Maryland Life Chapter 2

Adverse selection

tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk

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

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).

Know This

Insurable interest must exist at the time of application.   The policyowner must have insurable interest in the life of the insured

survivor protection

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

Estate planning

involves determining how an individual's assets will be preserved, managed, and distributed after death or in the event they become incapacitated

immediate estate

The purchase of life insurance creates an ________

Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed

Liquidity

As a result of the cash accumulation feature, some life insurance policies provide ______ to the policyowner. That means the policy’s cash values can be borrowed against at any time and used for immediate needs

Estate Conservation

Life insurance proceeds may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets

Mortgage Protection Term Life (or Mortgage Redemption)

policy is a type of decreasing term insurance in which the face amount directly correlates with the amount of outstanding loan and length of time remaining on a mortgage

Chronically ill

unable to perform at least two activities of daily living, such as eating, toileting, transferring, bathing, dressing, or continence, or conditions requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment

Terminally ill

means having an illness or sickness that can reasonably be expected to result in death in 24 months or less

Viator

the owner of a life insurance policy (or a certificate holder under a group policy) who enters or seeks to enter into a viatical settlement contract

Viatical settlement provider

means a person, other than a viator, that enters into or effectuates (makes effective) a viatical settlement contract with a viator resident in this state

Viatical settlement broker

means a person who on behalf of a viator and for a fee, commission, or other valuable consideration, negotiates viatical settlement contracts between a viator and one or more viatical settlement providers

deemed to represent only the viator, and owes a fiduciary duty to the viator to act according to the viator's instructions and in the viator's best interest

Viatical settlement purchaser

• A person who gives a sum of money as consideration for a life insurance policy or an interest in the death benefits of a life insurance policy; or

• A person who owns or 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 that has been or will be the subject of a viatical settlement contract, for the purpose of deriving an economic benefit.

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

Viators

(or the owners of the original policy) usually receive a percentage of the policy’s face value from a third party who purchases the policy. The new owner continues to maintain premium payments and will eventually collect the entire death benefit.

Viatical settlements are not allowed in the first 2 years after issuance of a life insurance policy

The two-year prohibition may be waived in the following cases:

• The owner or insured is terminally or chronically ill, or physically or mentally disabled;

• Death of a spouse;

• Divorce;

• Retirement from full-time employment;

• The owner becomes bankrupt or insolvent; or

• Any other condition that the Department of Insurance determines to be extraordinary circumstance for the owner.

Fraudulent viatical settlement acts

• Acts or omissions committed by any person who, knowingly or with intent to defraud, for the purpose of depriving another of property or for pecuniary gain, commits or permits its employees or its agents to engage in acts including presenting false material information, or concealing material information

• Embezzlement, theft, misappropriation or conversion of moneys, funds, premiums, credits, or other property of a viatical settlement provider, insurer, insured, viator, insurance policyowner, or any other person engaged in the business of viatical settlements or insurance;

life settlement

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

human life value approach (HLVA) 

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

needs of a family

needs approach is based on the predicted _________ 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

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

Replacing Insured’s Salary or Lost Services

the surviving spouse who was the caregiver of the children may have to train to enter the job market. If the spouse works outside the home, a new expense for day care must be considered

Social Security Income “Blackout” Period

Social Security blackout period is the time during which the surviving spouse and/or children do not receive any social security survivor benefits

Liquidation vs. Retention of Capital

• Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset (such as a home).

Old Age Survivors Disability Insurance

designed to provide protection for eligible workers and their dependents against financial loss due to old age, disability, or death

Quarter of Coverage (QC)

Social Security uses the ___________ system to determine whether an individual is qualified for Social Security benefits

The type and amount of benefits are determined by the amount of credits a worker has earned

fully insured

someone who has earned 40 quarters of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, premium-free Medicare Part A, and survivor benefits

RETIREMENT BENEFIT

Fully insured status and age 66* (or reduced benefits at age 62)

Retired individual and eligible dependents

Monthly benefit equal to the primary insurance amount (PIA)

DISABILITY BENEFIT

Fully insured status and total and permanent disability prior to the retirement age	Disabled worker and spouse and eligible dependents	Monthly disability benefit after a 5-month waiting period

SURVIVOR BENEFIT

Worker's death

Surviving spouse and dependent children

Lump-sum burial benefit if fully or currently insured Monthly income payments if fully insured

most common use of life insurance by businesses

an employee benefit, which serves as a protection for employees and their beneficiaries

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

aka. business continuation agreement

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

Stock Redemption

used when the corporation buys one policy on each shareholder

key person insurance

may be issued as term or permanent life, with whole life and universal life policies being used most often

A business can suffer a financial loss because of the premature death of someone who has specialized knowledge, skills or business contacts

Executive bonus

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

ordinary life insurance

any individual insurance sold with the benefit amount larger than $2,000 is considered

Term life insurance

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

Permanent life insurance

refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid

Individual life insurance

is written on a single life

Group life insurance

is written as a master policy, issued to the sponsoring organization, covering the lives of more than one individual member of that group

participating (mutual) life insurance policy

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

nonparticipating (stock) policy

does not pay dividends to policyowners; however, taxable dividends are paid to stockholders

participating policy (par)

annual dividends are paid to the policyholder

a substantial safety margin is built into the premium, sufficient to reflect a willful overcharge, but justified on the assumption that if the extra premium is not needed, it will be returned to the policyholder as a dividend

nonparticipating policies

The safety margin on ____________ is narrower, because the cost of the insurance to the policyholder cannot be adjusted at a later time

Fixed life insurance or annuities

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

Variable life insurance or annuities

are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance

Servicemembers' Group Life Insurance (SGLI)

low-cost term group life insurance issued to all members of the uniformed forces while on active duty, members of the National Guard, the Commissioned Corps of the National Oceanic and Atmospheric Administration, and the Public Health Service, as well as members of the Reserve Officer Training Corps (ROTC)

Federal Employees Group Life Insurance (FEGLI)

group term life insurance. All federal employees are automatically covered by basic life insurance unless waived

advertising

must be accurate and not misrepresent the facts

The insurer

______ whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them

illustration

means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years

buyer’s guide

provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance

policy summary

written statement describing the features and elements of the policy being issued. It must include the name and address of the agent, the full name and home office or administrative office address of the insurer, and the generic name of the basic policy and each rider

Know This

A buyer's guide provides generic information on various types of policies. A policy summary provides specific information on the policy being issued.

Traditional Net Cost method

compares the cash values available to buyers if they surrender the policy in 10 or 20 years. This index does not take into consideration the time value of money (or investment return on the insurance premium had it been invested elsewhere). Although this is the easiest cost-comparison method and can be helpful in determining income tax liability under the policy, it can also be the most misleading when used to estimate policy costs. Use of this method for comparing policy costs is illegal in most U.S. jurisdictions.

Interest-Adjusted Net Cost

method considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. This means that each year premiums and dividends are figured, interest is taken into consideration

Replacement

a practice of terminating an existing policy or letting it lapse, and obtaining a new one

Underwriting

the risk selection and classification process. It involves a careful analysis of many different factors to determine the acceptability of applicants for insurance

field underwriter

the agent is usually the one who has solicited the potential insured

The Application

the starting point and basic source of information used by the company in the risk selection process

they all have the same basic components: Part 1 - General Information and Part 2 - Medical Information.

Part 1 - General Information

includes the general questions about the applicant, such as name, age, address, birth date, gender, income, marital status, and occupation

Part 2 - Medical Information

includes information on the prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives

agent's (producer's) report

provides the agent's personal observations concerning the proposed insured

Consequences of Incomplete Application

If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer to the question. The insurer will not have the right to deny coverage based on any information that the unanswered question might have contained.

premium receipt

Whenever the agent collects premiums

will determine when coverage will be effective

conditional receipt

used only when the applicant submits a prepaid application

says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for.

unconditional (binding) receipt

used most often with property and casualty insurance
coverage begins immediately for a specific length of time, until the policy is issued

notice of information practices

Insurers and producers must provide a notice of information practices to applicants and policyholders in connection with insurance transactions

Know This

An insurance application is the key source underwriters use for information about the applicant

producer's (agent's) report

allows the producer to communicate with the underwriter and provide information on the applicant that may assist in the underwriting process

Attending Physician Statement (APS)

If, however, the underwriter sees answers to certain questions that could indicate greater risk, and the underwriter wants to obtain specific medical details, the underwriter will request a statement from the applicant's physician

Medical Information Bureau (MIB)

a membership corporation owned by member insurance companies. It is a nonprofit trade organization the purpose of which it is to collect, maintain, and make available to insurance companies important underwriting information on applicants for life and health insurance

Know This

Insurers cannot refuse coverage solely on the basis of adverse information on an MIB report

written Disclosure Authorization Notice

When insurers plan to seek and use information from investigators, they must first provide the applicant or insured with a _______________

Health Insurance Portability and Accountability Act (HIPAA)

is a federal law that protects health information

provide protection for the privacy of certain individually identifiable health information (such as demographic data that relates to physical or mental health condition, or payment information that can identify the individual), referred to as protected health information

Privacy Rule

patients have the right to view their own medical records, as well as the right to know who has accessed those records over the previous 6 years

however, allows disclosures without individual authorization to public health authorities authorized by law to collect or receive the information for the purpose of preventing or controlling disease, injury, or disability

unfair discrimination

Discriminating in policy rates and benefits based solely on

• Age or gender;

• Physical or mental impairment;

• Blindness or partial blindness; or

• Genetic characteristics or genetic testing

rating classification

used in deciding whether or not the applicant should pay a higher or lower premium. A prospective insured may be rated as one of the three classifications: standard, substandard, or preferred

Know This

The higher the risk, the higher the premium

Standard risks

are persons who, according to a company’s underwriting standards, are entitled to insurance protection without extra rating or special restrictions

average