Life & Health Insurance Comprehensive Practice
Chapter 1 Introduction to Insurance
Insurance Definition: A protection against the uncertainty of the future. It is a contract activated by an unforeseen event causing a loss. The risk is transferred to the insurer through benefits (payments) based on policy terms.
Risk: The uncertainty concerning a loss. It is a condition where a chance, likelihood, or probability of potential loss exists.
Pure Risk: Results in a loss or no change; there is no possibility for gain. This is the only type of risk insurance is designed to protect against.
Speculative Risk: May result in a gain, loss, or no change (e.g., gambling/stock market). These are not insurable.
Loss: A reduction, decrease, or disappearance in value affecting property or financial position. It acts as the basis for a claim.
Exposure (Loss Exposure): The condition of being at risk for a loss, regardless of whether an actual loss occurs.
Peril: The cause of a loss (e.g., fire, lightning, death, injury, sickness).
Hazard: Specific conditions increasing the likelihood of a loss from a peril.
Physical Hazard: Physical conditions (e.g., flammable material near a furnace, icy sidewalks).
Moral Hazard: Dishonest tendencies (e.g., faking an injury, intentional arson). These are excluded from coverage.
Morale Hazard: Indifference toward risk (e.g., leaving a car unlocked with keys in the ignition).
STARR Methods of Managing Risk:
Sharing: Distributing risk among multiple risk-takers (e.g., condominium associations, coinsuring).
Transfer: Shifting risk to another party, primarily through insurance policies or business incorporation.
Avoidance: Eliminating risk by not participating in activities (e.g., not driving).
Reduction: Minimizing risk (e.g., installing fire sprinklers, diet/exercise).
Retention: Maintaining responsibility for a loss (e.g., self-insurance, deductibles).
Elements of Insurable Risks:
Large number of homogeneous (similar) units to help predict future losses.
Statistically predictable losses for premium calculation.
Uncertain, accidental, and due to chance.
Measurable (definite amount, cause, place, and time).
Causes financial hardship.
Non-catastrophic (excludes war, nuclear hazards, or illegal activity).
Law of Large Numbers: A probability theory stating that as the sample size increases, the accuracy of predicted losses increases. Homogeneous units are similar units used in this theory.
Adverse Selection: The principle where people with higher risks seek insurance more frequently than average risks. Insurers counter this by charging higher premiums or declining coverage.
Reinsurance: Insurance for insurers. The primary company is the ceding insurer; the company assuming risk is the reinsurer.
Treaty Reinsurance: Automatic transfer of an entire class of risks.
Facultative Reinsurance: Negotiation for a single specific risk.
Types of Insurers:
Stock Company: Owned by stockholders who share in profits via taxable dividends. Usually issue nonparticipating policies.
Mutual Company: Owned by policyholders (members) who may receive non-taxable dividends as a return of premium. Usually issue participating policies.
Fraternal Benefit Societies: Social/nonprofit organizations providing life insurance to members (e.g., religious/lodge groups).
Reciprocal Insurance: Unincorporated group where members (subscribers) exchange insurance via an attorney-in-fact.
Risk Retention Groups (RRGs): Group-owned insurers spreading liability-related risks of members in a common trade.
Lloyd’s Associations: Syndicates of individual underwriters individually liable for risks.
Captive Insurance: Owned and controlled by the parent corporation it insures.
Insurer Domicile:
Domestic: Formed under the laws of the current state.
Foreign: Formed under the laws of another U.S. state/territory.
Alien: Formed under the laws of a jurisdiction outside the United States.
Admittance: An admitted (authorized) insurer has a Certificate of Authority; a non-admitted (unauthorized) insurer does not.
Insurer Departments:
Actuarial: Determines probability of loss and premium rates. A rate is the dollar amount per unit (e.g., per ).
Underwriting: Selects risks and determines the final premium.
Marketing Distribution Models:
Exclusive/Captive Agency: Represents only one company; insurer owns the business.
Independent Agency: Represents multiple insurers; agency owns the business.
Direct Writing: Agents are employees of the insurer.
Mass Marketing: Targets specific groups (e.g., AARP) via direct mail/media.
Law of Agency: Relationship between Principal (Insurer) and Agent (Producer).
Express Authority: Specifically granted in the contract.
Implied Authority: Necessary to carry out express duties (e.g., using company logo on cards).
Apparent Authority: Created by the agent's actions that the public assumes are authorized and the principal fails to counter.
Fiduciary Duty: Legal/ethical trust regarding handling principal money and reporting material facts.
Insurance Regulation:
McCarran-Ferguson Act of 1945: Established state-level regulation of insurance.
NAIC (National Association of Insurance Commissioners): Promotes uniformity but does not make laws.
Fair Credit Reporting Act (FCRA): Protects consumer privacy. Adverse information is excluded after ; bankruptcies after .
Gramm-Leach-Bliley Act (GLBA): Protects nonpublic personal information via Financial Privacy and Safeguards Rules.
USA PATRIOT Act: Anti-money laundering (AML) training and reporting of suspicious activities (e.g., single-premium cash payments).
Fraud and False Statements (): Penalties include up to in prison; ( if the activity jeopardizes an insurer). Embezzlement under allows up to .
Violent Crime Control and Law Enforcement Act of 1994: Prohibits felons involving dishonesty from insurance work without a waiver.
Insurance Contract Concepts:
Principle of Indemnity: Restoring the insured to the same financial/physical condition as before the loss; the insured should not profit.
Insurable Interest: Required at the time of application for life/health insurance. Based on financial hardship from a loss.
Elements of a Legal Contract: Competent Parties (no minors/intoxicated), Legal Purpose (insurable interest), Offer and Acceptance (Agreement), and Consideration (premium payment vs. promise to pay).
Contract of Adhesion: Written by one party (insurer) with no negotiation. Ambiguities are ruled in favor of the insured.
Unilateral Contract: Only one party (insurer) is legally bound to future performance.
Conditional Contract: Both parties must perform duties (e.g., pay claim if conditions are met).
Aleatory Contract: Unequal exchange of value due to uncertainty.
Personal Contract: Cannot be transferred (except life insurance, which can be assigned).
Utmost Good Faith: Parties act honestly without misleading.
Representations: Statements believed to be true. Material misrepresentations can void a policy.
Warranties: Guaranteed statements of fact. Breach of warranty voids the contract.
Waiver and Estoppel: Waiver is voluntary surrender of a right; Estoppel is judicial denial of a right based on prior actions.
Chapter 2 Life Insurance Basics
Definitions:
Policyowner: Applicant who controls the policy and rights.
Insured: Individual whose life is covered.
Third-party Ownership: Policy owned by someone other than the insured (e.g., spouse/employer).
Beneficiary: Receives death benefits; cannot be the insured.
Classifications of Policies:
Group vs. Individual: Group covers many via a Master Policy/Certificates of Insurance; Individual covers one person and requires evidence of insurability.
Permanent vs. Term: Permanent (e.g., Whole Life) accumulates cash value to age ; Term is temporary protection with no cash value.
Participating vs. Nonparticipating: Participating (Mutual) pays dividends; Nonparticipating (Stock) does not.
Fixed vs. Variable: Fixed has guaranteed returns (general account); Variable has investment risk (separate account).
Personal Uses:
Survivor Protection: Income for dependents.
Estate Creation: Providing an immediate lump sum assets.
Estate Conservation: Funds to pay taxes/fees to save estate assets.
Cash Accumulation: Living benefit via cash value.
Liquidity: Immediate funds for final expenses.
Determining Amount of Life Insurance:
Human Life Value Approach: Calculates the present value of future earnings (factors age, income, retirement age).
Needs Analysis Approach: Based on survivor needs (burial, debt, education, spouse retirement).
Blackout Period: Time when a surviving spouse is ineligible for Social Security benefits (youngest child age until spouse age ).
Capital Retention vs. Liquidation: Retention maintains the principal and pays interest as income; Liquidation spends down the principal and interest.
Business Uses:
Buy-Sell Agreement: Contractual intent to purchase assets of a business at a partner's death.
Cross Purchase: Each partner buys policies on others (Number of policies = , where is the number of partners).
Entity Plan: Business buys policies on each owner.
Stock Redemption: Corporate version of an entity plan.
Key Person Insurance: Business is owner and beneficiary to cover loss of a critical employee.
Executive Bonus Plan: Nonqualified plan where employer pays premiums for employee-owned life insurance as a tax-deductible bonus.
Sales and Solicitation:
Buyer’s Guide: General info for consumers.
Policy Summary: Specific details of the applied-for policy.
Policy Illustration: Nonguaranteed values/dividends.
Replacement: Transaction where existing policies are lapsed/surrendered for a new one. Requires a Notice Regarding Replacement.
Underwriting Sources:
Application: Part I (General info) and Part II (Medical history).
Medical Exam: Paramedic/RN check, vital stats.
MIB (Medical Information Bureau): Non-profit exchange for adverse medical info; cannot be the sole basis for denial.
Attending Physician Statement (APS): Physician report on specific conditions.
Agent’s Report: Confidential producer observations.
Risk Classifications:
Standard: Average life expectancy.
Preferred: Ideal health; lower premiums.
Substandard (Rated): Poor health/habits; surcharges apply.
Graded (Lien): Death benefit increases over time.
Rated-up Age: Premiums based on an older age.
Flat Rate: Constant dollar surcharge (e.g., + per ).
Tabular: Based on table of impairments.
Premium Determination: Formula is .
Net Single Premium: .
Delivery:
Constructive Delivery: Policy mailed from insurer to producer.
Statement of Good Health: Required if premium is not paid at application.
Conditional Receipt: Coverage starts on date of application or medical exam (whichever is later) if issued as applied for.
Chapter 3 Types of Life Insurance
Term Life Insurance (Temporary):
Pure protection; no cash value; low initial cost.
Level Term: Death benefit and premium stay level.
Annual Renewable Term (ART): Renewable each year without proof of health; premium increases based on attained age.
Chapter 8 Health Insurance Basics
Perils Covered:
Accidental Injury: Involves unforeseen events that result in injuries. The term "Accidental Means" applies a stricter definition, requiring both the cause and effect to be unexpected.
Sickness: Refers to illnesses that manifest after the policy has been issued.
Types of Losses:
Medical Expense: Costs associated with doctor visits, hospital stays, and surgeries.
Dental Expense: Inclusive of routine cleanings and other dental treatments like fillings and surgeries.
Disability Income: Compensation for lost wages due to a disability.
Long-term Care: Support services for individuals with chronic illnesses or disabilities requiring assistance.
Classes of Health Insurance:
Individual vs. Group: Individual plans necessitate health evidence; group plans are provided by employers or organizations with no medical exams for eligible members enrolled during the open enrollment period.
Private vs. Government: Covers plans like Medicare, Medicaid, and TRICARE, among others.
Limited vs. Comprehensive Coverage: Limited plans restrict benefits to specific occurrences, while comprehensive plans provide broader coverage.
Limited Policies (Notice of Limited Policy required):
Accident-Only: Fixed benefits for injuries due to accidents only.
AD&D (Accidental Death and Dismemberment): Provides lump-sum payments in case of accidental death or dismemberment.
Hospital Indemnity Insurance: Covers a daily cash benefit for hospitalization up to a predetermined limit (e.g., /day).
Dread Disease Insurance: Specifically targets critical illnesses like Cancer or Stroke.
Credit Disability Insurance: Intended to cover loan payments during a period of disability.
Underwriting Factors:
Include age, gender, tobacco use, occupation (with hazardous jobs often incurring higher premiums), location, and medical history.
Morbidity:
Refers to the expected frequency of medical claims within a year; higher morbidity forecasts lead to higher premiums, notably as women generally exhibit higher morbidity rates than men.
Premium Formula:
Calculated as .
Mode of Payment:
Payment frequency affects overall costs; for example, choosing monthly payments usually incurs additional processing fees that elevate total annual costs.
Chapter 9 Individual Medical and Dental Plans
Service Definitions:
Insured: Refers to individuals participating in indemnity insurance plans.
Subscriber: Individuals enrolled in managed care plans.
Managed Care Structures:
HMO (Health Maintenance Organization): Requires members to use contracted providers, focusing on preventive care with a primary care physician (PCP) acting as the gatekeeper.
PPO (Preferred Provider Organization): Provides flexibility in provider choice, often with lower out-of-pocket costs when visiting network providers.
POS (Point of Service): A hybrid model that allows for out-of-network services but at higher costs.
Cost Sharing:
Deductible: The amount required to be paid out-of-pocket before insurance kicks in.
Coinsurance: Ratio of cost-sharing post-deductible, commonly seen as .
Copayment (Copay): A fixed charge applicable per service or visit.
Stop-Loss: A cap on how much an insured will pay out-of-pocket; beyond this limit, the insurer covers 100% of costs.
Plan Types:
Basic Medical Coverage: Designed to provide initial cost cover without deductibles but with lower limits.
Major Medical Insurance: Offers a safety net for high-cost medical events with higher deductibles.
Comprehensive Major Medical Coverage: Merges both basic and major medical features.
Corridor Deductible: Applies after basic limits are reached.
Mandatory Benefits:
Newborn Care: Coverage begins from birth, with a notification requirement to inform the insurer.
Dependent Coverage: Includes children up to age .
Maternity Coverage: Requires minimum stay of hours for uncomplicated births and for cesarean deliveries.
Dental Categories:
Diagnostic/Preventive: Covers basic dental care like cleanings without a deductible requirement.
Restorative: Includes fillings and other corrective procedures.
Additional Services: Encompasses oral surgery, endodontics, periodontics, prosthodontics, and orthodontics with varying payment structures based on UCR (Usual, Customary, Reasonable) measures.
ACA (Affordable Care Act):
Guarantees Essential Health Benefits across ten categories, including maternity, mental health, and prescription drugs.
Categorizes plans into metal tiers—Bronze (coverage at 60\text{%}), Silver (70\text{%}), Gold (80\text{%}), and Platinum (90\text{%}).
Ensures Guaranteed Issue with no pre-existing condition exclusions for individuals under and caps annual or lifetime limits on essential benefits.
Chapter 10 Disability Income
Qualifying for Benefits:
Distinction between Own Occupation (best for insured) and Any Occupation (more challenging criteria).
Elimination Period (Waiting Period): Varies from to days before benefits commence.
Benefit Period: Duration of payable benefits can range from a fixed number of years, up to age .
Disability Types:
Total vs. Partial: Reflects the extent of disability affecting the individual's capability to work.
Residual Benefits: Compensation for income loss while partially employed.
Recurrent Disability: Reoccurrence of a similar disability within months typically avoids a new elimination period.
Presumptive Disability: Assured qualification based on total loss of function in key areas such as limbs or senses.
Business Disability Coverage:
Business Overhead Expense (BOE) Insurance: Covers operational costs during owner disability.
Disability Buy-Sell Agreement: Facilitates acquisition of a partner’s business share when they become disabled.
Coordination of Benefits:
Use of the Social Insurance Supplement (SIS) Rider for income replacement until Social Security payments start.
SIS calculation: .
Workers’ Compensation Insurance:
Covers injuries sustained at work, taking precedence over other health insurances.
Social Security Disability Insurance:
Eligibility hinges on total disability lasting at least months or impending death, with a month waiting interval before benefits are disbursed.
Chapter 11 Senior Needs
Medicare:
Eligibility Criteria: Available at age , or for specific disabilities (e.g., SSDI for two years, ESRD, ALS).
Benefit Breakdown:
Part A (Hospital Insurance): Funded through FICA taxes; involves deductibles and copays for service durations.
Part B (Medical Insurance): Voluntary enrollment entails premiums, covering outpatient services with a 20\text{%} coinsurance.
Part C (Medicare Advantage): Integrative plans combining various coverage types via private entities.
Part D (Prescription Drug Coverage): Involves gaps in coverage known as the "Donut Hole" preventing full benefit utilization.
Medigap Insurance:
Offers supplemental benefits covering gaps left by Medicare Parts A and B, ensuring extended hospital reach (up to extra days).
Guaranteed issued status during a month open enrollment window at age .
Long-Term Care Services:
Trigger events such as falling short of performing out of Activities of Daily Living (ADLs), including fundamental life functions like bathing and dressing.
Divided into levels: Skilled (intensive), Intermediate, and Custodial (personal assistance).
Provisions ensure customers can exercise a day free look option, with guarantees for renewal.
Benefits typically fall under tax-qualified categorizations, adhering to HIPAA standards.
Chapter 12 Individual Accident and Health Policy Provisions
Mandatory Provisions:
Entire Contract Clause: No amendments by the agent; the contract stands as a complete document.
Time Limit on Defenses: Conditions against claims must be invoked within years (Incontestability).
Grace Periods: Defines allowable late payments (ranging from to days across types).
Reinstatement Procedures: Outlines conditions for regaining coverage after lapses.
Document Filing Requirements: Specific timelines for claims processing and notification (e.g., notice within days, forms sent out by the insurer within ).
Legal Procedures: Time limits and conditions governing legal action against the insurer.
Optional Provisions:
Clauses adjusting benefits based on variations such as occupation changes or age inaccuracies.
Renewability Clauses:
Ranges from noncancellable guarantees of premiums to more flexible options allowing for periodic review.
Chapter 13 Group Health and Consumer-Driven Healthcare
Eligible Groups:
Generally comprises natural collectives like employers, multiple employer trusts (METs), and associations.
Multi-employer Welfare Arrangement (MEWA):
Arrangements enabling pooling of funds among unrelated employers in adherence to ERISA.
Multiple Employer Trust (MET):
Groups of businesses from the same sector banding together for improved rates.
Group Policy Provisions:
Coordination between different health plans to avoid over-coverage and ensure coverage during life events like divorce with COBRA.
Enactment of HIPAA ensuring better portability and coverage during transitions.
Consumer-Driven Plans:
Health Savings Accounts (HSA): Require High Deductible Health Plans (HDHP), allowing pre-tax contributions and carryover provisions.
Flexible Spending Accounts (FSA): Features a “use it or lose it” policy with limited carryover.
Health Reimbursement Arrangements (HRA): Exclusively funded by employers for employee reimbursements.
Tax Considerations:
Employer-funded premiums provide a tax deductions for businesses with no income tax liabilities for employees.
The tax implications for disability benefits vary depending on who made the premium contributions, impacting net taxable income accordingly.
Consumer-Driven Plans:
HSA (Health Savings Account): Requires HDHP (High Deductible Health Plan). Pre-tax contributions. Funds roll over. Employee-owned.
FSA (Flexible Spending Account): "Use it or Lose it" (except for small carryover/grace period). Funded by salary reduction.
HRA (Health Reimbursement Arrangement): Employer-funded only. Reimburses medical expenses.
Tax Considerations:
Employer-paid premiums are tax-deductible to business and not income to employee.
Disability benefits from employer-paid premiums are taxable income. Employee-paid portions are tax-free.
Insurance Definition: A contract for protection against future uncertainties, activated by unforeseen events causing loss.
Risk Types:
Pure Risk: Causes loss or no change; insurable.
Speculative Risk: Can result in gain, loss, or no change; not insurable.
Loss: Reduction in value that serves as the basis for claims.
Exposure: State of being at risk for loss.
Peril: Cause of loss (e.g., fire, death).
Hazard: Conditions increasing the chance of loss; types include physical, moral, and morale hazards.
STARR Methods: Strategies for managing risk—Sharing, Transfer, Avoidance, Reduction, Retention.
Insurable Risks: Requirements include predictability, measurability, financial hardship, and non-catastrophic causes.
Law of Large Numbers: Predicts accuracy increases with larger sample sizes of homogeneous units.
Adverse Selection: Higher risk individuals seek insurance more often, leading to higher premiums for insurers.
Types of Insurers: Include stock companies, mutual companies, fraternal benefit societies, and Lloyd’s associations.
Insurance Regulations: Governed by acts like McCarran-Ferguson and laws by the NAIC.
Contract Concepts: Principles include Indemnity, Insurable Interest, adhesion in contracts, representations, and waivers.