Comprehensive Life & Health Insurance Study Notes

Chapter 1: Types of Insurance Companies

Commercial insurers (private, for-profit) offer life, health, property, and casualty contracts.
• Stock companies – profit for shareholders; non-participating; $\text{mutualization} \leftrightarrow \text{demutualization}$ possible; stock dividends taxable.
• Mutual companies – owned by policy-holders; participating; dividends generally not taxable unless interest is left to accumulate.
• Mixed insurer = offers both participating & non-participating lines.
• Dividends are never guaranteed.
• Assessment mutuals – premiums collected "as needed".

1. Pure assessment: no advance premium; members assessed after loss.
2. Advance premium assessment: pay up-front; surplus returned as dividends; deficits lead to additional assessment (state limits apply).
   • Fraternal Benefit Societies – nonprofit religious/ethnic/charitable lodges (e.g., Knights of Columbus) insuring members only.
   • Risk Retention Groups – mutuals formed by professionals in the same industry (dentists, engineers, etc.).
   • Service Providers – sell service contracts: HMOs & PPOs; purchasers = subscribers.
   • Reciprocal Insurers – unincorporated exchanges of indemnity, run by an Attorney-in-Fact.
   • Reinsurers – accept risk from a ceding company.
   • Captive Insurer – owned by a parent firm to insure its own exposures.
   • Home-Service (industrial) Insurers – small face, weekly premiums ($1{,}000{-}2{,}000$).
   • Government programs – Social Security, Medicare, Medicaid, SGLI, VGLI, Tri-Care.
   • Self-insurers – retain risk, build self-funded reserves.
   • Lloyd’s of London – marketplace where syndicates underwrite unusual risks.

Chapter 2: How Insurance Is Sold

Channels: licensed agents & brokers, direct response, mass marketing.
• Career Agency System – insurer hires General Agent (GA) & captive producers.
• Personal Producing General Agency (PPGA) – independent agency, no recruiting duty.
• Independent Agency (American Agency) – producers own expirations; represent many insurers.
• Managerial System – branch manager (salaried) supervises captive agents.
• Mass Marketing – TV, radio, mail, vending machines, Internet; minimal agent contact.

Chapter 3: Industry Oversight & Regulation

Key court cases & laws: 1869 Paul v. Virginia, 1944 SEUA case, 1945 McCarran-Ferguson (states regulate unless ineffective), 1970 FCRA, 1999 GLBA, 2001 PATRIOT Act, 2003 Do-Not-Call, 2010 ACA.
NAIC – promotes uniformity; Advertising Code & Unfair Trade Practices Act.
Professionalism: suitability, disclosure, documentation, buyer’s guide, policy summary.
Reserves = future obligations; liquidity = ability to pay unexpected claims.
Guaranty associations – backstop insolvencies.
Rating agencies – A.M. Best, S&P, Moody’s, Fitch.

Chapter 4: Nature of Insurance – Hazards, Perils, Risk

• Hazards: physical, moral, morale.
• Peril = immediate cause of loss.
• Risk: speculative (not insurable) vs. pure (insurable).

Chapter 5: Elements of an Insurable Risk & Risk Management

Requirements: due to chance, definite/measurable, statistically predictable, non-catastrophic, large homogeneous exposure, randomly selected.
Law of Large Numbers $\Rightarrow$ credible prediction.
Risk treatment: avoidance, reduction, retention, transfer, pooling, reinsurance.
Principle of indemnity – restore, not profit.

Chapter 6: Economic Basis – Valuing Human Life

• Human-Life-Value Approach: $\text{Income}\times\text{Years}$ (e.g., $50{,}000\times10=500{,}000$).
• Needs-Based: totals future expenses (funeral, mortgage, college, etc.). (e.g., $60{,}000\times5=300{,}000$)

Chapter 7: Legal Concepts of the Contract

Four essentials: consideration, legal purpose, offer & acceptance, competent parties.

Chapter 8: Special Contract Features

Adhesion (take-it-or-leave-it), aleatory (unequal exchange), unilateral (only insurer promises), personal (non-transferable), conditional (benefit triggered by loss), valued (life) vs. indemnity (health), utmost good faith.
Insurable interest, reasonable expectations; Warranties/Representations/Concealment.
STOLI usually illegal.

Chapter 9: Agent Authority & Other Legal Doctrines

Express, implied, apparent authority; fiduciary duty; fraud; waiver & estoppel; parol evidence; subrogation; void vs. voidable; cancellation & endorsements; errors & omissions (E&O) coverage.

Chapter 10: Types of Life Policies

Term (level, decreasing, increasing, convertible, renewable, annual renewable).
Whole Life: straight, limited pay, single premium, modified, graded.
Industrial & group contracts.
Policy admin clauses: notice/claim, proof, payment, legal action, exam/autopsy.

Chapter 11: Special-Use Life Policies

Family Policy, Family Income, Family Maintenance, Multiple Protection (double/triple), Joint Life & Survivorship, Juvenile (payor benefit), Credit Life.

Chapter 12: Non-Traditional Policies

Interest-Sensitive WL, Adjustable Life, Universal Life (flexible), Equity-Indexed UL, Modified Endowment Contracts (7-pay test; LIFO; 10% penalty before $59\tfrac12$).

Chapter 13: Variable Products

Separate accounts; producer must hold securities registration.
Variable Whole Life – fixed premium, min death benefit.
Variable Universal Life – flexible premium & death benefit.

Chapter 14: Provisions, Options & Riders

Mandatory clauses: insuring, consideration, entire contract, grace, reinstatement, incontestability, misstatement, loan, automatic premium loan, owner rights, assignments, free-look.
Optional: discretionary, change of occupation, unpaid premium offset, cancellation, conformity, illegal occupation, intoxicants.
Nonforfeiture: cash, extended term (default), reduced paid-up.
Dividend choices: cash, reduce premium, accumulate interest, paid-up additions, 1-yr term.
Riders: waiver of premium, payor, accelerated benefit, accidental death (double/triple), AD&D, guaranteed insurability, cost-of-living, return of premium, automatic premium loan.
Settlement options: lump sum (default), interest only, fixed period, fixed amount, life income, joint & survivor.
Living benefits: accelerated death benefit, viatical settlements.
Common exclusions: war, suicide (first 1 yr), aviation, hazardous hobbies, felonies, drugs, etc.

Chapter 15: Premium Determination & Cost Indexes

Premium factors: mortality, interest, expenses (loading), benefits, age, gender, health, occupation, hobbies, habits, mode.
Cost comparison: surrender cost index vs. net payment index.
Tax points: premiums usually not deductible; cash-value growth tax-deferred; surrender gains taxable.

Chapter 16: Tax Treatment of Life Insurance

Death benefit lump sum – generally tax-free; interest portion taxable.
Policy loans not taxed; withdrawals taxed FIFO (life) unless MEC (LIFO + 10% penalty before $59\tfrac12$).
Section 1035 exchanges – life→life, life→annuity, annuity→annuity (not annuity→life) are tax-free.

Chapter 17: Beneficiaries & Special Situations

Specific vs. class; order: primary, contingent, tertiary.
Per stirpes vs. per capita.
Revocable vs. irrevocable.
Simultaneous death (Uniform Act), common-disaster, spendthrift clause, facility-of-payment.

Chapter 18 & 19: Underwriting & Risk Classification

Sources: application (Parts I, II, III), agent report, MIB, APS, inspection, credit, special questionnaires.
USA PATRIOT anti-money-laundering.
Risk classes: preferred, standard, substandard, declined.
Field underwriting duties: complete app, collect premium, deliver policy, statement of good health.
Errors: applicant must initial corrections; incomplete apps returned.
Receipts: conditional (coverage if insurable; effective app/medical date) vs. binding (temp coverage 30–60 days; rare in life).
Effective date depends on premium, approval, delivery.
Backdating up to 6 months to “save age.”
Constructive delivery & personal delivery.

Chapter 20–22: Policy Issue & Delivery

Policy issued once underwriter approves; may lag before delivery.
Statement of continued good health may be required if premium paid on delivery.

Chapter 23: Group Insurance Principles

Annual renewable term; master contract, certificates; two plan types: contributory (≥$75\%$ participate) vs. non-contributory (100% covered).
No individual EOI; lower expense; flow of insureds.
Eligible groups: employer-employee, unions, associations, creditor-debtor, trust, fraternal.
Dependent coverage ≤$50\%$ employee amount.
Conversion right within 31 days to individual WL.
Tax: employer premiums deductible; first $50{,}000$ of coverage usually tax-free to employee.
Special forms: franchise, group credit, blanket, group permanent.

Chapter 24: Risk Classification in Group Context

Maintain balanced pool to avoid adverse selection; same preferred/standard/substandard categories.

Chapter 25: Annuities – Fundamentals

Contract parties: owner, annuitant, beneficiary.
Phases: accumulation (pay-in) vs. annuity (pay-out).
Funding: single premium vs. periodic; immediate (SPIA) vs. deferred (SPDA, FPDA).
Payout options: straight life, cash refund, installment refund, life w/ period certain, joint & survivor (full, 2/3, 1/2), period certain only.
Taxation: principal return non-taxable; interest taxed – exclusion ratio $=\dfrac{\text{investment in contract}}{\text{expected return}}$.
Early withdrawals before $59\tfrac12$ – interest first, 10% penalty.
1035 exchanges allowed annuity→annuity.
Surrender charges; bailout provisions.

Chapter 26: Social Security (OASDI)

Payroll tax (FICA) up to wage base; fully insured = $40$ credits; currently insured = $6$ in last $13$ quarters.
Benefits: retirement (PIA at normal age; reduction at 62), disability (5-month wait, must last 12 mos), survivors (lump $255$, spouse, children, parents), black-out period for widows 16–60.
Not covered: certain pre-1984 federal workers, some state/local opting out, railroad employees.
Taxation: benefits taxable if provisional income >$25{,}000$ (single) / $32{,}000$ (joint).

Chapter 27: Retirement Plans – Qualified vs. Non-Qualified

Qualified plans – IRS approved, non-discriminatory, tax-deductible contributions, tax-deferred growth, ERISA standards.
Types:
• Defined Benefit – formula promise; employer funds.
• Defined Contribution – individual accounts; contribution limits $\le 25\%$ comp or $58{,}000$ (2021).
• Profit-sharing, money purchase, stock bonus.
• 401(k) CODA – salary deferral $\le 19{,}500$ + catch-up; employer match.
• 403(b) – tax-sheltered annuity for schools/charities.
• SEP – employer contributes to IRA (≤$25\%$ comp or $58{,}000$).
• SIMPLE – for ≤100 employees; 2% nonelective or 3% match.
• Keogh (HR-10) – self-employed; DC or DB.
Non-qualified plans – deferred comp, salary continuation, split-dollar; selective, contributions not currently deductible.
Pension Protection Act 2006 – stricter funding; auto-enrollment; higher limits; advice access.

Chapter 28: Uses of Life Insurance

Personal: survivor income, debt payoff, education fund, estate liquidity, retirement supplement, long-term care riders, charitable giving.
Business: buy-sell (sole proprietor, partnership cross-purchase/entity, close corp stock redemption), key-person, executive bonus, split-dollar, deferred comp, salary continuation.
Needs vs. Human-Life-Value method for amount determination.

Chapter 29: Employee Benefit Plans

Deferred compensation – elective deferral, tax-deferred.
Salary continuation – employer funded.
Split-dollar – cost & benefit shared; often term + WL combination.

These notes consolidate every major and minor principle, statute, policy form, tax rule, underwriting step, contractual clause, risk criterion, and marketing system presented in the transcript, tying each concept to its practical or legal significance within life & health insurance and annuity practice. All numerical limits, formulae, ages, percentages, and waiting periods are expressed for quick reference and exam mastery.