Life Class Review Study Guide: Chapters 1-5

Chapter 1: Completing the Application, Underwriting, and Delivering the Policy

• Insurable Interest: This occurs when a policy owner faces the possibility of losing money or something of value in the event of a loss. By law, insurable interest must exist at the time of application for a life insurance policy.
• Rejection of Policy: An insurance company reserves the legal right to reject a prospective insured’s life application on the basis of their medical history.
• Contract of Adhesion: This is a specific type of contract offered on a "take-it-or leave-it" basis by an insurer. The insured's only options are to either accept or reject the contract as written. Because the insurer drafts the contract, any ambiguities in the language will be settled legally in favor of the insured.
• Policy Summary: A document provided to the insured that highlights the specific coverages, riders, and exclusions of the issued policy. It includes all major highlights except the specific amounts of coverage that may be selected by individual insureds.
• Collecting Initial Premium: For coverage to begin on the day an insured signs a nonmedical application, the producer must take the specific action of collecting the premium on that same day.
• Risk Classification: This refers to the underwriting process that involves evaluating information such as past medical history, physical condition, habits, and morals provided on a life insurance application. The core principle is that the higher the risk posed by the applicant, the higher the required premium amount.
• Premium Receipt: This is a receipt given by a producer to an applicant showing that coverage is in force immediately or based on certain received conditions. It is specifically issued when the agent collects the premium.
• Conditional Receipt: This receipt is used only when a client submits a prepaid application. Under this arrangement, the applicant may be covered as early as the date of application or the date of the medical exam, whichever occurs last. This coverage is contingent upon the insurer finding the applicant insurable as a standard risk. Rather than being immediately effective, coverage depends on the insurer's finding. The applicant MUST sign the application and pay the initial premium to receive this.
• Delivery Receipt: A document signed by the policyholder acknowledging they have received and understand the policy terms. It acts as written evidence for the insurer that the policy was delivered and officially starts the "Free Look" period.
• Conditional Contract: A contract in which certain conditions must be met by both the policyowner and the company for the contract to be executed and before each party fulfills its obligations. Performance is contingent upon the occurrence of a particular event.
  • Example: The insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.
• Aleatory Contract: A contract in which the performance of one or both parties is contingent upon the occurrence of a particular event. It is characterized by the exchange of unequal amounts or values.
  • Numerical Example: A life insurance policy owner has paid $1,200$ in premiums over $6$ months for a $250,000$ policy. The policyowner dies suddenly and the insurer pays the beneficiary $250,000$. The exchange of $1,200$ for $250,000$ reflects the Aleatory feature.
• Incomplete Application and Misstatements:
  • Correction Process: If a producer discovers that answers to a series of questions on the life insurance application were not answered, the producer must schedule an appointment to meet back with the client to complete the unanswered questions.
  • Waiver of Rights: If an insurer accepts an incomplete application and issues the policy anyway, they must honor the contract; they have legally waived their right to require that missing information.
  • Processing: If the insurance company finds missing information on an application submitted by a producer, they will send the application back to the producer for completion.
  • Misstatement of Age: When a claim is filed against a Life policy and the insurer discovers a misstatement of age in the application, the company may adjust the death benefit to what it would have been for the insured’s true age based on the premiums paid.
• USA PATRIOT Act: A federal regulation that requires insurance companies offering permanent individual life insurance and individual annuity products to establish and maintain an anti-money laundering (AML) compliance program. It is aimed at detecting criminal activity, including money laundering, and preventing terrorist activities.
• Anti-Money Laundering (AML) Rules: A specific "red flag" under these rules is when a policy owner surrenders a policy and requests the proceeds be paid to a third party.
• Fair Credit Reporting Act (FCRA): This act requires an insurance company to advise an applicant that the company intends to secure a report containing details about the applicant's income and general reputation. The applicant must be informed of their rights when the producer completes the application. This ensures information is confidential, relevant, and properly used.
• Misrepresentation: The act of making untrue statements about a policy and its contents. If intentional, it can be considered fraud after the underwriting decision.
• Representations: These are statements believed to be true to the best of the insured's knowledge (the insured's statements on the application).
• Suspicious Activity Reporting: Both the producer AND the firm are required to report suspicious activity to FINRA.
• Mode of Premium Provision: A policy feature that defines the frequency at which an insured pays their insurance premiums, permitting payments more than once a year.
  • Cost: The lowest premium outlay for the insured is the annual payment mode.
  • Beneficiary Rights: A change of premium payment mode may be exercised WITHOUT the consent of the irrevocable beneficiary.

Chapter 2: Types of Life Policies

• Adjustable-Life Insurance: A flexible, permanent policy that allows policyholders to customize coverage by increasing or decreasing premiums, death benefits, and coverage periods over time. If a policyowner makes an additional premium payment, it generally increases the cash value and death benefit rather than decreasing nonforfeiture options.
• Whole Life Insurance: This type of insurance accumulates the greatest amount of cash value per $1,000$ of face amount. It is recommended for individuals wanting both protection and nonforfeiture options.
• Return of Premium Rider: A rider that adds an extra increase to the monthly premium cost in exchange for returning premiums under certain conditions.
• Flexible Premium Payments: A feature where failure to pay past-due premiums results in policy lapse at the end of the grace period.
• Convertible Term Policy: A policy that offers the advantage of changing to a whole life policy without the insured having to provide evidence of insurability.
• Permanent Protection with Lowest Premium: Whole life insurance generally provides permanent protection at the lowest annual premium relative to other permanent products.
• Limited-Pay Life Policy: This policy allows the insured to pay premiums for a predetermined period that is shorter than for a straight life policy. After this period, no further premiums are required.
  • Example (20-Pay Life): A $20$-Pay Life insurance policy provides a $25$-year-old with the most rapid growth of cash value.
  • Example (Paid-Up at 65): Life Paid-Up at Age $65$, where premiums are paid for a limited time until the age threshold is met.
• Universal Life: A type of life insurance policy that provides for flexible premium payments; the premium schedules differ from traditional whole life products.
  • Case Scenario: For a prospective insured who wants a policy that keeps up with interest rate changes and allows adjusted contributions over the next $25$ years, Universal Life is the best recommendation.
  • Investment Choice: If a prospect wants a Flexible Premium Life policy that accumulates cash value and pays a death benefit while choosing how the cash value is invested, they are looking for a variable component.
• Variable Life Policy: This allows the policyowner to select exactly where the policy's cash values are invested.
• Variable Universal Life: This product offers maximum flexibility in premium payments, the premium payment period, and the death benefit.
• Joint and Survivor Life Policy: A single policy covering two people (typically spouses or business owners). It usually has lower premiums than two separate policies. It pays a death benefit either upon the first death or the second death, depending on the specific policy structure.
• Survivorship Life Insurance: A specific type of joint policy used to provide payment only on the last death. It is typically purchased for estate planning purposes to cover income taxes.
• Renewability Feature (Term Policies): Guarantees the policyholder can continue coverage at the end of the term or expiration without providing evidence of insurability (proof of good health). Because the risk of death increases with age, the insurance company increases the premium at renewal based on the insured’s attained age.
• Entire Contract Provision: This provision dictates that the policy, a copy of the application, and any attached riders or amendments constitute the entire contract.
  • $\text{Entire Contract} = \text{Policy} + \text{Copy of Application} + \text{Riders/Amendments}$
• Level Premium Term: In level term insurance, the term "level" refers specifically to the death benefit, which does NOT change throughout the term.
• Term Insurance Overview: Provides the highest amount of coverage for limited financial resources.
  • Case Scenario: Mr. and Mrs. Xavier have a $1$-month-old infant and want a $250,000$ policy on Mr. Xavier with the lowest premium for the next $20$ years. The suitable recommendation is a $20$-Year Level Term.
• Buy and Sell Agreement: A legal contract (also called a business continuation agreement) that determines what will be done with a business if an owner dies or becomes disabled.
  • Funding Example: Two equal partners in a business worth $100,000$ enter into a Buy and Sell Agreement. The best funding arrangement is for each partner to purchase a $50,000$ policy on the life of the other partner.
• Annuity: A contract purchased with a lump sum that pays a guaranteed income.
• Single Premium Immediate Annuity (SPIA): This contract is purchased with a single, up-front lump sum. Total guaranteed income typically begins within one year of purchase.
  • Case Scenario: A $54$-year-old woman with a $100,000$ settlement check wants an annuity that pays $1,000$ per month until she is $64/65$. A SPIA is the recommended product.
• Joint and Survivor Life Annuity: Provides level income for the lifetime of two annuitants, commonly used for retirement income.
• Variable Annuity: Payments are based on units rather than specific dollar amounts.
• Immediate Annuity: Requires a single premium and provides income payments one period after purchase.
• Straight Life Annuities: Generally provide the highest monthly payout among annuity types and are used frequently for retirement income.
• Exclusions: Types of risk the policy will not cover, including aviation, hazardous occupations/hobbies, and suicide (for a specific duration).

Chapter 3: Life Policy Provisions, Riders, & Options

• Reinstatement: A provision that allows an insured to reestablish coverage if a policy lapsed (e.g., one year ago) and put it back in force.
• Automatic Premium Loan Provision: This can be incorporated into permanent policies but is NOT available for term insurance.
• Guaranteed Insurability Rider: Allows an insured owner of a life policy to increase the amount of coverage without evidence of insurability due to specific life events, such as the birth of a child.
• Insuring Clause: The part of the policy where the insurer promises to pay certain benefits upon the occurrence of a covered event.
• Consideration Clause: The binding force of the contract. It consists of the insurer’s promise to pay for losses and the insured’s payment of premium and statements on the application.
• Contestability Period: Generally lasts for $2$ years. After a policy has been in force for $2$ years, even if the insured failed to disclose a condition that resulted in death, the insurer will most likely pay the face amount. For example, if a policy has been in force for $10$ years, any misrepresentation is incontestable.
• Policy Loan Collateral: If a bank requires collateral for a loan, the insured may assign the life insurance policy to the bank.
• Free Look Provision: Allows a policyowner to return a newly issued policy within a specified period (e.g., $10$ to $30$ days) for a full refund of premiums paid.
• Standard Exclusions: Specific circumstances where the death benefit will not be paid, including:
  • Suicide within the first $2$ years.
  • High-risk/hazardous hobbies.
  • Illegal activities.
  • Acts of war.
  • Material misrepresentation on the application.
• Aviation Exclusion: A clause denying death benefits if the insured dies while operating or riding in a non-commercial aircraft (private planes, helicopters, or flight training). Special riders are available for pilots.
• Suicide Clause: Designed to protect the insurer from adverse selection by high-risk applicants. If an insured commits suicide during the first policy year, the insurer will return all premiums but will not pay the claim.
• Beneficiary Designations:
  • Irrevocable Beneficiary: Limits the policyowner's rights; they cannot change the beneficiary or certain policy features without the beneficiary's consent.
  • Ownership Transfer: The listed beneficiary remains the same even if policy ownership is transferred. If a mother is the beneficiary and the insured son transfers ownership to his new wife, the mother remains the beneficiary.
  • Loan Math: If a policy has a $100,000$ face value and a $10,000$ loan outstanding at the time of death, the beneficiary receives $100,000 - 10,000 = 90,000$.
• Common Disaster Provision: If the primary beneficiary dies shortly after the insured (e.g., within $10$ days) due to the same accident, proceeds are paid to the insured's estate.
• Waiver of Premium Provision: Guarantees the insurer will pay the premiums during a period of total disability after a specified waiting period.
• Term Riders:
  • Child Rider: A term rider providing additional coverage for children.
  • Spouse Rider: A method of providing life insurance on the spouse of the primary insured.
• Ownership Retention: If a father purchases a policy for his $18$-year-old son but intends to retain ownership, BOTH the father’s and the son’s signatures are required on the application.
• Accelerated Death Benefit Provision: Provides advanced payment of life insurance benefits if the insured is diagnosed with a terminal illness.
• Long Term Care (LTC) Rider: Triggered by the insured's inability to perform activities of daily living (ADLs). These cost less than stand-alone LTC policies. Note: Injuries sustained while serving in the armed forces are EXCLUDED.
• Accidental Death & Dismemberment (AD&D): Pays benefits only if death results from a specific accident.
  • Heart Attack Example: Rachel has a $25,000$ policy with an AD&D rider. If she dies from a heart attack while driving, the beneficiary receives only the base $25,000$ because a heart attack is considered a natural/medical cause, not an accident.

Chapter 4: Retirement & Other Insurance Concepts

• Key Employee Policy: If a company owns a policy on a key employee and they leave the company but die while the policy is still in force, the proceeds are paid to the company.
• Modified Endowment Contract (MEC): An overfunded policy according to IRS tables. It becomes a MEC if too much premium is paid in the initial policy years, leading to unfavorable tax implications on withdrawals.
• Contributory Plans: A type of group life insurance where employees share the cost of insurance. Typically, a minimum of $75\%$ of eligible employees must contribute to the plan for the company to establish it.
• Group Term Conversion Period: If death occurs during the conversion period after someone leaves a group, the death benefit must be paid. The conversion privilege allows an individual to leave a group and continue insurance without providing evidence of insurability.
• Individual Retirement Account (IRA): A retirement plan that can be established by an employee regardless of any other retirement plan they may have.
• Investor-Originated Life Insurance (IOLI): An arrangement where a third-party investor benefits from the death of the insured.
• Life Settlement: A financial transaction where the owner of a life insurance policy sells it to a third party for compensation, usually cash.
• Taxation Rules:
  • Personal Life Insurance Premiums: These are NOT tax deductible.
  • Group Term Life Insurance: Death benefits are generally income tax-free to beneficiaries. If a corporation pays a $5$ monthly premium for a $10,000$ group policy for an employee, the corporation reports $0$ additional taxable income for that employee.
• Primary Insurance Amount (PIA): Used to determine the amount of a worker's disability income under Social Security.

Chapter 5: MS Life Insurance Laws

• Denial of License: The Commissioner of Insurance must notify the applicant in writing of a denial. The applicant may request a hearing within $10$ days of notice; the hearing must be held within $30$ days of that request.
• Termination of Producer Appointment: If a producer’s appointment is terminated, they may continue to collect commissions on existing policies until they are canceled, replaced, or expired. An insurance company may terminate an appointment at any time.
• Definitions:
  • Producer: An individual appointed by an insurance company to transact business.
  • Order: A document issued by the Commissioner to a person who has violated insurance law.
  • Domestic Company: Incorporated and organized under the laws of Mississippi.
  • Foreign Insurance Company: Formed under the laws of a state other than Mississippi.
• Commissioner of Insurance Duties and Powers:
  • Approve applicants for producer licenses and administer insurance laws.
  • Examine producer books/records as often as deemed necessary.
  • Issue cease and desist orders against persons engaging in unfair competition.
  • Suspend, revoke, or refuse to renew a license if a producer is guilty of misrepresentation or fraud in obtaining the license.
• Life and Health Insurance Guaranty Association: Established to protect the public and reduce financial losses to policyholders resulting from insurance company insolvency.
• Certificate of Authority: Must be issued by the state for an insurer to transact business in Mississippi. Employees of the company must be licensed if they solicit potential clients for producers.
• Prohibited Practices:
  • Commingling: The illegal act of depositing premiums into a personal account.
  • Unfair Discrimination: Charging different rates for persons in the same risk class.
  • Insurance Fraud: Submitting an application containing material misrepresentation.
  • Controlled Business: Occurs if a producer earns more than $35\%$ of their commissions from selling insurance to family members.
  • Unfair Claims Settlement Practice: Failing to adopt and implement reasonable standards for the prompt investigation of claims.
• Legal Procedures: If a producer is accused of misrepresenting pertinent facts, the Commissioner will FIRST order a hearing or a cease-and-desist order. Upon notice of a fraudulent claim, the Commissioner can require the producer to disclose additional information.
• Ethics Requirement: Producers must complete $3$ hours of ethics education.