the life policy is being viaticated within 2 years of the policy issue.

Within 20 days of completing the contract, the viatical settlement provider must give written notice to the insurer that issued the insurance policy that the policy has or will become a viaticated policy.

once a month

If insured has a life expectacy of less than a year how often can the viactal settlement broker ask the insured about the viators health?

once every 3 months

If insured has a life expectancy of more than a year how often can the viatical settlement broker ask the insured about the viators health?

disclosure to consumer( viatical settlement)

• possible alternative to viatical settlement contract

• proceeds taxation information

• proceeds subject to claim of creditor

• effect on eligibility for Medicaid and other government benefits

• That the viator has 15 calendar days to rescind a viatical settlement. If the insured dies in the rescission(cancelation) period, the settlement contract will be deemed rescinded(canceled)

• That entering into a viatical settlement contract may cause other rights or benefits to be forfeited

• Funds will be sent to the viator within 3 business days after the viatical settlement provider acknowledges that the ownership of the policy or interest in the certificate has been transferred and the beneficiary has been designated.

20 days of change

If the viatical settlement provider transfers ownership or changes the beneficiary of the insurance policy, that provider must inform the insured within?

application for a viatical settlement license must include

-An audited financial statement – not more than 1 year and 120 days old;

-An unaudited financial statement (as of the end of the most recent quarter).

Licenses may be renewed annually, on the anniversary month, by filing the proper renewal forms and paying the renewal fee. The following licensing fees are due at the time of initial and renewal application:

cost of renewal fees (due annually on anniversary month)

• For licensure as a viatical settlement provider, $300; and

• For licensure as a viatical settlement broker, $100.

90 days of their receipt(The applicant may waive this)

All viatical applications will be approved or disapproved by the Department within?

Both providers and brokers must present to the Department new or revised information about changes in officers

10% or more stockholders, partners, directors, members or designated employees within 30 days of that change.

Life Settlements

-refers to any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for some form of compensation, usually cash. While viatical settlements are still used for persons who are terminally ill, most states regulate policies that are sold to a third party for compensation under the term

-the seller (the policyowner) could have a life expectancy of more than one year. Policyowners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy.

human life value approach

-gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual’s life value by looking at the insured’s wages, inflation, the number of years until retirement, and the time value of money.

-Let’s assume that a 40-year-old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. Out of his annual income, $40,000 is spent on family needs, and the remaining $10,000 goes to the insured’s personal expenses. This means that the human life value of this insured to his family is $1,000,000 ($40,000 a year spent on family needs x 25 years to retirement). Based on this assumption, and taking interest and inflation into consideration, the insurance company will determine the right amount of insurance to produce the same annual amount of income for the family if the insured were to die.

needs approach

-is based on the predicted needs of a family after the premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses.

determining lump sum needs

• Costs Associated with Death (postmortem) — taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance;

• Debt Cancellation (as an alternative to Estate Liquidation) — paying off debts of the insured such as home mortgage, or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan.);

• Emergency Reserve Funds — paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members;

• Education Funds — paying for children's education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market;

• Retirement Fund — as a source of retirement income;

• Bequests — leaving funds to the insured’s church, school, or a charity.

key person life insurance

-a type of life insurance policy purchased by a business to protect it from the financial impact of the death or disability of a key employee. The business is the owner, premium payer, and beneficiary of the policy, receiving a death benefit if the insured key person passes away. 

-In the event of death of a key employee, the business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage.

Key person insurance may be term or permanent. An employer may have more than one key person policy.

buy sell agreement

-is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

types of buy sell agreements

-Cross Purchase – used in partnerships when each partner buys a policy on the other;

• Entity Purchase – used when the partnership buys the policies on the partners;

• Stock Purchase – used by privately owned corporations when each stockholder buys a policy on each of the others; and

• Stock Redemption – used when the corporation buys one policy on each shareholder.

Example:

Here is an example of a cross-purchase buy-sell agreement: Partnership AB has two partners, Partner A and Partner B. The value of the business is $1,000,000. The partners each have an equal interest ($500,000 each). Partner A buys a life policy on Partner B for $500,000, and Partner B buys a life policy on Partner A for $500,000. If Partner A dies, Partner B gets 100% ownership of the business and A's heirs receive $500,000.

Executive bonus 

 is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and, therefore, has full rights to the policy. Since the employer treated the premium payment as a bonus, that amount is tax deductible to the employer and income taxable to the employee. It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit. Executive bonus plans are not subject to plan limits established by the IRS for qualified plans, so it is considered a nonqualified benefit plan.

Term life insurance

s temporary life insurance provided for a specific period of time. It is also known as pure life insurance.

Permanent life insurance(whole life)

is a general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid. Permanent insurance provides lifetime protection, and includes a savings element (or cash value).

participating(mutual)

life insurance policy refers to any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance

nonparticipating

-policy does not pay dividends to the policyowners.

Fixed life insurance or annuities( payment)

are contracts that offer guaranteed minimum or fixed benefits that are stated in the contract

variable life insurance or annuities (payments)

in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it.

indvidual life insurance

-life insurance is written on a single life. The rate and coverage are based upon the underwriting of that individual.

Group life insurance

-is written as a master policy covering the lives of more than one individual covered under the single policy. Individuals covered do not receive a policy but instead receive certificates of insurance. The rate and coverage are based upon group underwriting, with all individuals covered for the same amount and rate.

Solicitation and Sales Presentations

-, means an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing. This includes providing information about available products, describing the policy benefits, making recommendations about a specific type of policy, and trying to secure a contract between the applicant and the insurance company.

Any sales presentations used by insurers or their agents in communication with the public must be accurate and complete.

In an effort to protect consumers and promote informed purchasing decisions, the State of Pennsylvania has established certain regulations and requirements that effect the solicitation of life insurance.

advertising rules

-advertising must be accurate and not misrepresent the facts.

-Every insurance company must establish and maintain a system of control over the content, form, and method of dissemination of all advertising of its policies. The insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.

Forms of advertisement

-printed material, audio visual material or descriptive literature. These advertisements could be used in any of the following ways: direct mail, newspapers, magazines, radio scripts, TV scripts, billboards, circulars, leaflets, booklets, depictions, illustrations, form letters, prepared sales talks, and presentations.

Advertising rules specific to Pennsylvanian

• insurers must submit three copies of all advertisement to the department of insurance for approval;

• Once a mail-order solicitation has been filed, it may be used for 2 years without additional filing;

• Advertising material will remain filed for 4 years, or until the next regular examination of the company, whichever is longer; and

• If a testimonial refers to benefits received under a contract, the specific claim data should be retained by the insurer for 4 years or until the filing of the next regular examination of that insurer, whichever is longer.

A life insurance illustration must do the following:

• Distinguish between guaranteed and projected amounts;

• Clearly state that an illustration is not a part of the contract; and

• Identify those values that are not guaranteed as such.

• an agent may only use the illustrations of the insurer that have been approved, and may not change them in any way.

• The illustrations are not to be part of or attached to the contract.

• Those values that are not guaranteed must be identified as such. An agent may use only the illustrations of an insurer that have been approved and may not change them in any way.

• All illustrations must be clearly labeled, and must be dated and signed by the agent and insurer. Agents cannot provide an applicant with an incomplete illustration. A copy of all illustrations used must be provided for the applicant. The insurer must keep a copy of all illustrations used in the underwriting file.

30 days of anniversy

Pennsylvania, certification of the aforementioned notification must be provided, annually, within

30 days, 3 years, 6 years

a certificate must be provided at least ___, to using a new life insurance policy form, insurers should retain copies of basic illustrations, and their certification, for___,after those policies are no longer in force.

-Illustration actuaries certify the scale used in illustrations. Actuaries may not have resigned or been removed from similar positions within the past

disclosure statement

Every applicant for a life insurance policy must be given a written____, hat provides basic information about the cost and coverage of the insurance being solicited.

-must be given to the applicant no later than the time the application for insurance is signed. ____ will help the applicants to make more informed and educated decisions about their choice of insurance.

3 years, or until the next regular examination, whichever is later.

The insurer must maintain the agent's certification that a disclosure statement was delivered for either___