Introduction to Life and Health Insurance

Alabama Life and Health Insurance Producer Exam

Purpose of Life and Health Insurance

• To protect your greatest asset

• To offset risk

Life Insurance

A contract (or policy) that will pay a stated amount to a beneficiary upon death of the insured.

Functions Include:

• Funeral Protection

• Survivor Protection

• Estate and Creation and Protection

Funeral Protection

Life policy death benefits grew to cover the funeral and the final expenses of the deceased.

Survivor Protection

Pay final medical expenses, cover short-term debts and even installment loans in addition to funeral costs.

Estate Creation

“I want to leave an estate large enough to enable my family to do those same things in my absence.”

Only Life insurance can instantly create an estate

Estate Protection

Life insurance can provide that big check at exactly the right time to protect hidden wealth.

“If I leave my kids, my farm, my business or a bunch of assets, the IRS is going to want a big check”

Health Insurance

• A common factor in most American households

• Prepaid Medical Insurance became almost universally available through Blue Cross and Blue Shield

Disability Income

• Employers offered partial salary continuation following a worksite injury or illness that might prevent us from working either permanently or temporarily

Your ability to earn a paycheck

Your greatest asset

Risk

• Exposure

• Uncertainty

• Uncertainty or Chance of Loss

Speculative Risk

• The risk is actually created

• The opportunity for either gain or loss

Pure Risk

• Risk or Loss is not created; it is inherent

• If you are alive, there is a risk that you might die prematurely, get sick or become disabled

Risk Managers

Another title that policyowners view producers. Policyowners look to producers to show them where insurance is the most practical and cost effecient method of offsetting risk.

Risk avoiding

Inappropriate method of coping. Avoiding something to prevent risk and loss from occurring.

Reducing Risk

• Giving up something to lower risk

• Insurance companies would award your decision with lower rates

Retaining Risk

Idea of accepting deductibles or self-insuring

Transfer of Risk

• How insurance works by transferring risk from your client to an insurance company via an insurance policy

Insurance

A method by which your risk is transferred to a company, which for consideration, assumes your losses up to a predetermined limit.

Consideration

• Insurance companies are in the business to make money

• Something of value

• Both money and statements on the application are elements of this

Predetermined Limit

• Death Benefit

• Face Value

• What the insurance company knows exactly what they are on the hook for the event of the policyholder’s deathin

Adverse Selection

The tendency of poor or bad risks to buy more or large amounts of insurance

Law of Large Numbers

Tells us that it is possible to accurately predict what will happen to a large group of similar risks/individuals.

Mortality Tables

Used to predict life expectancy for life insurance

Morbidity Tables

Predict likelihood of sickness or accident for a particular group.

Stock companies

• In the business to earn money for its stockholders

• Pays dividends to stockholders

• Nonparticipating company

Non participating company

A company that does not return any surplus monies to policyowners

Mutual Companies

• Policyholders elect the board of directors

• Surplus is distributed to policyowners as dividends

• dividends paid to policyowners are viewed as a return of overcharge

• Dividends paid to policyowners are not taxable

• Participating company

Participating Company

policyowners participate in the profitability of the company.

Fraternal Benefit Societies

• Religious and social fraternities to offer small amounts of insurance to their members.

• Operated for the benefit of their members, they have no stockholders and they pay dividends to policyowners

• Before you can purchase insurance from a Fraternal, you must join the fraternal.

Risk Retention Groups

Form of group self insurance for business liability risks.

Lloyd’s Associations

• Not truly a company

• A place where several hundred insurance syndicates or associations meet to underwrite risks

• Famous for assuming highly unusual risks

• Primarily are engaged in insuring in transit, which is known as Marine insurance.

• Regarding to life and health insurance, they reinsure the exposure of smaller Life and Health companies thus spreading the risk and increasing the reserve capacity of companies to provide insurance.

Government Insurers

• Biggest insurer on the planet

• Provides Social Security and Medicare

• Insurance programs available to our servicemen and women as well as for their families

• Federal government involved with insurance for catastrophic losses like floods

• At a state level, Workers compensation is actually sold by the state in some jurisdictions.

• There are risk pools created to help people purchase Health Insurance

Domestic Company

A company chartered in the same state

Foreign Company

A company chartered in another state

Alien Company

A company chartered in another country

Admitted Company

A chartered Authorized Company

Due Diligence

• To ascertain the fiscal soundness of the companies with which you place your clients

  • There are a number of independent rating services that do this

    • Standard and Poor’s Insurance Rating Services

    • Moody’s Investor Service and the A.M. Best Company

• Initial fact finding interview with your client to truly understand their economic position, their financial objectives, and their willingness (and ability) to take risk

• Your recommendations should obviously match the client’s needs, and regular reviews should be held to monitor and adapt to important changes in your client’s profile

quite good

On the A.M. Best Scale B+ up to an A+ would be ___

barely marginal

On the A.M. Best Scale C or C- would be

not meet minimum requirements

On the A.M. Best Scale anything below C- would

Contract

Defined as an agreement between two or more parties

Insurance Policy

A contract between the policyowner and the insurer (the insurance company)

The purpose of this is to indemnify, or make whole, the insured in the event of a loss.

Life Insurance Contract

The company (also called the carrier) promises to pay a predetermined amount in exchange for the policyowner’s consideration.

Face Amount/Death Benefit

Predetermined amount from the insurance policy that will be paid out in the event of the policyowner/holder/insured’s death.

Health Insurance Contract

The insurer promises to pay medical bills or a predetermined income benefit while the insured is disabled in exchange for the policyowner’s consideration. Clearly demonstrates the idea of indemnification-you will never be paid more than what your medical provider charges. You will normally receive somewhat less due to deductibles and co-pays.

• Offer and Acceptance

• Consideration

• Legal Purpose

• Legal Capacity

Elements of a contract

Offer

The applicant initiates this action to buy the insurance policy by giving to the insurance agent who represents an insurance company a completed application and the first premium in advance.

Acceptance

The insurance company reacts to the policyholder’s offer by issuing the insurance policy,

Counteroffer

Issuing another policy at a higher premium rate or with different terms

Consideration

Something of value exchanged by the parties to the contract.

Applicant’s Consideration

Premium payment and statements made on the application.

Insurance Company’s Consideration

The promise to pay benefits in the event of a covered loss during the policy period.

Legal Purpose

Insurable interest and written consent prevent illegal purposes or misuse of the insurance policy. For an insurance policy to be legally enforceable, the contract must have this:

Insurable Interest

The applicant must have a financial stake in the insured’s life. The following are examples of this:

• Spouses in each other

• Parents in their children

• Creditors in their debtors

• Employers in their key employees

Note: No requirement that a beneficiary have an this type of relationship in an insured.

Doctrine of Reasonable Expectations

A policy should do for a policyowner for what they could reasonably expect it to do

Contract of Utmost Good Faith

• Mutual Reliance of Truthfulness on both parties

• The insurer relies on the applicant to complete the application as accurately and honestly as possible, and not to falsify any claims

• The applicant trusts that the insurer will fulfill its obligation by paying the claim in the event of a loss.

Contract of Adhesion

• Legal contract written exclusively by the insurance company

• The applicant does not take part in writing the policy, and must accept or reject it as written.

• Anything found to be ambiguous in the policy will be interpreted in favor of the policyholder or beneficiary

• Legally, the company must adhere to the contract.

Aleatory

Dollar Value exchanged by the two parties is not necessarily equal

Unilateral

Only one party makes a legally enforceable promise. The promise to pay the policy’s benefit in the event of a covered loss.

Personal Contracts

Insurance contracts are personal in nature.

Conditional Contracts

Certain events must transpire before they can be fully executed.

Waiver

Voluntary relinquishment of a right or privilege

Estoppel

Legally prevents one from exercising a right or privilege

Agents/Insurance Producers

Individuals representing insurance companies in sales to the public.

Principal

The Insurance Company

Law of Agency

(As an agent) Your words and actions become legally binding upon your company because you are an agent of that company

Many legal and fiduciary responsibilities to your clients are spelled out in the law; you are legally an agent serving a principal…the company.

Fiduciary Responsibility

Being responsible for others’ money.

Powers of Producers

• Expressed Authority

• Implied Authority

• Apparent Authority

Expressed Authority

These are the powers specifically expressed in your agency contract…the power to collect the initial premium for example.

Implied Authority

• Certain duties that may not be specified in your agency agreement but are implied by that contract

• If a certain policy is to be medically underwritten, you have the power to schedule a paramedic’s visit to your client’s home or office…even if scheduling paramedics is never mentioned in the agency contract.

Apparent Authority

The client could reasonably assume that you have such authority

Underwriting

The process of selecting and classifying risks, determining who will be insured and what premium will be charged.

Involves investigating detailed information about an insured’s health history, medical information, and credit rating.

Underwriters

Review the background information and medical history of the proposed insured to determine insurability. This information will determine whether or not a policy is issued. These individuals will determine whether the premium will be a standard or modified rate.

Part 1 of Insurance Policy Application

This section includes general information about the proposed insured, such as name, address, date of birth, gender, occupation, marital status, beneficiary designation, hobbies, existing life insurance coverage if there is one, whether the proposed insured smokes, height, weight and other similar facts.

Part 2 of Insurance Policy Application

The proposed insured’s health history including doctor’s visits, past illness and surgical procedures.

Additionally, the proposed insured’s parents’ health history is also required.

Non-medical information

A medical assessment and/or physical examination by a medical professional can, of course, be required in addition.

Non-medical Information

Health information supplied by the insured as asked by the agent.

Part 3 of Insurance Policy Application (Agent’s Report)

The proposed insured does not see this or sign this in any way

The agent provides to the insurance company firsthand knowledge about the proposed insured : how long the agent has known the proposed insured, the financial position, character and background information of the proposed insured

Agent’s Responsibility

• Agents must provide the client with the Buyer’s Guide so the client can make an informed selection

• Agents should ask the proposed insured if they have an existing life policy

• The agent is responsible to see that the application is completed fully and accurately. If an incomplete application is accepted by the company and a policy is issued, the company cannot later contest the validity of the policy on the basis of the incomplete application. The agent fills out the application while questioning the applicant.

• agents should explain that the conditional receipt shows proof of payment and provides coverage while still giving the company time to investigate the risk (the reason for the application)

• Agents must deliver the policy

• Reviewing the policy to the insured and answering additional questions they may have

• Giving the insured the policy summary

• Collecting additional premiums at policy delivery

• If the insured was rated by the insurance company, the agent might need to obtain the signature on the Statement of Good Health on a delivery receipt to start the Free Look Period.

Buyer’s Guide

Designed to give the purchaser an overview of the Life policies available in today’s marketplace.

Representations

Statements made by the applicant

Valid as long as it is true to the best knowledge and belief of the applicant

Fraud

An act of cheating or deceit intended to cause financial harm to another party

Warranty

Statements have to be absolutely true in order to be valid. Factual/accurate

Misrepresentation

A false representation made deliberately - a big fat lie

Concealing

If the applicant knowingly does not tell the truth on the application. If this happens, the policy can be legally contested by the company within a specified period of time.

Material

Only those which are considered ___ to the risk would be acceptable to a court of law. If the company would have failed to issue a policy or charged a higher premium had they known the whole truth at the time of application, then a statement could be viewed as ____.

Signatures

The applicant and proposed insured (if different from the applicant) and agent are required to sign the application. The applicant must initial ant changes on the application.

Attending Physician Statement

The underwriters could request detailed information from the proposed insured’s doctor about a specific medical condition listed on the application.

Medical Exam

If the proposed insured is a 60-year-old overweight smoker seeking a death benefit of $5,000,000, a an exam will be conducted by a medical professional in a doctor’s office or clinic.

Lab screen

An alternative to a medical exam for younger applicants seeking smaller death benefits.

This alternative involves sending a paramedic to the proposed insured’s home to verify essential health facts: Weight, height, blood pressure and pulse rate. Additionally, blood and urine samples for a screening of cholesterol levels, HIV, and nicotine and illegal drug use.

Medical Information Bureau (MIB)

• Established and is financially supported by insurance companies to aid in the underwriting process.

• Nonprofit centralized information agency that collects and shares inter-company (between insurers) medical information concerning applicants.

• Helps to disclose cases where applicants either forget or conceal important medical information.

• Applicants must be notified in writing that the insurer may consult the MIB Database

• Applicants must acknowledge and authorize the insurer to do so by signing an authorization form, which is usually part of the application.

• MIB procedures protect the applicant’s right to privacy and protect the insurer against possible fraud.

Health Insurance Portability and Accountability Act (HIPAA) 1996

• Insurance companies and agents must preserve and protect an insured’s right to confidentiality of such information.

• Imposes specific requirements with respect to the disclosure of an insured’s medical information including information related to HIV .

• The applicant must be given full notice of the insurer’s practices with respect to the treatment of this information, the applicant’s right to privacy and an opportunity to refuse the dissemination of this information.

• Requires that entities must protect the confidentiality, integrity, and security of electronically protected health information.

• Three types of ongoing standards that must be implemented

  • 1. administrative

  • 2. physical

  • 3. technical

    • These safeguards must provide security to prevent unauthorized or inappropriate access and use or disclosure of the information,

• Provides protection for patient healthcare

Insurance Company and AIDS/HIV

A company can choose to deny coverage to an individual with AIDS.

If an insurance company choose to issue a Life policy, they cannot specifically limit or exclude AIDS-HIV losses. On the application, a company may ask medically specific questions regarding AIDS and HIV, but no information can be requested regarding the proposed insured’s sexual orientation.

Credit Report

Underwriters will also investigate an applicant’s credit history. If the insurance company charges a higher premium because of an applicant’s credit rating, the applicant must be notified.

This is requested except in cases where a business is using the insurance to cover a key employee or to fund a buy-sell agreement.

Fair Credit Reporting Act of 1970

• Requires that an applicant be notified in writing if a credit report is being utilized

• Gives every consumer the right to question the validity and accuracy of any credit information.

• The insurer will inform the applicant of the source of credit information by giving the reporting company’s name and address.

Standard Risk

The great majority of insureds will fall into this category. There are no special restrictions and a standard premium is charged.

Substandard Risk

This special class risk category is for insureds who may expose the insurer to higher risk due to adverse health, hazardous employment or dangerous hobbies. Rated or rated-up policies.

rated or rated-up policies.

A policy can be issued with a higher premium than standard rates. Policies on special risks.

Preferred Risk

This risk profile offers the lowest chance of loss to the insurer. A lower premium could be rewarded to insureds who don’t smoke or keep their weight within an ideal range

Declined

If the proposed insured is rejected, the underwriters will not issue a policy. This is usually due to a serious health issue, or a very dangerous occupation or hobby. In this case, underwriters have labeled the applicant uninsurable.

Premium Calculations

Insurance company’s actuaries use financial and statistical data, the actuaries set premiums high enough to cover company claims and expenses, but low enough to remain competitive with other insurers.

Three primary factors

1. mortality/morbidity

2. operating expenses

3. interest