Louisiana life and health chp 1

Terms in this set (338)

Not all pure risks are insurable. Insurers will review pure risks to an even more defined level to insure that only indemnification would occur. They do this by looking for certain elements in the risk such as:a) The losses must be unexpected and out of the control of the insured and the loss must be hard to falsify, such as in a death claim.
b) The amount of the loss has to be able to be determined and the insurer must have the ability to quantify the value of the loss so that a claims amount can be applied so that the insurance company will indemnify the loss to the limits available.
c) There has to be a large homogenous group so that the pool can help absorb the costs of the losses that occur and a large enough group to be able to predict the amount of losses within an acceptable degree of certainty.
d) The loss must not be completely disastrous - Insurers need to be able to research cost-related statistics with regard to a risk so as to prepare for an approximate amount to cover the loss in a claim. Disastrous events such as 9/11 and Hurricane Katrina are extraordinary catastrophes for any insurer and are usually harder to predict than the normal insurable losses they are accustomed to handling. It can't be so disastrous that all the insurance companies involved may not have enough money to pay claims and would be bankrupt.
e) Must not be mandatory or forced to take on every risk - An insurer needs to be able to require an underwriting process to assess each applicant and not be forced by authorities to take all risks that apply for coverage. This gives the insurer the opportunity to set guidelines and premium rates applicable to the risks they absorb in every policy contract.They must be able to limit the policy to predictable losses and make sure they will be able to pay the claims while charging a premium the consumer can pay.
f) Predictable frequencies - An insurer needs to have the ability to predict the frequency of probable losses.
g) The loss must be large - enough to be worth the trouble of insuring it, or it would not be practical to do so.
Replacement is defined as selling a new life insurance or annuity policy in place of an active policy or annuity. Replacement would cause a client's current policy to lapse, terminate, reduce in cash value, convert to a policy with reduced benefits or in a reduction in the period of coverage, or be used as collateral for a loan that resulting in an aggregate amount exceeding 25% of the loan value set forth in the policy. Replacement requires extra work on the part of the producer, according to state regulations. Every agent replacing a policy must include a signed statement declaring that the new policy is replacing an active policy and another signed statement that the producer is aware that an active policy of the client will be changed or terminated because of the transaction. A Notice Regarding Replacement must be signed by the applicant and the producer and the applicant must have a signed copy of the notice for their records. The producer must obtain a list of all existing active policies that will be affected and send the insurer copies of the replacement notice and any written or printed presentation material used in the transaction with the client for the insurer's records. The existing insurance company may try to retain the client by sending conservation material (conservation is any correspondence between the active insurer in a replacement transaction and their current client with the intention of discouraging the replacement). Copies of conservation material should also be kept on file. The replacing insurance company is required by state law to send the existing insurance company written correspondence about the replacement transaction. They must also provide the existing company a copy of the illustration or proposal on the new policy being sold to the client and proof of the client's consent to replace their current policy. (i.e. a copy of the signed Notice Regarding Replacement and specifics on the current policy, such as the insured's name, insurer name and policy number, or other identifiers).
Producers are responsible for making certain that applications are filled out completely and accurately. In the insurance industry, accuracy is extremely important, because a policy will only perform as well as the information provided in the application to the company underwriter to assess and rate accordingly. Consequently, any inaccurate or illegible information in an application can cause delays or unintended denials. If an agent feels that there may be misrepresented information in the application, they must inform the insurer.
Part 1 of the application contains demographic information on the applicant such as name, age, address, gender, birth date, marital status, and occupation. It may also list existing policies and beneficiary information.

Part 2 of the application includes medical history and present medical information on an applicant. This underwriting source may determine if further medical examination will be required to prove insurability or if just an interview with the applicant would serve the purpose of medical history review.

The Producer's Report is used by the agent to disclose any observations of the applicant made by the agent that would be pertinent for the company underwriter to assess the applicant more completely. Some companies will require an agent to complete applications for the client to prevent mistakes, and other companies allow the applicant to complete it with agent assistance. In either case, the agent is the field underwriter or "front line" for the insurer and, as such, helps protect the insurer against adverse selection. Adverse Selectionis accepting risks that carry a higher than average propensity towards loss.
Both the producer and the applicant are always required to sign the application. If the insured person and the policy owner are not the same person, the policy would be under third-party ownership and both the policy owner and insured would be required to sign an application. The only time a proposed insured may not sign the application themselves is when the insured is a minor child.
If anything in the application needs to be changed, you may draw a single line through the error and the applicants must initial the change or error. The producer is never allowed to black out anything on the application or use 'white out' to make changes. If the errors make anything illegible, it is advisable to complete a new application so that all items are as clear as possible.
When the initial premium is collected with an application, agents give the applicant a receipt that will be used to determine when coverage starts. The type of receipt that an insurer requires an agent to use is significant and the most commonly used receipt is a conditional receipt. Conditional receipts state that coverage is effective the date of the application as long as the underwriting process reveals that the client was to be approved. If the client is found uninsurable upon completing the underwriting process, the applicant would simply receive a refund of the initial premium payment and no coverage ever existed. The language used in this type of premium receipt absolves the insurer of any liability if the applicant is denied and it only binds the insurer to cover the death benefit for the applicant if they were to be approved. This becomes quite significant in cases where an applicant dies during the underwriting process.
events, risks, and circumstances for which the policy does not cover. Exclusions usually exist for one of two reasons: either the risk was never meant to be covered by insurance because it is much too speculative or the risk may be covered by some other type of policy or risk management method. Some exclusions are riders on policies and others may come standard to the policy itself and would be listed in this section of the contract. The most common exclusions that were found in life insurance policies quite often were:

a. Aviation clause - flying used to be a speculative risk for insurers to cover, but nowadays, most policies will cover an insured as a fare-paying customer on a regular commercial flight. Most life insurance policies will exclude pilots, as there are specialty policies that will cover such a high-risk occupation.

b. Hazardous Occupations or hobbies clause - this provision will list what the insurer deems hazardous and will exclude coverage for deaths resulting from such activities, i.e. sky-diving, bungee-jumping, auto-racing, etc. These exclusions are usually expected due to the underwriting that is normally done to consider the occupation and hobbies of an insured in the premium rating of the policy. When it is found that an insured regularly participates in such activities during the underwriting process, the policy may be rated with listed exclusions or declined and never issued.

c. War or military service clause - this clause was used to exclude coverage from death resulting from active duty in the military (status clause) or if the insured is killed due to an act of war (results clause).

d. Suicide - If an insured commits suicide within 2 years from the policy issue date, the insurer is not legally obligated by the policy contract to pay a death benefit to the beneficiaries, according to this provision. This prevents insurers from paying claims for those planning to commit suicide and having liability for such claims. However, if the suicide happens after the 2-year period, the death benefit is paid as a normal claim.
End of Policy Year Cash or Loan Value Reduced Paid-up Extended Term
Years Days
1 0 0 0 50
2 60 240 0 120
3 350 1,500 2 140
4 900 3,500 5 25
5 1,500 5,550 7 180
6 2,050 7,500 9 175
7 2,700 9,350 10 50
8 3,250 11,000 11 180
9 3,900 14,500 12 310
10 4,600 16,500 14 5
11 5,200 18,000 15 330
12 5,900 20,750 16 240
13 6,650 22,050 17 90
14 7,350 23,350 17 250
15 8,000 24,000 18 5
16 8,700 25,950 18 115
17 9,600 26,800 18 200
18 10,350 28,400 18 280
19 11,250 29,650 19 30
20 12,500 31,700 19 190
In the above chart, for an example, imagine this person has $5,900 in cash value available and this is the 12th year of their policy. If this person uses the reduced paid-up option this year, and they use the cash value to pay for a permanent policy with it, the new reduced face amount of this policy after exercising this option would be $20,750. Even though it is less than their original face amount of $50,000, it allows them to keep a totally paid for, permanent policy in place on their life until age 100. Another option they could choose would be the Extended Term. In this example, if they chose the Extended Term option, the $5,900 available cash value could buy them a term policy that will last 16 years and 240 days, and it would be for the original face amount of $50,000. Therefore, if keeping the face amount in tact was the most important thing to this client, this option allows them to do so, even though it changes to a shorter term than the original permanent policy. Both of these options are available so that if a client has some financial hardship and can no longer afford the original whole life policy that they purchased, they do not have to 'forfeit' everything they have paid into the policy so far and can benefit from the value that the policy has accrued. They can use the cash available to keep some type of coverage based on a policy feature that is most important to them.
Any cash value within a life insurance policy can be made available to the policyholder by way of surrenders or loans, but that disbursement could be partly taxed. Anything equaling the cost basis or amounts paid into the policy by the policyholder is tax-free when they are withdrawn or loaned. The portion that would be taxable is the growth in excess of the total premium contributed by the policyholder, since all growth grows tax-deferred.

a. Cash value increases - The cash that is accumulated in the cash value part of a life insurance policy grows tax-deferred. This means that the IRS allows the growth to accumulate without requesting taxes to be paid on the interest year to year. This allow the value to increase much faster as opposed to paying yearly taxes on the increasing interest. Tax-deferral on the interest in the cash value of life insurance policies makes the product attractive to those who prefer not to have a yearly taxable event on interest.

b. Dividends -As stated earlier, dividends represent an overcharge in premium that is simply returned to the policyholder. Because this type of dividend is return of excess premium, it is not taxable. However, if the dividends are allowed to accumulate with interest, the interest on the dividends is taxable.
c. Policy loans - A policyholdercan make a tax-free loan against the available cash value in the life insurance policy, but there will be loan interest charges imposed by the insurer on the loan, because the insurer expects the money borrowed to be put back and available for investing. The policyholder has the freedom to decide whether to pay the loan back and the interest to the insurer or the policyholder can choose to let the loan remain unpaid. But this choice will result in the loan amount and unpaid interest being deducted from the death benefit and the beneficiary will only receive the remaining face amount upon the death of the insured.

d. Surrenders - (terminating or "cashing-in" the policy) Depending upon the timing and amount of any surrender, there may be a part of the surrender amount that would be taxed. Any amount in excess of premiums paid into the policy at the time of the surrender will be subject to taxes. The example below explains taxation on surrenders.
are taxed based upon the exclusion ratio, in which the cost basis and the interest that grew on top of the amount paid into the policy are compared. Cost basis ( the amount paid in ) is received tax- free and interest is taxable, and all payments made from the annuity are taxed accordingly.

a. Accumulation phase (including taxation issues) - taxes are deferred during the phase in which money is paid into an annuity and the annuity is growing with interest. If there is an early liquidation of an annuity, taxes are paid LIFO until the cost basis is all that is left. After it has been determined that all interest has been taxed first, then the cost basis is disbursed tax free for the remainder of the payout. This occurs as an immediate lump sum tax hit in a lump sum cash withdrawal of an annuity. The IRS will also impose an extra 10% penalty based upon the withdrawal amount for any withdrawals made before age 59 ½.

b. Annuity phase and the exclusion ratio - in the annuity phase, the annuitant will receive the annuity payments. Income tax will be charged on the part of each payment that represents the interest or profit. The % of the cash value of the account that represents the amount paid in would be excluded from tax (the exclusion ratio). The % of the account that is the accumulated interest is taxable. If 20% of the account was taxable interest and 80% excluded, then when the annuitant receives each payment, they would owe income tax on 20% of each payment.
c. Distributions at death - If an annuity contract owner dies before the annuity or liquidation period starts, the interest will be taxed, even though the beneficiary may receive the cost basis into the annuity tax-free. The only time taxes may be deferred longer is when the beneficiary is the spouse of the deceased annuitant.
Traditional Individual Retirement Accounts have contributions that are tax deductible for the year the contribution was made. Married couples must have individual accounts and adhere to the limits and rules, as all other individuals, stated by the IRS for the tax year. When a person has a Traditional IRA and a qualified plan at work and contributes to both, due to the tax treatment of both vehicles, the IRS will only allow a portion, subject to certain income limits, to be tax deductible. All of these limits are subject to constant changes by the IRS and can always be accessed on the IRS website or the annual tax publications disbursed to all taxpayers.

a. Contributions and deductible amounts - the annual maximum contribution is $5,000 or, for those above age 50, $6,000 (it includes the 'catch up' contribution that is allowed for those over age 50 of $1,000) and for Traditional IRA's the whole contribution for the year is tax deductible for that year. Excess contributions above the maximum set for that year are hit with an extra penalty of 6%. If a person's earned income only adds up to $5,000, the maximum contribution, for the year and they contribute to their IRA, it is tax deductible. Earned income is defined by the IRS as salary, wages, commissions, and such earned monies for the tax year. Unearned income would be investment gains, interest, unemployment benefits, trust fund income payments, and the like.b. Premature distributions (including taxation issues) - any withdrawal from the IRA before age 59 ½ is subject to income taxation for that individual for the year the distribution is made and an extra 10% penalty tax, unless it was made for the following allowable reasons:

i. Total disability

ii. Down payment for first home

iii. Post secondary education for the individual

iv. Financially disastrous medical expenses

v. Death



c. Annuity phase benefits payments - The annuity or payout phase of a Traditional IRA must start at age 70 ½ on April 1st of the year following that attained birth date. The IRS has an annual required payout that must be made to the individual in this annuity phase. If the payment made is not enough or does not meet the required amount to be disbursed, a penalty of 50% of the deficit is assessed.

d. Values included in the annuitant's estate - The annuitant's cost basis, or premiums paid in, are included in their estate upon their death.

e. Amounts received by beneficiary - Beneficiaries of IRA's receive the funds in an IRA if the owner dies. If the owner died before the annuity phase began, the interest must be scheduled for payout on the December 31st a year after the owner's death.
Roth IRA's have the tax-free advantages with regard to growth and distributions once the account has been opened and active for 5 years. However, these IRA contributions that are not tax-deductible.

a. Contributions and limits - $5,000 is the maximum contribution for individuals and, just like with contributions for Traditional IRA's, a person may contribute all of their income up to this limit if they so choose. Any excess contributions are subject to the 6% penalty. With a Roth IRA, a person may keep contributing to it even after 70 ½, contrasting with the Traditional IRA where the contributions must cease upon the beginning of the required annuity period starting at age 70 ½ . Individuals may convert a Traditional IRA to a Roth IRA as long as their adjusted gross income does not exceed the IRS current rule for this type of conversion. When a Traditional IRA's funds is rolled over into a Roth IRA, because of the differences in tax treatment to both arrangements, all deductible contributions made into the Traditional IRA and earnings on that money must be taxed the year of the rollover.

b. Distributions - With a Roth IRA, the payout phase does not have to start at age 70 ½. Also, distribution payment from a Roth IRA are not income taxable after the account is 5 years old, as mentioned earlier. All other rules will apply to the distributions as with Traditional IRA's such as, any payments made prior to age 59 ½ have an extra 10% penalty unless for the listed allowable reasons:

· Total disability

· Down payment for first home

· Post secondary education for the individual

· Financially disastrous medical expenses

· Death

Roth IRA's are usually chosen by individuals that meet the required maximum income levels set forth by the IRS.
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