Chapter Recap
This chapter explained some of the basic principles and processes of life insurance. Let's recap them:
PURCHASE OF LIFE INSURANCE
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Personal Use
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- Survivor protection - planning for survivor needs
- Cash accumulation - permanent policies have living benefits
- Estate creation - life insurance creates an immediate estate
- Estate conservation - using life insurance proceeds to cover estate taxes
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Amount of Insurance
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- Human life value approach - potential earnings of the insured (considering salary, years to retirement, inflation)
- Needs approach - predicted needs of the surviving family (considering debt, income, Social Security blackout, expenses)
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Business Uses of Life Insurance
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- Key person - third-party ownership - business is the owner; employee is the insured
- Buy-sell funding - not really insurance, but a business continuation agreement
- Executive bonuses - employer gives the employee a wage increase in the amount of insurance premium; employee is the policyowner
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PROCESS OF ISSUING A LIFE INSURANCE POLICY
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Solicitation and Sales Presentations
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- Advertisements - must be truthful and not misleading
- Illustrations - presentation of nonguaranteed elements
- Buyer's guide - generic information about life policies; must be provided at the time of application
- Policy summary - description of features and benefits of the policy being issued; must be provided when the policy is delivered
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Underwriting
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- Field underwriting (by agent)
- Application - completed and signed
- Agent's report - agent's observations about the applicant that can assist in underwriting
- Premiums with application and conditional receipts
- Company underwriting
- Multiple sources of information (e.g. application, consumer reports, Medical Information Bureau)
- Selection criteria - cannot discriminate unfairly
- Risk classification - 3 types of risks: standard, substandard, and preferred
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Premium Determination
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- 3 key factors for life insurance: mortality, interest and expense
- Premium payment mode - the higher the frequency, the higher the premium
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Policy Issue and Delivery
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- Effective date of coverage - policy is delivered and the premium is paid
- If the premium not paid with the application, the agent must obtain the premium and a statement of continued good health at the time of policy delivery
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