Facts of Life Insurance

Facts of Life Insurance
Course Manual 6 credit hours Online
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Important Information
Course Intent
Mountain CE, LLC does not render legal services or advice. This course is not intended as an authority on legal matters. The purpose of this course is to provide continuing education for insurance agents. We have attempted to provide the most accurate information available. As rules, regulations, and industry practices change, some aspects of this course may become outdated. This course will be updated on a periodic basis as deemed necessary.
Terms of Use
The content of this course is the sole property of Mountain CE, LLC. The course material cannot be duplicated, copied, or reproduced without written consent from Mountain CE, LLC. For correspondence (non-classroom) courses, you must read and study this course manual and then pass an exam to demonstrate what you have learned. For further instructions, visit our web-site at www.mountainCE.com.
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Table of Contents
Fundamentals History ......................................................................................................... 6 Fundamentals Personal Uses................................................................................................ 7 Fundamentals Business Uses ............................................................................................... 8 Fundamentals the Actors ................................................................................................... 10 Fundamentals Terminology ................................................................................................ 11 Fundamentals Standard Features ....................................................................................... 13 Types Comparison ............................................................................................................ 15 Types Term Life ............................................................................................................... 16 Types Whole Life .............................................................................................................. 17 Types Universal Life (UL)................................................................................................... 18 Types UL Option A ............................................................................................................ 19 Types UL Option B ............................................................................................................ 20 Needs Analysis Overview ................................................................................................... 21 Needs Analysis Income Factor & Human Life ........................................................................ 22 Needs Analysis Needs Approach ......................................................................................... 23 Needs Analysis Resources.................................................................................................. 27 Presentation Overview ...................................................................................................... 28 Presentation Advertising.................................................................................................... 29 Presentation Guaranty Association...................................................................................... 30 Presentation Illustrations................................................................................................... 31 Application Overview ........................................................................................................ 32 Application Proposed Insured ............................................................................................. 33 Application Policy Plan....................................................................................................... 34
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Application Riders............................................................................................................. 35 Application Replacement ................................................................................................... 36 Application Beneficiary ...................................................................................................... 37 Application Underwriting Questions..................................................................................... 38 Application Agents Report ................................................................................................. 41 Application Billing ............................................................................................................. 42 Application Conditional Receipt........................................................................................... 43 Application Signatures....................................................................................................... 46 Information Gathering Overview......................................................................................... 47 Information Gathering Paramedical Report .......................................................................... 48 Information Gathering Medical Exams and Lab Tests............................................................. 49 Information Gathering Attending Physician Statement........................................................... 50 Information Gathering Medical Information Bureau (MIB) ...................................................... 51 Information Gathering Investigative Consumer Reports......................................................... 52 Underwriting Overview ...................................................................................................... 53 Underwriting Family Health History ..................................................................................... 54 Underwriting Applicants Current Health .............................................................................. 55 Underwriting Habits, Occupations, Hobbies .......................................................................... 56 Underwriting Weight & Height ............................................................................................ 57 Underwriting Age, Gender, Mortality ................................................................................... 58 Rating Classifications ............................................................................................................ 59 Delivery .............................................................................................................................. 60 Servicing Overview ........................................................................................................... 61 Servicing Loans................................................................................................................ 62 Servicing Non-Forfeiture Options ........................................................................................ 63 Servicing Settlement Options ............................................................................................. 64
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Stranger Owned Life Insurance Overview ............................................................................ 65 Stranger Owned Life Insurance Types ................................................................................. 66 Federal Tax Considerations for Individuals............................................................................... 68
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Fundamentals History
The earliest record of something similar to life insurance came from ancient Romeroughly 2,000 years ago. They had burial clubs. Romans believed that in order to avoid being a tortured ghost, a dead person had to be given a proper burial. Therefore, they had elaborate funeral ceremonies that honored the life of the dead person. Common citizens would join a burial club and regularly paid dues to fund the club. When a member died, the club paid for the burial, and some clubs also paid a benefit to the deceaseds family. The Presbyterian Synod of Philadelphia in 1759 sponsored the first life insurance corporation in America. Its name was the Corporation for the Relief of Poor and Distressed Presbyterian Ministers and for the Poor and Distressed Widows and Children of Presbyterian Ministers. That is quite a long name, so many people just called it the Presbyterian Ministers Fund. Its name was later changed to Covenant Life Insurance Company, and that company merged with Provident Mutual Life Insurance Company in 1995.
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Fundamentals Personal Uses

Provide instant cash at death that is income tax freeand in most cases not subject to probate Pay final expenses (medical bills, taxes, funeral cost, funeral guest expenses such as travel, lodging, restaurant, groceries, phone, etc.) Provide immediate cash to sustain the survivors during the grieving period when it may be difficult for them to earn an income Estate conservation (liquid cash to pay estate taxes or other expenses so family assets do not have to be liquidated) Pay for future obligations (child care, college, weddings of children, etc.) Provide funds for long term dayto-day living expenses of the survivors Pay off family debts (credit cards, mortgages, car loans, etc.) Cash accumulation that can be borrowed or surrendered Leave a legacy to relatives or friends Provide a charitable contribution
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Fundamentals Business Uses

Buy/Sell Agreement a contract between business partners to buy out each others share of the business when one of them dies. Life insurance can be used to provide the funds for the purchase. Key Person every business has star employees who are critical to the success of the organization. If a star employee dies, life insurance can make up for the loss of earnings and assist in the expense of finding and training a replacement. Group Term Insurance is often included in the employee benefit package offered by employers. According to www.lifehappens.org, today 40% of Americans have life insurance through work. Deferred Compensation Plan an arrangement where an employer defers a portion of an employees current income until a later date. Wages earned in one period are paid at a specified future date. Life insurance can be used for this type of plan. The deferred income can be used to pay the premiums on a Cash Value life insurance policywith the employee as the Insured and the employer as the owner. When the Insured dies, the employees Beneficiary will receive the Death Benefit. Or, the Cash Value can be used at retirement as supplemental income. This type of plan can either be nonqualified or qualified.
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Fundamentals Business Uses (cont.)

Executive Bonus Plan with this type of plan the employee applies for a personal life insurance policy and chooses a Beneficiary. The business pays the premium to the Insurer, and is able to deduct the premium from its taxable income (as long as the total compensation is considered reasonable). The employee has control of the policy and must pay income tax on the premium paid by the employer. This plan is simple to set up and administer and IRS restrictions and reporting do not apply. Split Dollar Arrangement an agreement between employer and employee to share the cost of life insurance premium payments on the employees life. They also agree to share the policy benefits (Death Benefits and Cash Value). This plan provides cash to fund nonqualified deferred compensation plans for an employee and provide life insurance with a Death Benefit amount that the employee might not otherwise be able to afford.
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Fundamentals the Actors

Insured Policyowner Beneficiary Producer
The person whose life the policy depends on; when the Insured dies, the Death Benefit is paid to the Beneficiary Must be a person
The entity who has control of the policy and is responsible for paying the premiums Can be an entity other than a person
The entity who receives the proceeds from the policy when the Insured dies Can be an entity other than a person
The licensed insurance agent who sells the policy to the Policyowner Represents the Insurer
Yes
The Insured can be the Policyowner of his or her life insurance policy. The Policyowner can be the Beneficiary.
Not Recommended
The Insureds estate can be the Beneficiary. However it is usually not a good idea, since a Death Benefit paid to the Insureds estate must go through probate.
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Fundamentals Terminology
Issue Age Attained Age Insurable Interest The age of the Insured when the policy is first started The age of the Insured at a specific point in time A requirement that when someone buys an insurance policy on someone elses life, the Policyowner must be a close relative or have a financial need for the Insured to remain alive An initial or regular payment by the Policyowner to the Insurer to keep the policy in force The amount stated on a life insurance policy, to be paid upon death of the Insured The savings portion of a permanent life insurance policy which accumulates when the premium payments exceed the cost of insurance Giving up (cancellation) a life insurance policy The lump sum amount available to the Policyowner when he or she gives up a life insurance policy; it is calculated by taking the Cash Value and subtracting surrender charges (if any) imposed by the life Insurer
Premium Face Amount Cash Value
Surrender Surrender Value
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Fundamentals Terminology (cont.)

Death Benefit The actual amount paid to the Beneficiary when the Insured dies or the policy endows; it is calculated by taking the Face Amount and making any necessary adjustments such as: Subtracting any outstanding policy loans Making adjustments such as accidental death double indemnity Using dividends to purchase paid up additions Using Cash Value to increase the Death Benefit as in Universal Life Option B Amount at Risk Endowment Age The difference between the Death Benefit and the Cash Value of a life insurance policy The age at which a whole life policy matures; if the Insured is still alive at that age, the Death Benefit will be paid; most whole life policies sold today endow at age 100
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Fundamentals Standard Features

Assignment Allows the Policyowner to sell or give the policy to another person or entity; the Policyowner does not need the permission of the Insurer to assign a policy; however, the Policyowner must notify the Insurer in writing of the assignment; there are two types of assignment: absolute (permanent) and collateral (temporary); a collateral assignment may be done to secure a loan Prevents the Insurer from denying a Death Benefit claim due to inaccurate or misleading initial application informationafter the policy has been in force for two years or more Gives the Policyowner the right to examine and return the policy for any reason; in Utah the free look can be done on or before ten days after the policy is delivered (30 days if the policy purchased replaced another policy) The amount of time in which a life insurance policy can remain in effect even though the premium is past due; it is typically at least 31 days
Incontestability
Free Look
Grace Period
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Fundamentals Standard Features (cont.)

Dividends Are sometimes paid by mutual companies to Policyowners of whole life policies and are considered return of excess premium; the Policyowner can elect to receive cash, reduce future premiums, or to purchase paid up additional insurance; policies that pay dividends are known as participating policies Allows the Policyowner to restore the policy if it was cancelled due to non-payment of premium; the Policyowner will have to provide evidence of the Insureds insurability and pay overdue premiums with interest; the maximum time limit for reinstatement varies from policy to policy (usually three or five years) Allows the Insurer to adjust the policy premium or benefits at any time if it is discovered that the age or gender on the application is incorrect If the Insured commits suicide within two years of the issue date, the amount paid to the Beneficiary will be limited to only the premiums paid
Reinstatement
Misstatement
Suicide
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Types Comparison
Term Description Provides temporary protection for a specific period of time; pays a Death Benefit upon the Insureds death if the death occurs before the policy expires No Simple; inexpensive for young adults; provides the greatest amount of coverage for the premium paid; sometimes can be converted to a permanent policy A vast majority (approx. 99%) of term policies expire before death occurs; expensive for older people; usually not available for minor children Permanent Combines life insurance with a savings component; includes whole life and universal life Yes Designed to be in force and pay a Death Benefit whenever the Insured dies (or when the policy endows upon the Insured reaching a certain age such as 100) Expensive; high fees and commissions
Cash Value Accumulation Major Advantages
Major Criticisms
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Types Term Life

Annual Renewable Term Guaranteed Renewable up to a certain age, such as 70 or 90 Premium increases each year Death Benefit remains level Level Premium Term Guaranteed Renewable up to a certain age, such as 70 or 90 Premium is the same for a specific number of years, such as 10, 15, 20 or 30 Death Benefit remains level Decreasing Term Not Guaranteed Renewable beyond the term Premium is the same for the entire term Death Benefit decreases each year until it reaches zero at the end of the term
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Types Whole Life

Straight or Continuous Life Provides a level, guaranteed Death Benefit Charges a level annual premium for the life of the Insured (or when the policy endows upon the Insured reaching a certain age such as 100) Limited Payment Life Provides a level, guaranteed Death Benefit Charges a level annual premium for a specific number of years and then will be completely paid up Single Premium Life Provides a level, guaranteed Death Benefit One lump sum is paid into the policy in return for a Death Benefit that is guaranteed to be paid-up
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Types Universal Life (UL)
UL Option A * Combines a cash account with annual renewable term insurance Allows for flexible premiums Death Benefit remains level each year Cash Value increases more rapidly than Option B
UL Option B * Combines a cash account with annual renewable term insurance Allows for flexible premiums Death Benefit increases each year Cash Value increases less rapidly than Option A
* At some insurance companies, Option A is called Option 1 and Option B is called Option 2.
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Types UL Option A
$200,000 Death Benefit $150,000
$100,000
Since the Death Benefit stays level, the Cash Value can increase rapidly.
Cash Value
$50,000
Pure Insurance
$0 35 40 45 50 55 60 65
Eventually the Cash Value will approach the Death Benefit. When this happens the Death Benefit will increase rapidly and maintain a corridor between the two. This prevents the policy from violating the IRS rules regarding life insurance and allows the policy keep the tax advantages of life insurance.
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Types UL Option B
The Death Benefit increases by the amount the Cash Value increases.
$200,000 Death Benefit $150,000
$100,000
$50,000
Pure Insurance
Cash Value
$0 35 40 45 50 55 60 65
The Death Benefit is always equal to the face amount of the policy plus the Cash Value.
The amount at risk (pure insurance) always remains the same.
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Needs Analysis Overview

How much life insurance do I need?
Methods used to determine the amount of life insurance needed include:
Income Factor Approach
Human Life Value Approach
Needs Approach
Here are the details of each
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Needs Analysis Income Factor & Human Life

Income Factor Approachthis method takes the Insureds current annual earned income and multiplies it by a factor such as 10. This method is popular, because it is simple and easy. Human Life Value Approachthis method calculates the earning capability of the Insured for the rest of his or her expected lifetime. The formula considers the: a) Insureds after-tax earned annual income b) Number of years until retirement c) Estimated rate of return generated on a lump sum Death Benefit d) Estimated effect inflation will have on income Caution! Relying solely on these methods might be inaccurate since: They do not consider the actual needs of the survivors They do not consider other sources of income that are available upon the Insureds death such as social security and retirement savings
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Needs Analysis Needs Approach

The Needs Approach is often the best method to determine how much life insurance is needed. It considers the following: a) Final Expenses. This includes costs for funeral, burial or cremation, medical, hospital, attorney, executor, probate, income taxes, and estate taxes; it may also include travel, lodging, and food expenses for friends and family who attend the funeral; according to the Life and Health Insurance Foundation for Education (LIFE) final expenses are typically the greater of $15,000 or 4% of the Insureds estate. b) Grieving Period. Surviving family members usually need time to grieve and handle the deceaseds affairs; therefore, they may be unable to work for weeks or months and money is needed to replace this lost income. c) Debt Cancellation. It is usually wise to have life insurance available to pay off the familys debtsinstead of burdening the survivors with them; this may include mortgages, credit cards, and car loans. d) Emergency Fund. This means preparing for unexpected medical, automobile, and home repair expense. At least three months of household living expenses is recommended.
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Needs Analysis Needs Approach (cont.)

e) Future Obligations. This may include the following: College Costs for the surviving spouse and/or children. According to Trends in College Pricing 2008 by The College Board, average published annual tuition and fees for in-state students at public four-year colleges and universities in 2008-09 are $6,585 and average total charges, including tuition and fees and room and board, are $14,333. Average published annual tuition and fees at private four-year colleges and universities in 2008-09 are $25,143 and average total charges, including tuition and fees and room and board, are $34,132. Wedding Costs for the surviving children. A wedding can cost a few hundred dollars or more than $100,000. A typical wedding in the United States costs between $10,000 and $30,000.
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f) Survivor Living Expenses. This includes current necessary household expenses such as groceries, home maintenance, rent, clothing, automobile gas and maintenance, utilities, child care and entertainment. Since survivor living expenses are ongoing costs for an indefinite period of time, consideration should be given to determining the lump sum needed to generate the necessary annual income. Lump Sum Needed To determine a lump sum needed, take the annual amount needed and divide it by the estimated percent return.
Example If $50,000 is needed annually for survivor living expenses and a 5% average annual return is expected, divide $50,000 by .05 to get $1,000,000. That would allow $50,000 to be generated each year without having to touch the principal.
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g) Available Assets & Income. These will reduce the amount of life insurance needed.
Assets Bank accounts, money market accounts, stocks, bonds, mutual funds, annuities, etc. IRAs, 401(k)s, defined benefit pension plans
Income Surviving spouse income Income from income producing assets Social Security income
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Needs Analysis Resources

What resources are available on the Web to help me do the needs analysis?
The Life and Health Insurance Foundation for Education (LIFE) is a great resource.
Life Insurance Needs Calculator http://www.lifehappens.org/life-insurance/life-calculator
Life insurance needs worksheet http://lifehappens.org/catalog/pdf/LI-03.pdf

a.
What you need to know about life insurance http://www.lifehappens.org/pdf/printable-consumer-guide/life-insurance-pcg.pdf
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Presentation Overview
As a Producer, what are some of the regulations I must be aware of regarding the sales presentation?
Advertising Guarantee Association Illustrations
Here are some details of each
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Presentation Advertising
According to Utah Insurance Rule R590-130 (Rules Governing Advertisements of Insurance) This rule is designed to help assure the clear and truthful disclosure of the benefits, limitations and exclusions of policies sold as insurance. This is intended to be accomplished by the establishment of guidelines and standards of conduct in the advertising of insurance in a manner which prevents unfair, deceptive and misleading advertising. The format and content of an insurance advertisement shall be sufficiently complete and clear to avoid deceiving or misleading the reader, viewer, or listener. Advertisements shall be truthful and not misleading in fact or in implication. An insurer must clearly identify its insurance policy as an insurance policy. A policy trade name must be followed by the words "Insurance Policy" or similar words clearly identifying the fact that an insurance policy is being offered. No insurer, agent, broker, producer, solicitor or other person may solicit residents of this state for the purchase of insurance through the use of a name that is deceptive or misleading with regard to the status, character, or proprietary or representative capacity of such person, or the true purpose of the advertisement.
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Presentation Guaranty Association

According to Utah Insurance Rule R590-155 (Disclosure of Life and Health Guaranty Association Limitations) Insurance companies licensed to sell life insurance in the State of Utah are required by law to be members of the Utah Life and Health Insurance Guaranty Association (ULHIGA). If an Insurer that is licensed to sell insurance in Utah becomes insolvent (bankrupt), and is unable to pay claims, the law requires ULHIGA to pay some of the Insurers claims. The maximum ULHIGA will pay under any circumstance is the amount of coverage or $500,000 (whichever is lower). More specific life insurance limits include: $200,000 in net cash surrender values $500,000 in life insurance Death Benefits
Important! According to Utah Code 31A-28-119, it is illegal for a Producer or Insurer to advertise or make any statement that an Insurers policies are guaranteed by the Utah Life and Health Insurance Guaranty Association.
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Presentation Illustrations
According to Utah Insurance Rule R590-177 (Life Insurance Illustrations Rule) If a basic illustration is used by an insurance agent, broker or other authorized representative of the Insurer in the sale of a life insurance policy and the policy is applied for as illustrated, a copy of that illustration, signed in accordance with this rule, shall be submitted to the Insurer at the time of policy application. A copy also shall be provided to the applicant. The purpose of this rule is to provide rules for life insurance policy illustrations that will protect consumers and foster consumer education. The rule provides illustration formats, prescribes standards to be followed when illustrations are used, and specifies the disclosures that are required in connection with illustrations. The goals of this rule are to ensure that illustrations do not mislead purchasers of life insurance and to make illustrations more understandable. The standards for basic illustrations include (a) the format requirements; (b) a narrative summary; (c) a numeric summary including policy guarantees and nonguaranteed amounts; (d) the statement requirements; (e) the tabular detail.
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Application Overview
What information is gathered on the application?
Proposed Insured Policy Plan Riders Replacement Beneficiary Lets look at each one in more detail
Underwriting Questions Agents Report Billing Conditional Receipt Signatures
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Application Proposed Insured

Information Gathered About the Proposed Insured
Name, Phone # Residence Address, Mailing Address Gender, Date of Birth Social Security #, Drivers License # Issuing State, Birth Place Citizenship, Residency Status, Type of Visa Occupation, Employer
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Application Policy Plan

* The Policy Plan must be Selected Annual Renewable Term Level Premium Term (10, 20, or 30 years) Decreasing Term Straight Whole Life to 100 Limited Payment Whole Life (10, 20, or 30 years) Single Payment Whole Life Universal Life Option A Universal Life Option B
* The most common policy plans are shown above. Not all insurance companies offer all plans.
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Application Riders
A rider is a provision attached to a policy that may add, delete or change the insurance coverage. Spouse / Child Term Rider allows the children or spouse of the Insured to be added to the policy for a limited period of time. Accelerated Death Benefit Rider (or living benefit), allows for the early payment of some or all of the Death Benefit if the Insured is diagnosed as having a terminal illness or permanently confined to a long-term care facility. Cost of Living Rider increases or decreases the face value by an inflation factor. Waiver of Premium Rider eliminates the requirement for the Policyowner to pay the premium if the Insured becomes totally disabled. Term Life Rider can be added to Whole Life or Universal Life policies as an affordable way to increase the face amount. Waiver of Cost Rider is found in some Universal Life policies; it removes the requirement for the Policyowner to pay the cost of insurance (but not the cost to grow Cash Value) if the Insured becomes totally disabled. Guaranteed Insurability Rider allows the Policyowner to purchase additional coverage at specified future dates without evidence of insurability. Disability Income Benefit Rider provides that if the Insured becomes disabled, the Insurer will waive the policy premiums and pay a monthly income. Accidental Death Rider pays a multiple of the face amount if death is the result of an accident as defined in the policy.
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Application Replacement
Replacement is a transaction in which a new life insurance policy is being purchased to take the place of another policy that is being lapsed, terminated, surrendered, forfeited, or changed that results in a reduction of coverage. Since it is often in the best interest of the Policyowner for existing policies to remain in force, insurance laws and rules regarding replacement ensure the proposed owner of the new policy understands the ramifications of replacing an existing policy.
Questions on the application regarding replacement Does the proposed Insured currently have individual life insurance in force with another Insurer? If so, what is the name of the Insurer, what is the coverage amount, and when was it issued? Has the proposed Policyowner recently changed, withdrawn, or borrowed against the existing life policy, or does he or she intend to do so?
Duties of the Producer regarding replacements Have a Notice Regarding Replacement signed by the applicant and the Producer Get a list of all existing life insurance policies being replaced Submit the Notice Regarding Replacement the Insurer
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Application Beneficiary
To whom can the Death Benefit be paid to?
Person Primary and secondary Beneficiaries can be named. More than one primary and more than one secondary Beneficiary can be named. Secondary Beneficiaries do not receive anything if a primary Beneficiary is still alive at the time of the Insureds death. Trust A trust is a legal entity created for the benefit of a person (e.g. children), place, or thing. Then, once created, a trust can be the Beneficiary of a life policy.
Classes of People Children are a common class of people named as Beneficiary. It is best to be as specific as possible, such as, Children of the marriage of John James Jones and Sarah Sandra Smith. It is not a good idea to directly name minor children as Beneficiaries, since it is likely to create legal issues regarding the control and management of the money when the insured dies. Corporation or Charity Corporations and charities can be named as Beneficiaries of a life insurance policy.
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Application Underwriting Questions

Underwriting questions on the application vary by company, type of policy, and insurance amount. However, here are some common questions asked about the proposed Insured:
Healthcare Primary care physician and/or health care facility? Has been hospitalized, taking treatment, or been advised to take treatment? Had a blood study, urinalysis, electrocardiogram, x-ray, scan, or other diagnostic test done?
Current Condition Current height and weight? Has there been a recent weight loss of more than 20 pounds?
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Application Underwriting Questions (cont.)

Habits, Hobbies, Activities Alcohol or controlled substance abuse, illegal drug use? Used nicotine in the past three years? Participated in flying as pilot or crewmember? Involved in racing or climbing? Involved in scuba diving or sky diving? Had drivers license revoked or suspended in last five years? Been convicted of driving under the influence of drugs or alcohol in last five years? Have ever filed for bankruptcy? Have ever been convicted of a crime? Have ever been disabled? Ever traveled or intend to travel outside the United States or Canada?
Family History Parents or siblings before age 60: death, cancer, or diabetes? Parents or siblings before age 60: mental disorders? Parents or siblings before age 60: heart or circulatory disorders?
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Application Underwriting Questions (cont.)

Health Conditions or Disorders HIV or AIDS? Diabetes, stroke, cancer, or tumor? Hormone or thyroid disorder? Heart, blood, respiratory disorder? Stomach, digestive, lymph gland, or liver disorder? High blood pressure or anemia? Throat, ears, or nose disorder? Loss of hearing or vision? Dizziness, fainting, headaches, paralysis or seizures? Shortness of breath, coughing up blood, chronic cough? Chronic abdominal pain, indigestion, diarrhea, intestinal bleeding? Frequent or difficult urination, blood in urine? Brain or nervous system disorders? Mental, neurological, or emotional disorders? Complications during pregnancy? Bladder, kidney, prostate problems? Breast or reproductive organ disorders? Sexually transmitted disease? Blood or high amounts of protein or sugar in urine? Disorder of the muscles, bones, joints, or connective tissue? Chest pain, irregular heart beat, persistent skin lesions?
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Application Agents Report

Although the agents report is a separate document from the application, it is part of the application process. Its purpose is for the Producer to document his or her observations and knowledge about the proposed Insured and the life insurance transaction. This information is critical to the underwriting process. Information that may be gathered on the agents report may include
Does the proposed Insured have existing life insurance in force? Is the life insurance being applied for intended to replace existing life insurance? Is the proposed Insured a minor? If so, how much life insurance is in force on his or her parents and siblings? Is the life insurance being applied for suitable for the proposed owner and consistent with his or her financial goals? Have all the necessary reports been ordered and medical exams scheduled? Have the identities of the proposed Policyowner and Insured been verified?
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Application Billing
At the time the application is completed, the initial premium should be collected by the Producer and submitted to the Insurer along with the application. Upon receiving the initial premium, most Producers issue a conditional receipt (see next page). * Payment Mode Options Cash Check Money Order Credit Card Debit Card Automated Funds Transfer (AFT) * Payment Frequency Options Monthly Quarterly Semi-Annual Annual
* The most common mode and frequency options are shown above. Not all insurance companies offer all these billing options.
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Application Conditional Receipt

The Conditional Receipt is provided by the Producer to the Policyowner at the completion of the application. It states that all the necessary requirements must be fulfilled before the life insurance coverage is to be effective such as: The application has been completed The first premium has been paid All medical exams and underwriting must be completed The proposed Insured must be determined to be an acceptable insurable risk to the company It obligates a life Insurer to provide coverage that is conditional on the Insured meeting all the requirements. This gives the Insurer time to process the application and to either issue or deny the policy.
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Application Conditional Receipt (cont.)

What if a Conditional Receipt has been provided, and the Insured dies before the policy is issued or denied?
If the Insurer would have issued the policy
If the Insurer would not have issued the policy
The Insurer will pay the Death Benefit
The Insurer will not pay the Death Benefit
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Application Conditional Receipt (cont.)

What if a Conditional Receipt has been provided, and the Insured does not die before the policy is issued or denied?
If the Insurer issues the policy
If the Insurer denies the policy
Coverage will be effective as of the date on the application or the date of the medial examwhichever is last.
No coverage is in effect.
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Application Signatures
The following signatures are required on the application Producer Policyowner The Insured must also sign if he or she is not the Policyowner. An exception to this rule is when the Insured is a minor child. In that case, the Policyowner signs the application and the Insured does not.
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Information Gathering Overview

Once Ive applied for life insurance, what does the Insurer do to gather information about me?
Paramedical Report Medical Exams & Lab Tests Attending Physicians Statement Medical Information Bureau Investigative Consumer Report
Lets look at each one in more detail
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Information Gathering Paramedical Report

A Paramedical (paramed) Report is a common information gathering technique used by insurance companies. The Paramedical Report is relatively inexpensive and is paid by the Insurer. It can be completed by a registered nurse or a paramedic after he or she conducts a personal interview with the proposed Insured and collects information and items such as: Medical History Blood Pressure and Pulse Height and Weight Specimens of Blood, Urine, and Oral Fluids EKG (conducted only in some situations)
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Information Gathering Medical Exams and Lab Tests

Once specimens of blood, urine, and oral fluids have been collected, the Insurer will have them tested at its expense for the presence of numerous things including: Medications Illegal drugs Nicotine Hepatitis antibodies Prostate specific antigen (PSA) Human immunodeficiency virus (HIV) antigens or antibodies Immune disorders High cholesterol and related lipids Liver or kidney disorder
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Information Gathering Attending Physician Statement

An Attending Physician Statement is usually requested by the underwriter if the amount of insurance being requested is large or concerns about the Insureds health were raised during the application process. It is completed by a physician who has treatedor is currently treatingthe proposed Insured. Since the Insurer must wait for the physician to complete the report, it may take weeks or months to receive. Then once the report is obtained, reviewing and analyzing all the information takes additional time.
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Information Gathering Medical Information Bureau (MIB)

The Medical Information Bureau (MIB) is a nonprofit organization that is sponsored by member insurance companies. Its purpose is to allow insurance companies to share information with each other about the health history of life and health insurance applicants to aid the underwriting process. A proposed Insured cannot be denied coverage due to information solely obtained through the MIB. However, the Insurer can use the information to prompt further investigation.
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Information Gathering Investigative Consumer Reports

If the underwriter needs information about the proposed Insured in addition to medical data, an Investigative Consumer Report can be ordered from a variety of sources. The use of these reports is subject to the Fair Credit Reporting Act (FCRA), and the proposed Insured must be notified by the Insurer if these reports are requested. They may involve the following types of activities: Interviews with neighbors and acquaintances An evaluation of reputation, character, habits, and lifestyle An assessment of credit and financial history
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Underwriting Overview
What information does the Insurer look at to determine if Im eligible and how much the premium will be?
Family Health History
Applicants Current Health
Habits, Occupations, Hobbies
Weight & Height
Age, Gender, Mortality

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Underwriting Family Health History

Underwriting Criteria Cancer Heart Problems Diabetes Stroke * Typical Guidelines to Receive the Best Rate None in either parent or siblings before age 60. None in either parent or siblings before age 60. None in either parent or siblings before age 60. None in either parent or siblings before age 60.
* Guidelines vary by Insurer
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Underwriting Applicants Current Health

Underwriting Criteria Blood Pressure Total Cholesterol Cholesterol / HDL Ratio Cancer Stroke Heart Problems Depression & Anxiety Diabetes Asthma HIV * Typical Guidelines to Receive the Best Rate Cannot exceed 140/85; no past or current treatment Cannot exceed 220 Cannot exceed 5.0 Noneexcept some types of skin cancer are acceptable None None No condition requiring treatment in the last two years None No condition requiring treatment in the last two years None
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Underwriting Habits, Occupations, Hobbies

Underwriting Criteria Alcohol Abuse Substance Abuse Nicotine Use Driving Violations Driving Under Influence (DUI) Hazardous Hobbies Hazardous Occupations * Typical Guidelines to Receive the Best Rate No history in lifetime No history in lifetime None in the past 36 months Not more than two in the past three years None in the past five years No racing, skydiving, hang gliding, rock climbing, mountain climbing, scuba diving, etc. No private pilots, professional racing, instruction of hazardous hobbies
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Underwriting Weight & Height

According to the Centers for Disease Control (CDC), Body Mass Index (BMI) is a number calculated from a person's weight and height. BMI is a reliable indicator of body fatness for people. BMI does not measure body fat directly, but research has shown that BMI correlates to direct measures of body fat. BMI is an inexpensive and easy-to-perform method of screening for weight categories that may lead to health problems. The chart shows the CDC standard weight status categories for adults.
Many Insurers base their height and weight tables on the BMI. To qualify for the best rate, an Insured usually cannot be in the obese category.
BMI 18.524.9 25.029.9 30 and Above
Weight Status Normal Overweight Obese
CDC Adult BMI Calculator

http://www.cdc.gov/healthyweight/assessing/bmi/adult_bmi/english_bmi_calculator/bmi_calculator.html
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Underwriting Age, Gender, Mortality

According to Utah Insurance Rule R590-223, the 2001 Commissioners Standard Ordinary (CSO) mortality table shall be used for calculating life insurance policy premiums and benefits as of January 1, 2009. Life insurance companies look at the age of the Insured and using the mortality rates of the 2001 CSO, calculate how much money must be held in reserves to pay future Death Benefits. The 2001 CSO table is also the basis for calculating guaranteed Cash Values and other non-forfeiture benefits. Using the 2001 CSO table, life Insurers determine how many more years on average the Insured is expected to live.
A baby girl born today is expected to live another 81 years. A baby boy born today is expected to live another 77 years.
A woman that is 50 years old now is expected to live another 33 years. A man that is 50 years old now is expected to live another 29 years.
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Rating Classifications
To properly classify an applicant, the Insurers underwriting department considers information about the applicants family health history, current health, habits, occupation, hobbies, weight, height, age, gender, and mortality. Applicants that are not eligible are considered to be declined. Very few applicants for life insurance are declined. Some reasons why someone might be declined include (a) not meeting the age requirement for the type of policy being sold; (b) being terminally ill; and (c) lack of insurable interest. If the applicant is eligible, he or she will be placed in a rating classification. Rating classifications vary by Insurer; nonetheless, here are some common rating classifications:
Select Best risk classification; least expensive
Preferred Above average risk; more expensive than Select
Standard Average risk; more expensive than Preferred
Substandard Higher than average risk (e.g. nicotine users); most expensive (referred to as rated risks)
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Delivery
Once the Insurer issues the policy, the Insurer will mail it to the Policyowner or it will be hand delivered by the Producer. Either method is acceptable and legal. In addition to delivering the policy, the following two documents must be provided to the Policyowner when the policy is delivered:
Policy Summary Generically describes the policy and its features and riders Includes the contact information of the Producer and Insurer
Buyers Guide Provides basic information about life insurance and how to compare the cost of policies Explains how to choose the type and amount of life insurance
Once the policy has been delivered, the Policyowner has the right to examine and return the policy for any reason. This is called the free look period and the length of time varies by state. In Utah the free look can be done on or before ten days after the policy is delivered (30 days if the policy purchased replaced another policy).
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Servicing Overview
What are some opportunities for the Producer and Insurer to provide service to customers after the policy is in force and delivered?
Loans Non-Forfeiture Options
Settlement Options
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Servicing Loans
I need money to pay for my daughters college education. Can I borrow cash from my life insurance policy? The Policyowner is entitled to borrow from a permanent policy that has Cash Value. The Insurer usually allows mostif not allof the Cash Value to be borrowed. The loan does not have to be paid back, but the outstanding loan amount and accrued interest will be deducted from the Death Benefit when the Insured dies. Automatic Premium Loans Most permanent policies allow for an automatic loan to be made against the Cash Value if the owner does not pay the premium by the grace period.
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Servicing Non-Forfeiture Options

If I surrender my permanent life insurance policy, what guarantees or options do I have with my Cash Value? The Insurer automatically picks this option if the policy is surrendered. It can be changed by the owner.
Cash Surrender Value The Policyowner can receive the Cash Value in a lump sum. This option terminates all insurance coverage.
Extended Term The Cash Value is converted into term insurance for the same face amount. The coverage will last until the Cash Value that pays for it runs out.
Reduced Paid-Up The Cash Value is used to purchase a permanent policy that is completely paid up. The face amount is reduced to the amount the Cash Value will purchase.
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Servicing Settlement Options

What methods can be used to pay the Beneficiary upon the Insureds death? Cash Payment A lump sum paid to the Beneficiary is the default if the Policyowner does not specify an option.
Specified Period The Beneficiary receives a series of payments lasting a specified number of years. The payments consist of principal and interest.
Interest Only The Insurer temporarily keeps the Death Benefit and pays interest to the Beneficiary. This method is normally used when the Beneficiary needs more time to decide on a settlement option.
Specified Amount The Beneficiary receives a series of payments for a specified amount. The payments consist of principal and interest.
Life Income The Beneficiary receives payments that are guaranteed for as long as he or she lives. The payment amount is based on the amount of Death Benefit and the Beneficiarys life expectancy.
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Stranger Owned Life Insurance Overview

Is it possible to sell my life insurance policy?
The Assignment Clause in life insurance policies allows a Policyowner to sell or give the policy to another person or entity for any reasonthe Policyowner does not need the permission of the Insurer to assign a policy. However, the Policyowner must notify the Insurer in writing of the assignment. The new Policyowner does not need to have Insurable Interest on the life of Insuredthat requirement is only needed when the policy is purchased. Sometimes Policyowners give their policy to a charity or to a relative or trust for estate planning. Recently, however, Policyowners have increasingly sold policies to strangers for cash. This is known as STranger Owned Life Insurance (STOLI). Once a stranger owns the policy, he or she immediately names himself or herself as the Beneficiary. It can be an awkward situation for someone who has no interest for the Insured to remain alive to be the Beneficiary. Furthermore, there have been situations where people have been taken advantage of. For these reasons STOLIs have come under scrutiny by insurance companies and state regulators, and laws and rules have been implemented to monitor and standardize their activity.
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Stranger Owned Life Insurance Types

Viatical Settlement A Viatical Settlement is an agreement in which a third party purchases a life insurance policy from the Policyowner for the right to be the legal Beneficiary. This agreement is used when the Insured has a terminal illness, and his or her life expectancy is less than three to five years. Viaticals became popular in the 1980s when HIV and AIDS surfacedpeople diagnosed with HIV or AIDS and desperate for cash looked to investors to buy their policies for a fraction of the Death Benefit. Since then, most life insurance companies have added Accelerated Death Benefit riders to their policies which have greatly reduced the need for Viatical Settlements. Life Settlement or Senior Settlement Similar to Viatical Settlements, a Life Settlement (also known as a Senior Settlement) is an agreement in which a third party purchases a life insurance policy from the Policyowner for the right to be the legal Beneficiary. However, this type of agreement is normally used when the Insured reaches retirement age and is considered to have a shortened life expectancybut not necessarily a terminal situation. People who need cash can sometimes find investors who are willing to buy their Permanent Cash Value policies for more than the Surrender Value. Sometimes owners of Term polices are also able to find buyers willing to pay cash for them.
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Stranger Owned Life Insurance Types (cont.)

Stranger Originated Another twist to STranger Owned Life Insurance (STOLI) is STranger Originated Life Insurance (likewise known as STOLI). With Stranger Originated Life Insurance, a stranger approaches a person (usually a senior) with a shortened life expectancy with a proposal similar to this: the stranger asks the person to apply for a life insurance policy on his or her own life and offers to pay the first premium plus a free gift. In return, the stranger asks to be assigned the policy. Once the policy is assigned, the stranger immediately names himself or herself the Beneficiary. The net result is a stranger has purchased a life insurance policy on someone elses life and does not have an interest in that person to remain alive. Since STranger Originated Life Insurance violates the Insurable Interest requirement needed at the time of purchase, insurance companies and state regulators are increasingly treating this scheme as insurance fraud. In 2007, North Dakota became the first state to pass legislation to combat STranger Originated Life Insurance. Since then at least 19 more states have enacted similar laws.
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Federal Tax Considerations for Individuals

Policy Premiums Cash Value Increases Cash Value Surrenders Dividends Dividend Interest Policy Loans Death Benefits Not income tax deductible Not income taxable as long as the Cash Value remains in the policy If the amount received exceeds the premium paid in, the excess is income taxable; partial surrenders are taxed as First-In First-Out (FIFO) Not income taxable Income taxable Not income taxable Not income taxable; if the Death Benefit remains with the Insurer, any interest paid to the Beneficiary is income taxable
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Federal Tax Considerations for Individuals (cont.)

Estate Taxes If the Insured owned the policy at the time of deathor assigned the policy to a trust or someone else less than three years before deaththe Death Benefit will be included in the decedents (dead persons) estate. If the Insureds estate is the Beneficiary at the time of death, the Death Benefit will be included in the decedents estate. Amounts included in the decedents estate could be subject to estate taxesif the value of the estate exceeds the exemption amount.
Section 1035 Exchanges When a Cash Value life insurance policy is surrendered for cash, income tax is owed on the amount received that exceeds the total premiums paid in. However, Section 1035 of the Internal Revenue Code allows a Policyowner to exchange a life insurance policy or annuity for another life insurance policy or annuity without having to pay income tax.
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Federal Tax Considerations for Individuals (cont.)

Modified Endowment Contracts If too much premium is paid into a permanent life insurance policy too soon, it becomes over-funded and may be considered to be a Modified Endowment Contract (MEC)instead of life insurance. More specifically, it becomes a MEC if the premiums paid during the first seven years of a life insurance policy exceed the level annual premiums that would be required to pay up the policy using guaranteed mortality costs and interest. When a life insurance policy becomes a MEC, it loses some of the tax favored treatment it would otherwise have at the time Cash Value is surrendered, withdrawn, or borrowed. With a normal life insurance policy, when Cash Value is surrendered only the amount that exceeds the total premiums paid in is taxed. When a life insurance policy turns into a MEC, however, the first withdrawal dollars received by the Policyowner are immediately taxedLast-In First-Out (LIFO). Furthermore, if Cash Value distribution occurs on a MEC before the Policyowner is 59, there is a 10% penalty on the gain. Even if a policy becomes a MEC, any Cash Value remaining in the policy will accumulate tax-deferred, and when the insured dies the Death Benefit will be tax-free to the Beneficiary.
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