Basic Principles of Insurance

TYPES OF INSURANCE

Commercial Insurers (also known as private insurance companies) are in the business of selling insurance for a profit. Commercial insurers offer many lines of insurance. Some sell primarily life insurance and annuities, while other sell accident and health insurance, or property and casualty insurance. An insurance company selling more than one line of insurance is known as a Multi-line insurer. Commercial insurance is divided into two main groups: stock and mutual insurers.

Stock Companies are organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). Traditionally, stock insurers are called nonparticipating insurers because policyholders do not participate in receiving dividends or electing the board of directors, unless they are also a stockholder of the company. When declared, stock dividends are paid to stockholders. In a stock company, the directors and officers are responsible to the stockholders. Transformation of a stock insurer into a mutual insurer is termed mutualization, and the reverse is termed demutualization. Dividends from a stock insurer subject to taxation because they are considered profit.

Mutual Companies are owned by their policyholders. Mutual insurers are known as Participating Insurers because policyholders PARTICIPATE in receiving dividends and electing the board of directors. When declared, mutual company dividends are paid to the policyholders. Dividends from a mutual insurer are not subject to taxation because the dividends are considered to be a return of premium. The only exception is if the policyowner chooses to let the dividends sit and collect interest. In this case, only the accumulated interest would be taxable.

If a company operates as both a PARTICIPATING and NONPARTICIPATING insurer they are known as a MIXED insurer . DIVIDENDS can NEVER be guaranteed regardless of the type of company offering them.

Strong Assessment Mutual Companies are classified by the way the charge premium.

1. A pure assessment mutual company, operates based on loss-sharing by group members. No premium is payable in advance. Instead, each member is assessed an individual portion of losses that occur.

2. An advance premium assessment mutual, charges a premium at the beginning of the policy period. If the original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as dividends. However, if total premiums are not enough to meet losses, additional assessments are levied against the members. Normally, the amount of assessment that may be levied is limited either by state law or simply as a provision in the insurer's by-laws.

Fraternal benefit societies are special types of mutual companies, nonprofit religious, ethnic or charitable organizations that provide insurance solely to their members. Fraternal must be formed for reasons other than obtaining insurance. An example of fraternal societies is Knights of Columbus.

Risk retention groups are mutual companies formed by a group of people in the same industry or profession. Examples would be pharmacists, dentists, and engineers.

Service Providers offer benefits to subscribers in return for the payment of a premium. These services are packaged into various plans, and those who purchase the plans are known as subscribers. Examples of service providers are Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO).

Reciprocal insurers are unincorporated groups of individual members that provide insurance for other members through indemnity contracts. Each member acts as both insurer and insured and are managed by Attorney in Fact.

Reinsurers make arrangements with other insurance companies to transfer a portion of their risk to the reinsurer. The company transferring the risk is called the Ceding Company and the company assuming the risk is the Reinsurer.

* In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called the primary insurer

Captive Insurer is an insurer established and owned by the parent company to insure the parent company's loss exposure.

Home Service Insurers (also known as industrial insurance ), is sold by home service or debit life insurance companies. Face amounts are small; usually $1,000 to $2,000 and premiums are paid weekly.

Government Insurance : Federal and state government are also insurers. They provide social insurance programs, to protect against universal risks by redistributing income to help people who cannot afford the cost of incurring such losses themselves. These programs have far reaching effects and millions of people depend on them. Types of Government Insurance include:

* Social Security (Old Age Survivor Disability Insurance OASDI- Provides income benefits for the elderly (retirement), survivors of those who died young (young child of a deceased parent), and those qualifying for federal disability.

* Medicare - Health insurance to CARE for the elderly

* Medicaid - Health insurance to AID the financially needy.

* S.G.L.I. and V.G.L.I (Serviceman's or Veteran's Group Life Insurance: life insurance for active and retired members of the military)

* Tri-Care (health insurance for members of the military and their family)

Self-Insurers retain risks and must have a large number of similar risks and enough capital to pay claims. However, they may save money if the loss experience is lower than the expected costs. Self-insurers are not a method of transferring risk, rather self-insurers establish their own self-funded plan to cover potential losses. A Self-funded plan is a plan in which an employer pays insurance benefits from a fund derived from the employer's current revenues

Lloyd's of London is not an insurance company. Members of the association form syndicates to underwrite and issue insurance- like coverage. This is a group of investors who share in unusual risk.

HOW INSURANCE IS SOLD

Distribution Systems are the ways insurance products are marketed and sold to the public. Insurance can be purchased through licensed insurance producers, who are either agents or brokers, or through a number of other ways. Agents are either captive/career agents or independent agents. Captive agents work for only one insurer. Independent agents work for themselves or for several insurers non- exclusively.

Career Agency System: With the career agency system commercial insurers establish offices in certain locations. Career agents are recruited to work at these locations. A general agent hires and trains new producers and supervises a number of other producers. All producers under the career agency system are captive agents and employees of the insurer.

Personal Producing General Agency System: With the personal producing general agency (PPGA) system, agents work for an independent agency selling policies from several insurance companies. Unlike the career agency system, agents are not employees of the insurance company. Instead, they work for the PPGA. Furthermore, personal producing general agents primarily sell insurance, instead of recruiting and training new agents as in the career agency system.

Independent Agency System (American Agency System): Independent agents represent a number of insurance companies under separate contractual agreements. They may also work for themselves or under other insurance agents. Independent insurance agents have control and ownership over their clients' accounts. This means they may place clients' business with a different insurer when policies are up for renewal. Independent insurance agents earn commissions on the sales they make and overrides on sales made by agents they manage.

Managerial System: With the managerial system, branch offices are established in several locations. Instead of a general agent running the agency, a salaried branch manager is employed by the insurer. The branch manager supervises agents working out of that branch office. The insurer pays the branch manager's salary and pays him a bonus based on the amount and type of insurance sold and number of new agents hired.

Mass Marketing: Another way to sell insurance is through mass marketing methods. Direct selling (or direct mail) is a mass marketing method where agents are not used. Instead, policies are marketed and sold through television and radio advertisements, print sources found in newspapers and magazines, by mail, in vending machines, and over the Internet.

INDUSTRY OVERSIGHT AND REGULATION

The insurance industry is primarily regulated on a state-by-state basis with minimal federal oversight. The primary purpose of this regulation is to promote public welfare and provide consumer protection and ensure fair trade practices, contracts and prices. Key historical events that have shaped the current regulation include:

*1869 Paul v. Virginia: the U.S. Supreme Court ruled that insurance transactions crossing state lines are not interstate commerce.

*1905 The Armstrong Investigation Act gave the authority to the states to regulate insurance.

*1944 United States v. South-Eastern Underwriters Association ruled that insurance transactions crossing state lines are interstate commerce and are subject to federal regulation. Thus, many federal laws were conflicting with existing state laws. However, this decision did not affect the power of states to regulate insurance.

*1945 The McCarran Ferguson Act states that while the federal government has authority to regulate the insurance industry, it would not exercise its right if the insurance industry was regulated effectively and adequately on the state level. Under the McCarran-Ferguson Act, the minimum penalty of a producer who has obtained personal information about a client without having a legitimate reason to do so is a fine of $10,000.

*1970 Fair Credit Reporting Act: provides individuals privacy protection and fair and accurate credit reporting. Insurance companies are required to notify applicants if a credit check will be made on them. Under the Fair Credit Reporting Act, the maximum penalty of a producer who has obtained Consumer Information Reports under false pretenses is a fine of $5,000.

*1999 Gramm-Leach-Bliley Act (Financial Services Modernization Act): This law repealed the Glass-Steagall Act; this allows Banks, Retail Brokerages and Insurance companies to enter each other's line of business.

*2001 USA PATRIOT ACT (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act): as it relates to the insurance industry, is designed to detect and deter terrorists and their funding by imposing anti-money laundering requirements on brokerage firms and financial institutions.

*2003 National Do Not Call Registry: Insurance calls are not exempt from the no not call registry.

*2010 Patient Protection and Affordable Care Act (PPACA): often shortened to the Affordable Care Act (ACA), represents one of the most significant regulatory overhauls and expansions of coverage in U.S. history.

The National Association of Insurance Commissioners (NAIC) is an organization composed of insurance commissioners from all 50 states, the District of Columbia and the 4 US territories. They are responsible for recommending appropriate laws and regulations. They are responsible for the creation of the Advertising Code and the Unfair Trade Practices Act, and the Medicare Supplement Insurance Minimum Standards Model Act. The NAIC has four broad objectives:

1. To encourage uniformity in state insurance laws and regulations

2. To assist in the administration of those laws and regulations by promoting efficiency

3. To protect the interest of policyowners and consumers

4. To preserve state regulation of the insurance business

Advertising Code: the code specifies certain words and phrases that are considered misleading and are not to be used in advertising of any kind.

Unfair Trade Practices Act: gives chief financial officer the power to investigate insurance companies and producers to impose penalties. In addition to that, the act gives officers the authority to seek a court injunction to restrain insurers from using any methods believed to be unfair.

NAIFA (National Association of Insurance and Financial Advisors) and NAHU (National Association of Health Underwriters): Members of these organizations are life and health agents dedicated to supporting the industry and advancing the quality of service provided by insurance professionals. These organizations created a Code of Ethics detailing the expectations of agents in their duties toward clients.

To sell insurance, each state requires high level of professionalism and ethics. Some of these standards and ethics are:

* Selling to needs: agents must first determine the consumers' needs then determine which policy fits their needs best.

* Suitability of recommended products: an ethical agent must be able to assess the correlation between a recommended product and the consumer's needs.

* Full and accurate disclosure: an ethical agent must inform consumers of the benefits and limitations of recommended products. Recommendations must be accurate, complete and clear.

* Documentation: an ethical agent must document each client's meeting and transaction.

* Client Services: an ethical agent must know that a sale does not mark the end of the relationship, but rather the beginning of the relationship. Therefore, routine follow-up calls are recommended.

* Buyer's Guide: each state requires agents to deliver a buyer's guide to consumers that explain various types of life insurance products and other information on the recommended policy, such as premiums, dividends, and benefit amounts.

* Policy Summary: help consumers evaluate the suitability of the recommended product.

Reserves: are the accounting measurement of an insurer's future obligations to its policyholders. They are classified as liabilities on the insurance company's accounting statements since they must be settled at a future date. Reserves are set aside by an insurance company and designated for the payment of future claims.

Liquidity: An insurer's ability to make unpredictable payouts to policyowners

Guaranty Associations are established by all states to support insurers and protect consumers in case an insurer becomes insolvent. State life and health guaranty associations provide a safety net for all member life, health and annuities insurers in a particular state. Guaranty associations protect insureds in the event of insurer insolvency, or inability to pay claims up to a certain limit.

Independent Rating Services are credit rating agencies that rate or "grade" the financial strength and stability of insurers based on claims, reserves, and company profits. The nationally recognized statistical rating organizations that rate insurers are A. M. Best, Moody's, Standard and Poor's, and Fitch Ratings. Each rating service has its own rating system, but most use an A to F letter grading scheme.

Legal Concepts of the Insurance Contract

Insurance policies are legal contracts where a promise of benefits is exchanged for valuable consideration (Premiums). Contracts of insurance are binding and enforceable. All parties are subject to specific legal requirements.

* Life insurance: the insurance company agrees to pay a predetermined amount - the face amount (or benefit), in exchange for the insured's consideration (premium).

* Health insurance: the insurance company agrees to pay a percentage of the insured's medical bills (or benefit) in exchange for consideration (premiums).

ELEMENTS OF THE CONTRACT

Four elements must be present in every contract to be valid and legally enforceable. These elements include:

1. Consideration: Consideration is something of value that each interested party gives to each other. The insured provides consideration with payment of premium. The insurer provides consideration by promising to pay the insurance benefit. The applicant says, "PLEASE CONSIDER me for insurance. Here's my initial premium, my completed application, as well as how much and how often I agree to pay."

2. Legal Purpose: An insurance contract must be legal and not in opposition of public policy. If an insurance contract has insurable interest and the insured has provided written consent, it has legal purpose. Without legal effect, the contract would be null and void. Said differently, the contract cannot be for an illegal purpose.

3. Offer and Acceptance: An offer is made when the applicant submits an application and initial premium for insurance to the insurance company. The offer is accepted by the insurer after it has been approved by the insurance company's underwriter and a policy is issued. If no money is given, the applicant is making an invitation. On the other hand, if an offer is answered by a counteroffer, the first offer is void.

4. Competent Parties: All parties must be of legal competence, meaning they must be of legal age, mentally capable of understanding the terms, and not influenced by drugs or alcohol.

SPECIAL FEATURES OF INSURANCE CONTRACTS

Contract of Adhesion: Because an insurance contract has been prepared by an insurance company with no negotiation, it is considered a contract of adhesion. In a contract of adhesion there is only one author - the insurance company. Insurance carriers are also responsible for assembling the policy forms for insureds. If there is an ambiguity in the contract, the courts always favor the insured over the insurer. Under a contract of adhesion, the terms must be accepted or rejected in full. The customer must adhere to the insurer's contract without any input of their own.

Aleatory Contract: Insurance contracts are aleatory, which means there is an unequal exchange. The premiums paid by the applicant is small in relation to the amount that will be paid by the insurance company in the event of a loss. For example, Tory paid one month's premium of $50, when she died one month later, her beneficiary received the whole $50,000 face value of Tory's policy.

* Consideration may be unequal

* The outcome depends on chance or uncertain event

* A legal bet is considered an aleatory contract

Unilateral Contract: One sided agreement, where only the insurer is legally bound. In an insurance contract, only the insurance company is legally bound to do anything (pay claims). Uni=one lateral=side, one side - the insurance company is legally bound. The insured does not make a promise to pay premiums, however, if premiums are not paid the insurer has the right to cancel the contract.

Personal Contract: Most insurance contracts are personal contracts between the insurance company and the insured individual, and are not transferable to another person without the insurer's consent. Life insurance is an exception to this standard as the owner of the policy has no bearing on the insurer's assumed risk. Therefore, people who own life insurance are called policyowners rather than policyholders and may transfer or assign ownership by notifying the company.

Conditional Contract: Insurance contracts are conditional because certain conditions must be met by all parties in the contract. Hence, benefits depend on the occurrence of an event covered by contract. This is needed when a loss occurs for the contract to be legally enforceable.

Valued vs. Indemnity: Life insurance contracts are valued contracts, which means it will pay a stated amount. Health insurance contracts are indemnity contracts and will only reimburse the actual cost of the loss (pay medical bills, etc.). The Principle of Indemnity is to restore the insured to the same financial condition as that which existed prior to the loss. You cannot profit from an indemnity contract.

Utmost Good Faith: Implies that there will be no attempt by either party to misrepresent, conceal or commit fraud as it pertains to insurance policies. Insurance applicants are required to make full, fair, and honest disclosure of the risk to the agent and insurer. Agents and insurers are required to accurately explain the policy's features, benefits, advantages, and possible disadvantages to an applicant.

Warranties: Statements made by the applicant guaranteed to be true (name, DOB) becomes part of the contract and if found to be untrue, can be ground for revoking the contract.

Representations: Statements made by the applicant believed to be true (height, weight) are not part of the contract and need to be true only to the extent that they are material and related to the risk.

Concealment: Withholding of information or facts by the applicant (smoker, diabetes).

Insurable Interest: Requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. Insurable interest only needs to exist at the time of the application (the inception of the contract). For example, spouses would typically have insurable interest on each other's life childhood friends typically would not have insurable interest on each other's life. An employer may have insurable interest on a key employee's life.

Reasonable Expectations: A concept which states that the insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide. Reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder.

Stranger-Originated Life Insurance: In Stranger-Originated Life Insurance, or STOLI , a consumer purchases a life insurance policy with the agreement that a third-party agent/broker or investor will purchase the consumer's policy and receive the proceeds as a profit upon the consumer's death. This differs from a standard insurance policy because a 3rd party OWNER will be the one benefiting from the death of the insured. STOLI policies are typically illegal as they violate insurable interest requirements.

AGENT AUTHORITY

A relationship in which one person is authorized to represent and act for another person or company is established through the law of agency. In applying the law of agency, the insurance company (insurer) is the principal. An agent or producer will always be deemed to represent the insurance company and not the applicant. Regarding the insurance contract, any knowledge of the agent is considered to be the knowledge of the insurance company (insurer). If the agent is working within the conditions of his/her contract, the insurance company is fully responsible.

Authorized agent: a person who acts for another person or entity and has the power to bind the principal to contracts.

Agents are granted authority by the insurer through the agency contract to transact insurance or adjust claims on their behalf. Some common tasks agents are authorized to perform include solicit applications, collect premiums, render services to prospects, and describes the company's insurance policies.

Types of agent authority:

* Express: Express authority is the explicit authority granted to the agent by the insurer as written in the agency contract. For example, solicit applications and collect premiums.

* Implied: The unwritten authority of a producer to perform incidental acts necessary to fulfill the purpose of the agency agreement (otherwise unwritten in the contract). For example, since you are authorized to solicit applications and collect premiums, it is implied that you are authorized to set appointments.

* Apparent: Apparent authority deals with the relationship between the insurer, the agent, and the customer. It is the appearance of authority based on the agent-insurer relationship. Apparent authority is a situation in which the insurer gives the customer reasonable belief that an agent has the power and authority to bind the principal. For example, since you have all of the insurance application forms and business cards it is apparent to the customer that you are able to help them apply for insurance.

OTHER LEGAL CONCEPTS

Fiduciary Responsibility - Because the agent handles money of the insured and insurer, he/she has a fiduciary responsibility. A fiduciary is someone in a position of trust and confidence. With insurance, for example, it is illegal for agents to mix premiums collected from applicants with their own personal funds. This is called commingling.

Fraud: Fraud is an intentional misrepresentation or concealment of material fact made by one party in order to cheat another party out of something that has economic value. An insurer may void an insurance policy if a misrepresentation on the application is proven to be material.

Waiver: Waiver is the voluntarily giving up of a known right. For example, if an insurer chose to approve an application and issue a policy without requesting a medical exam they cannot later request a medical exam to for that policy in the future.

Estoppel: The legal process of preventing one party from reclaiming a right that was waived.

Parol Evidence Rule: Rule that prevents parties in a contract from changing the meaning of a written contract by introducing oral or written evidence made prior to the formation of the contract, but are not part of the contract.

Subrogation is the right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid to the insured for the loss. For example, if an insured driver's car is totaled through the fault of another driver; the insurance carrier will reimburse the covered driver as described in the policy and take legal action against the driver-at-fault in an attempt to recuperate the cost of that claim.

Void and Voidable Contracts: A void contract is an agreement that does not have legal effect, and therefore is not a contract. Void contracts are not enforceable by either party. Unlike a void contract, a voidable contract is a valid, binding contract which can be voided at the request of a party with the right to reject.

Cancellation: the voluntary act of terminating an insurance contract.

Endorsement: a written form attached to an insurance policy that alters the policy's coverage, terms, or conditions.

Brokers: a broker or independent agent may represent a number of insurance companies under separate contractual agreements.

Professional Liability Insurance (Errors and omissions): A professional liability for which producers can be sued for mistakes of putting a policy into effect. under the insurance, the insurer agrees to pay sums that the agent legally is obligated to pay for injuries resulting from professional services that he rendered or failed to render.

LIFE INSURANCE POLICIES

TYPES OF LIFE INSURANCE POLICIES

1. Industrial life: insurance issues very small face amounts, such as $1,000 or $2,000. Premiums are paid weekly and collected by debit agents. They were designed for burial coverage.

2. Group life: insurance written for members of a group, such as a place of employment, association, or a union. Coverage is provided to the members of that group under one master contract. The group is underwritten as a whole, not on each individual member. One of the benefits of group life coverage is usually there is no evidence of insurability required.

3. Ordinary life: Is made up of several types of individual life insurance, such as temporary (term), permanent (whole). Term life insurance gives you the greatest amount of coverage for a limited period of time. Term insurance is only good for a limited period of time because it has a TERMination date. Term insurance is an inexpensive type of insurance, making it an attractive option for large policies. Term life is the CHEAPEST type of pure life insurance, and due to having a termination date and not having any cash value, it will ALWAYS be cheaper than a whole life policy with the same face value. It provides a pure death protection since it only pays a death benefit if the insured dies during the policy term.

Term is often renewal and convertible. For example, if you have a 10-year renewable and convertible term; After the 10 years are up, the policy terminates or you can renew it. If you renew it the premium price will go up, and you will have the policy for another 10 years. This cycle continues until you are too old to renew or it's too expensive. All TERM insurance has a final TERMINATION date where you can no longer renew it. If the policy is CONVERTIBLE, you can CONVERT it to whole life (think rent to own) at any time. Any time you renew or convert ANY type of insurance, you do not have to worry about your health, is your insurability is locked in. However, the price will always go up, because your attained (or current) age is used for your new policy. Term is typically thought of as "renting" -- you have a roof over your head, but they're going to raise the price and until it no longer makes sense for you to keep it or at some point they TERMINATE the contract and kick you out.

Level term: also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period. However, the premiums will increase at each renewal. Life insurance written to cover a need for a specified period of time at the lowest premium is called Level Term Insurance. Term insurance always expires at the end of the policy period. For example, if D needs life insurance that provides coverage for the remainder of her working years and wants to pay as little as possible, D would need Level term. Level term provides a fixed, low premium in exchange for coverage which lasts a specified time period.

Decreasing term: Term life insurance that provides an annually decreasing face amount over time with level premiums. These policies are usually used for mortgage protection. A decreasing term policy is a type of life policy which has a death benefit that adjusts periodically (according to a schedule) and is written for a specific period of time. Decreasing term policies are usually written for a mortgage or other debt that typically decreases over time until it is paid off. For example, a 15 year decreasing term policy could protect a 15-year mortgage. As the mortgage balance reduces each year, the face value of the insurance policy will adjust accordingly to match. After the mortgage is paid off, the insurance policy will expire.

Credit policies are typically purchased using a decreasing term life insurance policy, with the term matched to the length of the loan period and the decreasing insurance amount matched to the declining loan balance. Since Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid, credit policies can only be purchased for up to the amount of the debt or loan outstanding. For example, if you wanted an insurance policy to protect a $20,000, 5-year auto loan, you would use a 5 year decreasing term life insurance policy with an initial face value of $20,000. You will pay the same level premium every month for the 5-year term of the policy. The face value will start out at $20,000 and change according to a schedule (the decreasing balance of the auto loan). After 5 years, the car will be paid for and the insurance policy will no longer be needed.

Increasing term: Term life insurance that provides an increasing face amount over time based on specific amounts or a percentage of the original face amount.

Convertible term: A term life policy has a provision that allows policyowners to convert their term insurance into permanent policies without showing proof of insurability. Convertible Term provides temporary coverage that may be changed to permanent coverage without evidence of insurability. For example, if you take out a term insurance policy when you are young to take advantage of your good health and the policy's lower premium, but want the option convert the policy to a permanent one for final expense benefits once your finances improve, you would want a convertible term life policy. The conversion privilege of a group term life policy allows an individual to leave the group term (temporary) plan and convert his or her insurance to an individual (permanent) policy without providing evidence of insurability. The most important factor to consider when determining whether to convert term insurance at the insured's attained age or the insured's original age is the premium cost. The number one factor which impacts life insurance premium cost is the insureds current or attained age. For example, a $25,000 policy on a healthy 7-year-old boy will cost substantially less than a $25,000 policy on a 57-year-old man. Whether converting an individual or group term insurance policy, although your insurability is guaranteed, your age is typically reevaluated to your current (attained) age, not left at the age you were when you applied for the original term policy. Convertible Term would allow you to take your temporary coverage and change it to permanent coverage without evidence of insurability or good health, but your premiums will increase due to using your attained age.

Renewable term: Term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability. Renewable Term provides temporary level coverage at the lowest possible cost for a limited period of time, but then allows the policyowner to renew the policy to maintain coverage past the policy's termination. When a term policy is renewed, the insured does not have to prove insurability. However, the premium price will rise because the insurance company will use the insureds current or attained age to determine the new premiums. If a customer wanted coverage at the lowest possible cost that was good for a limited period of time, but offered the ability to continue the coverage after the expiration, the customer would want a renewable term policy.

Annual renewable term: Term coverage that provides a level face amount that renews annually. This type of coverage is guaranteed renewable annually without proof of insurability.

Term - Rider: A term rider is a type of life insurance product which covers children under their parent's policy. Family plan policies usually cover the family head with permanent insurance, and the coverage on the spouse and children is term insurance in the form of a rider. A term rider is always level term. This is cheaper than every family member getting their own policy. For example, the main policy may be on Dad, then mom and the children are riding on (attached to) to dad's policy as term riders. Term riders allow for additional family members to be covered under one policy by attaching everyone to a main policy. Term riders can also allow an applicant to have excess coverage by adding an additional term rider for them to the main policy.

Whole life: insurance that provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and normally has a level premium.

Whole Life Insurance: Provides both living and death benefits. Provides permanent life insurance protection for the insured's entire life. It also provides living benefits such as cash value and policy loans.

Advantages of whole life insurance:

* Covers the entire life of the insured

* Living benefits - cash value and policy loans

* Fixed premiums

Drawbacks of whole life insurance:

* Protection is more expensive because of living benefits

* Premium paying period may extend beyond the income-earning years

Whole life is often compared to BUYING like BUYING a house: You can pay the house off slowly or quickly, but once it's paid for, you still own the house. There are several types of whole life All whole life has the same type of benefits. The only difference in "types" of whole life is how the policy is paid. Some will be paid straight until death or age 100, some will be paid for after a few years or by a specific age, some may give you a little discount in the early years to help you get started, etc. All whole life lasts until death or age 100, has a fixed premium, and level benefit with cash value accumulation, regardless of how it is paid. Types of whole life insurance include:

1. straight whole life

2. limited pay whole life

3. single-premium whole life

4. modified whole life

5. graded whole life

Straight life: This is basic whole life insurance with a level face amount and fixed premiums payable over the insured's entire life. Premium payments made until death of insured or age 100 (maturity of policy).

Limited Pay life: This is whole life insurance where the insured is covered for his entire life, but premiums are paid for a limited time. As the premium payment period shortens, cash values increase faster and the fixed premiums are higher. For example, under a life paid-up at 65 policy, premiums are only paid until the insured is 65 years old. With a 20-pay life policy, the insured only pays for 20 years. These policies are in effect until the insured's death or they reach age 100.

Single premium whole life: Allows the insured to pay the entire premium in one lump-sum and have coverage for the insured's entire life.

* An immediate nonforfeiture value is created

* An immediate cash value is created

* A large part of the premium is used to set up the policy's reserve

Modified whole life: Low premiums in the early years and jumps to a higher premium in the later years and remains fixed thereafter. Premiums increase just once.

Graded whole life: Under a typical graded premium life insurance policy, the premium increases yearly for a stated number of years, then remains level. Premiums continue to stay level for the remainder of the policy. For example, a policy can start out low in a graded whole life and increase a small amount every year up until the fifth year, then levels off for the remainder of the policy.

SPECIAL USE POLICIES

In addition to the basic types of life insurance policies, there are a number of "special use" policies insurance companies offer. Many of these are a combination or "packaging" of different policy types, designed to serve a variety of needs.

Family Plan Policies: These are designed to insure all family members under one policy. Usually the family head is covered by permanent (whole life) insurance and the spouse/children are included on the same policy as level term life riders (family term riders)

. The term coverage on the spouse and children are normally convertible to permanent coverage without evidence of insurability. If "Attached" to someone else's policy. Think side car on motorcycle. Riders must RIDE on something.

Family Plan Policy Example:

Husband - Whole Life Policy

Wife (spouse) - Term Policy - convertible without proof of insurability

Children - Term Policies - convertible usually at age 18 or 21 without proof of insurability; premium remains same regardless of the number of children

Family Income Policies: Whole life and decreasing term insurance (begins date of purchase). Provides monthly income to a beneficiary if death occurs during a specified period after date of purchase. If the insured dies after the specified period, only the face value is paid to the beneficiary since the decreasing term insurance expired. Income this concern typically DECREASES over time because the household shrinks. They use decreasing term instead of level. With decreasing term, the benefit begins to decrease as soon as the policy begins.

Family Maintenance Policy: Whole life and level term (begins date of death). Provides income to a beneficiary for a selected period of time if an insured die during that period. At the end of the income- paying period, the beneficiary also receives the entire face amount of the policy. If an insured die after the end of the selected period, the beneficiary receives only the face value of the policy. Maintenance "maintains" the family using level term. This means the family will receive a benefit for so many years after the insured's death.

Multiple protection policies: Pays a benefit of double or triple the face amount if death occurs during a specified period. If death occurs after the period has expired, only the policy face amount is paid. The period may be for a specified number of years - 10, 15, or 20 years or to a specified age such as 65. These policies are combinations of permanent insurance and level term insurance.

Joint Life Policy: A policy that covers two or more people. The age of the insureds are "averaged" and a single premium is charged. It uses permanent insurance (as opposed to term) and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. ONE policy covers two. Think "joint accounts" with a bank. One account, two people.

Note: A variation of the joint life policy is the joint and survivor policy, or a "survivorship life policy" (it can also be known as a "second to die" policy). This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured.

Compared to the combined premium for separate life insurance policies on two individuals, the premium for a survivorship life policy is lower.

Juvenile Insurance: Life insurance which is written on the lives of a minor is called juvenile insurance. The adult applicant is usually the premium payor as well, until the child comes of age and is able to take over the payments. A payor provision is typically attached to juvenile policies. It provides that, in the event of death or disability of the adult premium payor, the premiums will be waived until the child reaches a specified age (such as 18, 21, or 25). Payor Provision protects the insured in the event the PAYOR dies or is disabled.

Credit life insurance: is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. It is normally issued in an amount not to exceed the outstanding loan balance and is usually paid entirely by the borrower. A decreasing term policy is most often used.

NONTRADITIONAL LIFE POLICIES

In the 1980s, insurance companies introduced a number of new life products designed to keep up with inflation and are interest-sensitive, most of which are more flexible in design and provisions than their traditional counterparts. The most notable of these are interest- sensitive whole life, adjustable life, universal life, variable life, and variable universal life.

Interest-Sensitive Whole Life: Interest-sensitive life insurance is a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. This is also called current assumption whole life insurance. It also gives the insured the opportunity to either increase the face amount or use the extra cash value to lower future premiums. Premiums can vary to reflect the insurer's changing assumptions with regard to its death, investment, and expense factors. CAWL (current assumption whole life) policies are almost always a MEC due to accelerated premiums.

Adjustable life policies: are distinguished by their flexibility that comes from combining term and whole life insurance into a single plan.

* The policyowner determines how much face amount protection is needed and how much premium the policyowner wants to pay

* Adjustable life insurance allows you to vary your coverage as your needs change without requiring evidence of insurability

* Consequently, no new policy needs to be issued when changes are desired

* Adjustable life has all the usual features of level premium cash value life insurance

Universal life: is a variation of whole life insurance, characterized by considerable flexibility.

* Changes may be made with relative ease by the policyowner with these flexible-premium policies

* Investment Gains go towards cash value

* Unlike whole life (with its fixed premiums, fixed face amounts, and fixed cash value accumulations) universal life allows its policyowners to determine the amount and frequency of premium payments which will adjust the policy face amount

* Basic characteristics of a universal life policy are flexible premiums, flexible benefits, no minimum death benefit, and cash value withdrawals

* Cash value accumulations are subject to a minimum interest guarantee

* Any surrender charges of a universal policy must be disclosed

Equity Index Universal Life insurance (EIUL): A permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index, like the S&P 500. Indexed universal life insurance policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns. Potential extra interest based on the investments of the company's general account.

Modified Endowment Contracts (MEC): A policy that is overfunded, according to IRS tables, is classified as a Modified Endowment Contract. Policies that do not meet the 7-pay test are considered MEC's and will lose favorable tax treatment. The 7-pay test is a limitation on the total amount you can pay into your policy in the first seven years of its existence. The test is designed to discourage premium schedules that would result in a paid-up policy before the end of a seven-year period. For example, if yearly premium is $500, in a seven year period a

total amount paid would equal $3,500. If you paid $3,501, it has now exceeded the 7-pay test and is no longer a life insurance contract. It will now be taxed as an investment.

* If withdrawn prior to age 59 1/2, there is a 10% penalty.

* Taxation only occurs when cash is distributed

* Funds withdrawn from a MEC are subject to last-in first-out (LIFO) tax treatment, which assumes that the investment or earnings portion of the contract's values is withdrawn first (making these funds fully taxable as ordinary income).

* Penalty taxes on premature distributions from a modified endowment contract (MEC) normally apply to policy loans

VARIABLE INSURANCE PRODUCTS

Note: Because of the transfer of investment risk from the insurer to the policyowner, variable insurance products are considered securities contracts as well as insurance contracts. A producer is required to register with the National Association of Securities Dealers to sell variable products.

Variable whole life insurance: was created to help offset the effects of inflation on death benefits. It's permanent life insurance with many of the same characteristics of traditional whole life insurance. The main difference is the manner in which the policy's values are invested. With traditional whole life, these values are kept in the insurer's general accounts and invested in conservative investments selected by the insurer to match its contractual guarantees and liabilities. With variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options. Values held in these separate accounts are invested in riskier, but potentially higher yielding, assets than those held in the general account. The basic characteristics of a variable life policy are: fixed premiums, a guaranteed minimum death benefit which fluctuates over the minimum, and cash values which fluctuate and are not guaranteed.

Variable universal life (VUL): is a type of life insurance that builds cash value. It combines all the characteristics of a universal life and variable life. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to the ability to invest in separate accounts whose values vary-they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. This provides the policyowner with flexible premiums, adjustable death benefits, a guaranteed minimum death benefit and gives the insured growth potential for higher returns, but also potential for loss. Evidence of insurability can be required for an individual covered by a variable universal life policy when the death benefit is increased.

Life Insurance Provisions, Options, and Riders

Required Provisions

Insuring Clause (or Insuring Agreement): The insurer's basic promise to pay specified benefits to a designated person in the event of a covered loss. The insuring clause is the part of the health insurance policy that states the kind of benefits provided and the circumstances under which they will be paid. The purpose of the insuring clause in an insurance policy is to specify the scope and limits of the coverage provided. The insuring clause is the part of the insurance policy that identifies the specific type of benefits or or services that are covered by that policy and the circumstances under which they will be paid. Any promises the INSURER makes will be in the INSURING clause.

Consideration Clause: A policyowner must pay a premium in exchange for the insurer's promise to pay benefits. A policyowner's consideration consists of completing the application and paying the initial premium. The amount and frequency of premium payments are contained in the consideration clause. In insurance, the insurance company exchanges the promises in the policy for a two-part consideration from the insured. (Consideration is an exchange of something of value on which a contract is based). An insurance contract is valid only if the insured provides consideration in the form of the initial full minimum premium required and the statements made in the application. The applicant begs, "Please CONSIDER me for insurance. Here is my completed application, my initial premium, and how much money/how often I agree to pay. Please CONSIDER me!"

Entire Contract

* The entire contract includes the actual policy and the application

* It states that nothing outside of the contract (the contract includes the signed application and any attached policy riders) can be considered part of the contract

* It also assures the policyowner that no changes will be made to the contract or waive any of the provisions after it has been issued, even if the insurer makes policy changes that affect all policy sales in the future. This, however, does not prevent a mutually agreeable change or modifying the contract after it has been issued.

* Any change to a policy must be made with the approval of an executive officer of the insurance company whose approval must be endorsed on the policy or attached in a rider

* This mandatory health policy provision states that the policy, including endorsements and attached papers, constitutes the entire insurance contract between the parties

* We can't send you additional paperwork later. THE ENTIRE POLICY AND APPLICATION is sent to you and that makes up your ENTIRE CONTRACT.

Grace Period: The period of time policyowners are allowed to pay an overdue premium during which the policy remains in force, usually 30 days. If an insured dies during the Grace Period of a life insurance policy before paying the required annual premium, the beneficiary will receive the face amount of the policy less any required premiums. The purpose of the Grace Period is to give the policyowner additional time to pay overdue premiums. The policyowner is given a number of days after the premium due date during which time the premium payment may be delayed without penalty and the policy continues in force. Grace period is the same definition for your insurance bill as it is for all of your other bills. Don't pick it as an answer if the question isn't talking about paying your bill late and keeping your insurance.

Reinstatement: Permits the policyowner to reinstate a policy that has lapsed- as long as the policyowner can provide proof of insurability and pays all back premiums, outstanding loans, and interest. Most states allow reinstatement up to 3 years after a policy has lapsed. However, some states are 5-7 years. The Reinstatement provision specifies that if an insured fails to pay a renewal premium within the time granted but the insurer subsequently accepts the premium, coverage may be restored. Under certain conditions, a policy that has lapsed may be reinstated. Reinstatement is automatic if the delinquent premium is accepted by the company or its authorized agent and the company does not require an application for reinstatement. If it takes no action on the application for 45 days, the policy is reinstated automatically. To reinstate any policy, you need: A reinstatement application, statement of good health, all back premiums.

Incontestable Clause: The clause in a life insurance contract that prohibits the insurer from questioning the validity of the contract after a certain period of time has elapsed.

Misstatement of Age or Sex: Allows the insurer to adjust the policy benefits if the insured's age or sex is misstated on the policy application. The misstatement of age provision allows the insurer to adjust the benefit payable if the age of the insured was misstated when application for the policy was made. The insurer can adjust the benefit to what the premiums paid would have purchased at the insured's actual age. If the insured was older at the time of application than is shown in the policy, benefits would be reduced accordingly. The reverse would be true if the insured were younger than listed in the application

Policy Loan Provisions: Policies that have cash value also have policy loan and withdrawal provisions. These policies must begin to build cash value after a certain number of years. In most states, this is 3 years. These loans, with interest, cannot exceed the guaranteed cash value or the policy is no longer in force. The policyowner has the right to the policy's cash value. Policy loans are not taxable. Any loans with interest due at the time of death will be deducted from the insured's policy proceeds.

Automatic Premium Loans: Allows the insurer to automatically use the policy cash value to pay an overdue premium. There is no cost for this provision. Automatic Premium Loans: Like using a savings account for overdraft protection, but there's no fee, just interest for borrowing your money. If you don't pay it back, interest is added to the loan, it also will be subtracted from any death benefit or cash surrenders if not paid back first.

Owner's Rights Provision

Defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy.

Assignment Clause or Provisions: The right to transfer policy rights to another person or entity. The new owner is known as the assignee.

Absolute assignment: When the assignee receives full control of the policy and rights to the policy benefits from the current policyowner. Under an absolute assignment, the transfer is complete and irrevocable, and the assignee receives full control over the policy and full rights to its benefits.

Collateral assignment: The partial and temporary transfer of rights to another person or entity. Collateral assignments are usually intended for securing a loan with a creditor. A collateral assignment is one in which the policy is assigned to a creditor as security, or collateral, for a debt. If the insured dies (or sometimes becomes totally\permanently disabled), the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed. The insured's beneficiary is then entitled to any excess of policy proceeds over the amount due to the creditor.

Free Look: The policyowner is permitted a certain number of days once the policy is delivered to look over the policy and return it for a refund of all premiums paid.

Notice of Claim

* The notice of claim provision describes the policyowner's obligation to notify the insurance company of a claim in a reasonable period of time

* Typically, the period is 20 days after the occurrence or a commencement of the loss, or as soon thereafter as is reasonably possible

* You need to let the insurance company know that you are going to be filing a claim, so they are expecting your claim forms.

Claim Forms

* It is the company's responsibility to supply a claim form to an insured within 15 days after receiving notice of claim

* If the insurance company fails to send out the claim forms within the time period required by the provision, the insured should submit the claim in any form, which must be accepted by the company as adequate proof of loss

* You can submit your claim using a napkin and crayon as long as you provide all the necessary information.

Proof of Loss

* The statement that an insured must give an insurance company to show that a loss actually occurred is a Proof of Loss

* After a loss occurs, or after the company becomes liable for periodic payments (e.g., disability income benefits), the claimant has 90 days in which to submit proof of loss.

* Insurance company can't pay you if you don't prove there is a loss.

Time of Payment of Claims

* The time of payment of claims provision provides for immediate payment of the claim after the insurer receives notification and proof of loss.

* If the claim involves disability income payments, they must be paid at least monthly if not at more frequent intervals specified in the policy

* The purpose of the Time of Payment of Claims provision is to prevent the insurance company from delaying claim payments

* You did your part (Paid your bill and got injured/sick/ etc.) now the insurance company has to immediately do our part (Pay you) and it can't be less often than monthly, or you wouldn't be able to pay your bills.

Payment of Claims

* The payment of claims provision in an insurance contract specifies how and to whom claim payments are to be made.

* Payments for loss of life are to be made to the designated beneficiary

* If no beneficiary has been named, death proceeds are to be paid to the deceased insured's estate. Claims other than death benefits are to be paid to the insured.

* Should the insurance company pay you, or the doctor, or someone else?

Physical Exam and Autopsy

* The physical exam and autopsy provision entitles a company, at its own expense, to make physical examinations of the insured at reasonable intervals during the period of a claim, unless it's forbidden by state law.

* Forget everything you learned on "Law and Order," only the state can forbid an autopsy. You gave up your (and your families) rights to refuse when you applied for insurance.

Legal Actions

* The insured cannot take legal action against the company in a claim dispute until after 60 days from the time the insured submits proof of loss.

* The Legal Action provision provides the insurer adequate time to research a claim

* At least give the insurance company 2 months to take care of you before you take them to court.

Beneficiary designation

* Where the policyowner indicates who is to receive the proceeds.

Change of Beneficiary

* The insured, as policyowner, may change the beneficiary designation at any time unless a beneficiary has been named irrevocably.

Settlement options

* Where the ways in which the proceeds can be paid out or settled are explained.

Discretionary Provision

* Limits the way a court can review a claim denial and makes it difficult for the court to conduct a fair review of the claim. Some states have enacted laws that prohibit Discretionary provision because they are designed to protect the insurance company.

Change of Occupation

* This provision also allows the insurer to reduce the maximum benefit payable under the policy if the insured switches to a more hazardous occupation or to reduce the premium rate charged if the insured changes to a less hazardous occupation

Unpaid Premiums

* If there is an unpaid premium at the time a claim becomes payable, the amount of the premium is to be deducted from the sum payable to the insured or beneficiary.

Cancellation

* Though prohibited in a number of states, the provision for cancellation gives the company the right to cancel the policy at any time with 45 days' written notice to the insured

* This notice must also be given when the insurer refuses to renew a policy or change the premium rates

* If the cancellation is for nonpayment of premium, the insurer must give 10 days' written notice to the insured, unless the premiums are due monthly or more frequently

* The cancellation provision also allows the insured to cancel the policy any time after the policy's original term has expired by notifying the insurer in writing

Conformity with State Statutes

* Any policy provision that is in conflict with state statutes in the state where the insured lives at the time the policy is issued is automatically amended to conform with the minimum statutory requirements.

Illegal Occupation

* The illegal occupation provision specifies that the insurer is not liable for losses attributed to the insured's being connected with a felony or participation in any illegal occupation.

Intoxicants and Narcotics

* The insurer is not liable for any loss attributed to the insured while intoxicated or under the influence of narcotics.

* Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded

The Policy Face

* The Policy face contains a summary of the type of policy and the coverage provided by the policy. It Identifies the insured, the term of the policy (the effective date and termination date), and how the policy can be renewed.

Guaranteed Insurability Option Rider

* Allows a policyowner to purchase additional life insurance coverage at specified dates without providing evidence of insurability.

Payor Provision (Rider)

* Provides waiver of premiums if the adult premium-payor should die or, with some policies, become totally disabled.

Accidental Death Benefit Rider (Double Indemnity)

* Provides an additional amount of insurance usually equal to the face amount of the base policy if the cause of death was an accident

COMMON EXCLUSIONS OR RESTRICTIONS

* Exclusions: A feature of a life insurance policy stating that the policy will not cover certain risks.

* Exclusions and restrictions are situations or conditions which are not covered or covered with substantial limits.

* The common ones are injuries due to war or an act of war, self-inflicted injuries, and those incurred while the insured is serving as a pilot or crew member of an aircraft

* Other exclusions are losses resulting from suicide, hernia (as an accidental injury), riots, or the use of drugs or narcotics

* Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded

* Foreign travel may not be excluded in every instance, but extended stays overseas or foreign residence may cause a loss of benefits

* Occupational injuries and illnesses are covered by Workers' Compensation and typically excluded

* The exclusions section is NOT included in the policy face (first page of an insurance policy)

* Suicide Clause: The policy will be voided and no death benefit will be paid if the insured commits suicide within 1 year from policy issuance. The primary purpose of a suicide provision is to protect the insurer against the purchase of a policy in contemplation of suicide.

* Aviation: The insurer will not pay the claim if the insured dies due to involvement with aviation, such as a military pilot flying a jet aircraft.

* War or Military Service: The insurer will not pay the claim if the insured dies while in active military service or due to an act of war.

* Hazardous Occupation or Hobby: If the insured dies as a result of a hazardous occupation or hobby, the insurer will not pay the claim.

Waivers for Impairments

* When an insurance company does not cover a loss due to a specific condition the insured has. This is usually called an impairment rider.

* If the insured's condition improves, the company may be willing to remove the waiver.

Policy Options

Nonforfeiture Options You are closing your account (surrendering your policy), what do you want us to do with your cash (so you don't forfeit it)?

When a policyowner decides he does not want his life insurance policy anymore, he has the option to surrender his policy. If there is cash value remaining he must use one of the following nonforfeiture options:

Cash Surrender: allows the policyowner to receive the policy's cash value. Policyowner no longer has coverage at this point. Normally, the maximum length of time a life insurance company may legally defer paying the cash value of a surrendered policy is 6 months (Delayed Payment provision).

Extended Term Option: permits the policyowner to use the policy's cash value to buy level, extended term insurance for a specified period. No premium payments are made. The coverage provided with the extended term nonforfeiture option is equal to the net death benefit of the lapsed policy.

Reduced Paid-Up Option: the policyowner pays no more premiums but the face amount is decreased.

Dividend Options

Participating policies pay dividends to policyowners if the company's operations result in a divisible surplus. Recall that dividends are a return of overcharged premiums, and are therefore not taxable. Insurers typically pay dividends on an annual basis. The following dividend options are available to policyowners for settling dividend payments.

* Cash Option: Take the cash - It's your money, you can take it and run.

* Reduced Premiums Option: Reduces premium payments - "Just keep them and next year don't charge me so much."

* Accumulate Interest Option: Allows dividends to accumulate interest. Interest is the only thing you can be charged tax on.

* Paid-Up Additions Option: Purchase single payment whole life coverage

* One-Year Term Option: Purchase one-year term protection

Keep in mind, with dividends, the policy is still active.

POLICY RIDERS

Waiver of Premium Rider: Allows the policyowner to waive premium payments during a disability and keeps the policy in force. It does not provide cash payments to the policyowner. The disability must be total and permanent and have sustained through the waiting period (90 days or 6 months). After a certain age (usually 60 or 65), the waiver of premium rider is void. Waiver: Covers the PRIMARY INSURED. Does NOT provide income. Is NOT a loan. The insurance company is "waiving" the premiums" it's just as if the insured made the premiums every month.

Payor Rider (or Payor Clause): If the individual paying the premiums on a juvenile life policy becomes disabled or dies, the Payor Rider ensures that premiums will be waived.

Accelerated Benefit Rider: Allows the insured to receive a portion of the death benefit prior to death if the insured has a terminal illness and expected to die within 1-2 years. Whatever amount is withdrawn in an accelerated death benefit will decrease the death benefit when death occurs. Accelerated Benefit: Your doctor said you are going to die, so you aren't going to stop paying your insurance (since you know you'll need it soon). Insurance company now knows you are going to die soon which means they are going to have to pay out the benefit. To make things a little easier and less stressful, they will give YOU some of the proceeds NOW and deduct from what would go to your beneficiary at your death.

Accidental Death Benefit Rider (multiple indemnity): Pays an additional sum to the beneficiary if the insured dies due to an accident. The amount paid is a multiple of the policy face amount such as double or triple the original benefit. Truly the cheapest way to add a lot of coverage for a period of time.

Accidental Death and Dismemberment: May be added to a life insurance policy. Pays benefits for dismemberment and accidental death. Pays a principal sum for loss of both hands, both arms, both legs, or loss of vision in both eyes. AD&D: FACE VALUE= amount for accidental loss or loss of 2 hands, feet, eye sight, etc. 1/2 face value for loss of 1 foot, hand eye, etc. One foot and one hand = 100% face value.

Guaranteed Insurability Rider (future increase option): Permits the policyowner to buy additional permanent life insurance coverage at specific points of time in the future without submitting proof of insurability. It also includes specific events like marriage and births, without requiring the proof of insurability. Usually the benefit is allowed every 3 years, up to the original face amount of the policy.

Cost of Living Rider: Allows the policy face amount to be adjusted to account for inflation based on the consumer price index.

Return of Premium Rider: pays the total amount of premiums paid into the policy in addition to the face value, as long as the insured dies within a certain time period specified in the policy. It also returns premiums to the living insured at the end of a specified period of time, as long as the premiums have been paid.

Automatic Premium Loan Rider: Allows the insurance company to deduct overdue premium from an insured's cash value by the end of the grace period if a payment is missed on a life policy. The insurance company can AUTOMATICALLY take out a LOAN for you against your CASH VALUE to cover your PREMIUM in the event they don't receive payment from you. This can continue for as long as they don't receive a payment and you still have cash value. Once all of your cash value is gone, if you don't start paying, your policy will lapse. This is just like any other cash value loan.

Life Insurance Premiums, Proceeds and Beneficiaries

PRIMARY FACTORS IN PREMIUM CALCULATIONS

Once an insurance company determines that an applicant is insurable, they need to establish the payment (premium) for the insurance policy.

Life insurance premiums are calculated based on the following three primary factors:

1. Mortality Factor

2. Interest Factor

3. Expense Factor

Mortality Factor: A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Interest Factor: Insurance companies invest the premiums they receive in an effort to earn interest. The rate of earnings on investments is one of the ways an insurance company can reduce premium rates. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners.

Expense Factor: Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. The expense factor is also known as the loading charge. Each insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries, agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other administrative expenses.

Benefits : The number and kinds of benefits provided by a policy affect the premium rate The greater the benefits, the higher the premium. To state it another way, the greater the risk to the company, the higher the premium.

Other factors that impact the premium amount include:

* Age: The older the person, the higher probability of death and disability

* Sex / Gender: Women tend to live longer than men, so their premiums are usually lower

* Health: Poor health increases probability of death and disability

* Occupation: Hazardous job increases the risk of loss

* Hobbies: High risk hobbies also increase the risk of loss

* Habits: Tobacco use presents a higher risk than non-smokers

Remember these are typically only important at time of application. If you tell them you never went sky diving (and that is true) then 5 years later you go sky diving for the first time and die, they will pay.

Mode refers to the premium payment schedule and permits the policyowner to select the timing of premium payments. Insurance policy rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest (interest factor) for a full year. If the policyowner chooses to pay the premium more than once per year (example monthly, quarterly, semi-annually) there normally will be an additional charge because the company will have additional charges in billing and collecting the premium payments.

The more payments you make, the more it is going to cost you overall. Ideally, if you could make 1 payment in a lump sum to start and "Pay up" the policy, you would save the most amount of money. Also, your cash value would begin accumulating right away. The higher your premium payments are, the quicker you accumulate cash value.

Premium Payment Options:

* Annual

* Semi-Annual

* Quarterly

* Monthly

Note: The higher the frequency of payments = higher premiums

Level Premium Funding: The policyowner pays more in the early years for protection to help cover the cost in later years, which allows the premiums to remain level throughout the life of the policy. The shorter the premium-paying period, the higher the premiums, and vice versa.

Single Premium Funding: The policyowner pays a single premium that provides protection for life as a paid- up policy. Normally associated with whole life insurance

Reserves vs. Cash Value

Reserves: Money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company's obligations to pay future claims.

Cash Value: Cash value applies to the savings element of whole life insurance policies that are payable before death. However, during the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid.

Comparing life insurance policy costs

Life insurance cost comparison methods are used to evaluate the cost of one life insurance policy in relation to another so that consumers can be better informed when shopping for the most competitively priced offering for their particular needs. Although the cost of life insurance depends largely upon an individual's specific circumstances and requirements, cost estimates are nonetheless useful so that the consumer has the opportunity to consider every factor when making a buying decision. When evaluating different policies, it's not enough to simply compare premiums. A lower premium does not automatically mean a lower-cost policy. To that extent, cost indexes have been developed to help in the process of measuring an insurance policy's actual cost. Here are two of these indexes:

Surrender Cost Index: Uses a complicated calculation formula where the net cost is averaged over the number of years the policy was in force to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of that period.

Net Payment Cost Index: Uses the same the same formula as the Surrender Cost Index with the exception that it doesn't assume that the policy will be surrendered at the end of the period. The net payment cost index is useful if one's primary concern is the amount of death benefits provided in the policy. It is helpful in comparing future costs, such as in 10 to 20 years, if one will continue to pay premiums and does not take the policy's cash value.

Tax Treatment of Premiums

Premiums paid on individual life insurance policies are generally not deductible. Premiums for life insurance used for business purposes are generally not tax-deductible. Here are the exceptions to these rules:

* Premiums used for a charity are tax-deductible.

* Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax- deductible.

* Employer-paid premiums used to fund group life insurance for the benefit of employees are tax- deductible.

Tax Treatment of Cash Values

If cash value is surrendered, the portion that exceeds the premiums paid is taxable. For policies that are not surrendered, the cash value grows tax-free. As long as the cash value stays in the policy taxes will never be imposed on any portion, not even the amount that exceeds the cost basis.

Policy Proceeds

Death Benefits: Death benefits are paid out in a variety of ways. These methods are known as settlement options. The policyowner may select a settlement option at the time of the application and may change the option at anytime during the life of the insured. Once selected, the settlement option cannot be changed by the beneficiary.

Death Benefit Settlement Options

* Lump Sum: Death benefit is paid in a single payment, minus any outstanding policy loan balances and overdue premiums. The lump sum option is considered the automatic (or "default") option for most life insurance contracts.

* Interest Only: Insurance company holds death benefit for a period of time and pays only the interest earned to beneficiaries. A minimum rate of interest is guaranteed and the interest must be paid at least annually.

* Fixed Period: Also called period certain. The fixed period option is when the insurer pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a specified number of years. Part of the installments paid to a beneficiary consists of interest calculated on the proceeds of the policy. The dollar amount of each installment depends upon the total number of installments.

* Fixed Amount: The fixed amount installment option pays a fixed death benefit in specified installment amounts until the proceeds are exhausted. The larger the installment payment the shorter the payout period.

* Life Income: The life income option provides the beneficiary with an income that they cannot outlive. Installment payments are guaranteed for as long as the recipient lives, the amount of each installment is based on the recipient's life expectancy and the amount of principal. This gives the potential for a greater return, or the potential for greater loss, based on how long the insured lives

* Joint and Survivor: Benefits will be paid on a life-long basis to two or more people. This option may include a period certain and the amount payable is based on the ages of the beneficiaries.

Living Benefits: A living benefit is the option to use some of the future death benefit proceeds when they may be most needed, before their death, when the insured has a terminal illness.

Living Benefit Options

Accelerated Benefit - Allows someone that a physician certifies as terminally ill to access the death benefit. The amount of benefit received will be tax free.

Viatical Settlement - Allows someone with a terminal illness to sell their existing life insurance policy to a third party for a percentage of the death benefit. The new owner continues to make the premium payments and will eventually collect the entire death benefit.

Note: the original policyowner is called the Viator and the new third-party owner is called the Viatical, or sometimes referred to as the Viatee.

Tax Treatment of Proceeds

* Premiums: Not tax deductible

* Death Benefit: Tax- free if taken as a lump sum to a named beneficiary. Proceeds pass directly to the beneficiary and are not subject to attachment by the insured's creditors.

* Death Benefit Installments: Principal is tax- free - interest is taxable

Taxation of Proceeds Paid at Death

Life insurance proceeds paid to a beneficiary are usually tax free if taken as a lump sum. The exception to this rule is the transfer for value rule, which applies when a life insurance policy is sold to another party before the insured's death. Another tax cost typically associated with death is the Federal estate tax (although most relatively simple estates do not require the filing of an estate tax return).

Taxation of Proceeds Paid During the Insured's Lifetime

Policy Surrender: When a policy is surrendered for the cash value, some of the cash value received may be taxable, if the value was more than the amount of the premiums paid for the policy.

Accelerated Death Benefit: When benefits are paid under a life insurance policy to a terminally ill person, the benefits are received tax-free. To be considered terminally ill, a physician must certify that the person has a condition or illness that will result in death in two years.

Note: Most states still require a Viatical company to inform the client that under a Viatical arrangement the proceeds could be taxable in certain situations and recommend they consult a tax advisor

1035 Exchange: When an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes as a Section 1035 exchange. Policy exchanges that qualify as a 1035 exchange are not taxable.

BENEFICIARIES

Qualifications

There are very few restrictions on who may be named a beneficiary of a life insurance policy. The policyowner is the ultimate decision maker. However, in the underwriting process, the underwriter may consider the issue of insurable interest. When the policyowner lists themselves as the beneficiary, they will require proof of insurable interest. Remember, insurable interest ONLY applies at time of APPLICATION.

Who can be beneficiaries?

* Individuals

* Businesses

* Trust

* Estates

* Charities

* Minors

* Class (having a group named as the beneficiary instead, such as the children of the insured)

Types of Beneficiaries

A beneficiary can be either specific (a person identified by name and relationship), or a class designation (a group of individuals such as the "children of the insured"). If no one named, or if all beneficiaries die before the insured dies, death benefit will go to insured's estate.

By Order of Succession:

* Primary: First in line to receive death benefit proceeds

* Secondary (contingent): Second in line to receive death benefit proceeds if primary beneficiary dies first

* Tertiary: Third in line to receive death benefit proceeds. If no one named, death benefit will go to insured's estate.

Distribution by Descent

* Per Stirpes: (meaning by the bloodline) In the event that a beneficiary dies before the insured, benefits from that policy will be paid to that beneficiary's heirs.

* Per Capita: (meaning by the head) Evenly distributes benefits among all named living beneficiaries.

Changing a Beneficiary

A policyowner may change the beneficiary at any time. There may be limitations, however.

* Revocable Beneficiary - The policyowner may change the beneficiary at any time without notifying or getting permission from the beneficiary.

* Irrevocable Beneficiary - An irrevocable designation may not be changed without the written consent of the beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not exercise certain rights (such as taking out a policy loan) without the consent of the beneficiary.

Special Situations

* Simultaneous Death: If the insured and the primary beneficiary die at approximately the same time for a common accident with no clear evidence as to who died first, the Uniform Simultaneous Death Act law will assume that the primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

* Common Disaster Provision: With a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary.

* Spendthrift Clause: Prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.

* Facility of Payment: allows the insurance company to pay all or part of proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor or when the named beneficiary is deceased.

Life Insurance Underwriting and Policy Issue

PURPOSE OF UNDERWRITING

Underwriting: is another term for risk selection. It is the process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums. The underwriter will utilize several different types of information in determining the insurability of the individual. This is called risk classification. Material facts can affect an applicant being accepted or rejected.

One of the main responsibilities of an underwriter is to protect the insurer against adverse selection.

UNDERWRITING PROCESS

The underwriting process involves reviewing and evaluating information about the applicant and establishing individual against the insurer's standards and guidelines for insurability and premium rates. The larger the policy, the more comprehensive and diligent the underwriting process.

The most common sources of underwriting information include:

1. The application

2. The medical report

3. Attending physician's statement

4. The Medical Information Bureau

5. Special Questionnaires

6. Inspection Reports

7. Credit Reports

Application: The application is the starting point and basic source of information used by the insurance company in the risk selection. Although applications differ from company to company they all have the following same components. Insurable interest must exist between the policyowner and insured at the time when the application is made.

Insurable interest exists when the death of the insured would have a clear financial impact on the policyowner.

Application

Part I of the Application

* General Information - Age, DOB, Sex, Address, Marital Status, Occupation,

* Details about the requested insurance coverage:

o Type of policy

o Amount of insurance

o Name and relationship of the beneficiary

o Other insurance the proposed insured owns

* Other information personal information

o Tobacco use

o Hazardous hobby

o Foreign travel

o Aviation activity

o Military service.

Part II of the Application

* Medical Information - Health History

o Part II focuses on the proposed insured's health and asks a number of questions about the health history.

o This medical section must be completed in its entirety for every application.

o Depending on the proposed policy, this section may or may not be all that is required in the way of medical information.

* The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen.

Part III of the Application

* Agent's Report (Statement) - Agent's personal observations of the applicant.

* Includes the applicant's financial condition, character, background, purpose of sale, and how long agent has known the applicant.

* Part III of the application is often called the agent's report. This is where the agent reports personal observations about the proposed insured.

* Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully.

Policies below a certain face amount, such as $50,000 or even $100,000, will not require additional medical information, other than provided by the application. However, they require a medical report for further information.

Credit Reports: An applicant's credit history is sometimes used for underwriting and to determine the likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

Warranty: Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

Representation: Statements made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail.

Medical Report: A medical report is sometimes used for underwriting policies with higher face amounts. If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS).

Inspection Reports: This report provides information about the applicant's character, lifestyle, and financial stability. Inspection reports are usually only requested for larger coverages because they add expense to the underwriting process. When an investigative consumer report is used in connection with an insurance application,

the applicant has the right to receive a copy of the report. However, company rules vary as to the sizes of policies that require a report by an outside agency. Companies are allowed to obtain inspection reports under The Fair Credit Reporting Act. The Fair Credit Reporting Act of 1970 (FCRA) regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing. This report provides information about the applicant's character, lifestyle, and financial stability. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

Medical Information Bureau (MIB): The MIB is a nonprofit trade organization which maintains medical information about individuals. Information from the MIB is used by life and health insurers. This helps insurance companies from adverse selection by applicants, as it detects misrepresentations, helps identify fraudulent information, and controls the cost of insurance. Information released from the Medical Information Bureau about a proposed insured may be released to the proposed insured's physician. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician. An insurance company would NOT notify the MIB if an application is declined.

USA Patriot Act: The USA Patriot Act was enacted in 2001. It requires insurance companies to establish formal anti-money laundering programs. The purpose of the act is to detect and deter terrorism. A life insurance policy can be cash-surrendered, which can be an attractive money laundering vehicle because it allows criminals or terrorists to put dirty money in and take clean money out in the form of an insurance company check.

Special Questionnaires: are used for applicants involved in special circumstances, such as aviation, military service, or hazardous occupations or hobbies. The questionnaire provides details on how much of the applicant's time is spent in these activities.

Fair Credit Reporting Act of 1970 (FCRA): Regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested. Information regarding an individual's credit standing and general reputation is contained in a consumer report. It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. If an insurance company requests a credit report, the consumer must be notified in writing.

* The producer must provide a privacy notice to an applicant if personal information about that applicant is disclosed and is passed along to the insurer or its affiliates.

* The applicant has the right to receive a copy of the report when an investigative consumer report is used in connection with an insurance application.

Applicant Ratings: once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the applicant poses to the insurer. This is evaluation is known as risk classification.

CLASSIFICATIONS OF RISK

Once all the information about a given applicant has been reviewed, the underwriter will utilize several different types of information in determining the insurability of the individual and the risk that the applicant poses to the insurer. This is evaluation is known as risk classification. The producer must provide a privacy notice to an applicant if personal information about that applicant is disclosed and is passed along to the insurer or its affiliates. The following rating classification system is used to categorize the favorability of a given risk:

Preferred - Low Risk - Lower Premiums. Lower risks tend to have lower premiums. Some of the following may result in a policy being issued with a preferred insurance premium:

* Applicant is nonsmoker and/or nondrinker

* Good personal/family health history

Standard - Average Risk - No Extra Ratings or Restrictions standard terms and rates

Substandard - High Risk - Rated Up - Higher Premiums chronic conditions, insulin diabetes, heart disease

Declined - Not Insurable - Potential of Loss to Insurance Company is Too High terminal illness, too many chronic conditions

FIELD UNDERWRITING PROCEDURES

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant, which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection, assure that the application is filled out completely and correctly, collect the initial premium, and deliver the policy. Other duties include:

* Forwarding the application to the insurer in a timely manner

* Seeking additional information about the applicant's medical history if requested

* Notifying the insurer of any suspected misstatements in the application

* Assuring the application is filled out completely and correctly

* Collect the initial premium

* In addition to that, agents have the responsibility and duty to solicit good business. Therefore, an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer's underwriting guidelines and represent profitable business to the insurer.

Upon policy delivery, agents must deliver the life insurance buyer's guide and policy summary to the applicant. A life insurance producer may also be required to obtain a signature on a statement of good health at the time of policy delivery.

Application Errors

* If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes

* An incomplete application will be returned to the agent

* The agent can NEVER change the application without the customer present to initial the changes

Buyer's Guide: provides general information about the types of life insurance policies available, in language that can be understood by the average person. This is whole life, this is term life this is what variable life means, etc.

Policy Summary: provides specific information about the policy purchased, such as the premium and benefits. Mom calls you excited because she bought new health insurance. This allows you to quickly see what "health insurance" specifically did she buy: Medicare Supplement, Major Medical, Critical Illness, Long-term Care.

Suitability Form Ensures that the customer is best suited for the policy they are purchasing. Prevents the sale of unnecessary insurance for example a 75 year old customer living off of Social Security would not be suited for a single premium deferred annuity because they would be giving up a large some of cash that they could live on and possibly not live long enough to collect on the annuity.

Signatures: The agent and the applicant are required to sign the application. If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application. Having an applicant that is different from the insured (parent and minor child) is considered third party ownership In most states, once a minor reaches the age of 15, he is eligible to contract for an insurance policy.

If an agent fails to deliver a fully completed and accurate application, the insurance company will return the application to the agent.

When an applicant makes a mistake in the information given to an agent in completing the application, the applicant can have the agent correct the information, but the applicant must initial the correction. If, however, the company discovers the mistake before the applicant, then it usually returns the application to the agent. The agent then corrects the mistake with the applicant and has the applicant initial the change.

An incomplete application will be returned to the producer and a new one will have to be filled out.

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application. However, if premium is not collected with the application, the policy will not become valid until the initial premium is collected.

The agent issues the applicant a premium receipt upon collecting the initial premium.

The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time.

There are two types of premium receipts that determine when coverage will begin. These are conditional receipts and binding receipts.

* Conditional Receipt: The producer issues a conditional receipt to the applicant when the application and premium are collected. The conditional receipt denotes that coverage will be effective once certain conditions are met. If the insurer accepts the coverage as applied for, the coverage will take effect from the date of the application or medical exam, whichever is later.

* Binding Receipt: The binding receipt or the temporary insurance agreement provides coverage from the date of the application regardless of whether the applicant is insurable. Coverage usually lasts for 30 to 60 days, or until the insurer accepts or declines the coverage. Binding receipts are rarely used in life insurance, and are primarily used in auto and homeowners' insurance. Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. This may also be described as Insurer is bound to coverage until the application is formally rejected. Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application

Effective Date of Coverage

As explained under conditional receipt, coverage is not effective without collection of the initial premium, approval of the application, and policy issuance and delivery. If the initial premium does not accompany the application, the premium must be collected by the agent. In some cases, the insurer requires the agent to collect a statement of good health from the insured at the time of delivery. If the initial premium is not submitted with the application, the policy effective date is established by insurer. In this case, it could be the date of policy issuance, or the date the policy is delivered to the applicant, premium collected, and statement of continued good health signed.

The effective date is important for two reasons:it identifies when the coverage is effective and establishes the date by which future annual premiums must be paid.

Backdating: is the process of predating the application a certain number of months to achieve a lower premium. A lower age results in a lower premium. A backdated application results in a backdated policy effective date, if approved by the insurer. Applications usually can only be backdated up to 6 months. This process is also known as "saves age". In addition, policyowners are required to pay all back-due premiums and the next premium is due at the backdated anniversary date.

Insurance contract is sent to the sales agent for delivery to the applicant. The policy usually is not sent to the policyowner because it should be explained by the sales agent to the policyowner.

Policy Issue

* Happens when the insurer "approves" the application, they are "issuing the policy"

* Technically a policy could be ISSUED and not delivered for days or weeks later

POLICY ISSUE AND DELIVERY

Constructive Delivery: policy delivery may be accomplished without physically delivering the policy into the policyowner's possession. Constructive policy occurs if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent. Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy. If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery.

The Statement of good health: verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy), or did not submit the initial premium with the application. Is used when the applicant did not submit the initial premium with the application In such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health. Also used when reinstating a policy

Personal delivery: of the policy is a good practice as it allows the producer to explain the coverage to the insured (such as the riders, provisions, and options). Personal delivery also builds trust and reinforces the need for the coverage. All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy.

Group Life Insurance

PRINCIPLES OF GROUP INSURANCE

Different from individual life insurance, which is written on a single life, group life insurance is written on more than one life. Group life insurance is usually written for employee-employer groups and is most often written as an annual renewable term policy. An important underwriting principle of group life insurance is that all or a large percentage of persons in the group must be covered by the insurance.

Contributory and Noncontributory Plans

Contributory - An employee group plan in which employees share the cost. Insurance company requires that at least 75% of all employees participate.

Noncontributory - An employee group plan in which employees do NOT share in the cost. Insurance company requires that 100% of all employees be eligible.

FEATURES OF GROUP INSURANCE

The following are the two features that separate group insurance from individual insurance.

* the individual does not have to provide evidence of insurability- group underwriting is involved

* are not issued as individual policies- master contracts are issued instead

* low cost due to lower administrative, operational, and selling expenses associated with group plans

* flow of insureds: entering and exiting under the policy as they join and leave the group

* typically issued as level term insurance, which provides a fixed amount of coverage throughout the term of the contract

Note: Since the individual does not own or control the policy, they are issued a certificate of insurance to prove they have coverage. The actual policy, which is called the master policy, is issued to the employer.

* Employees are called - certificate holders

* Employers are called - contract holders

ELIGIBLE GROUPS

Group life insurance can be formed by the following as well as other organizations, just as long as they are formed for a reason other than to purchase insurance. There is no minimum # of members required for group life insurance.

* Single-employee groups

* Multiple-employee groups

* Labor Unions

* Trade Associations

* Credit/Debit groups

* Fraternal Organizations

* Trustee Groups (Established by two or more employers or labor unions)

Eligibility of Group Members - (employees)

* Employee must be full time and actively working

* If contributory, employees must approve of automatic payroll deduction

* New employee probationary period is usually 1 to 6 months

* The employee has 31 days during the enrollment period to sign up, otherwise they may need to provide evidence of insurability

Classification of Risk

Insurers require that a minimum number of group members/employees participate in a group insurance plan in order to minimize adverse selection. Adverse selection means that the people most likely to need life insurance will purchase life insurance in greater numbers than those in good health.

After all necessary information is collected on an applicant, the underwriter will classify the applicant based on the degree of risk assumed.

The following rating classification system is used to categorize the favorability of a given risk:

Preferred - Low Risk - Lower Premiums

Standard - Average Risk - No Extra Ratings or Restrictions

Substandard - High Risk - Rated Up - Higher Premiums

Declined - Not Insurable - Potential of Loss to Insurance Company is Too High

Lower risks tend to have lower premiums. If an applicant is too risky, the insurer will decline coverage.

Types of Group Life Insurance Plans

Group Term Life: Life insurance is normally offered as a guaranteed annual renewable term policy. The policy is issued for one year and may be renewed annually without evidence of insurability at the discretion of the policyowner.

Group Whole Life: Though not as common, group whole life offers permanent protection for insured members under the group.

Note: The most common types of Group Permanent (whole life) plans are: Group Ordinary, Group Paid-Up, and Group Universal Life

Dependent Coverage: Most group life insurance policies cover the member's dependents, as long as the amount of coverage does not exceed 50% of the insured member's coverage.

Taxation of Group Life Insurance Plans

For a group life insurance plan to receive favorable tax treatment, there are certain requirements in place. This makes sure that the average employee is not discriminated against in favor of higher level employees.

Determining eligibility: Must benefit at least 70% of all employees. At least 85% of all participating employees must not be key employees.

Premiums for group life insurance: If paid by the employee are not tax-deductible. However, if the employer pays, it can deduct the premiums it pays as a business expense. Proceeds from a group life policy are tax-free if taken in a lump-sum. Proceeds taken in installments will be subject to taxes on the interest portion of the installments.

How Benefits are Determined

Most employers will establish benefit schedules according to the following:

* Earnings

* Employment position

* Flat benefit

Conversion to Individual Policy: If a member's coverage is terminated, the member and his dependents may convert their group coverage to individual whole life coverage, without having to show proof of insurability.

Conversion Period: An individual must apply for individual coverage within 31 days after the date of group coverage termination. An individual is covered under the group policy during the conversion period.

Group Policy Termination: If the master policy is terminated, each individual member who has been insured for at least 5 years is permitted to convert to an individual policy, providing coverage up to the face value of the group policy.

OTHER FORMS OF GROUP LIFE INSURANCE

The following are other types of life insurance issued as group plans:

Franchise Life Insurance: This is used where participants are employees of a common employer (i.e., the employer may operate several companies) or are members of a common association or society. The employer/association/society is a sponsor of the plan and may or may not contribute to the premium payments. Unlike the employer's group plan, each individual will be issued an individual policy which will remain in force as long as premiums are paid and the employee/member maintains their relationship with the sponsor. These are used by small groups who individually do not meet the state's minimum numbers required by law.

Group Credit Life: These are set-up by banks, finance companies, etc. in case the insured dies before a loan is repaid. Policy benefits are paid to the creditor and used to settle the loan balance. The premiums are usually paid by the borrower. A decreasing term policy is commonly used.

Blanket Life Insurance: Covers groups of people exposed to the same hazard, such as passengers on an airplane. No one is named on the policy and there is not a certificate of coverage given out. Individuals are only covered for the common hazard.

Group Permanent Life: Some group life plans are permanent (whole life) plans, using some form of permanent or whole life insurance as the underlying policy. The most common types of permanent group plans are group ordinary, group paid-up, and group universal life.

Annuities

PURPOSE AND FUNCTION

While life insurance protects against the risk of premature death, annuities protect against the risk of living too long.

Annuity Basics

Annuities: are ways of providing a stream of income for a guaranteed period of time.

* Simply stated, an annuity is started with a large sum of money that will be paid out in installments over a period of time or until the money is all gone.

* The monthly amount of benefit an annuitant receives is based on factors such as: principle amount, rate of interest the annuity earns, and length of payout period.

Contract owner: The individual who purchases the annuity pays the premiums and has rights of ownership.

* An owner may be the annuitant, the beneficiary, or neither

Annuitant: The income benefits distributed at regular intervals during the liquidation phase of an annuity contract are normally payable to the annuitant.

Beneficiary: The beneficiary is the person who receives survivor benefits upon the annuitant's death.

Accumulation Period vs. Annuity Period

Most annuities have two phases, the accumulation period and the annuity period.

* Accumulation Period: The pay-in period, where the contract owner makes the purchase payments. The accumulation period of an annuity normally may continue after the purchase payments cease.

* Annuity Period: This is also called the liquidation period, annuitization period, or pay- out period. This is the time when the money that has accrued during the accumulation period is paid-out in the form of payments to the annuitant.

STRUCTURE AND DESIGN

Funding Method When defining an annuity, (describe how you pay for it) + (describe how they pay you) SINGLE PREMIUM (You pay once) + DEFERRED (They start paying you at least a year later). You CANNOT make installment payments and get paid immediately.

* Single Payment - Lump Sum

* Periodic Payments - Installments paid over a period of time

Date Income Payments Begin

Immediate Annuities: Purchased with a single lump sum payment, and will start providing income payments within the first year, but usually starting 30 days from the purchase date. It's purpose is to provide for liquidation of a principle sum.

* Commonly used to structure the payment of liability insurance settlements, lottery winnings, and other large sums

* This type of annuity is usually called a Single Premium Immediate Annuity (SPIA)

Deferred Annuities: will start providing income payments after the first year. Deferred annuities are usually purchased with either a single lump sum payment known as a Single Premium Deferred Annuity (SPDA) or from monthly payments known as Flexible Premium Deferred Annuity (FPDA). A Fixed Deferred Annuity, for example, pays out a fixed amount for life starting at a future date. Interest credited to the cash values of annuities are deferred until distribution. Other characteristics of deferred annuities include:

* When a deferred annuity is cancelled during the early contract years, the insurer normally will assess a back-end load known as a surrender charge

* The "bailout" feature, sometimes found in single premium deferred annuity contracts, waives surrender charges when the interest rate falls below a stated level

* Before a deferred annuity contract can be terminated for its surrender value, the insurer must first obtain authorization from the owner

* The accumulation value of a deferred annuity is equal to the sum of premium paid plus interest earned minus expenses and withdrawals

PAY OUT OPTIONS

Straight Life Income Payout Option: pays the annuitant a guaranteed income for the annuitant's lifetime. When the annuitant dies, no further payments are made to anyone. This offers protection against exhaustion of savings due to longevity.

Fixed Amount Option: Under the fixed amount option, the annuitant receives a fixed payment until the contract value is exhausted, regardless of when that will be. If the annuitant dies before the contract is depleted, the beneficiary receives the remainder.

Cash Refund Payout Option: Pays a guaranteed income to the annuitant for life. If the annuitant dies before all the money is gone, a lump-sum cash payment of the remaining funds are paid out to the annuitant's beneficiary.

Installment Refund Payout Option: Pays a guaranteed income to the annuitant for life. If the annuitant dies before the money is gone, the beneficiary will continue to receive the same monthly installment payments.

Life with Period Certain Payout Option (life income with term certain): is designed to pay the annuitant guaranteed payments for the life of the annuitant or for a specific period of time for the beneficiary. It

provides that benefit payments will continue for a minimum number of years regardless of when the annuitant dies.

* For example, if an annuitant has a 20 year period certain and dies after 10 years, the beneficiary will receive payments for another 10 years. Joint and Full Survivor Payout Option: Pays out the annuity to two or more people until the last annuitant dies. If one of them dies, the other will continue to receive the same income payments. There are two additional options made available with a joint and survivor payout:

* Joint and two-thirds survivor: Survivor will have payments reduced to two-thirds of the original payment.

* Joint and one-half survivor: Survivor will have payments reduced to one-half of the original payment. Period Certain Payout Option: Pays guaranteed income payments for a certain period of time, such as 10 or 20 years, whether or not the annuitant is living.

INVESTMENT CONFIGURATION

Annuities can also be defined by their investment configuration, which will determine the amount of income the benefits pay. The two types of annuity classifications are fixed annuities and variable annuities.

Fixed Annuity: Provide a guaranteed rate of return. Fixed annuities credit interest at a rate no lower than the contract guaranteed rate.

Variable Annuity: Does not provide a guaranteed rate of return, because of the investment risk. The cash value is based on the results of these investment funds. A statement must be provided to the owner of the annuity at a minimum of once per year. Variable annuities can be classified as either immediate or deferred. Insurers that deal with variable annuities are subject to dual regulation by the SEC and the state's Office of Insurance Regulation.

* Accumulation Units: In a variable annuity, the value of the accumulation units varies depending on the value of the stock investment that is a part of a variable annuity.

* Annuity Units: At the time the variable annuity is to be paid out to the annuitant, the accumulations are converted into annuity units. These payouts can vary from month to month depending on the investment results. The number of units doesn't change, but the value does. The amount of each variable annuity benefit paid to an annuitant varies according to the market value of the securities backing it.

Equity Indexed Annuities: A type of fixed annuity that offers the potential for a higher return than a standard fixed annuity. They are sometimes tied to the Standard and Poor's 500 or the Composite Stock Price Index.

Single-life annuities: Characterized by having only one annuitant.

Tax-sheltered annuities: Limited exclusively for employees of religious, charity, or educational groups.

* Also called 403(b) plans

* Accumulation payments often come from voluntary salary reductions

* The annuitant may have an individual account contract

Income Tax Treatment of Annuity Benefits: Annuity benefit payments consist of principal and interest. The portion of annuity benefits that consists of principal (premiums paid into the annuity during the accumulation period) are not taxed and is sometimes called the owner's "cost basis". The portion of the annuity benefits that is interest earned on the principal is taxable as ordinary income. Interest income must be reported for federal income tax purposes upon receiving distributions or income benefits from the contract.

* The exclusion ratio is a simple way to determine what portion of each annuity benefit payment is taxable: Exclusion ratio = Investment in the contract / Expected return

Partial Withdrawal: is taken from an annuity before age 59 1/2 the withdrawal is considered 100% interest, and is therefore taxable as ordinary income.

A 10% tax penalty is applied if a distribution is received before the annuitant reaches age 59 1/2 . After this age, withdrawals do not incur the 10% penalty tax, but are taxable as ordinary income.

1035 Exchange: applies to annuities. If an annuity is exchanged for another annuity, a gain (for tax purposes) is not realized. This is also true for a life insurance policy or an endowment contract exchanged for an annuity. However, an annuity cannot be exchanged for a life insurance policy.

Qualified Annuity Plans: a qualified plan is a tax-deferred arrangement established by an employer to provide retirement benefits for employees. The plan is qualified because of having met government requirements. A qualified annuity is an annuity purchased as part of a tax-qualified individual or employer-sponsored retirement plan, such as an individual retirement account (IRA). A qualified deferred annuity in the accumulation phase may be used to fund an IRA and permit continued contributions within the maximum limits set by the IRS. IRA funds that have been annuitized no longer permit contributions.

SUITABILITY OF ANNUITY SALES FOR SENIOR CUSTOMERS

Senior Residents Age 65 or Older

When making recommendations to a senior consumer regarding the purchase or exchange of an annuity, an agent must have reasonable grounds for believing that this recommendation is suitable for the senior consumer. This recommendation should be based on the facts disclosed by the senior consumer. It should include an evaluation of his investments and other insurance products along with his financial situation and needs.

Social Security

PURPOSE

The Social Security system provides a basic floor of protection to all working Americans against the financial problems brought on by death, disability, and aging. Social Security augments but does not replace a sound personal insurance plan. Unfortunately, too many Americans have come to expect Social Security will fulfill all their financial needs. The consequence of this misunderstanding has been disillusionment by many who found, often too late, they were inadequately covered when they needed life insurance, disability income, or retirement income.

Social Security, also known as Old Age, Survivors, and Disability Insurance (OASDI), was signed into law in 1935 by President Roosevelt as part of the Social Security Act. Social Security was established during the Great Depression to assist the masses of people who could not afford to sustain their way of life because of unemployment, disability, illness, old age, or death.

WHO IS COVERED

Social Security extends coverage to virtually every American who is employed or self-employed, with few exceptions. Those not covered include:

* Most federal employees hired before 1984 who are covered by Civil Service Retirement or another similar plan

* Approximately 25% of state and local government employees who are covered by a state pension program and elect not to participate in the Social Security Program

* Railroad workers covered under a separate federal program called the Railroad Retirement System

HOW BENEFITS ARE DETERMINED

A person must be insured under the Social Security program for survivors, disability, or retirement benefits to pay. Social Security benefits are based on how long a covered worker has worked throughout his life.

Insured Status

Social Security establishes benefit eligibility based on an "insured" status. There are two types of insured statuses that qualify individuals for Social Security benefits:

* To obtain Fully Insured Status, a covered worker must accrue a total of 40 quarters of credit, which is about 10 years of work.

* To be considered Currently Insured, and thus eligible for limited survivor benefits, a worker must have earned 6 credits during the last 13-quarter period.

Social Security Payroll Taxes

* Funding for Social Security is collected from FICA payroll taxes.

* Social Security payroll taxes are collected from employers, employees, and self-employed individuals.

* FICA tax is applied to an employee's income up to a certain income amount. This amount is called the taxable wage base.

* There is a maximum amount of earnings that can be subject to Social Security tax each year. This amount is indexed each year to the national average wage index. This maximum applies to employers, employees, and self-employed individuals. Medicare Part A taxes are not subject to a maximum taxable wage cap.

Taxation of Social Security Benefits

* Social Security benefits are subject to federal income tax if the beneficiary files an individual tax return and his annual income is greater than $25,000.

* Joint filers will pay federal income tax on their Social Security benefits if their income is greater than $32,000.

Calculating Benefits

* Based on the individual's average monthly wage during his working years.

* The primary insurance amount (PIA) is used to establish the benefit. It is equal to the worker's full retirement benefit at age 65.

* If a worker retires early, for example at age 62, his retirement benefits will be 80% of his PIA and will remain lower for the covered worker's life.

* The PIA is based on the average earnings over your lifetime.

TYPES OF OASDI BENEFITS Survivors Benefits

Social Security Survivors benefits or death benefits: pay a lump-sum death benefit or monthly income to survivors of deceased covered workers.

Survivor's benefits: include a $255 lump-sum death benefit, surviving spouse benefits, child's benefit, and parent's benefit.

* A surviving spouse without dependent children is eligible for Social Security survivor benefits as early as age 60.

* Survivor benefits are also available to:

o A spouse of any age who is caring for children under age 16

o Children under age 18

o Children under age 19 who are full time students

o Children at any age if disabled before age 22 and remain disabled

* A Social Security benefit of 75% of the Primary Insurance Amount (PIA) is given to an underage child of a deceased worker.

Disability Benefits

* Only available to covered workers who are fully insured,as defined by Social Security, at the time of disability.

* Disability income benefits are paid to the covered worker in the amount of the PIA after a 5-month waiting period.

* Only available prior to the age of 65

* Does not pay partial disability or short-term disability benefits

* Disability must be total and expected to last 12 months or end in death

* Benefits include monthly payments to the disabled worker, spousal benefits, and child's benefits.

* Definition of Disability: In order to be considered totally disabled, an individual has to qualify according the following requirements:

o The inability to engage in any gainful work that exists in the national economy

o The disability must result from a medically determinable physical or mental impairment that is expected to result in early death, or has lasted, or is expected to last for a continuous period of 12 months

Retirement Benefits

* Benefits are only available to covered workers who are fully insured upon retirement.

* Benefits are paid monthly.

* If a covered worker retires at the normal retirement age, he will receive 100% of the PIA.

* If a covered worker retires early at the age of 62, the maximum Social Security benefit is 80% of the PIA. This reduction remains all through retirement.

* Retirement benefits pay covered retired workers at least 62 years of age, their spouses and other eligible dependents monthly retirement income.

* Retirement benefits include monthly retirement payments to the covered worker, spousal benefits, and child's benefits.

Black-Out Period

* Benefits paid to the surviving spouse of a deceased person who was receiving Social Security.

* The "black-out period" begins when Social Security survivorship benefits cease.

* This is when the youngest child turns 16 years old, or immediately if there are no children.

* The "black-out period" ends when the surviving spouse turns at least 60 years old.

Retirement Plans

QUALIFIED PLANS VERSUS NONQUALIFIED PLANS

Qualified plans are retirement plans that meet federal requirements and receive favorable tax treatment. Qualified plans provide tax benefits and must be approved by the IRS. The plans must be permanent, in writing, communicated to employees, defined contributions or benefits, and cannot favor highly paid employees, executives, or stockholders. The primary type of qualified plans includes defined benefit and defined contribution plans.

* To comply with ERISA minimum participation standards, qualified retirement plans must allow the enrollment of all employees over age 21 with one year experience.

* If more than 60% of a qualified retirement plan's assets are in key employee accounts, the plan is considered "top heavy".

Qualified plans have the following features:

* Employer's contributions are tax-deductible as a business expense.

* Employee contributions are made with pretax dollars - contributions are not taxed until withdrawn.

* Interest earned on contributions is tax-deferred until withdrawn upon retirement

* The annual addition to an employee's account in a qualified retirement plan cannot exceed the maximum limits set by the Internal Revenue Service

Nonqualified plans are characterized by the following:

* Do not need to be approved by the IRS

* Can discriminate in favor of certain employees

* Contributions are not tax-deductible

* Interest earned on contributions is tax-deferred until withdrawn upon retirement

Tax Benefits of Qualified Plans

Employer's contributions are tax-deductible and not treated as taxable income to the employee. Employee contributions are made with pre-tax dollars, and any interest earned on both employer and employee contributions are tax- deferred. Employees only pay taxes on amounts at the time of withdrawal.

Withdrawals and Taxation

Withdrawals by the employee are treated as taxable income. Withdrawals by the employee made prior to age 59 1/2 are assessed an additional 10% penalty tax. Distributions are mandatory by April 1st of the year following age 70 1/2, and failure to take the required withdrawal results in a 50% excise tax on those funds.

Funds may be withdrawn prior to the employee reaching age 59 1/2 without the 10% penalty tax: if the employee dies or becomes disabled; if a loan is taken on the plan's proceeds; if the withdrawal is the result of a divorce proceeding; if the withdrawal is made to a qualified rollover plan; or if the employee elects to receive annual level payments for the remainder of his life.

The Employee Retirement Income Security Act of 1974 (ERISA)

ERISA was enacted to provide minimum benefit standards for pension and employee benefits plans, including fiduciary responsibility, reporting and disclosure practices, and vesting rules. The overall purpose of ERISA is to protect the rights of workers covered under an employersponsored plan.

EMPLOYER-SPONSORED PLANS

Defined Benefit Plans

Defined benefit plans pay a specified benefit amount upon the employee's retirement. When the term pension is used, it normally is referring to a defined benefit plan. The benefit is based on the employee's length of service and/or earnings. Defined benefit plans are mostly funded by individual and group deferred annuities.

Defined Contribution Plans

Defined contribution plans do not specify the exact benefit amount until distribution begins. Two main types of plans are profit-sharing and pension plans. The maximum contribution is the lesser of the employee's earnings or $49,000 per year. Here are some examples of defined contribution plans:

Profit-Sharing Plans

A type of retirement plan that sets aside a portion of the firm's net income for distributions to employees who qualify under the plan. Plans must provide participants with the formula the employer uses for contributions. The contributions may vary year to year, and contributions and interest are tax-deferred until withdrawal.

Pension Plans

Employers contribute to a plan based on the employee's compensation and years of service, not company profitability or performance.

Money Purchase Plans

Allow employers to contribute a fixed annual amount, apportioned to each participant, with benefits based on funds in the account upon retirement. Target benefit plans have a target benefit amount.

Stock Bonus Plans

These plans are similar to a profit-sharing plan, except that contributions by the employer do not depend on profits, and benefits are distributed in the form of company stock.

Other Employer-Sponsored Plans

Cash or Deferred Arrangement (401(k) Plans)

401(k) plans allow employers to make tax-deferred contributions to the participant, either by placing a cash bonus into the employee's account on a pre-tax basis or the individual taking a reduced salary with the reduction placed pre-tax in the account. The account's funds are taxable upon withdrawal.

Tax-Sheltered Annuity (403(b) Plans)

Tax-sheltered annuities are a special class of retirement plans available to employees of certain charitable, educational, or religious organizations.

QUALIFIED PLANS FOR SMALL EMPLOYERS

Simplified Employee Plans (SEPs)

SEP's are basically an arrangement where an employee (including a self-employed individual) establishes and maintains an IRA to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much larger amount that can be contributed to an employee's SEP plan is the lesser of 25% of the employee's annual compensation.

Savings Incentive Match Plan for Employees (SIMPLE)

SIMPLE plans are available to small businesses (including tax exempt and government entities) that employ no more than 100 employees who received at least $5,000 in compensation from the employer during the previous year. An employer can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee. To establish a SIMPLE plan, the employer must not have a qualified plan in place.

Keogh Plans

Keogh or HR-10 plans are for self-employed persons, such as doctors, farmers, lawyers, or other sole- proprietors. Keoghs may be defined contribution or defined benefit plans. Defined contribution Keoghs have a maximum contribution of $49,000 per year, while defined benefit Keoghs have maximum benefits of $195,000 per year. Contributions are tax- deductible, and interest and dividends are tax-deferred.

INDIVIDUAL RETIREMENT PLANS

IRAs are established by an individual who has earned income to save for retirement.

Traditional IRAs

Traditional IRAs allow for an individual to contribute a limited amount of money per year, and the interest earned is tax- deferred until withdrawal. Contribution limits are indexed annually, currently at $5,000 per year, with $6,000 for individuals age 50 or older. Some individuals may deduct contributions from their taxes based on their adjusted gross income (AGI), but all withdrawals are taxable income. If an individual or spouse does not have an employer retirement plan, the entire contribution is tax-deductible, regardless of AGI. Withdrawals made prior to age 59 1/2 are assessed an additional 10% penalty tax.

To avoid penalties, traditional IRA owners must begin to receive payment from their accounts no later than April 1 in the year following the attainment of age 70 1/2. Funds may be withdrawn prior to the employee reaching age 59 1/2 without paying the 10% penalty tax (but the interest is still taxable) to the following: death, disability, first-time homebuyers up to $10,000, education (no dollar maximum), health insurance premiums if unemployed, qualified medical expenses.

Roth IRAs

Roth IRAs are designed so that withdrawals are received income tax-free. Contributions to Roth IRAs are subject to the same limits as traditional IRAs, but are not tax-deductible. Interest on contributions is not taxable as long as the withdrawal is a qualified distribution. Qualified distributions must occur after five years in the event of death or disability of the individual, up to $10,000 for first-time homebuyers, or at the age of 59 1/2.

Rollovers

Rollovers are a transfer of funds from one IRA or qualified plan to another.

* Rollovers are subjected to 20% withholding tax if eligible rollover funds are received personally by a participant in a qualified plan, unless the funds are deposited into a new IRA or qualified plan within 60 days of distribution.

* Funds that are transferred directly from one qualified IRA to another qualified IRA are not subject to this withholding tax. This also includes a trustee-to-trustee transfer of rollover funds instead of personally receiving the funds and then rolling them over. This election permits the participant to avoid mandatory income tax withholding on the amount transferred.

* A surviving spouse who inherits IRA benefits from a deceased spouse's qualified plan is eligible to establish a rollover IRA in their own name.

* Rollover contributions to an individual retirement annuity (IRA) are unlimited by dollar amount

FEDERAL PENSION ACT OF 2006

This law sets forth standards for funding, participating, vesting, disclosure, and tax treatment of retirement plans.

* This Act improves the pension system and encourages employees to increase contributions to their employer- sponsored retirement plans. The provisions of the act have two main goals: addressing employers pension funds and assisting employees who are saving for retirement.

* It addresses employer responsibilities by requiring additional premiums for underfunded plans. It does this by requiring employers to obtain accurate assessments of the pension's financial obligations. It also closes loopholes by which underfunded plans skip payments and prevents employers with under-funded plans from promising extra benefits without first funding those benefits.

* It helps employees who save for retirement through qualified plans by: allowing employers to automatically enroll employees in defined compensation plans; provide more accurate information about accounts; increase access to professional advice about investments; allow for direct deposit of income tax refunds into IRA's; allow active military to make early penalty-free withdrawals; increase limits on contributions to all qualified plans; and provide for better portability for those plans.

1035 EXCHANGES

All of the following are types of insurance policy exchanges that can be made without current taxation:

* The exchange of a life insurance policy for an annuity

* An annuity exchanged for another annuity contract

* A life insurance policy exchanged for another life policy

The exchange of an annuity for a life insurance policy is NOT permitted

Uses of Life Insurance

The valuable role that life insurance plays in providing a death benefit is easily recognized. What is often overlooked or not understood are the many "living benefits" of life insurance-especially whole life insurance. Life insurance creates an immediate estate by paying a death benefit whenever the insured dies. The cash value feature of permanent insurance and the owner's right to borrow from the cash value make these policies an important source of funds to meet living needs.

This section reviews the more common uses of life insurance in meeting individual needs as well as business needs, not only at the death of the policyowner, but also during the owner's life.

DETERMINING THE PROPER INSURANCE AMOUNTS

1. Human Life Value Approach: Calculates the amount of money a person is expected to earn over his lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual.

2. Needs Approach: A method of life insurance planning which identifies the needs of an individual and the individual's dependents. This approach determines the total funds available to a family from all sources and subtracts the amount needed to meet their financial objectives. It takes into consideration:

* Final Expense Fund

* Housing Fund

* Education Fund

* Monthly Income

* Emergency Fund

* Income Needs if Disabled or Ill

* Retirement Income

* Estate Conservation (using life insurance to enable heirs to pay estate taxes)

* NEEDS include ANY(ONE or THING) depending on that person, charity, child, pet,

- The needs approach to personal life insurance planning may involve creating a lump sum to provide for such things as education, retirement, and charitable

- The needs approach to personal life insurance planning also includes the creation of an emergency reserve fund. This fund is designed primarily to cover the cost of unexpected expenses.

- The "needs approach" in life insurance is most useful in determining how much life insurance a client should apply for.

BUSINESS USES OF LIFE INSURANCE

Buy-Sell agreements are also known as business continuation agreements and are used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner. Third-party ownership of life insurance policies is widely used in business insurance and estate- planning situations.

Buy-Sell Funding for Sole Proprietors

There is a two-step business continuation plan to keep the business running after the proprietor's death, whereby the employee takes over management of the business:

* Buy-Sell Plan: an attorney drafts a buy-sell plan stating the employee's agreement to purchase the proprietor's estate and sell the business at a price that has been agreed-upon beforehand.

* Insurance Policy: the employee purchases a life insurance policy on the life of the proprietor. The employee is the policyowner, beneficiary, and pays the premiums. Upon the proprietor's death, the funds from the policy are used to buy the business.

Buy-Sell Funding for Partnerships

There are two types of buy-sell agreements for partnerships: cross-purchase plans and entity plans.

Cross-purchase plans: In a cross-purchase plan, each partner buys, pays the premiums, and is the beneficiary of a life insurance policy on each of the other partners. The amount of the policy is equivalent to each partner's share of the business. When one partner dies, each of the other partners receives the death benefit from the life insurance on the deceased partner, which is then used to buy the deceased partner's ownership of the business.

Entity plans: the partnership itself agrees to buy the deceased partner's share of the business. Entity plans are best for businesses with several partners. In this case, the business purchases, pays the premiums and is the beneficiary of life insurance on each partner.

Buy-Sell Funding for Close Corporations

Unlike a partnership, a close corporation (i.e. an incorporated family business) is legally separate from its owners. It exists after one or more owners dies. A close corporation may purchase either buy-sell plans: cross-purchase or entity. The difference is that an entity plan is termed a stock redemption plan for close corporations.

Close Corporation Cross-Purchase Plan

Similar to partnership cross-purchase plans, a close corporation cross-purchase plan requires surviving stockholders purchase the deceased stockholder's interest in the company, and the deceased stockholder's estate sell the interest to the surviving stockholders. The corporation is not part of the buy-sell plan. Each stockholder owns, pays the premiums and is the beneficiary of life insurance on each of the other stockholders in an amount equal to his share of the corporation's purchase price.

Close Corporation Stock Redemption Plan

Similar to the partnership entity plan, the corporation purchases, is the owner, pays the premiums and is the beneficiary of life insurance policies on each stockholder. The amount of life insurance is equal to each stockholder's share of the corporation's purchase price. When a stockholder dies, the corporation purchases, or redeems, the deceased stockholder's share.

Key Person Insurance: The purpose of key person insurance is to prevent the financial loss that may ensue when an owner, officer or manager dies.

* It pays for finding and training a replacement if the key employee dies prematurely

* The company purchases, owns, pays the premiums and is the beneficiary of the life insurance policy on the key person.

* The premiums are not deductible for income purposes. However, the death proceeds received by the business are not taxable.

EMPLOYEE BENEFIT PLANS

Deferred Compensation: is an executive benefit an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement or death.

Salary Continuation Plan: works the same as deferred compensation except that the employer funds the plan rather than the employee. The employer establishes an agreement, whereby an employee will continue to receive income payments upon death, disability or retirement.

Split-Dollar Plan: is an arrangement where an employer and an employee share in the cost of purchasing a life insurance policy on the employee. It is a method of buying insurance, not an insurance policy itself. Many times it is a combination of term and whole life insurance.

Health and Accident Insurance

Uses of Health Insurance

Health insurance: refers to the broad field of insurance plans that provide protection against the financial consequences of illness, accidents, injury, and disability.

The two perils that are covered in health insurance are accident and sickness. Distinct categories of health coverage include:

1. Medical expense insurance provides financial protection against the cost of medical care by reimbursing the insured, fully or in part, for these costs, called reimbursement plans. Examples of medical expense insurance are Medicare supplement insurance and long-term care insurance.

2. Disability income insurance provide a replacement income when wages are lost due to a disability.

3. Accidental Death and Dismemberment Insurance (AD&D): provides the insured with a lump-sum benefit amount in the event of accidental death or dismemberment under accidental circumstances.

4. Interim Coverage: short-term policies that can be purchased on an interim basis when in between jobs or waiting for a new policy to start.

Health insurance policies are paid for on a year-to-year basis and are subject to periodic increases in premium. Health insurance premium is calculated based on interest, expense, types of benefits, and morbidity, or the expected incidence of sickness or disability within a given age group during a given period of time.

Health insurance benefits are not fixed rather they depend on the amount of loss.

Subrogation: the right for an insurer to pursue a third party that caused an insurance loss to the insured. This is done as a means of recovering the amount of the claim paid by the insurance carrier to the insured for the loss. For example, the right of an insurance company to sue the at-fault drive of an accident to recuperate the loss suffered from paying related medical bills.

BUSINESS NEEDS FOR HEALTH INSURANCE

Business uses of health insurance can be broadly divided into two categories:

1. Business Continuation Plans to continue the operation of a business in the event of a disabling sickness or injury to a business owner or key employee.

2. Employee Benefit Plans to help an employee in the event of a disabling sickness or injury.

Business Continuation Plans

• Business Overhead Expense Insurance

• Sold on an individual basis to professionals in private practice, self-employed business owners, partners, and occasionally close corporations.

• Business overhead expense insurance is designed to reimburse a business for overhead expenses in the event a business owner becomes disabled

• Designed to help the day to day operation of businesses to continue during the period of disability.

• Overhead expenses include such things as rent or mortgage payments, utilities, telephones, leased equipment, employees' salaries etc.

• Does not include any compensation for the disabled owner

• The premium for business overhead insurance is a tax-deductible business expense

• The benefits when paid are treated as taxable income

• For example, an attorney may take out a business overhead expense policy to cover the expense of keeping is practice open if we were in an accident and couldn't work for 3 months. However, this would not provide him any income.

• Disability Buy-Sell Plan also known as Disability Buy-Outs

• A Business Disability Buy-Sell policy is designed to assist in the sale of a business in the event of the disability of a business owner.

• The plan sets forth the terms for selling and buying a partner's or stock owner's share of a business in the event she becomes disabled and is no longer able to participate in the business.

• It is a legal, binding arrangement funded with a disability income policy.

• Unlike typical disability income insurance plans that pay benefits in the form of periodic payments, the buy-out plan usually contains a provision allowing for a lump-sum payment of the benefit.

• Benefits are received tax-free because the premiums paid are not tax deductible.

• Characterized by lengthy elimination periods, often as long as two years.

• For example, three partners of a law firm may take out a disability buy-sell plan on each other with an agreement if one becomes disability they will sell the business to the other two partners who will use the proceeds from the policy to purchase the business.

• Key Person Disability Insurance

• This type of coverage pays a monthly benefit to a business to cover expenses for additional help or outside services when an essential person is disabled.

• The key person's economic value to the business is determined in terms of the potential loss of business income that could occur, as well as the expense of hiring and training a replacement for the key person.

• The business is the owner and premium payor of the policy.

• Benefits are received by the business tax-free because the premium paid is not tax deductible.

• These policies are typically reserved for "hard-to-replace" employees like executives or key sales members and would not be used on lower-level employees like secretaries or assistants.

Employee Benefit Plans

While the term employee benefit plan can encompass a wide variety of benefit offerings (life insurance, pension or profit-sharing plans, vacation pay, deferred compensation arrangements, funeral leave, sick time) it is rare when it does not include some kind of provision for health insurance or health benefits. By providing its employees with a plan for health insurance, an employer derives many benefits:

• The plan contributes to employee morale and productivity

• The plan enables the employer to provide a needed benefit that employees would otherwise have to pay for with personal after-tax dollars (this helps hold down demands for wage increases)

• The plan places the employer in a competitive position for hiring and retaining employees

• The employer can obtain a tax deduction for the cost of contributing to the plan

• The plan enhances the employer's image in both public and employee relations

NATURE OF GROUP HEALTH INSURANCE

The contract for a group health insurance policy is between the insurance company and the group (usually employer). Health insurance is provided through group master contracts. In this case, the employer or the association is the policyowner and is responsible for premium payments. The employer may pay the entire premium or require some contribution from each member to cover the insurance cost.

• A master policy is issued to the employer.

• Insureds (employees or group members) receive certificates of insurance and an outline that describes their benefits.

• The benefits provided under a group health plan are more extensive than those provided under an individual health plan.

• Group health plans typically have higher benefit maximums and lower deductibles.

• Benefits provided to individual insureds are predetermined by the employer in conjunction with the insurer's benefit schedules and coverage limits. For example, group disability benefits can be tied to a position or earnings schedule

• Probationary period: the period of time during which a new employee is ineligible for group health insurance coverage. Think the probation period when you start a new job.

• Enrollment period: the limited period of time during which all members may sign up for a group plan.

• To qualify for group health coverage, the group must be a natural group) formed for some reason other than to obtain insurance). For example, employers, public school students, labor unions, trade associations, creditor-debtor groups, multiple employer trusts, lodges etc.

• State laws specify the minimum number of persons to be covered under a group policy

• Like group life, group health plans commonly impose a set of eligibility requirements that must be met before an individual member is eligible to participate in the group plan.

Coordination of Benefits

The purpose of the coordination of benefits (COB) provision, found only in group health plans, is to avoid duplication of benefit payments and over insurance when an individual is covered under more than one group health plan.

• The provision limits the total amount of claims paid from all insurers covering the patient to no more than the total allowable medical expenses

• The COB provision establishes which plan is the primary carrier (provider), or the plan that is responsible for providing the full benefit amounts as it specifies.

• Once the primary plan has paid its full promised benefit, the insured may submit the claim to the secondary carrier(provider) for any additional benefits payable

• In no case will the total amount the insured receives exceed the costs incurred or the total maximum benefits available under all plans

• Are more appropriate for married couples when each is covered by an employer group plan

• Coordinating benefits are needed for workers with Medicare

• Overutilization of a plan occurs when health benefits are too high.

FUNDING OF GROUP INSURANCE

Group coverage plans have a significantly less out of pocket costs. The cost of insuring an individual under a group health plan is less than the cost of insurance under an individual plan mostly because administrative and selling

expenses involved with group plans are far less. Factors that help determine group health insurance premiums are: the size of the group, the claims experience with previous insurers, and the ages of group members

Contributory Versus Noncontributory

• If the employer pays the entire premium, the plan is noncontributory. The employee does not contribute in paying the bill.

o Most noncontributory group health plans require 100% participation by eligible members, whereas contributory group health plans often require participation by 75% of eligible members

o The reason for these minimum participation requirements is to protect the insurer against adverse selection and to keep administrative expenses in line with coverage units

• If the employees share a portion of the premium, it is contributory. The employee does contribute in paying the bill.

Other group funding options include:

• Shared funding arrangement: this allows the employer to self-fund health care expenses up to a certain limit.

• Minimum premium arrangement: allows the employer to self-insure the normal and expected claims up to a given amount and the insurer funds only the excess amounts.

• Retrospective premium arrangement: the insurer agrees to collect a provisional premium but may collect additional premium or make refund at the end of the year based on the actual incurred losses.

• Self-funding arrangement: large employers may elect to fully self-fund, or may self-fun a plan, but contract for administrative services only.

UNDERWRITING GROUP INSURANCE

The insurer evaluates the group as a whole rather than individuals within the group. The underwriter's objective is to reduce the risk of adverse selection. In order to achieve this the underwriter reviews a number of factors to determine whether or not the group should be accepted. Rarely is an entire group rejected on the basis of one bad risk, unless the group is very small. Based on the group's risk profile, the group is either accepted or rejected. In spite of the many differences between types of groups, there are certain general groups of underwriting considerations. General groups of underwriting considerations are applicable to all or most types of groups, such as:

• Reason for the group's existence (purchasing group insurance must be incidental to the group's formation, not the reason for it)

• Stability of the group (underwriters want to see a group of stable workers without an excessive amount of "turnover")

• Persistency of the group (groups that change insurers every year do not represent a good risk)

• Method of determining benefits (it must be by a schedule or method that prevents individual selection of benefits)

• How eligibility is determined (insurers want to see a sickness-related probationary period, for example, to reduce adverse selection)

• Source of premium payments, whether contributory or noncontributory (noncontributory plans are preferred because they usually require 100% participation, which helps spread the risk and reduces adverse selection)

• Prior claims experience of the group

• Size and composition of the group

• Industry or business with which the group is associated (hazardous industries are typified by higher-than- standard mortality and morbidity rates)

Preexisting Conditions, Conversion and HIPPA Requirements

• Beginning July 1, 1997, HIPAA limited the ability of employer- sponsored groups and insurers to exclude individuals on the basis of preexisting medical conditions.

o The exclusion for preexisting conditions is now limited to conditions for which medical advice or treatment was recommended or received within the six-month period ending on the enrollment date and the exclusion can extend for no more than 12 months

o When determining whether preexisting conditions apply, new employees enrolling in a new group health plan cannot have a gap of more than 63 days without health insurance for preexisting conditions

o Creditable coverage is prior group health insurance that reduces the maximum preexisting condition exclusion period that a new group health plan can apply to that individual

• HIPAA provides the ability to transfer and continue health insurance coverage for millions of American workers and their families when they change or lose their jobs.

o HIPAA portability rules allow individuals who change from one group medical plan to another to reduce or eliminate any pre-existing conditions excluded under the new plan

o Under HIPAA, when an insured individual leaves an employer and immediately begins working for a new company that offers group health insurance, the individual is eligible for coverage upon hire

o The Conversion Privilege allows an insured to convert their group certificate to an individual medical expense policy with the same insurer, if and when they leave their employment, or the group plan is being eliminated

- The conversion privilege is available to terminated employees. Termination of employment includes an employee who is laid-off or who leaves a job voluntarily, but not those who are fired "for cause"

- Insurers are permitted to evaluate the individual and charge the appropriate premium, be it a standard rate or substandard rate

- An individual cannot be denied coverage even if he/she has become uninsurable

- The conversion must be exercised within a given period of time (usually 30 or 31 days) depending on the state. (the employee must make application for a converted policy within this timeframe)

Excess Benefits

A converted group health plan may not include benefits in excess to those benefits offered under the converted health plan.

Other Coverages

The insurer may refuse to renew a converted policy due:

• Benefits resulting in over-insurance
• Fraud or material misrepresentation
• The insured is covered under Medicare

• The HIPAA Privacy Rule provides federal protection for an individual's health information and gives patients an array of rights with respect to that individually identifiable health information.

o HIPAA considers a person's health claim information as individually identifiable health information

o HIPAA imposes requirements on health care providers with respect to disclosure of protected health information

o Notice of information practices must be given to a policyholder at least every three years

o The HIPAA Security Rule provides technical safeguards to assure the confidentiality, integrity, and availability of electronic protected health information.

• HIPPA rules apply to most group health plans like HMO's, PPO's, and Major medical plans. It excludes coverage such as workers compensation and disability income plans.

o HIPAA requires employers with 20 or more employees to allow former employees to continue benefits under the employer's group health insurance

o HIPAA states that a group health policy renewal can be denied when participation or contribution rules have been violated

o HIPAA provides that the 10% excise tax for early withdrawal from IRAs will not apply to the extent a withdrawal is used for medical expenses that exceed 7.5% of the individual's adjusted gross income

COBRA Continuation of Benefits

COBRA is a federal law that guarantees a continuation of their group coverage if their employment is terminated for reasons other than gross misconduct. It stands for the Consolidated Omnibus Budget Reconciliation Act of 1985.

• Protects employees who are laid-off, but not those who are fired "for cause"

• The law does not protect those are covered by other hospital, surgical or medical coverage for individuals in a group plan

• Requires employers with 20 or more employees to continue group medical expense coverage for terminated workers for up to 18 months following termination

• The law does not require the employer to pay the cost of the continued group coverage

• However, the law requires the employer to provide the employee with a written notification of the continuation privilege

• After expiration of group benefits under COBRA, a fully insured group policy can be converted to an individual health insurance policy

• The terminated employee can be required to pay the premium, which may be up to 102% of the premium that would otherwise be charged

• The benefits under COBRA continuation coverage will end if the employer terminates all group health plans

• The following events would qualify for extended medical expense coverage under COBRA for a terminated employee:

o Employment is terminated (for other than gross misconduct): 18 months of continued coverage (or up to 29 months if disabled)

o Employee's hours are reduced (resulting in termination from the plan): 18 months of continued coverage (or up to 29 months if disabled)

o Employee dies: 36 months of continued coverage for dependents

o Dependent child no longer qualifies as "dependent child" under the plan: 36 months of continued coverage

o Employee becomes eligible for Medicare: 36 months of continued coverage

o Employee divorces or legally separates: 36 months of continued coverage for former spouse

o Common exclusions to continuation of group coverage includes: dental, vision care, and other prescription drug benefits

Pregnancy Discrimination Act

• The Pregnancy Discrimination Act of 1978 is an amendment to the Civil Rights Act of 1964 designed to prohibit sex discrimination on the basis of pregnancy.

• Requires employers to treat pregnancy in the same manner as a disability for any other medical reason

• Requires group plans covering 15 or more people to treat pregnancy related claims no differently than any other allowable medical expense

GROUP HEALTH INSURANCE COVERAGES

Health insurance group plans are predetermined by the employer in conjunction with the insurer's benefit schedules and coverage limits. Group health insurance contracts providing coverage for employees in more than one state are usually controlled by the laws of the state where the master contract is issued. Working people age 65 or over generally must be offered the same accident and health benefits offered to younger employees.

Group Basic Medical Expense

• The three standard forms of basic medical expense insurance; hospital, surgical, and physicians' expenses- are available for group insurance

• A group basic medical expense plan can combine two or more of these coverages or it may consist of only one type of coverage, such as hospital expense only

Group Major Medical Plans

• Like individual major medical plans, group major medical plans may be offered as a single, extensive plan (comprehensive major medical) or superimposed over a group basic plan (supplemental major medical)

• Participants are usually required to satisfy an initial deductible with comprehensive plans and either a corridor or an integrated deductible with supplemental plans

• Benefits provided by group major medical plans are usually more extensive than those of individual plans

• For most group health plans the coverage begins on the policy's effective date. However, some plans may also impose a waiting period which gives an insurance company the right to delay coverage for a covered sickness for a specified number of days after the effective date of the policy

• No health plan coverage will begin until the application is completed and approved, the policy is issued, and the initial premium is paid.

Dental care and vision care

• Dental care coverage is designed to cover the costs associated with normal dental maintenance as well as oral surgery, root canal therapy, and orthodontia

• The coverage may be on a "reasonable and customary charge" basis or on a dollar-per-service schedule approach

• Deductible and coinsurance features are typical as are maximum yearly benefit amounts

• Vision care coverage usually pays for reasonable and customary charges incurred during eye exams by ophthalmologists and optometrists.

• A common exclusion with Vision plans is Lasik surgery

Cafeteria Plans (Section 125 plan)

• Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit (salary) into non-taxable benefits. Under a Section 125 program you may choose to pay for qualified benefit premiums before any taxes are deducted from employee paychecks. An S-Corp Owner with a greater than 2% share is ineligible to participate in a Section 125 Plan.

• Cafeteria plans are benefit arrangements in which employees can pick and choose from a menu of benefits, thus tailoring their benefits package to their specific needs

• Employees can select the benefits they value or need and forgo those of lesser importance to them

• The employer allocates a certain amount of money to each employee to "buy" the benefits he/she desires

• If the cost of the benefits exceeds the allocation, the employee may contribute the balance

• Without a Section 125 Plan in place an employee's payroll contribution would not be allowed to an HAS

• Church employee welfare plans are specifically exempt from regulation under ERISA

Wellness Programs:

• Employers offer at least some wellness programs in an effort to promote employee health and productivity and reduce health related costs.

• Wellness programs focus on drug abuse and stress

• Can also be offered by insurance plans directly to their enrollees

Group Disability Income Plans

• Group disability plans usually specify benefits in terms of a percentage of the individual's earnings

• Most group disability plans require the employee to have a minimum period of service, such as 30 to 90 days, before being eligible for coverage

• A group Disability Income plan that pays tax-free benefits to covered employees is considered fully contributory

• Group short-term disability plans are characterized by maximum benefit periods of rather short duration, such as 13 or 26 weeks.

• Group long-term disability plans provide for maximum benefit periods of more than two years, occasionally extending to the insured's retirement age.

Group Health Plan Termination

• No employer or fiduciary managing a group life or health plan may willfully refuse to pay premiums in order to cause the cancellation or nonrenewal of the plan.

• The employer or fiduciary must provide 45 days' notice of termination of the plan to all those covered and receiving benefits.

• Any person violating this regulation shall be guilty of a Class H felony.

Renewability Provisions

• Life insurance (particularly whole life insurance) and annuities are characterized by their permanence. These policies cannot be cancelled by the insurer unless the policyowner fails to make a required premium payment.

• Health insurance is not as permanent in nature. Health insurance policies may contain any one of a wide range of renewability provisions, which define the rights of the insurer to cancel the policy at different points during the life of the policy.

• There are five principal renewability classifications: cancellable, optionally renewable, conditionally renewable, guaranteed renewable, and noncancelable.

• Generally speaking, the more advantageous the renewability provisions to the insured, the more expensive the coverage.

• Every individual or blanket family hospitalization policy, except group plans, covering less than 10 persons, shall be renewable at the option of the policyholder unless sufficient notice of nonrenewal, generally,30 days is given to the policyholder in writing by the insurer.

Offsets for Payments

• Group disability benefits are generally coordinated with or decreased by disability income received from government plans, pensions or other forms of social insurance such as Social Security disability or Workers’ Compensation.

• Individual disability income policies generally pay the monthly income benefit in addition to any income derived from other sources.

Group AD&D

• Frequently offered in conjunction with group life insurance plans.

• May be provided as a separate policy, such as employee-pay-all plans, which are called voluntary group AD&D

• May be provided for both occupational and nonoccupationally losses or for nonoccupationally losses only

• Normally, does not include a conversion privilege

Blanket Health Plans

• Blanket health insurance is issued to cover a group who may be exposed to the same risks, but the composition of the group (the individuals within the group) are constantly changing.

• A blanket health plan may be issued to an airline or a bus company to cover its passengers or to a school to cover its students

• No certificates of coverage are issued in a blanket health plan, as compared to group insurance.

Franchise Health Plans (Wholesale Plans)

• Provide health insurance coverage to members of an association or professional society

• Individual policies are issued to individual members and the association or society simply serves as the sponsor for the plan

• Premium rates are usually discounted for franchise plans

Credit Accident and Health Plans

• Credit accident and health plans are designed to help the insured pay off a loan in the event she is disabled due to an accident or sickness

• If the insured becomes disabled, the policy provides for monthly benefit payments equal to the monthly loan payments due

Health Savings Accounts (HSAs)

• An HSA is a tax-favored vehicle for accumulating funds to cover medical expenses

• Individuals under age 65 are eligible to establish and contribute to HSAs if they have a qualified high- deductible health plan

• Annual contributions of up to 100% of an individual's health plan deductible can be made to an HSA

• Individuals who are 55 to 65 years old can make an additional catch-up contribution

• Earnings in HSAs grow tax-free, and account beneficiaries can make tax-free withdrawals to cover current and future qualified health care costs.

Qualified health care expenses include amounts paid for:

o Doctors' fees

o Prescription and nonprescription medicines

o Necessary hospital services not paid for by insurance

o Retiree health insurance premiums

o Medicare expenses (but not Medigap)

o Qualified long-term care services

o COBRA coverage

Non-occupational Health Plans

• A policy that does not cover injuries sustained while at work because those injuries are covered by workers compensation.

TAX TREATMENT OF GROUP HEALTH PLANS

• Employers are entitled to take a tax deduction for premium contributions they make to a group health plan, as long as the contributions represent an "ordinary and necessary business expense."

• As a general rule, individual premium contributions to a group health plan are NOT tax deductible

• Individual participants do not include employer contributions made on their behalf as part of their taxable income

• Any benefits an individual receives under a medical expense plan are NOT considered taxable income because they are provided to cover losses the individual incurred

• Disability benefit payments that are attributed to employee contributions are not taxable, but benefit payments that are attributed to employer contributions are taxable.

• Sole proprietors are permitted tax deductions for health costs paid from their earnings in the amount of 100% of costs

• Federal income taxes will not likely be applied to death benefits paid to the named beneficiary of an insured under a health insurance policy. However, the proceeds may still be included as part of the insured's taxable estate for estate tax purposes.

Accidental Death and Dismemberment Insurance:

• Pays benefits in the event of a fatal accident or if dismemberment results from an accidental injury.

• Primary form of pure accident coverage

• Provides a stated lump-sum benefit in the event of accidental death or in the event of loss of body members due to accidental injury

• Principal Sum

o The principal sum under an AD&D policy is the amount payable as a death benefit. It is the amount of insurance purchased- $10,000, $25,000, $50,000, $100,000, or more. The principal sum represents the maximum amount the policy will pay.

• Capital Sum

o Another form of payment payable under an AD&D policy is the amount payable for the accidental loss of sight or accidental dismemberment. It is a specified amount, usually expressed as a percentage of the principal sum, which varies according to the severity of the injury. For example, the benefit for the loss of one foot or one hand is typically of the principal sum. The benefit for the loss of one arm or one leg is usually two-thirds of the principal sum. The most extreme losses (such as both feet or sight in both eyes) generally qualify for payment of the full benefit, which is 100% of the principal sum

• Policies that base their benefit payments on accidental means require that both the cause and the result of an accident must be unintentional.

• AD&D can be purchased by individuals as a single policy or as part of an individual disability income policy.

• AD&D provide benefits only in the event of death or dismemberment due to an accident

• Limited Risk Policies Set forth specific risk and provide benefits to cover death or dismemberment due to that risk

• Special Risk Policies Covers unusual hazards normally not covered under ordinary accident and health insurance.

Health Insurance Providers

Commercial Insurance Providers

Health insurance may be written by a number of commercial insurers. The list includes: life insurance companies, casualty insurance companies, and monoline companies which specialize in one or more types of medical expense and disability income insurance.

• Commercial insurance companies function on the reimbursement approach

• The right of assignment built into most commercial health policies lets policyowners assign benefit payments from the insurer directly to the health care provider, thus relieving the policyowner of first having to pay the medical care provider

SERVICE PROVIDERS

Service providers offer benefits to subscribers in return for the payment of a premium. Benefits are in the form of services provided by hospitals and physicians in the plan.

Blue Cross and Blue Shield

Blue Cross and Blue Shield are the dominant health insurers of the United States. The nation's Blue Cross and Blue Shield plans are loosely affiliated through the national Blue Cross and Blue Shield Association but are independently managed. The Blues provide the majority of their benefits on a service basis rather than on a reimbursement basis. This means that the insurer pays the provider directly for the medical treatment given to the subscriber, instead of reimbursing the insured.

• As participating providers, the doctors and hospitals contractually agree to specific costs for the medical services provided to subscribers

• Members of Blue Cross and Blue Shield are known as subscribers

• Blue Cross and Blue Shield plans are called prepaid plans because the subscribers pay a set fee (usually each month) for medical services covered under the plan

• Most Blue Cross and Blue Shield organizations operate as nonprofits

Health Maintenance Organizations

A health maintenance organization, or HMO, is another type of organization offering comprehensive prepaid health care services to its subscribing members. HMOs are distinguished by the fact that they not only finance health care services for their subscribers on a prepayment basis, but they also organize and deliver these health services at its own local health care facilities.

• Subscribers pay a fixed periodic fee to the HMO (as opposed to paying for services only when needed) and are provided with a broad range of health services, from routine doctor visits to emergency and hospital care

• Health care services are normally rendered only by physicians and hospitals (providers) who participate in the HMO

• The payment given to a physician for each member of an HMO assigned to them is called capitation

• When the HMO is represented by a group of physicians who are salaried employees and work out of the HMO's facility, this is known as a closed panel (sometimes called a staff model HMO)

• For non-emergency situations in a closed network plan, a subscriber may be required to pay up to 100% of the billed amount if a health provider is chosen outside of the network

• HMOs function on an individual or independent practice association (IPA) basis, which is characterized by a network of physicians who work out of their own facilities and participate in the HMO on a part-time basis. This is also known as an open panel.

• HMOs are known for stressing preventive care

• Health maintenance organizations may be self-contained and self-funded based on dues or fees from their subscribers. They may also contract for excess insurance or administrative services provided by insurance companies. In fact, some HMOs are sponsored by insurance companies.

• Employers with 25 or more employees to offer enrollment in an HMO if they provide health care benefits for their workers

• Hospital care under a typical HMO plan includes services such as hospitalization, in-hospital lab work and X-rays, inpatient laboratory services, and inpatient mental health care

• HMO's often require subscribers to select a primary care physician, which is a doctor who provides all care for a particular member and controls all referrals for specialized care, and in some cases, hospital care

• If a need for emergency health services arises for an enrollee of a health maintenance organization (HMO) using a gatekeeper system, the enrollee should proceed directly to the nearest emergency room

• With HMO prescription drug plans, drugs are usually dispensed through participating pharmacies

• An in-house pharmacy is typically available to enrollees in a staff model

Preferred Provider Organizations

Another type of health insurance provider is the preferred provider organization, or PPO. A preferred provider organization is a collection of health care providers such as physicians, hospitals, and clinics who offer their services to certain groups at prearranged discount prices. In return, the group refers its members to the preferred providers for health care services.

• Unlike HMOs, preferred provider organizations usually operate on a fee for-service-rendered basis, not on a prepaid basis

• Members of the PPO select from among the preferred providers for needed services. In contrast to HMOs, PPO's provide a wider choice of physicians. PPO health care providers are normally in private practice. They have agreed to offer their services to the group and its members at fees that are typically less than what they normally charge. In return, the group refers its members to the PPO and the providers broaden their patient/service base. If service is obtained outside the PPO, benefits are reduced and costs increase.

• Groups that contract with PPOs are often employers, insurance companies, or other health insurance benefit providers

• While these groups do not mandate that individual members must use the PPO, a reduced benefit is typical if they do not

• If a patient with a preferred provider organization (PPO) chooses to use a non-PPO, the patient usually can expect to have higher out-of-pocket expenses

Ambulatory Care

Ambulatory care is a personal health care consultation, treatment, or intervention using advanced medical technology or procedures delivered on an outpatient basis. Designed to handle:

• Outpatient surgery

• Routine physicals

• Immunizations

GOVERNMENT INSURANCE PROGRAMS

Government provides insurance for many reasons. The primary reasons include:

• To meet social needs

• To make insurance available for certain groups

• To encourage economic development

Medicare

The federally administered Medicare program took effect in 1966. Its purpose is to provide hospital and medical expense insurance protection to those aged 65 and older. It also provides insurance protection to any individual who suffers from chronic kidney disease or to those who have been receiving Social Security Disability benefits for at least 24 months.

• Medicare Part A (Hospital Insurance) covers inpatient care in hospitals and skilled nursing facilities, and it covers care provided in a hospice and some care provided at home

• Part A covers drugs administered as part of inpatient treatment

• Social Security Administration enrollment for the Medicare program and provides information about Medicare to the public

• All parts of the Medicare program (except for public information and enrollment) are administered by The Centers for Medicare and Medicaid Services

• The day the insured enters a hospital is the first day of a Medicare Part A benefit period

• Skilled nursing facility expenses are sometimes covered by Medicare Part A, but ONLY if the insured was hospitalized shortly before entering the facility

• Medicare Part A will cover a maximum of 100 days per benefit period in a skilled nursing facility (days 1- 20 will pay 100%, days 21-100 will pay a flat dollar amount per day)

• The lifetime maximum for inpatient psychiatric care under Part A Medicare is 190 days

• The primary source of financing for Part A is Federal payroll and self-employment taxes

• Physicians who agree to accept assignment on ALL Medicare claims are called participating providers

• Dental care is not covered under Medicare

• Medicare Part B (Medical Insurance) provides medical insurance for required doctors' services, outpatient services and medical supplies, and many services not covered by Part A

• The difference between the physician's actual charges and Medicare's approved amount is called "excess charge"

• Falling below the federal poverty level is not a qualifying event for Medicare

• Open enrollment period for Medicare Part B is January 1 through March 31

• When becoming eligible for Medicare an individual can enroll in a Part C Medicare Advantage Plan

• Medicare Part B is funded by General tax revenue and user premiums

• Medicare Part A covers inpatient hospital stay

• To become eligible for Part D: Prescription Drug coverage, one must have Medicare coverage

Social Security Disability Income

Social Security provides services other than survivorship and retirement benefits. In addition to Medicare, the federal government also provides disability related benefits through the Social Security OASDI program.

• To be eligible for Social Security Disability benefits, you need to be fully insured, in which you need at least one quarter of coverage for each calendar year after turning 21 years old. The minimum number of credits needed is 6.

• To be fully insured on a permanent basis, 40 quarter credits are required - at this point you are fully insured for Social Security Disability benefits whether you continue to work or not.

• The maximum Social Security Disability benefit an insured may receive is equal to 100% of the insured's Primary Insurance Amount (PIA)

• Disability income benefits are available to covered workers who qualify under Social Security requirements

• One of the requirements is that the individual must be so mentally or physically disabled that he cannot perform any substantial gainful work

• The impairment must be expected to last at least 12 months or result in an earlier death

• A five-month waiting period is required before an individual will qualify for benefits, during which time he/she must remain disabled

• The worker's spouse and dependent children are entitled to an income benefit which is a percentage of the worker's primary insurance amount

Medicaid

Medicaid is Title XIX of the Social Security Act, added to the Social Security program in 1965. Its purpose is to provide matching federal funds to states for their medical public assistance plans to help needy persons, regardless of age.

• Medicaid benefits are generally payable to low income individuals who are blind, disabled, or under 21 years of age

• The benefits may be applied to Medicare deductibles and co-payment requirements

• Medicaid is financed by both federal and state governments

• Under Medicaid, financial need is an eligibility requirement for the payment of nursing home expenses

TRI-CARE

TRI-CARE is a federal government accident and health plan which provides accident and health coverage to military families.

Federal Employees Health Benefits Program

The Federal Employees Health Benefits (FEHB) Program is a system of "managed competition" through which employee health benefits are provided to civilian government employees and annuitants of the United States government. There are two types of plans that participate in the FEHB program: fee-for-service plans and health maintenance organizations (prepaid).

State Workers' Compensation Programs

• Workers compensation benefits generally compensate employees for lost wages and medical expenses due to occupational accidents.

• All states have workers' compensation laws, which were enacted to provide mandatory benefits to employees for work-related injuries, illness, or death

• Employers are responsible for providing workers' compensation benefits to their employees and do so by purchasing coverage through state programs, private insurers, or by self-insuring

• There is no time limit on how long Workers' Compensation medical expense benefits continue for disabled workers

• The benefits arising from a worker's compensation claim could be inadequate to replace the loss of income

• Under medical expense insurance policies, losses that are covered by workers' compensation are generally excluded from coverage

ALTERNATIVE METHODS OF PROVIDING HEALTH INSURANCE

Self-Insurance

• Many self-insured plans are administered by insurance companies or other organizations that are paid a fee for handling the paperwork and processing the claims. When an outside organization provides these functions, it is called an administrative-services-only (ASO) or third-party administrator (TPA) arrangement.

• To bolster a self-insured plan, some groups adopt a minimum premium plan (MPP). These plans are designed to insure against a certain level of large, unpredictable losses, above and beyond the self-insured level. As the name implies, MPPs are available for a fraction of the insurer's normal premium.

Multiple Employer Trusts

• A method of marketing group benefits to employers who have a small number of employees is the multiple employer trust (MET). They are usually in the same industry group

• METs can provide a single type of insurance (e.g., health insurance) or a wide range of coverages (e.g., life, medical expense, and disability income insurance)

• An employer who wants to get coverage for employees from a MET must first become a member of the trust by subscribing to it

• A MET may either provide benefits on a self-funded basis or fund benefits with a contract purchased from an insurance company

• In the latter case, the trust (rather than the subscribing employers) is the master insurance contract holder

• Participants are issued a joinder agreement (document which an individual is admitted as a member and bound to the terms of membership)

• The employer's premium payments are directed into a trust from which the plan's benefits and claims are paid. These trusts are also called 501(c)(9) trusts after the relevant section of the Internal Revenue Code.

• Self-insured plans are common to multiple employer trusts (METs) or multiple employer welfare arrangements (MEWAs). They are also common in cases where the insured group is small, with relatively healthy members and few claims.

• Self-funded plans commonly use the services of an insurance company to act as a third-party administrator of the plan. Insurers may provide such services without responsibility for claims payment under an Administrative Services Only (ASO) contract.

Multiple Employer Welfare Arrangements

• A multiple employer welfare arrangement (MEWA) is a type of MET

• It consists of small employers who have joined to provide health benefits for their employees, often on a self-insured basis

• They are tax-exempt entities

• Employees covered by a MEWA are required by law to have an employment related common bond

Medical Expense Insurance

Introduction

Medical expense insurance provides financial protection against the cost of medical care for accidents and illness. Loss due to accident and illness are the perils covered by medical expense insurance. Coverage may be provided for hospital care, physician services, surgical expenses, diagnostic and laboratory services, drugs, nursing, and other medically necessary procedures. The broadness of the specific types of services and treatment are dependent upon the medical expense policy written. Medical expense insurance typically excludes coverage for care provided in a government facility. Individual medical expense insurance typically is written for a term of 1 year.

BASIC MEDICAL EXPENSE PLANS

• Basic medical expense insurance is sometimes called "first dollar insurance". Unlike major medical expense insurance, it provides benefits up front without having to satisfy a deductible

• Basic medical expense policies classify their coverages according to general categories of medical care: hospital expense, surgical expense, and physicians' (nonsurgical) expense

• Basic medical expense insurance typically has lower benefit limits than major medical insurance

• The benefits provided by basic medical expense insurance are lower than the actual expenses incurred

• A particular fee charged by a physician or other health professional is called a usual, customary, and reasonable expense

• The amount of the patient's claim payment will be based on the terms of the policy

Hospital Expense policies

• Cover hospital room and board, miscellaneous hospital expenses (such as lab and x-ray charges), medicines, use of operating room, and supplies

• These expenses are covered while the insured is confined in a hospital

• There is no deductible and the limits on room and board are set at a specified dollar amount per day up to a maximum number of days

• Hospital room and board benefits cover expenses for occupancy of the room and bed, general nursing care, food and beverages, and personal hygiene items

• Concurrent review is a method of utilization review that takes place on-site when a patient is confined to a hospital. A typical result of a concurrent review is that the length of stay in the hospital is monitored.

• Preadmission testing helps control health care costs primarily by reducing the length of hospitalization

• These limits may not provide for the full amount of hospital room and board charges incurred by the insured.

• For example, if the hospital expense benefit was $200 per day and the hospital actually charged $400 per day, the insured would be responsible for the additional $200 per day

Basic Surgical Expense Coverage

• Commonly written in conjunction with hospital expense policies

• These policies pay for the costs of surgeons' services, whether the surgery is performed in or out of the hospital

• Coverage includes surgeon's fees, anesthesiologist, and the operating room

• Under the surgical schedule approach, every surgical procedure is assigned a dollar amount by the insurer

• Under the reasonable and customary approach, the surgical expense is compared to what is deemed reasonable and customary for the geographical part of the country where the surgery was performed. If the charge is within the reasonable and customary parameters, the expense is normally paid in full. If the charge is more than what is reasonable and customary, the patient must absorb the difference

• Usual, customary, and reasonable (UCR) charges are the maximum amount the insurer will consider eligible for reimbursement under a health insurance plan. It is based primarily on average charges within a geographic area

• The relative value approach is similar to the surgical schedule method. The difference is that instead of a flat dollar amount being assigned to every surgical procedure, a specified set of units is assigned. The policy will carry a stated dollar-per-units amount (known as the conversion factor) to determine the benefit

Basic Physicians' Expense Coverage

• Often referred to as Basic Physicians Nonsurgical Expense Coverage because it provides coverage for nonsurgical services a physician provides

• Basic medical expense coverage can be purchased to cover emergency accident benefits, maternity benefits, mental and nervous disorders, hospice care, home health care, outpatient care, and nurses' expenses

• Regardless of what type of plan or coverage is purchased, these policies usually offer only limited benefits that are subject to time limitations

Other Basic Plans

Physician Assistants

o No agency, institution or physician providing a service for which payment or reimbursement is required to be made under a policy governed by State law shall be denied such payment or reimbursement on account of the fact that such services were rendered through a physician assistant.

• Nurses' expense benefits

o Usually pay only for private duty nursing care arranged according to a doctor's order while the insured is a hospital patient

o Both registered professional and licensed practical nurses may be covered

• Convalescent care facility benefits

o Provide a daily benefit for confinement in a skilled nursing facility for a limited recovery period following discharge from a hospital

• Pharmacy benefits

o Patient care services are generally limited to medication dispensing and medication therapy management activities required by individual state boards of pharmacy.

o A controlled substance list is a pharmacy benefit that covers prescription drugs

MAJOR MEDICAL EXPENSE PLANS

Major medical expense insurance usually picks up where basic medical expense insurance leaves off in one of two ways: as a supplement to a basic plan or as a comprehensive stand-alone plan. Major medical expense plans offer broad coverage under one policy:

• Benefit periods are generally for one year

• Benefits for reasonable and necessary medical expenses, subject to policy limits

• Comprehensive coverage for hospital expenses (room and board and miscellaneous expenses, nursing services, physicians' services, etc.)

• Catastrophic medical expense protection

• Benefits for prolonged injury or illness

• Unlike the basic medical expense plans, these policies usually carry deductibles, coinsurance requirements, and have large benefit maximums

• Coverage is provided for both inpatient and outpatient hospital expenses

• Hospice benefits under a major medical plan normally includes coverage for pain management, home- based services, and counseling

• The list of prescription drugs covered by a pharmacy benefit is called a drug formulary

Supplementary Major Medical

• These policies are used to supplement the coverage payable under a basic medical expense policy

• After the basic policy pays, the supplemental major medical will provide coverage for expenses that were not covered by the basic policy, and expenses that exceed the maximum

• If the time limitation is used up in the basic policy, the supplemental coverage will provide coverage thereafter

Comprehensive Major Medical

• Combines the features of basic expense coverage and major medical coverage, sold as one policy

• Cover practically all medical expenses, hospital, physicians, surgical, nursing, drugs, laboratory tests, etc.

• Comprehensive major medical policies include a deductible (usually a single deductible per person and per family, but corridor deductible may also apply), coinsurance, and are generally sold on a group basis. An example of a comprehensive health policy is a major medical policy.

• Most major medical plans contain a "lifetime maximum benefit" that limits the insurer's total exposure under a contract, while few contain a "per cause maximum benefit" which limits the medical expenses covered for each cause

• More expensive plans are characterized by an unlimited lifetime limit

Restoration of Used Benefits

Major medical policies that have a lifetime maximum benefit or a per year maximum will always have the possibility that the limit could be exhausted. This provision allows the maximum benefit to be restored after a specific amount of the benefit is used or after the plan has been in effect for a specified period of time.

• The amount of coverage restored is usually a percentage of the used benefit

MAJOR MEDICAL EXPENSE CHARACTERISTICS

Deductibles

A deductible is a stated initial dollar amount that the individual insured is required to pay before insurance benefits are paid. Deductibles are used primarily to help control the cost of premiums and are used most frequently with major medical policies. A policy can have multiple types of deductibles.

• Flat (initial) deductible is a stated dollar amount that applies to a covered loss (for example $500). This deductible is applied per occurrence, per insured individual.

• Corridor deductible covers the gap between basic coverage and major medical. When a major medical policy is supplementing basic coverage (that contains no deductible), the deductible is not applied until the basic coverage has been exhausted

• Integrated deductible is used when a major medical plan is supplementing basic coverages. For example, If the major medical has a $500 deductible and the insured has basic coverage of $500 or more, then, in the event of a claim, the amount paid by the basic coverage satisfies the major medical deductible. However, if the basic does not cover the entire deductible amount of the major medical plan, the insured is required to make up the difference

• In a per-cause deductible, the insured must satisfy a deductible for each accident or illness.

• In an all-cause deductible, the insured only has to meet the deductible amount once during the benefit period.

• With a Calendar-year deductible, the deductible year begins on January 1st and ends on December 31st. Calendar-year deductibles reset every January 1st. A Calendar-year deductible requires the insured to pay a specific sum out of pocket before any benefits are paid in a calendar year.

The carryover provision permits expenses incurred during the last 3 months of the calendar year to be carried over into the new year if needed to satisfy the deductible for the next year.

Common Accident or Sickness Deductible

Some major medical plans include a common accident or sickness provision which states that only one deductible (usually equal to the individual deductible amount) need be satisfied when two or more insureds from the same family are injured in the same accident or suffer concurrently from the same illness.

Family Maximum Deductible

A family maximum deductible waives the deductible for all family members after some of them have satisfied individual deductibles within the same year. Once the family deductible is satisfied, future covered medical expenses of all family members are paid just as if each member of the family had satisfied his or her individual deductible.

Coinsurance

Coinsurance is another characteristic of major medical policies. It is a sharing of expenses by the insured and the insurer. After the insured satisfies the deductible, the insurance company and the insured share in the remainder of expenses.

• The insurance company pays a high percentage of the additional expenses (usually 75% or 80%) and the insured pays the remainder.

• Typically, the percentage of payment participation required of the insured is 20% and the insurance company pays 80%

• Coinsurance requires the insured to participate in the payment of expenses

Stop-Loss (Out of Pocket Maximum/Maximum Out of Pocket)

• Stop - Loss is a feature designed to limit the amount of expense the insured may be exposed to in a policy year

• Often, the stop-loss will state that after the insured has paid a specific amount toward his covered expense, the insurer, will pay 100% of the remaining expenses for the remainder of the policy year, up to the maximum limit of the policy.

Pre-existing Conditions

• Most policies contain a benefit limitation on pre-existing conditions

• Limitations apply to all pre-existing conditions whether or not the insured declared them on the application

• Unlike the impairment rider, the exclusion for pre-existing conditions is subject to the time limit for certain defenses

• When considering the replacement of an individual accident and health insurance policy, a preexisting conditions exclusion in the new contract may reduce the insured's benefits. The new policy may not cover the same health conditions under the new policy.

Internal Limits

Certain types of expenses may have limits placed on the dollar amount of certain services or on the type of service provided. For example, the policy will only pay for a semi-private room, not for a private room; or it will pay only medical expenses that are usual and customary; or it will pay lifetime alcohol or drug rehab expenses only up to $10,000, or for 75 days, etc.

MEDICAL EXPENSE ACCOUNTS

Health Savings Accounts (HSA)

• A tax-advantaged medical savings account available to individuals who are enrolled in a high-deductible health plan.

• The funds contributed to an account are not subject to federal income tax at the time of deposit and roll over and accumulate year to year if not spent.

• HSAs are owned by the individual and are an alternate tax-deductible source of funds used to pay for qualified medical expenses at any time without federal tax liability or penalty.

• Health savings accounts (HSAs) are designed to help individuals save for qualified health expenses such as deductibles, coinsurance, prescription drugs etc. that they, their spouse, or their dependents incur

• HSAs are tax deductible

• An individual who is covered by a high- deductible health plan can make a tax-deductible contribution to an HSA and use it to pay for out- of-pocket medical expenses

• Contributions to HSAs by individuals are deductible, even if the taxpayer does not itemize.

• Contributions by an employer are not included in the individual's taxable income

• To be eligible for a Health Savings Account, an individual must be covered by a high-deductible health plan (HDHP), must not be covered by other health insurance (does not apply to accident insurance, disability, dental care, vision care, long-term care), must not be eligible for Medicare, and can't be claimed as a dependent on someone else's tax return

• Distributions other than for qualified medical expenses to a Health Savings Account are taxable and subject to a penalty of 20%

Health Reimbursement Arrangements (HRA)

• Must be established by the employer

• Employer-funded, tax-advantaged health benefit plans that reimburse employees for out-of-pocket medical expenses and individual health insurance premiums.

• Unused amounts may be carried forward for reimbursement in future years.

• Reimbursements may be tax-free if the employee paid for qualified medical expenses or a qualified medical plan

• Employee does NOT contribute to an HRA

Medical Savings Accounts (MSA)

• Created to help employees of small employers, as well as self-employed individuals, pay for their medical care expenses.

• MSA's are tax-free accounts set up with financial institution such as banks and insurance companies.

• Qualified medical savings accounts are available for employers with no more than 50 employees

Flexible Savings Accounts (Flexible Spending Accounts)

• Tax-advantaged accounts that can be set up through a cafeteria plan of an employer.

• An FSA allows an employee to set aside a portion of earnings to pay for qualified medical expenses (such as prescription medication) as established in the cafeteria plan.

Disability Income Insurance

Purpose of Disability Income Insurance

• The insuring agreement of a disability income is designed to provide an individual with a specified income benefit in the event of a disabling accident or sickness or accident and sickness combined

• The financial impact of total disability may be worse than the financial impact of death

• Disability income policies are available as individual plans and group plans

• They also serve a very important function for businesses and business owners

• The most common type of individual disability income policy is the guaranteed renewable policy, which typically adjusts the premium on an annual basis and provide benefits for nonoccupational illnesses and injuries

DISABILITY INCOME BENEFITS

• The insured's income limits the amount of the monthly benefit that an insured may select in a Disability Income policy

• The benefits paid under a disability income policy are in the form of monthly income payments.

• The highest premium under the disability income policy is a 14-day waiting period with a 10-year benefit period

• Insurers typically place a ceiling on the amount of disability income protection they will issue on any one applicant, defined in terms of the insured's earnings

• Insurers use two methods to determine the amount of benefits payable under their disability income policies: percent-of-earnings approach and the flat amount method.

• The first method is called the percent-of-earnings approach, which determines the benefit using a percentage of the insured's pre-disability earnings and considers other sources of disability income

• The second method used to establish disability benefits is the flat amount method. Under this approach, the policy specifies a flat income benefit amount that will be paid if the insured becomes totally disabled. Normally, this amount is payable regardless of any other income benefits the insured may receive.

• In the event the insured dies because of the disability, any earned but unpaid benefits will be paid to the insured's estate

• Group long-term disability benefit amounts are typically limited to 60% of a participant's income

Disability Defined

• With one exception (partial disability), an insured must be totally disabled before benefits under a disability income policy are payable

• What constitutes total disability varies from policy to policy

• The insured must meet the definition set forth in her policy

• In disability income insurance, the definition of total disability often considers the insured's education, training, and experience

• There are two definitions: any occupation or own occupation

Any Occupation

Any Combination or also known as "Combination Definitions", requires the insured to be unable to perform any occupation for which he is reasonably suited by reason of education, training, or experience to qualify for disability income benefits

Own Occupation

The "own occupation" definition of total disability requires that the insured be unable to perform the insured's current occupation because of an accident or sickness.

• From a policyowner's point of view, an "own occupation" disability income policy is more advantageous

• It is more expensive and difficult to qualify for

Presumptive Disability

• This provision specifies certain conditions that automatically qualify the insured for the full benefit because the severity of the conditions presumes the insured is totally disabled even if he can work

• Presumptive disabilities include blindness, deafness, loss of speech, and loss of two or more limbs (in this case it is presumed you are disabled)

• A presumptive disability provision typically waives the usual requirements for total disability benefits

Partial Disability

• The inability of the insured to perform one or more important duties of the job or the inability to work at that job on a full-time basis. Either of which results in a decrease in income.

• Normally, partial disability benefits are payable only if the policyowner has first been totally disabled

• Permanent Partial disability would be less than total impairment and equal to permanent impairment

• This benefit is intended to encourage disabled insureds to get back to work, even on a part-time basis, without fear that they will lose all their disability income benefits

• The amount of benefit payable when a policy covers partial disabilities depends on whether the policy stipulates a flat amount or a residual amount

Flat Amount Benefit

• A flat amount benefit is a set amount stated in the policy

• This amount is usually 50% of the full disability benefit

• For example, let's assume Helen, who has a disability income policy with an own-occupation definition, is severely injured after falling down a flight of stairs. She is unable to work for four months during which time her disability income policy pays a full benefit. After four months she can return to work, but only on a part-time basis earning substantially less than she did before her injury. If her policy did not contain a partial disability provision, her benefits would cease entirely because she no longer meets the definition of totally disabled. However, if her policy provides for partial disability benefits to be paid as a flat amount, she will be able to work on a part-time basis and continue to receive half of her disability benefits.

Residual Amount Benefit

• Normally used after a full disability payment have been paid and the insured is back to work, however with a reduced workload

• A residual amount benefit is based on the proportion of income lost due to the partial disability, considering the fact that the insured is able to work and earn some income

• The benefit is usually determined by multiplying the percentage of lost income by the stated monthly benefit for total disability.

• For example, let's say your job was to wash 10 cars a day. You broke your arm, were still able to work, but could only wash 6 cars a day because of the residual impact of the broken arm.

• If the insured suffered a 40% loss of income because of the partial disability, the residual benefit payable would be 40% of the benefit that the policy would provide for total disability.

• A Residual Disability benefit is usually a percentage of the total disability benefit for when the insured is working, but unable to perform some of the duties of his/her occupation

Rehabilitation Benefit

• An insured may not be able to return normal occupation because of a disability, but still be able to work at some kind of job. The rehabilitation benefit facilitates vocational training to prepare insureds for a new occupation.

• Under the rehabilitation benefit in a disability income policy, the insurer will pay the approved cost a of a rehabilitation program to help a disabled return to work

Cause of Disability

• Policies that use the accidental means provision require that the cause of the injury must have been unexpected and accidental

• Policies that use the accidental bodily injury provision (or results provision) require that the result of the injury has to be unexpected and accidental

• For example, Jim took an intentional dive off a high, rocky ledge into a lake. He struck his head on some rocks and ended up partially paralyzed. If his policy had an accidental means provision, the benefits would probably not be payable because the cause of his injury (the dive) was intentional. However, if his policy had an accidental bodily injury (or results) provision, benefits would be payable because the result of the accident (his injury) was unintentional and accidental.

• Today, most disability income policies use the accidental bodily injury or results provision, which is far less restrictive than the accidental means provision

DISABILITY INCOME POLICY PROVISIONS Probationary Period

• The probationary period specified in a disability insurance policy is the period of time that must elapse following the effective date of the policy before benefits are payable.

• It is a one-time-only period that begins on the policy's effective date and ends 15 or 30 days after the policy has been in force.

• Purpose of the probationary period is to exclude preexisting sicknesses from coverage and provide a guidepost in borderline cases when there is a question as to whether an insured became ill before or after the effective date of the policy.

• Helps protect the insurer against adverse selection because those who know they are ill are more likely to try to obtain insurance coverage.

• Probationary period does not apply to accidents because you cannot anticipate an accident

Elimination Period

• The elimination period is the time immediately following the start of a disability when benefits are not payable

• Elimination periods eliminate claims for short-term disabilities

• The longer the elimination period, the lower the premium for comparable disability benefits

• The elimination period is sometimes called the waiting period

Benefit Period

• The benefit period is the maximum length of time that disability income benefits will be paid to the disabled insured

• The longer the benefit period, the higher the cost of the policy

• Individual short-term policies provide benefits for six months to two years

• Individual long-term policies are characterized by benefit periods of more than two years, such as 5, 10, or 20

Delayed Disability Provision

• In some cases, total disability does not occur immediately after an accident but develops some days or weeks later

• Most policies allow a certain amount of time during which total disability may result from an accident and the insured will still be eligible for benefits

• The amount of time allowed for a delayed disability may be 30, 60, or 90 days etc.

Recurrent Disability Provision

• It is not unusual for a person who experienced a total disability to recover and then, weeks or months later, undergo a recurrence of the same disability

• Most policies provide for recurrent disabilities by specifying a period of time during which the recurrence of a disability is considered a continuation of the prior disability

• The insurer will then pay benefits without a new elimination period • If the recurrence takes place after that period, it is considered a new disability and will be subject to a new elimination period before benefits are again payable

• If the recurrence takes place after that period, it is considered a new disability and will be subject to a new elimination period before benefits are again payable

• For example, say you were recovering from a serious illness and missed 2 months of work. Then you went back to work and 2 weeks later the disability came back or recurred and you were forced to miss more work while you recovered again.

Change of Occupation Provision

Under the change of occupation provision, if an individual covered under a disability income policy is injured while engaged in an occupation that is more hazardous than the occupation stated in the policy, the result will be the benefit level is reduced. If the insured is engaged in a less hazardous occupation than that was originally stated in the policy, the benefits will likely be increased

Nondisabling Injury

• Frequently, a person covered by a disability income policy will suffer an injury that does not qualify for income benefits

• Many such policies include a provision for a medical expense benefit that pays the actual cost of medical treatment for nondisabling injuries that result from an accident or sickness

Elective Indemnity

• Some short-term disability income policies provide for an optional lump- sum payment for certain named injuries

• The insured may sometimes select this elective indemnity option when applying for the policy

Coverage after Age 65

Disability income policies typically require the insured to be actively working for the stated number of hours per week if coverage extends past age 65.

DISABILITY INCOME POLICY RIDERS

Waiver of Premium Rider

• A waiver of premium rider generally is included with guaranteed renewable and noncancelable individual disability income policies.

• It exempts the policyowner from paying the policy's premiums during periods of total disability.

• To qualify for the exemption, the insured must experience total disability for more than a specified period, commonly three or six months.

• The waiver of premium generally does not extend past the insured's age 60 or 65

• Premiums are waived beginning at the date of disability

Disability Benefits in a Life Insurance Contract

Many insurers offer a waiver of premium rider that also includes a disability income benefit. Most riders provide a benefit of one-percent of the face amount of the policy which is payable if the insured is totally disabled.

Social Security Rider

The Social Security rider provides for the payment of additional income when the insured is eligible for social insurance benefits, but those benefits have not yet begun, have been denied, or have begun in an amount less than the benefit amount of the rider

Cost-of-Living Adjustment (COLA) Rider

• The cost-of-living adjustment (COLA) rider provides for indexing the monthly or weekly benefit payable under a disability policy to changes in the Consumer Price Index (CPI)

• Typically, the benefit amount is adjusted on each disability anniversary date to reflect changes in the CPI

Guaranteed Insurability Rider

This option guarantees the insured the right to purchase additional amounts of disability income coverage at predetermined times in the future without evidence of insurability

Exclusion Rider

An exclusion rider on a disability income policy means that a specified disease or body part is not afforded coverage

Health Insurance Policy Provisions

NAIC MODEL HEALTH INSURANCE POLICY PROVISIONS

• Years ago, the National Association of insurance Commissioners (NAIC) developed a model Uniform Individual Accident and Sickness Policy Provisions Law

• Almost all states have adopted this model law or similar legislation or regulations

• The purpose of the NAIC law was to establish uniform or model terms, provisions, and wording standards for inclusion in all individual health insurance contracts

Twelve Mandatory Policy Provisions

1. Entire Contract

• The entire contract includes the actual policy and the application

• It states that nothing outside of the contract (the contract includes the signed application and any attached policy riders) can be considered part of the contract

• It also assures the policyowner that no changes will be made to the contract or waive any of the provisions after it has been issued, even if the insurer makes policy changes that affect all policy sales in the future. This, however, does not prevent a mutually agreeable change or modifying the contract after it has been issued.

• Any change to a policy must be made with the approval of an executive officer of the insurance company whose approval must be endorsed on the policy or attached in a rider

• This mandatory health policy provision states that the policy, including endorsements and attached papers, constitutes the entire insurance contract between the parties

• We can't send you additional paperwork later. THE ENTIRE POLICY AND APPLICATION is sent to you and that makes up your ENTIRE CONTRACT.

2. Time Limit on Certain Defenses

• The Time Limit on Certain Defenses provision limits the time during which the insurance company may challenge the validity of an insurance claim based on a misstatement made on the insured's application.

• Under the time limit on certain defenses provision, the policy is incontestable after it has been in force a certain period of time, usually two years.

• This is similar to the incontestable clause in a life insurance policy. Unlike life policies, a fraudulent statement on a health insurance application is grounds for contest at any time, unless the policy is guaranteed renewable.

• An insurance company can usually contest the information contained in an accident and health application starting on the date the insurance company dates the policy

• There is a TIME LIMIT for which you must DEFEND yourself. This applies to the contestable period (application), preexisting conditions, and new claims (conditions that must be met while a claim is pending.

• If you file a claim that you broke your leg yesterday, and the insurance company sees you moving a grand piano up 5 flights of stairs, you will probably have to DEFEND your claim. However, at some point, it is expected your leg will heal.

3. Grace Period

• The purpose of the Grace Period is to give the policyowner additional time to pay overdue premiums.

• The policyowner is given a number of days after the premium due date during which time the premium payment may be delayed without penalty and the policy continues in force

• Depending on the state, the minimum grace periods typically specified are 7 days for policies with weekly premium payments (i.e., industrial policies), 10 days for policies with premiums payable on a monthly basis, and 31 days for policies payable on an annual basis.

• The effect of nonpayment of premium before the expiration of a grace period will cause a policy lapse.

• If an insurer pays an individual accident and health insurance claim during a policy's grace period, the amount of unpaid premium may be subtracted from the reimbursement

• Grace period is the same definition for your insurance bill as it is for all of your other bills. Don't pick it as an answer if the question isn't talking about paying your bill late and keeping your insurance.

• Remember Aunt Grace's Birthday 7 (makes payments more than once a month, weekly) - 10 (makes premium payments once a month) - 31 (makes Premium payments less than monthly (quarterly, semiannually, etc.). 7-10-31

4. Reinstatement

• The Reinstatement provision specifies that if an insured fails to pay a renewal premium within the time granted but the insurer subsequently accepts the premium, coverage may be restored.

• Under certain conditions, a policy that has lapsed may be reinstated.

• Reinstatement is automatic if the delinquent premium is accepted by the company or its authorized agent and the company does not require an application for reinstatement.

• If it takes no action on the application for 45 days, the policy is reinstated automatically.

• To protect the company against adverse selection, losses resulting from sickness are covered only if the sickness occurs at least 10 days after the reinstatement date.

• Accidents are covered immediately upon reinstatement

• To reinstate any policy, you need: A reinstatement application, statement of good health, all back premiums.

5. Notice of Claim

• The notice of claim provision describes the policyowner's obligation to notify the insurance company of a claim in a reasonable period of time

• Typically, the period is 20 days after the occurrence or a commencement of the loss, or as soon thereafter as is reasonably possible

• You need to let the insurance company know that you are going to be filing a claim, so they are expecting your claim forms.

6. Claim Forms

• It is the company's responsibility to supply a claim form to an insured within 15 days after receiving notice of claim

• If the insurance company fails to send out the claim forms within the time period required by the provision, the insured should submit the claim in any form, which must be accepted by the company as adequate proof of loss

• You can submit your claim using a napkin and crayon as long as you provide all the necessary information.

7. Proof of Loss

• The statement that an insured must give an insurance company to show that a loss actually occurred is a Proof of Loss

• After a loss occurs, or after the company becomes liable for periodic payments (e.g., disability income benefits), the claimant has 90 days in which to submit proof of loss.

• Insurance company can't pay you if you don't prove there is a loss.

8. Time of Payment of Claims

• The time of payment of claims provision provides for immediate payment of the claim after the insurer receives notification and proof of loss.

• If the claim involves disability income payments, they must be paid at least monthly if not at more frequent intervals specified in the policy

• The purpose of the Time of Payment of Claims provision is to prevent the insurance company from delaying claim payments

• You did your part (Paid your bill and got injured/sick/ etc.) now the insurance company has to immediately do our part (Pay you) and it can't be less often than monthly, or you wouldn't be able to pay your bills.

9. Payment of Claims

• The payment of claims provision in a health insurance contract specifies how and to whom claim payments are to be made.

• Payments for loss of life are to be made to the designated beneficiary

• If no beneficiary has been named, death proceeds are to be paid to the deceased insured's estate. Claims other than death benefits are to be paid to the insured.

• Should the insurance company pay you, or the doctor, or someone else?

10. Physical Exam and Autopsy

• The physical exam and autopsy provision entitles a company, at its own expense, to make physical examinations of the insured at reasonable intervals during the period of a claim, unless it's forbidden by state law.

• Forget everything you learned on "Law and Order," only the state can forbid an autopsy. You gave up your (and your families) rights to refuse when you applied for insurance.

11. Legal Actions

• The insured cannot take legal action against the company in a claim dispute until after 60 days from the time the insured submits proof of loss.

• The legal action provision in a health contract is limited to no more than 5 years.

• The Legal Action provision provides the insurer adequate time to research a claim

• At least give the insurance company 2 months to take care of you before you take them to court.

12. Change of Beneficiary

The insured, as policyowner, may change the beneficiary designation at any time unless a beneficiary has been named irrevocably.

Eleven Optional Provisions

1. Change of Occupation

This provision also allows the insurer to reduce the maximum benefit payable under the policy if the insured switches to a more hazardous occupation or to reduce the premium rate charged if the insured changes to a less hazardous occupation

2. Misstatement of Age

• The misstatement of age provision allows the insurer to adjust the benefit payable if the age of the insured was misstated when application for the policy was made

• The insurer can adjust the benefit to what the premiums paid would have purchased at the insured's actual age

• If the insured was older at the time of application than is shown in the policy, benefits would be reduced accordingly

• The reverse would be true if the insured were younger than listed in the application

3. Other Insurance with This Insurer

Under this provision, the total amount of coverage to be underwritten by a company for one person is restricted to a specified maximum amount, regardless of the number of policies issued. This provision is designed to protect the insurer by controlling over insurance through its own policies.

4. Insurance with Other Insurer

In attempting to deal with the potential problem of over insurance, the insurance with other insurer provision states that benefits payable for expenses incurred will be prorated in cases where the company accepted the risk without being notified of other existing coverage for the same risk.

5. Insurance with Other Insurers

Similar to the previous, the insurance with other insurers provision allows an insurer to pay benefits to the insured on a pro-rata basis when the insurer was not notified prior to the claim that the insured has other health coverage.

6. Relation of Earnings to Insurance

If disability income benefits from all disability income policies for the same loss exceed the insured's monthly earnings at the time of disability, the relation of earnings provision states that the insurer is liable only for that proportionate amount of benefits as the insured's earnings bear to the total benefits under all such coverage.

7. Unpaid Premiums

If there is an unpaid premium at the time a claim becomes payable, the amount of the premium is to be deducted from the sum payable to the insured or beneficiary.

8. Cancellation

• Though prohibited in a number of states, the provision for cancellation gives the company the right to cancel the policy at any time with 45 days' written notice to the insured

• This notice must also be given when the insurer refuses to renew a policy or change the premium rates

• If the cancellation is for nonpayment of premium, the insurer must give 10 days' written notice to the insured, unless the premiums are due monthly or more frequently

• The cancellation provision also allows the insured to cancel the policy any time after the policy's original term has expired by notifying the insurer in writing

9. Conformity with State Statutes

Any policy provision that is in conflict with state statutes in the state where the insured lives at the time the policy is issued is automatically amended to conform with the minimum statutory requirements.

10. Illegal Occupation

The illegal occupation provision specifies that the insurer is not liable for losses attributed to the insured's being connected with a felony or participation in any illegal occupation.

11. Intoxicants and Narcotics

• The insurer is not liable for any loss attributed to the insured while intoxicated or under the influence of narcotics.

• Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded

OTHER HEALTH INSURANCE POLICY PROVISIONS and RIDERS

Filing and Approval of Policy Forms

• Accident and Health insurance policies must be issued and approved by the commissioner

• If the commissioner does not reject the policy within 90 days it is considered approved as is

• Insurers may request a hearing within 20 days if their policy is rejected

The Policy Face

The Policy face contains a summary of the type of policy and the coverage provided by the policy. It Identifies the insured, the term of the policy (the effective date and termination date), and how the policy can be renewed.

Insuring Clause

• The insuring clause is the part of the health insurance policy that states the kind of benefits provided and the circumstances under which they will be paid.

• The purpose of the insuring clause in a Health and Accident policy is to specify the scope and limits of the coverage provided.

• The insuring clause is the part of the health insurance policy that identifies the specific type of benefits or health care services that are covered by that policy and the circumstances under which they will be paid.

• Any promises the INSURER makes will be in the INSURING clause.

Consideration Clause

• In health insurance, the insurance company exchanges the promises in the policy for a two-part consideration from the insured. (Consideration is an exchange of something of value on which a contract is based). A health insurance contract is valid only if the insured provides consideration in the form of:

• The initial full minimum premium required

• The statements made in the application

• The applicant begs, "Please CONSIDER me for insurance. Here is my completed application, my initial premium, and how much money/how often I agree to pay. Please CONSIDER me!"

Probationary Period

• Specified number of days after an insurance policy's issue date during which coverage is not afforded for sickness.

• A Probationary Period provision in a health insurance contract becomes effective at the inception of the policy

Owner’s Rights Provision

• Defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy.

Types of Beneficiaries

• A beneficiary can be either specific (a person identified by name and relationship), or a class designation (a group of individuals such as the “children of the insured”).

• If no one named, or if all beneficiaries die before the insured dies, death benefit will go to insured’s estate.

By Order of Succession:

• Primary: First in line to receive death benefit proceeds
• Secondary (contingent): Second in line to receive death benefit proceeds
• Tertiary: Third in line to receive death benefit proceeds. If no one is named, death benefit will go to insured’s estate

Dependent Children Benefits

Dependent children must be covered by their parents health insurance plan until a certain age. Coverage may also continue for children who are incapable of earning their own living due to a mental or physical disability.

Conversion Privilege for Dependents

• Beginning October 1, 2010, the Affordable Health Care Act mandated that all policies and plans must provide dependent coverage up to age 26

• Adopted children, stepchildren, and foster children usually are eligible for coverage

• As long as a policy is in force, coverage for a child generally continues until the child marries or reaches the limiting age

Mandatory Second Surgical Opinion Provision

A mandatory second surgical opinion provision typically requires the insured to seek a second opinion for surgeries that are on a list of elective surgeries

Waiver of Premium

The Waiver of Premium provision waives the payment of premiums after the insured has been totally disabled for the specified period of time. The following disabling acts are usually excluded from this provision: self- inflicted injuries, wartime or military service injuries, and injuries received during the commission of a crime.

Owner's Rights Provision

Defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy.

Free-Look Provision

Gives the policyowner the right to return the policy for a full premium refund within a limited period of time after the delivery of the policy.

Assignment Provision

The transfer of ownership in a life insurance policy. The new owner is known as the assignee.

• Absolute assignment: Under an absolute assignment, the transfer is complete and irrevocable, and the assignee receives full control over the policy and full rights to its benefits.

• Collateral assignment: A collateral assignment is one in which the policy is assigned to a creditor as security, or collateral, for a debt. If the insured dies (or sometimes becomes totally\permanently disabled), the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed. The insured's beneficiary is then entitled to any excess of policy proceeds over the amount due to the creditor.

Beneficiary designation

Where the policyowner indicates who is to receive the proceeds.

Settlement options

Where the ways in which the proceeds can be paid out or settled are explained.

Discretionary Provision

Limits the way a court can review a claim denial and makes it difficult for the court to conduct a fair review of the claim. Some states have enacted laws that prohibit Discretionary provision because they are designed to protect the insurance company.

Maternity Benefits

• A maternity provision may provide a fixed amount for childbirth or a benefit based upon a specified multiple of the daily hospital room benefit

• Frequently, the maternity benefit is available only as an added benefit for an additional premium

States that have "no loss no gain" provision laws require a replacing policy to pay for ongoing claims under the policy it replaces

Guaranteed Insurability Option Rider

Allows a policyowner to purchase additional life insurance coverage at specified dates without providing evidence of insurability.

Payor Provision (Rider)

Provides waiver of premiums if the adult premium-payor should die or, with some policies, become totally disabled.

Accidental Death Benefit Rider (Double Indemnity)

Provides an additional amount of insurance usually equal to the face amount of the base policy if the cause of death was an accident.

Return of Premium Ride

Provides that in the event of the death of the insured within a specified period of time, the policy will pay, in addition to the face amount, and amount equal to the sum of all premiums paid to date.

Cost of Living Rider

Gives applicants the ability to guard against the eroding effects of inflation.

Long-Term Care Rider

Help safeguard against the financial burden of long-term care. In addition to that, it provides an acceleration of the death benefit to help pay for costs involved with long-term care.

COMMON EXCLUSIONS OR RESTRICTIONS

Medical Expense, Disability, Accident, Health, and Sickness insurance policies frequently cite a number of exclusions or conditions that are not covered, such as:

Injuries due to war or an act of war, self-inflicted injuries, and those incurred while the insured is serving as a pilot or crew member of an aircraft

• Military service since the insured is covered by the government while in its service; Some insurers also include a military suspension provision which limits or suspends disability income protection when the insured serves in the arm • Foreign travel may not be excluded in every instance, but extended stays overseas or foreign residence may cause a loss of benefits

• Noncommercial air travel

• Other exclusions are losses resulting from suicide, hernia (as an accidental injury), riots, or the use of drugs or narcotics

• Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded

• Medical necessities: Even if an insured has a benefit for a particular service, if they do not have a medical need for that benefit, it will not be covered by their insurance

• Occupational injuries and illnesses that are covered by Workers’ Compensation or care paid by the Veterans Administration are typically excluded

• Cosmetic Surgery, Experimental Surgery, and vision correction (i.e eye exams) may also be excluded

Preexisting Conditions

• Medical expense and disability income policies usually exclude paying benefits for losses due to preexisting conditions pertaining to illness, disease, or other physical impairments

• Such exclusions are subject to the "time limit on certain defenses" provision. Any preexisting condition that the insured has disclosed clearly in the application usually is not excluded or, if it is, the condition is named specifically in an excluding waiver or rider.

Waivers for Impairments

• When an insurance company does not cover a loss due to a specific condition the insured has. This is usually called an impairment rider.

• If the insured's condition improves, the company may be willing to remove the waiver.

RENEWABILITY PROVISIONS

Health insurance is not permanent in nature, unlike life insurance and annuities. Hence, health insurance policies contain a wide range of renewability provisions, which allows the insurer to cancel health insurance at different

points during the life of the policy. Generally speaking, the more favorable the renewability provision is to the insured policyholder, the higher the premium. The insured, can typically cancel the policy at any time, and the policy can always we canceled by the insurer if premium is not paid within the grace period. There are five principal renewability classifications:

Cancelable Policies

• May be terminated by either the insured or the insurer

• The renewability provision in a cancelable policy allows the insurer to cancel or terminate the policy at anytime

• Cancelable policies also allow the insurer to increase premiums

• This is the ONLY type of renewability where the insurer can cancel at any time. This type of renewability is illegal in most states.

Optionally Renewable Policies

The renewability provision in an optionally renewable policy gives the insurer the option to terminate the policy on a date specified in the contract.

Conditionally Renewable Policies

• A conditionally renewable policy allows an insurer to terminate the coverage but only in the event of one or more conditions stated in the contract

• They typically are related to the insured reaching a certain age or losing gainful employment

• A conditionally renewable policy can increase premiums at time of renewal

Guaranteed Renewable Policies

• The renewal provision in a guaranteed renewable policy specifies that the policy must be renewed (as long as premiums are paid) until the insured reaches a specified age, such as 60 or 65.

• Guaranteed renewable policies normally have increasing premiums

• If rates are increased on a guaranteed renewable policy, the must be increased for an entire rate class

• "We're definitely going to renew you, but we may raise the premiums so high you won't want to keep the insurance."

• This is the common renewability for Medicare Supplement and Long-term care policies.

Nonrenewable Policies

• Nonrenewable policies are normally associated with short-term health insurance. These are policies that are for established policy lengths of a year or less and are considered temporary.

Noncancelable Policies

• A noncancelable policy cannot be cancelled nor can its premium rates be increased under any circumstances (other than reaching a specific age or non-payment of premiums)

• Noncancelable provisions are most commonly found in disability income policies. They are rarely used in medical expense policies

• Noncancelable policies may not be changed in anyway by the insurer (sometimes up to a specified age), so long as the premiums are paid.

• "We're stuck with you. We can't cancel you, we can't raise the premiums or do anything else to entice you to cancel."

• This is common for disability policies.

Private Insurance Plans for Seniors

MEDICARE SUPPLEMENTS, MEDICARE SELECT, MEDICARE PART C&D

Medicare Supplement Policies (Medigap)

* Medicare Supplement (Medigap) insurance is specifically designed for individuals by the age of 65 who have enrolled in Medicare however, anyone currently receiving Medicare Parts A and B is eligible to participate in a Medigap policy

* Medicare in-hospital deductible is addressed with Medicare Supplemental Insurance

* A Medigap policy is a Medicare supplement insurance policy sold by private insurance companies to cover medical costs not covered by the government in Medicare Parts A and B.

* Medigap policies do not pay costs for Medicare Parts C and D

* As of June 2010, there are 10 standardized Medigap plans. Each of the 10 plans has a letter designation of A, B, C, D, F, G, K, L, M, or N

* These policies were standardized by the National Association of Insurance Commissioners (NAIC) to help consumers understand and compare them and make informed buying decisions

* These standards can be found in NAIC's Medicare Supplement Insurance Minimum Standards Model Act

* Medicare Supplement policies sometimes provide preventative medical care benefits such as annual physical exams

* A Medicare Supplement policy must NOT contain benefits which duplicate Medicare benefits

* Individuals over 65 who have just enrolled in Medicare Part B for the first time cannot be refused a Medicare Supplement policy and cannot be rated if they apply for coverage within 6 months of Part B enrollment (in other words, Medicare Supplements must be guaranteed issue during open enrollment)

* All Medicare supplement policies must be guaranteed renewable and can only be canceled by the insurer for nonpayment of premiums

* Hospice care is included in most standard Medicare Supplement insurance policies

* Hospice care typically offers a family counseling benefit

* Medicare Supplement policies typically provide foreign travel emergency health care coverage as a core benefit when you travel outside the U.S.

* Coverage for Medicare Part B excess charges is a Medicare Supplement additional benefit.

* Medicare Supplement Plans F and G are the only Medicare Supplement insurance plans that cover costs known as Medicare Part B excess charges

* An excess charge is the difference between what a doctor or provider charges and the amount Medicare will pay

* In general, the following six minimum standards apply to all policies designated as Medicare Supplement Insurance.

o The policy must supplement both Part A and Part B of Medicare

o The policy must automatically adjust its benefits to reflect statutory changes in Medicare

o The policy must cover all expenses not covered by Part A from the 61st to the 90th day. Furthermore, it must cover the lifetime reserve copayment and must provide full coverage for an additional 365 days after Medicare benefits are exhausted.

o If the policy excludes coverage for preexisting conditions, the exclusion cannot exist for longer than six months. That is, no coverage can be denied as a preexisting condition after the policy has been in effect for six months.

o Part B expenses not covered by Medicare (that is, the 20% co-payment) must be covered by the Medigap policy. However, policies may include a deductible before this benefit becomes payable.

o The policy must include a minimum 30 day free-look provision.

Core Benefits

All Medicare Supplement plans cover coinsurance on hospital costs, up to an additional 365 days after Medicare Part A hospital benefits run out. All Medigap policies also cover at least part of these costs:

* Medicare Part A hospice coinsurance or copayment

* Medicare Part B coinsurance or copayment

* First 3 pints of blood received as a hospital inpatient

Medicare Select

Medicare Select Coverage means Medicare supplement coverage through a preferred provider organization (PPO) or any other type of restricted network whose coverage has been approved by the state. A PPO is a health care provider or an entity that contracts with health care providers that establish alternative or discounted rates of payment and offers the insureds certain advantages for selecting the member providers. Examples of Medicare Select organizations include provider groups, hospital marketing plans, and groups that are formed or operated by insurers or third-party administrators. An insured must choose providers that belong to a network (except in cases of emergencies).

* With a Medicare Select plan, the insured agrees to use preferred providers, and in exchange, pay a lower premium

Medicare and Managed Care

There are a number of Managed Care Organizations (MCOs) that have contracted with the Health Care Financing Administration to provide both Part A and Part B services to Medicare recipients. Medicare managed care plans are offered by private companies. A company can make a plan available to everyone with Medicare in a state or only be open in certain counties. A company also may choose to offer more than one plan in an area providing different benefits and costs. Each year a managed care company can decide to join or leave Medicare.

Medicare Part C (Medicare Advantage)

Medicare Advantage Plans are Medicare provided by an approved Health Maintenance Organization or Preferred Provider Organization. Some of these plans do not charge premiums beyond what is paid by Medicare and others do. These are coordinated care plans that generally offer people with Medicare additional benefits and coordinated care beyond the standard Medicare coverage (such as eye exams, hearing aids, dental care, and prescription drugs).

Another choice is a Private Fee For Service (PFFS) Plan. In this type of plan an individual may go to any Medicare-approved doctor or hospital that accepts Medicare payments. The insurance plan, rather than the Medicare Program, decides how much it will pay and what the Medicare enrollee pays for the services rendered. The plan could include extra benefits that are not covered under the original Medicare plan.

* HMO's, PPO's, and Private Fee-For-Services are all types of a Medicare Advantage Plan

* In addition to the premium, Medicare Advantage enrollees normally must pay a small copayment per visit or per service

* Medicare Part C does NOT cover long-term care

Medicare Part D

Medicare Part D is a prescription drug plan administered by one of several private insurance companies, each offering a plan with different costs and lists of drugs that are covered. Participation in Part D requires payment of a premium and a deductible.

LONG-TERM CARE INSURANCE

Nursing home care is often covered by long-term care insurance. However, long-term care (LTC) refers to a broad range of medical, personal, and environmental services designed to assist individuals who have lost their ability to remain completely independent in the community.

* Although care may be provided for short periods of time while a patient is recuperating from an accident or illness, LTC refers to care provided for an extended period of time (normally more than 90 days).

* Depending on the severity of the impairment, assistance may be given at home, at an adult care center, or in a nursing home.

* It is similar to most insurance plans in that the insured receives specified benefits in the event long-term care is required

* Most LTC policies pay the insured a fixed dollar amount for each day the policy covers, regardless of what the care costs

Long-Term Care Coverages

* As individuals age, they are likely to suffer from acute and chronic illnesses or conditions. An acute illness is a serious condition, such as pneumonia or influenza, from which the body can fully recover with proper medical attention. The patient may also need some assistance with chores for short periods of time until recovery and rehabilitation from the illness are complete.

* Some people will suffer from chronic conditions, such as arthritis, heart disease, or hypertension, which are treatable but not curable illnesses

* Over time, a chronic condition frequently goes beyond being a nuisance and begins to inhibit a person's independence

* Most long-term care insurance policies will pay benefits when you cannot perform at least two Activities of Daily Living (ADL).

* The Activities of Daily Living are a series of basic activities performed by individuals on a daily basis necessary for independent living at home or in the community. There are many variations on the definition of the activities of daily living, but most organizations agree there are 5 basic categories.

1. Personal hygiene - bathing, grooming and oral care

2. Dressing - the ability to make appropriate clothing decisions and physically dress oneself

3. Eating - the ability to feed oneself though not necessarily to prepare food

4. Maintaining continence - both the mental and physical ability to use a restroom

5. Transferring - moving oneself from seated to standing and get in and out of bed

Categories of long-term care

* Skilled nursing care is continuous, around-the-clock care provided by licensed medical professionals under the direct supervision of a physician. Skilled nursing care is usually administered in nursing homes.

* Intermediate nursing care is provided by registered nurses, licensed practical nurses, and nurse's aides under the supervision of a physician. It's provided in nursing homes for stable medical conditions that require daily, but not 24-hour, supervision.

* Custodial care provides assistance in meeting daily living requirements, such as bathing, dressing, getting out of bed, toileting, and so on.

Home and Community-Based Services

Home health care is care provided in the insured's home, usually on a part-time basis. It can include skilled care (e.g., nursing, rehabilitative, or physical therapy care ordered by a doctor) or unskilled care (e.g., help with cooking or cleaning).

Adult Day Care

Adult day care is designed for those who require assistance with various activities of daily living, while their primary caregivers (usually family or friends) are absent

Respite Care

Respite care is designed to provide a short rest period for a family caregiver.

Continuing Care

Designed to provide a benefit for elderly individuals who live in a continuing care retirement community

Taxation of LTC Benefits

* Qualified LTC insurance contracts are treated in the same manner as accident and health insurance contracts

* Amounts received under an LTC contract are excluded from income because they are considered amounts received for personal injuries and sickness

* There is a limit on these amounts and these limits are adjusted for inflation annually

Long Term Care Partnership Plan

The Long-Term Care Partnership Program is a Federally-supported, state-operated initiative that allows individuals who purchase a qualified long-term care insurance policy or coverage to protect a portion of their assets that they would typically need to spend down prior to qualifying for Medicaid coverage. The difference between a Long- Term Care Partnership Plan and a Non-Partnership Plan is asset protection

Underwriting and Policy Issue

UNDERWRITING PROCESS

• Underwriting is the process of risk selection

• The process used by an insurance company to determine whether or not an applicant is insurable and if so, how much to charge for premiums

• Material facts can affect an applicant being accepted or rejected

• One of the main responsibilities of an underwriter is to protect the insurer against adverse selection.

• The underwriting process involves reviewing and evaluating information about the applicant and establishing individual against the insurer's standards and guidelines for insurability and premium rates. The most common sources of underwriting information include:

1. Application

The application is the starting point and basic source of information used by the insurance company in the risk selection. Although applications differ from company to company they all have the following same components. Insurable interest must exist between the policyowner and insured at the time when the application is made. It does not necessarily have to exist when the policy proceeds are actually paid.

Part I of the Application

• General Information - Age, DOB, Sex, Address, Marital Status, Occupation,

• Details about the requested insurance coverage:

o Type of policy

o Amount of insurance

o Name and relationship of the beneficiary

o Other insurance the proposed insured owns

• Other information personal information

o Tobacco use

o Hazardous hobby

o Foreign travel

o Aviation activity

o Military service.

Part II of the Application

• Medical Information - Health History

o Part II focuses on the proposed insured's health and asks a number of questions about the health history.

o This medical section must be completed in its entirety for every application.

o Depending on the proposed policy, this section may or may not be all that is required in the way of medical information.

• The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen.

Part III of the Application

• Agent's Report (Statement) - Agent's personal observations of the applicant.

• Includes the applicant's financial condition, character, background, purpose of sale, and how long agent has known the applicant.

• Part III of the application is often called the agent's report. This is where the agent reports personal observations about the proposed insured.

• Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully.

2. Credit Report

• An applicant's credit history is sometimes used for underwriting and to determine the likelihood of making premium payments.

• The Fair Credit Reporting Act requires the applicant be notified in writing if a credit report will be used. The applicant must also be notified if the premium is increased because of a credit rating.

3. Applicant Statements

• Warranties are statements that are guaranteed to be literally true. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

• Representation are Statements made by applicants that are substantially true to the best of their knowledge, but not warrantied as exact in every detail.

4. Medical Report

• A medical report is sometimes used for underwriting policies.

• If the information in the medical section warrants further investigation into the applicant's medical conditions, the underwriter may need an attending physician statement (APS).

5. Inspection Reports

• Companies are allowed to obtain inspection reports under The Fair Credit Reporting Act.

• The Fair Credit Reporting Act of 1970 (FCRA) regulates the way credit information is collected and used to protect the rights of consumers for whom an inspection or credit report has been requested.

• It established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports.

• If an insurance company requests a credit report, the consumer must be notified in writing.

• This report provides information about the applicant's character, lifestyle, and financial stability.

• When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

6. Medical Information Bureau (MIB):

• The MIB is a nonprofit trade organization which maintains medical information about individuals.

• Information from the MIB is used by life and health insurers.

• This helps insurance companies from adverse selection by applicants, as it detects misrepresentations, helps identify fraudulent information, controls the cost of insurance, and helps underwriters evaluate risk.

• Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.

• An insurance company would NOT notify the MIB if an application is declined.

7. Special Questionnaires

• Special questionnaires are used for applicants involved in special circumstances, such as aviation, military service, or hazardous occupations or hobbies.

• The questionnaire provides details on how much of the applicant's time is spent in these activities.

FIELD UNDERWRITING PROCEDURES

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face contact with the applicant which can aid the insurer in risk selection. As field underwriters, agents help reduce the chance of adverse selection by:

• Assuring the application is filled out completely and correctly

• Collect the initial premium

• Forwarding the application to the insurer in a timely manner

• Seeking additional information about the applicant's medical history if requested

• Notifying the insurer of any suspected misstatements in the application

• Delivering the policy

Policies may be issued as applied for by the applicant or they may be amended or modified by the insurer when issued. If they are amended or modified when issued, they are generally rated-up as well. This means that the premium will be higher than the standard rate.

Application Errors

• If an agent realizes that an applicant has made an error on an application, the agent must correct the information and have the applicant initial the changes

• An incomplete application will be returned to the agent

• The agent can NEVER change the application without the customer present to initial the changes

Signatures

• The agent and the applicant are required to sign the application

• If the applicant is someone other than the proposed insured, except for a minor child, the proposed insured must also sign the application

• Having an applicant that is different from the insured (parent and minor child) is considered third party ownership

USA Patriot Act:

• The USA Patriot Act was enacted in 2001.

• It requires insurance companies to establish formal anti-money laundering programs. The purpose of the act is to detect and deter terrorism.

Buyer's Guide

• Provides general information about the types of insurance policies available, in language that can be understood by the average person

• This is what a PPO is, this is what an HMO is, these are the basics of the 10 Medigap options, etc.

Policy Summary

• Provides specific information about the policy purchased, such as the premium and benefits.

• Mom calls you excited because she bought new health insurance. This allows you to quickly see what "health insurance" specifically did she buy: Medicare Supplement, Major Medical, Critical Illness, Long- term Care?

Suitability Form

• Ensures that the customer is best suited for the policy they are purchasing.

• Prevents the sale of unnecessary insurance for example a customer on Medicaid would not be suited for a Medicare Supplement policy because Medicare Supplement policies are typically expensive, and the customer is already receiving Medicaid due to financial need.

RISK FACTORS and CLASSIFICATIONS

Applicant Ratings and Classifications

Once all the information about a given applicant has been reviewed, the underwriter will utilize several different types of information in determining the insurability of the individual and the risk that the applicant poses to the insurer. This is evaluation is known as risk classification. The producer must provide a privacy notice to an applicant if personal information about that applicant is disclosed and is passed along to the insurer or its affiliates. The following rating classification system is used to categorize the favorability of a given risk:

Preferred

Low/Better than Average Risk - Lower Premiums - nonsmoker, weight within an ideal range, nondrinker

Standard

Average Risk - No Extra Ratings or Restrictions - standard terms and rates

Substandard

High Risk - Rated Up - higher premiums or restricted coverage - chronic conditions, insulin diabetes, heart disease

Declined/Uninsurable

Not Insurable - potential of loss to insurance company is too high - terminal illness, too many chronic conditions

• Lower risks tend to have lower premiums.

• If an applicant is too risky, the insurer will decline coverage.

• Besides outright rejection, there are three techniques commonly used by insurers in issuing health insurance policies to substandard risks:

o Attaching an exclusion (or impairment) rider or waiver to a policy

o Charging an extra premium

o Limiting the type of policy or coverage issued

• The insurance company will NEVER alter the PROVISIONS of an insurance policy due to risk

Risk Factors

Physical Condition

An applicant's present physical condition is of primary importance when evaluating health risks

Moral Hazards

• The habits or lifestyles of applicants

• Personalities and attitudes may draw attention in the underwriting process

• Moral hazards include

o Excessive drinking and the use of drugs represent serious moral hazards

o Applicants who are seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits)

o Poor credit rating

o Dishonest business practices

Occupation

• Some types of work are more hazardous than others, the premium rates for a person's health insurance policy may be affected by their occupation.

o There is little physical risk associated with professional persons, office managers, or office workers.

o However, occupations involving heavy machinery, strong chemicals, or high electrical voltage, for example, represent a high degree of risk for the insurer.

• Change of occupation provision:

o if the insured changes to a less hazardous job, the insurer will return any excess unearned premium

o if the change is to a more hazardous occupation, the benefits are reduced proportionately, and the premium remains the same

Age

• Generally, the older the applicant, the higher the risk.

• Health insurance claims costs tend to increase as the age of the insured increases

Sex

• Men show a lower rate of disability than women, except at the upper ages

• Women are sometimes required to undergo more expensive testing like a Pap test, which is used for detecting cervical cancer

• Women have a longer life expectancy than men

History

• Medical history may point to the possibility of a recurrence of a certain health condition.

• An applicant's family history may reflect a tendency toward certain medical conditions or health impairments.

Avocations

Certain hobbies an applicant may have (such as skydiving or mountain climbing) may increase his/her risk to the insurer

Insurable Interest

• An insurable interest exists if the applicant is in a position to suffer a loss should the insured incur medical expenses or be unable to work due to a disability

• As with life insurance, insurable interest is a prerequisite for issuing a health insurance policy

• You have insurable interest in yourself

• A producer may be the beneficiary of an applicant's policy of the producer has insurable interest on an insured

Premiums, Receipts, and Effective Date Premium Factors

Besides risk factors, there are many other standard items that impact the cost of premium for a health insurance policy.

Morbidity

Whereas mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, morbidity rates show the expected incidence of sickness or disability within a given group during a given period of time.

Interest

Just as with life insurance, interest is a major element in establishing health insurance premiums. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners.

Expenses

• Every business has expenses that must be paid, and the insurance business is no different.

• Each health insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries, agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other administrative expenses.

Benefits

• The number and kinds of benefits provided by a policy affect the premium rate

• The greater the benefits, the higher the premium. To state it another way, the greater the risk to the company, the higher the premium.

Claims Experience

• Before realistic premium rates can be established for health insurance, the insurer must know what can be expected as to the dollar amount of the future claims

• The most practical way to estimate the cost of future claims is to rely on claims tables based on past claims experience

• Experience tables have been constructed for hospital expenses based on the amounts paid out in the past for the same types of expenses

• Experience tables have also been developed for surgical benefits, covering various kinds of surgery based on past experience

Community Rating

This concept requires health insurance providers to offer health insurance policies within a given geographical area at the same price to all individual or group plans without medical underwriting, regardless of their health status.

Initial Premium

• It is best for both the proposed insured and the agent to have the initial premium (sometimes referred to as prepaid premium) paid with the application and forwarded to the insurer

• For the agent, this will help solidify the sale and may accelerate the payment of commissions on the sale

• If the premium is not paid with the application, (sometimes referred to as non-prepaid premium) the agent should submit the application to the insurance company without the premium

• The policy will not become effective until the initial premiums is collected even if it is approved and issued

Premium Mode (Mode of Premium Provision)

• The policy feature that permits the policyowner to select the timing of premium payments

• If the policyowner chooses to pay premium more than once per year, there may be additional charges because the company will have additional charges in billing and collecting the premium payments

• For health insurance, premium payment options include

o Annual

o semi-annual

o quarterly

o Monthly

• Unlike life insurance, there is no "single-pay" option for health insurance policies

Receipts

• Agents should make every effort to collect the initial premium with the application.

• The agent issues the applicant a premium receipt upon collecting the initial premium.

• The only time a customer will receive a receipt is if they pay their initial premium at the time of application. No receipt will be given at any other time.

• There are two types of premium receipts that determine when coverage will begin

Conditional Receipt:

• The producer issues a conditional receipt to the applicant when the application and premium are collected

• The conditional receipt denotes that coverage will be effective once the applicant proves to be insurable either on the date the application was signed or the date of the medical exam

• This may also be described as when the conditions of the receipt are met

• If the insurer accepts the coverage as applied for, the coverage will take effect from the date of the application or medical exam, whichever is later

Binding Receipt:

• Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application

• This may also be described as Insurer is bound to coverage until the application is formally rejected

• Even if the proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application

POLICY ISSUE AND DELIVERY

Policy Issue

• Happens when the insurer "approves" the application, they are "issuing the policy"

• Technically a policy could be ISSUED and not delivered for days or weeks later

Effective Date of Coverage

• The effective date identifies when the coverage is effective and establishes the date by which future annual premiums must be paid

• If the initial premium is collected at the time of application, the effective date is dependent on the type of receipt given to the applicant

• In some cases, the insurer requires the agent to collect a statement of good health from the insured at the time of delivery.

• If the initial premium is not submitted with the application, the policy effective date is the date the policy is delivered to the applicant, premium collected, and statement of continued good health signed. Coverage will not be in effect until all of those things happen.

Statement of Good Health

• Verifies that the insured has not become ill, injured or disabled during the policy approval process (time between submitting application and delivery of the policy)

• Is used when the applicant did not submit the initial premium with the application

• In such cases, common company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health

• Also used when reinstating a policy

Policy Delivery

All of the following acts can be considered means of delivery: mailing policy to the agent; mailing the policy to applicant; and the agent personally delivering policy.

Personal Delivery

• Allows the producer to explain the coverage to the insured (such as the riders, provisions, and options)

• Builds trust and reinforces the need for the coverage.

Constructive Delivery

• Occurs if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company's own agent.

• Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy.

• If the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no constructive delivery.

TAX TREATMENT OF HEALTH INSURANCE PREMIUMS AND BENEFITS

As a rule of thumb, insurance premiums and benefits are taxed in one of two ways:

Premiums are tax deductible

• Paid before your paycheck is taxed or removed from your taxable income when you file taxes

• In this case the benefits will be taxed (because you are already saving taxes on the premiums)

Premiums are NOT tax deductible

• Paid after your paycheck is taxed and are not removed from your taxable income

• In this case, the benefits of the policy would be tax free

Taxation of Disability Income Insurance

• Premiums paid for personal disability income insurance are not deductible by the individual insured, but the disability benefits are tax-free to the recipient

• When a group disability income insurance plan is paid for entirely by the employer and benefits are paid directly to individual employees who qualify, the premiums are deductible by the employer. The benefits, in turn, are taxable to the recipient

• If an employee contributes to any portion of the premium, her benefit will be received tax-free in proportion to the premium contributed

Taxation of Medical Expense Insurance

• Incurred medical expenses that are reimbursed by insurance may not be deducted from an individual's federal income tax

• Incurred medical expenses that are not reimbursed by insurance may only be deducted to the extent they exceed 7.5% of the insured's adjusted gross

• Benefits received by an insured under a medical expense policy are not included in his gross income because they are paid to offset losses he incurred

• For self-employed individuals, 100% of their health insurance premium is tax deductible (as of 2003)

Group Insurance Premium Taxation

• Premiums paid by an employer for the benefit of employees are tax deductible to the employer.

• Premiums paid by the employer are NOT tax deductible nor are they taxable to the employee.

MANAGED CARE

Policy Design

The design or structure of a policy and its provisions can have an impact on an insurer's cost containment efforts.

• A higher deductible will help limit claims

• Coinsurance is another important means of sharing the cost of medical care between the insured and the insurer

• Shortened benefit periods can also prove beneficial from a cost containment standpoint

Medical Cost Management

Defined as the process of controlling how policy owners utilize their policies. There are four general approaches insurers use for cost management: mandatory second opinions, precertification review, ambulatory surgery, and case management.

Mandatory Second Opinions

• In an effort to reduce unnecessary surgical operations, many health policies today contain a provision requiring the insured to obtain a second opinion before receiving elective surgery

• Under the mandatory second surgical opinion provision, an insured typically will pay more out-of-pocket expenses for surgeries for which only one opinion was obtained

• The mandatory second surgical option provision can help contain the cost of a group medical plan

Precertification Review

• To control hospital claims and prevent unnecessary medical costs, many policies today require policy owners to obtain approval from the insurer before entering a hospital for elective surgeries

• A pre-hospitalization authorization program (pre-certification) determines whether the requested treatment is medically necessary

• Pre-admission, pre-hospitalization, and pre-certification are all common names used for this particular type of managed care

• Pre-certification occurs before the treatment is provided

• Pre-admission testing, also known as pre-admission certification, usually involves evaluating an individual's overall health prior to being hospitalized for surgery

• Preadmission testing helps control health care costs primarily by reducing the length of hospitalization

• Failure to obtain a preadmission certification in non-emergency situations reduces or eliminates the health care provider's obligation to pay for services rendered

Concurrent (Utilization) Review

• A health insurance company's opportunity to review a request for medical treatment to confirm that the plan provides coverage for your medical services

• Health care is reviewed as it is being provided

• Involves monitoring the appropriateness of the care, the setting, and the length of time spent in the hospital

• This ongoing review is directed at keeping costs as low as possible and maintaining effectiveness of care by determining if the recommended treatment is appropriate

Ambulatory Surgery

The advances in medicine now permit many surgical procedures to be performed on an outpatient basis where once an overnight hospital stay was required these outpatient procedures are commonly referred to as ambulatory surgery.

Case Management

• Case management is sometimes referred to as Utilization Review.

• Case management involves a specialist within the insurance company, such as a registered nurse, who reviews a potentially large claim as it develops to discuss treatment alternatives with the insured.

• The purpose of case management is to let the insurer take an active role in the management of what could potentially become a very expensive claim.

• Most of these services are performed on a prospective basis, a concurrent basis, a retrospective basis or a combination of all three.

• A prospective review involves analyzing a case before admission to determine what type of treatment is necessary.

• Concurrent review involves the monitoring of a hospital stay by a nurse while a patient is in the hospital to determine when they will be released, if they require home health care or if a transfer to another facility such as a hospice center is warranted.

• Retrospective review involves an analysis of care, after the fact, to determine if it was necessary and appropriate. The purpose of this review is not to deny claims but to monitor trends regarding treatment so that future actions may be taken to reduce or eliminate unnecessary health care costs, especially in high cost areas.

Point-of-service Plans

• A point-of-service plan allows the insured to choose either an in-network or an out-of-network provider at the time care is needed.

• With in-network coverage, the insured receives care through a particular network of doctors and hospitals participating in the plan

• All care is coordinated by the insured's primary care physician, which includes referrals to specialists

• An insured receiving out-of-network care usually pays more of the cost than if it had been in- network (except for emergencies)

North Carolina General Laws

A contract of insurance is defined in North Carolina statutes as an agreement by which the insurer is bound to pay money or its equivalent or do some act of value to the insured upon, and as an indemnity or reimbursement for, the destruction, loss, or injury of something in which the other party has an interest. The Insurance Department is responsible for regulating the business of transacting insurance contracts in North Carolina. All contracts of insurance that are made within North Carolina are subject to the laws of this state.

Commissioner of Insurance

The Commissioner of Insurance enforces all laws of the state governing insurance companies and makes rules and regulations relating to the business of insurance. The Commissioner is elected to office for a term of 4 years. If a vacancy occurs during the term, it shall be filled by the Governor for the unexpired term. The Commissioner’s powers and duties include:

• Enforcing and carrying out all the provisions of the General Statutes

• Adopting rules and regulations to enforce provisions of the General Statutes

• Adopting rules pertaining to solicitation of proxies, including financial reporting of equity securities of any domestic stock insurance company

• Approving forms used by companies, association, orders, or bureaus

• Receiving and thoroughly examining all financial records

• Reporting in detail to the Attorney General any violation of insurance laws

• Instituting civil actions or criminal prosecutions by the Attorney General for any violation

• When requested by any citizen of this state, providing a synopsis of the provisions of any insurance contract which is offered or issued

• Compiling and making available to the public lists of rates charged, including deviations, and explanations of coverages that are provided by insurers

Examination of records

The Commissioner may conduct a financial examination of any insurance company as often as deemed appropriate. At the very least, a company shall be examined once every 5 years.

Notice and hearing

The Commissioner may call and hold hearings for any purpose deemed necessary. At least 10 days written notice will be given to all persons affected by the hearing.

Cease and desist order

The Commissioner has the authority to examine and investigate the affairs of any person engaged in the business of insurance in this state. Based on the investigation, the Commissioner may issue a cease and desist order.

Any person who willfully violates a cease and desist order of the Commissioner may be subject to a fine of $1,000 to $5,000 for each violation.

Form, classification, and rates

Before an insurance policy is issued or delivered, the form, classification or risks, and premium rates must be filed with the Commissioner of Insurance.

Definitions

Company

Company, insurance company, or an insurer includes any corporation, association, partnership, society, order, individual or aggregation of individuals engaging or attempting to engage in the insurance business.

Department

Department is the Department of Insurance of North Carolina.

Person

A person is any individual, partnership, firm, association, corporation, joint-stock company, trust, or any similar entity.

• The singular form includes the plural, and the masculine form includes the feminine wherever appropriate

Licensing

Agent

An individual who in any manner sells, solicits, or negotiates insurance on behalf of insurance companies for compensation is an insurance agent.

• The licensing of insurance agents is needed to protect the public.

• In North Carolina, an individual agent is considered to represent the insurance company.

• A licensee may not transact insurance business in North Carolina until the licensee is appointed by an insurer.

Broker

An insurance broker in North Carolina is a representative of the insured.

Licensee

A licensee is any person who holds a license.

Process

An applicant for a resident agent license in North Carolina must submit an application to the Commissioner and

• Be at least 18 years of age

• Not have committed any act that is grounds for denial, suspension, or revocation

• Completed a 20-hour pre-licensing course

• Have passed the state exam for the lines of authority in which licensure is sought

• Submit the application with fees

• Not intend to use the license primarily to write controlled business

• Be deemed trustworthy and competent

Nonresident agents

An agent who holds a resident license in a different state may apply for a nonresident license in North Carolina, as long as both states have a reciprocal agreement. To apply, nonresidents must submit an application form, proof of resident license in good standing, and fees. Nonresident agent applicants do not have to take the North Carolina state licensing exam but must not have committed any act for which the license could be denied, suspended, or revoked.

New Residents

Licensed agents moving to North Carolina from another state have 90 days within cancelling their previous license to apply for a resident license here. After 90 days, the applicant must complete pre-license education and pass the state exam in North Carolina.

Temporary License

The Commissioner may issue a temporary insurance agent license for a maximum period of 180 days (or longer for good cause) without requiring an examination if the Commissioner deems that the temporary license is necessary for the servicing of an insurance business.

• A temporary license may be issued in cases where an agent has become disabled or dies, requiring a replacement to service the agent’s business

• A temporary license may also be issued in cases where the agent becomes activated for military service

Denial of License

If the Commissioner refuses to issue a license for any reason, a license may be suspended, revoked, or denied. The applicant will be notified in writing. Within 30 days after service of the notification, the applicant may make a written appeal to the Commissioner for a review. The review must be completed without undue delay, and the applicant must be notified promptly in writing as to the outcome of the review. If the applicant still disagrees with the outcome, he or she may appeal for a hearing within 30 days.

Continuing education

Resident agents must complete 24 hours of continuing education every 2 years to keep their license active. 3 of those hours must be in ethics.

• The Board of Insurance Agent Education develops the continuation education program and submits the proposal to the Commissioner for approval.

• Nonresident agents are not required to complete North Carolina continuing education requirements as long as their home state requirements are met.

Reinstatement and renewal

A licensee who allows his or her license to lapse may, within 4 months from the renewal date, reinstate the license without retaking a pre-licensing course and state licensing exam. Continuing education requirements still need to be met and a reinstatement fee applies.

Direct response

Direct response solicitation means any offer by an insurance company to persons in this state (either directly or through a third party) to effect life or health insurance coverage which enables the individual to apply for the insurance on the basis of the offer.

Fingerprinting

The Commissioner requires fingerprinting within 30 days of applying for a resident insurance license.

Probation, suspension, revocation, refusal to issue or renew of licenses

The Commissioner must give written notice to the agent before holding a hearing that may lead to the suspension or revocation of the agent’s license. The Commissioner may place on probation, suspend, revoke, refuse to renew, or deny a license to any person who has:

• Provided incorrect, misleading, incomplete, or untrue information in the license application

• Violated any insurance laws, regulations, subpoena, or orders from the Commissioner

• Attempted to obtain a license through fraud or misrepresentation

• Intentionally misrepresented the terms of an insurance contract

• Been convicted of a felony

• Committed any insurance unfair trade practice

• Used fraudulent, coercive, or dishonest practices or demonstrated incompetence, untrustworthiness, or financial irresponsibility in this or any other state.

• Had an insurance license denied, suspended, or revoked by another state

• Forged a name to an insurance document or application

• Cheated on an insurance license examination

• Knowingly accepted insurance business from an unlicensed individual

• Failed to comply with a court order imposing child support

• Failed to pay state income tax

Exemption From Examination

The Commissioner may exempt an applicant from the licensing exam if that person meets the following criteria;

• An applicant who has obtained the designation of Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Life Underwriter Training Council Fellow (LUTCF), Chartered Property and Casualty Underwriter (CPCU) or Fellow of Life Management Institute (FLMI).

Regulations

Address/name change

Agents must report a change in address or name to the Commissioner within 10 business days of the change.

Assumed names

An insurance producer doing business under any name other than the producer's legal name shall notify the Commissioner before using the assumed name.

Reporting of actions

If a licensee is convicted in any court for any crime or offense other than a motor vehicle infraction, the licensee must notify the Commissioner 10 days after the date of conviction. When an agent reports a final disposition of an administrative action against the agent to the Commissioner, the report must include a copy of the order or other relevant legal documents.

Ethical Standards

Agents, brokers, and other insurance company representitives must conduct themselves in a professional manner. Below are some important ethical standards to keep in mind;

• Act fairly and honestly
• Immediately identify yourself and your role
• Carry your insurance license while performing insurance duties
• DO NOT accept gratuity for referrals to other providers of service
• DO NOT intimidate or discourage a client from seeking advice or counsel
Agent appointments

An agent cannot act as an agent for an insurer unless he or she is appointed to work for that insurer. Insurers are responsible for submitting an appointment notice to the Commissioner within 30 days of an agent’s appointment or submission of first insurance application. The insurer is also responsible for paying the agent’s appointment renewal fee.

Termination of agent appointment

An insurer that terminates an agent appointment must notify the Commissioner within 30 days of the date of termination. Within 15 days of such notice, the insurer must mail a copy of the notice to the terminated agent, after which the agent will have 30 days to submit written comments to the Commissioner.

Commissions

No person shall pay or accept commissions to/from an unlicensed individual for the purpose of selling or negotiating insurance business.

Claim forms

An insurance company will send forms for filing proof of loss to a claimant within 15 days after the company receives notice of a claim.

Business Records

Every insurance agent/broker MUST maintain all records, books, and documents for insurance transactions for a period of no less than 5 years.

Complaint Record

Each insurer or its agents must maintain, for at least 5 years, a log of all written complaints listing the following:

• Department file number;

• Name of insured;

• Nature of the complaint,

• Department subject to the complaint;

• Policy or claim number of the insured; and

• Disposition of the complaint.

Free look period

The free-look period allows the policyowner time to decide whether or not to keep it. If the policyowner decides not to keep the policy within the free-look period, a full refund will be given. In North Carolina, life insurance policies must provide a minimum free-look period of 10 days upon policy delivery. A delivery receipt is a signed document that starts the free-look period.

Solicitation and sales presentations

Agents must provide applicants and prospects with the approved NAIC Buyer’s Guide. Agents must also provide a Policy Summary to applicants.

Policy summary

The policy summary contains specific information on the provisions, benefits, and coverage of the policy applied for.

Buyer's guide

The buyer’s guide enables applicants to compare different life insurance policies and help them choose which policy is best for their needs.

Statements in Application

All statements or descriptions in any application for a policy of insurance, or in the policy itself, are representations and not warranties. A representation, unless material or fraudulent, will NOT prevent a recovery on the policy.

Blank Contract Application

An agent who signs a blank contract application or policy of insurance is guilty of a misdemeanor. The fine for this can be anywhere between $1,000 and $5,000.

False Pretenses and Cheats

If any insurance agent, broker, or administrator embezzles or fraudulently uses or withholds any money received as a result of acting as an agent, broker, or administrator, he/she can be charged with a felony.

Controlled business

Controlled business can be defined as policies written on people that the licensed agent has direct influence over: including family, employers, and/or any company to which the agent has stock control. Obtaining a license for the primary purpose of writing controlled business is prohibited.

Prohibited Discrimination/Sickle-Cell Trait

Insurers may not discriminate against applicants who are diagnosed with sickle-cell trait or hemoglobin-C trait.

Impersonation

A licensee who advertises or markets themselves as something they are not has engaged in impersonation (i.e.; a producer who advertises themselves by a name or trade name other than the one appearing on the license on record). A specific fine may apply to impersonation without permission from the Commissioner.

Commingling

An agent who has combined premiums collected with personal funds has engaged in commingling, which is a prohibited act.

Medical examinations and lab tests including HIV

For underwriting an individual policy, insurers may require proposed insureds to undergo an HIV test, but only in conjunction with other medical tests. The basis for requiring an HIV test cannot be the proposed insured’s sexual orientation. The insurer must obtain written consent from the proposed insured in order to conduct the HIV test.

Financial planner/consultant

Terms such as "financial planner" or "financial consultant" may not be used by life insurance agents to imply that they are generally engaged in an advisory business in which compensation is unrelated to sales UNLESS such is actually the case.

Age limits

If a company accepts a renewal premium payment that would extend coverage beyond the policy's maximum age limit, the company must continue the coverage to the end of the period of time for which the premium was accepted.

Interest payments on death benefits

Upon the death of the insured, payments made after 30 days from the receipt of satisfactory proof of loss must receive the insurer's current interest rate, computed from the date of death.

Fraternal Benefit Society

Fraternal Benefit Societies are a corporation, society, or order that have a representative form of government and are organized through a lodge system. Fraternal benefit societies exist for the benefit of its members and their beneficiaries.

• Fraternal Benefit Societies may provide: death benefits, endowment benefits, annuity benefits, disability benefits, and hospital/medical/nursing benefits

• Agents for a fraternal benefits society must be licensed in accordance with general insurance laws if they are receiving a commission OR if they are soliciting outside of the membership

• Fraternal benefit society agents do not need to pass an exam or be licensed if they do not receive commission

• A Fraternal Benefit Society is a nonprofit entity

Domestic, Foreign, and Alien Companies

An insurance company is classified according to the location of its corporation. Regardless of where the insurance company is incorporated, it still has to get a Certificate of Authority before transacting insurance within a state. The following definitions apply:

Domestic insurance company: A company that resides and is incorporated under the laws of the state in which its home office is located.

A company domiciled in North Carolina would be a domestic company in North Carolina

Foreign insurance company: A company whose home office is located in another state. It is considered to be a foreign company in all states except for its home office.

A company domiciled in Pennsylvania would be a foreign company in North Carolina

Alien insurance company: A company that is chartered and organized in any country other than the United States. It is considered an alien company in all states.

A company chartered in Canada would be an alien company in North Carolina

Authorized and Unauthorized Insurers

Authorized insurer: An insurance company that has qualified and received a Certificate of Authority from the Insurance Department to sell insurance in this state.

• Also called an admitted insurance company

Unauthorized insurer: An insurance company that has been denied or not yet applied for a Certificate of Authority and may not sell insurance in this state. Any agent that sells an insurance policy for an unauthorized insurer runs the risk of being responsible for unpaid claims.

• Also called a non-admitted company

• Any person or entity who solicits, negotiates, or sells insurance for an unauthorized insurance company is guilty of a misdemeanor and will be liable for any losses or unpaid claims.

Stock and Mutual Company

Stock Insurance Company: An insurance company that is owned and controlled by stockholders (shareholders). The stockholders provide the capital and share in profits or losses.

• Stock insurance companies are considered nonparticipating because the policyowners do not share in the profits of the company.

• The objective is to produce profits for the owners, the stockholders.

• A stock insurance company that issues both participating and nonparticipating policies is referred to as a company doing business on a mixed plan.

Mutual life insurance companies: An insurance company owned and controlled by its policyowners. These policyholders elect a board of trustees or governing body to manage the firm. The profits of a mutual insurance company are returned to the policyowners in the form of dividends or retained as surplus to meet future obligations.

• Mutual insurance companies are considered participating because the policyowners do share in the profits of the company.

• The objective is to provide insurance to its owners, the policyowners, at the lowest net cost.

Unfair Trade Practices

Misrepresentation

It is an illegal practice to misrepresent any fact about an insurance policy, such as policy terms, benefits, value, cost, effective date, or existence of a contract of insurance.

False advertising

It is an illegal practice to falsely advertise insurance products or publish misleading information about its insurance coverage. This includes making false statements about the financial condition of an insurer.

Defamation

It is an illegal practice to make any public statement or advertisement that contains false information or unsubstantiated criticisms about an insurance company intended to harm or malign.

Boycott, coercion, and intimidation

It is an illegal practice to commit or coordinate any act or boycott, coercion, or intimidation in order to restrain or monopolize the business of insurance.

Soliciting

Soliciting is any effort to influence a person to buy an insurance product from you.

False financial statements

It is illegal to publish any false financial statement regarding a person or entity.

Unfair discrimination

It is an illegal practice to unfairly discriminate against a person in any way on an insurance-related matter. An example would be charging a different rate for someone in the same actuarial class. Fair discrimination is necessary for the issuance of life insurance policies, which is based on mortality.

Rebating

It is illegal to offer a prospective client something of value that is not specified in a contract to induce the purchase of an insurance policy. This does not include sharing commissions with other licensed and appointed agents.

Twisting

Twisting is inducing or attempting to induce any insured person through misrepresentation to lapse, forfeit, or surrender insurance. The reason for this is normally to sell an insurance policy with another insurer.

Unfair Claims Methods

The following acts, omissions, or practices are defined as unfair and deceptive claim settlement practices when knowingly committed or performed with such frequency as to indicate a general business practice, and are prohibited:

• Misrepresenting to insureds pertinent facts or policy provisions relating to coverage at issue

• Failing to acknowledge and act reasonably promptly upon communications with respect to an insurance claim

• Failing to adopt and implement reasonable standards for prompt investigation and processing of insured’s claims

• Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements are completed and submitted by insureds

• Not attempting in good faith to effect prompt, fair, and equitable settlements of claims for which liability has become reasonably clear; Refusing or delaying a settlement solely because there is other insurance available to partially or entirely satisfy the claim loss; the claimant who has a right to recover from more than one insurer has the right to choose the coverage from which to recover and the order in which payment is to be made.

• Compelling insureds to initiate suits to recover amounts due under an insurance policy by offering substantially less than the amount ultimately recovered in those suits

Fraudulent Claims

Anyone who knowingly provides an untrue, false or fraudulent claim to an insurance company is guilty of a felony.

Whenever a licensee is aware and knows that a person has violated a fraudulent claim or embezzled, it is that person's duty to notify the Commissioner or risk suspension or revocation of their license.

North Carolina Life and Health Guaranty Association

The North Carolina Life and Health Guaranty Association provides claim payments of admitted, insolvent (financially incapacitated) insurers. Agents are prohibited from using the existence of the North Carolina Guaranty Association for selling, soliciting, or inducing purchase of an insurance policy. For any one person, the Guaranty Association will provide:

• Contractual obligations provided by the insurer
• $300,000 in life insurance death benefits and $300,000 in cash values
• $300,000 for coverages not defined in health benefit plans
• No more than $500,000 in health benefit plans
• $300,000 in health insurance; disability; long-term care insurance
• $300,000 in present value annuity benefits
• $5,000,000 in benefits for those covered by any unallocated annuity or $1,000,000 in benefits and cash value

The North Carolina Life and Health Guaranty Association is not obligated to cover more than $300,000 in benefits

The Life and Health Guaranty Association is funded by insurance companies through assessments.

Insurance Information and Privacy Protection Act

The purpose of this Act is to establish standards for the collection, use, and disclosure of information gathered during an insurance transaction.

The Insurance Information and Privacy Protection Act is designed to limit or direct the information collection activities of:

• agents and limited representatives

• insurance support organizations

• insurance companies

The Insurance Information and Privacy Protection Act requires that an applicant for an individual insurance policy be notified of an investigation into his personal character, general reputation, and mode of living.

An insurance company MUST clearly specify questions designed to obtain information solely for marketing research in any insurance transaction.

When access to recorded personal information is requested following an adverse underwriting decision, the insurer must make the information available within 30 business days. Any reported violations of this Act require the Commissioner of Insurance to issue and serve a statement of charges and notice of hearing. The date of such hearing shall be at least 10 days after service of charges.

Immunity

During a fraud investigation, the Commissioner may request documents from a person concerning the transaction. The person must provide the documents and is not subject to liability or slander, unless the person acted maliciously.

False Statements

If a licensee or person willingly misstates information on any financial document or statement, they are guilty of perjury, and the entity in which they represent is subject to a fine between $2,000 and $10,000.

Required Insurance (Forced Insurance)

A lender cannot require anyone to purchase insurance from them or an affiliate as a condition for approving, refinancing, renewing or make part of the terms of the loan.

Car Rental Company Licenses

The Commissioner may issue a limited license to a rental car company allowing it to sell certain insurance coverage associated with vehicle rental.

Binders As Evidence

Lenders must accept binders or temporary insurance contracts as evidence of insurance as long as they meet the following criteria;

• they include standard insurance contract provisions
• they include applicable contract endorsements
• they include a paid receipt for a full year premium

Note: The law doesn't prohibit a lender from refusing to accept a binder as evidence, as long as the refusal is reasonable. Premium Payment by Credit Card

An insurer or agent may accept premium payments by credit card as long as the payment option is available to all existing clients and if the insurer pays all applicable credit card processing fees.

North Carolina Life Laws

Incontestability

After a policy has been in force for two years, the insurance company cannot contest the validity of the policy for any reason other than failure to pay the premiums.

Suicide

An insurer may exclude liability for paying a death claim in a life insurance policy if the insured commits suicide within two years of policy issue. The insurer will return the premiums if the insured commits suicide within that period

Policy summary and buyer’s guide

An agent who sells an individual life insurance policy in North Carolina must deliver to the policyowner a Policy Summary and Buyer’s Guide.

Disclosure

Any information required to be disclosed by the insurer cannot be minimized or intermingled within the text of advertisement so as to be confusing or misleading. Also, advertisements may not omit information or use statements, references, or illustrations that will mislead or deceive prospective purchasers.

Grace Period

Life insurance policies must provide a grace period of 31 days after the due date. If the insured dies during the grace period, the insurance company may deduct any premium due from the death benefit.

Minors

Minors in North Carolina age 15 and up can enter into life insurance contracts and have all the rights that come with ownership.

Illustrations

Illustrations are charts, graphs, and numerical data that depict the non-guaranteed elements of a policy over time. Non-guaranteed elements are premiums, benefits, values, credits, or charges under a policy of life insurance that are not guaranteed or not determined when the policy is issued. A life insurance illustration showing future premiums being paid out of nonguaranteed values must disclose that the policyowner may need to resume premium payments, depending on actual results.

Exemption from creditors

Proceeds from a life insurance policy are protected from any claims by a creditor of the insured as long as there is a named beneficiary.

Interest payments on death benefits

Upon the death of the insured, payments made after 30 days from the receipt of satisfactory proof of loss must receive the insurer's current interest rate, computed from the date of death.

Policy Loan Interest Rate

• The maximum fixed interest rate charged by insurers is 8% in North Carolina

• An insurance policy has the right to defer granting a policy loan for a maximum of 6 months after receiving a request for the loan

Replacement

Replacement is strictly regulated and requires full disclosure by both the agent and the replacing insurance company. Replacement regulations exists to assure that purchasers receive specified information and it also reduces the opportunity for misrepresentation. Policy replacement is defined as a transaction in which a new policy or contract is to be purchased, and the agent is aware that an existing policy or contract has been, or will be:

• Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated

• Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values

• Modified to cause a reduction in benefits or length of policy term

• Subjected to loans exceeding 25% of the cash value

• Reissued with a reduction in cash value

• Used in a financed purchase

Duties of the replacing agent

• Present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the agent. A copy must be left with the applicant.

• Obtain a list of all existing life insurance and/or annuity policies to be replaced including policy numbers and the names of all companies being replaced.

• Leave the applicant with the original or a copy of written or printed communications used for presentation to the applicant.

• Submit to the replacing insurance company a copy of the Replacement Notice with the application.

Duties of the replacing insurance company

• Require from the agent a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant.

• Send each existing insurance company a written communication advising of the proposed replacement within a specified period of time of the date that the application is received in the replacing insurance company's home or regional office. A policy summary or ledger statement containing policy data on the proposed life insurance or annuity must be included.

Conservation

An agent's attempt to stop the replacement of an existing life insurance policy or annuity is known as conservation.

Group Life Insurance

• The employees eligible for group insurance under the policy shall be all of the employees of the employer.

• In the event of a termination of a group life plan or termination of a covered employee, a person covered by a group policy has the right to convert such coverage to an individual policy within the conversion period (31 days) without proving insurability. If this right is exercised, the employee is responsible for the payment of premium.

There are no restrictions regarding the assignment of coverage under a group life insurance policy

Industrial Life

Industrial life insurance is a form of life insurance that:

• Do not exceed a face amount of $1,000

• Have premiums that are payable monthly or more frequently (weekly, bi-weekly)

• Have the words “Industrial Policy” printed upon the policy.

Viatical settlements

A viatical settlement contract is an agreement under which the owner of a life insurance policy sells the policy to another person in exchange for a bargained-for payment, which is generally less than the expected death benefit under the policy.

• The viator is considered to be an individual suffering from a terminal illness or severe chronic illness who sells his/her life insurance policy to a viatical settlement provider.

• The viatical settlement provider becomes the policyowner and assumes responsibility for paying premiums. When the insured dies, the provider receives the death benefits.

• Proceeds of the viatical settlement contract could be subject to the claims of creditors.

• Viatical settlement brokers are insurance agents licensed to solicit viatical settlement agreements between providers and policyowners (viators), charging a fee for their services.

• An agent must obtain a license to transact viatical settlements in North Carolina.

Insurable interest

• Insurable interest exists on the lives of those individuals who wish to sell (upon their death) their shares of stock or ownership shares in a company to those individual(s) contracted to buy these shares.

• Employers have insurable interest in the lives of their employees. An employer may insure the life of an employee as long as the proposed insured provides prior written consent.

• A married person has insurable interest in the life of his or her spouse, even in the absence of an economic interest.

Reinstatement

Unless a policy has been surrendered for its cash value, a policy can be reinstated within 5 years after the date of premium default. The requirements of reinstatement include:

• Written application

• Payment of any past due premiums or indebtedness to the insurer

• Evidence of insurability

Contestability after reinstatement

A reinstated life insurance policy or annuity may be contested by the insurance company on account of fraud or misrepresentation under the same conditions with respect to contestability after original issuance.

Notice of Premium Default

A life insurance company cannot declare a policy lapsed or forfeited within one year after default in premium payment, unless it has mailed a notice indicating the amount of premium due. This requirement only applies to policies with an annual premium schedule, and not to policies that are payable monthly (or shorter intervals), or to group insurance and term insurance contracts for one year or less. A policy may not be lapsed or forfeited within 30 days after the notice has been sent.

• Policies that don't have a grace period, the notice must be sent at least 15 days, but no more than 45 days, prior to the due date. For policies with a grace period, the notice must be sent at least 5 days, but no more than 45 days, prior to the due date.

Prearranged Funeral Contracts

A prearranged funeral contract is a life insurance policy in which the purpose is to fund a funeral for an insured. These polices may be individual or group coverage. Before accepting the initial premium, the agent must make these disclosures:

• The relationship between the prearrangement and the life insurance policy
• The fact that the life insurance policy will be funding the prearrangement
• The nature of the relationship of everyone involved

North Carolina Health Laws

Entire contract

A provision that the policy (including the endorsements and the attached papers) along with the application shall constitute the entire contract between the parties.

Free Look

A policyowner has 10 days to return an Accident/Health insurance policy and receive a full refund on premiums. The free-look provision of any health policy begins the date the policy is delivered to the insured.

Grace Period

The grace period for health and accident insurance is required to be no less than 7 days for weekly premium policies, 10 for monthly premium policies, and 31 for all other policies. If premium is paid within the grace period, coverage shall remain in effect.

Notice of lapse

An insurance company must provide a notice to the insured 15 days before a policy will be cancelled or lapsed due to nonpayment.

Contestability period (Time limit on certain defenses)

EXCEPT for fraud, the time after issuance of a policy during which an insurance company may contest a health insurance claim due to the statements on an application is 2 years from the date of issue.

Policy forms

If an insurer has been notified by the Commissioner of Insurance that an individual Health Policy form does not comply with the state's laws, the insurer may not issue the form in connection with any new applications.

Claim forms

An insurance company will send forms for filing proof of loss to a claimant within 15 days after company receives notice of a claim.

Notice of claim

Written notice of claim for injury or sickness must be given to the insurer within 20 days after the date of occurrence.

Proof of loss

Written proof of loss must be furnished to the insurer within 180 days after the date of such loss.

Time payment of claims

Indemnity claims will be paid immediately upon receipt of written proof of loss. Disability claims will be paid no less frequently than monthly.

Reinstatement

If a health policy is reinstated after it has lapsed for nonpayment, there is a waiting period of 10 days before a claim covering sickness will be covered. Injuries sustained from an accident, however, will be covered immediately.

Legal Action

There is a waiting period of 60 days to file a lawsuit after a claim for loss has been filed by the insured. No lawsuit may be filed after 3 years has passed from when the claim was submitted.

Rate increases

An insurer must provide written notice to individual accident and health policyowners at least 30 days before the effective date of a rate increase.

Definition of small employer

A small employer is defined as one that employs between 2-50 employees.

Definition of “employee”

The term “employee”, for group health insurance purposes, is defined as a nonseasonal person who works on a full-time basis with a normal work week of 30 or more hours and is otherwise eligible for coverage.

Employee eligibility

Employees shall be added to the master group coverage no later than 90 days after their first day of employment.

Group Health Certificate

In North Carolina, a group health certificate of insurance must contain a summary of policy features and benefits.

Group rates

Approved premium rates for group health insurance shall be guaranteed by the insurer for an initial period of no less than 12 months.

Pre-existing conditions/group coverage

Pre-existing conditions are health issues that existed, were treated, or diagnosed within 6 months prior to employment. An enrollee for a health benefit plan may be excluded for up to 12 months (18 months for late enrollees). A late enrollee is an individual who elects coverage after the initial eligibility period.

Pre-existing conditions, replacement policies

When replacing an individual health policy in North Carolina, the required replacement notice to the applicant must include notice that pre-existing conditions may not be covered.

If a group health policy in North Carolina is replaced with another group policy within 15 daysit must cover all eligible persons under the discontinued plan.

An individual’s waiting period for pre-existing conditions is reduced when he or she has “creditable coverage.” Creditable coverage is previous coverage under another group or individual health plan when there has not been a break in coverage of 63 days. The 63-day period begins when the individual’s previous coverage ended. It ends when coverage under your plan begins, or, if earlier, when your group’s waiting period for eligibility begins.

Industrial Health Insurance

Industrial health insurance is a form of health insurance that:

• Have a minimum grace period of 4 weeks for additional death benefit premium
• Have a maximum of 2 years incontestability provision of the death benefit
• Have a noncancellable death benefit unless due to nonpayment of premium

Handicapped dependents

Handicapped children are not subject to an age limitation and are covered until they become self-supportive.

Newborn child coverage

All individual and group health plans which provide coverage to family members of the insured must provide coverage for the insured’s newborn child at the moment of birth. If a premium is required to continue the newborn’s coverage, it must be paid within the first 31 days to continue coverage. Coverage includes injury and sickness, including medical care for diagnosed congenital defects and birth abnormalities.

Coverage of adopted and foster children

All individual and group health plans must provide coverage to the insured’s adopted/foster children on the same basis as other dependents.

Relation of earnings to income

Disability payments shall not exceed the average monthly earnings of the insured at the time disability begins or for the two years prior to the disability.

Medical examinations and lab tests including HIV

For underwriting an individual policy, insurers may require proposed insureds to undergo an HIV test, but only in conjunction with other medical tests. The basis for requiring an HIV test cannot be the proposed insured’s sexual orientation. The insurer must obtain written consent from the proposed insured in order to conduct the HIV test.

Prohibited Discrimination/Sickle-Cell Trait

Insurers may not discriminate against applicants who are diagnosed with sickle-cell trait or hemoglobin-C trait.

Genetic screening information

It is illegal for insurers to use the results of a proposed insured’s genetic screening to: underwrite a policy; determine whether to issue an insurance policy or to cancel; refuse to issue or renew, or limit benefits of a policy.

Continuation of coverage

• Continuation of group health coverage is only available to those employees who were covered under a group plan for a minimum period of 3 months prior to the date of termination.

• Continuation of coverage of a group Hospital, Surgical, and Major Medical Policy must include hospital expenses.

• The eligible employee can elect continuation of coverage for at least 60 days and up to 18 months after termination, as long as the premiums are paid by the employee. No more than 102% of the full group rate will be charged to that employee.

• Continuation payments need to start being paid by the employee within 31 days of termination to be eligible for continuation coverage.

• Continuation coverage is not required to include dental, vision, or prescription drug benefits.

Conversion of coverage

• An employee who is insured under a group plan that has been terminated can convert to an individual plan with the same insurer without evidence of insurability.

• Employee must have been covered under the group plan for a period of at least 3 months.

• Application for a conversion policy and first premium payment must be made within 31 days after termination of insurance.

• The converted policy will not exclude, as a pre-existing condition, any condition covered by the group policy.

Insurer Grievance Process

North Carolina insurance law provides standards for the establishment and maintenance of procedures by insurers to assure that covered persons have the opportunity for appropriate resolutions of their grievances.

• Insurer must maintain grievance records for three years

OB-GYN Coverage

Each health plan will allow female participants 13 and older access to the services of an obstetrician-gynecologist.

Minimum Maternity Benefits

Any individual and group policy that provides for maternity benefits must provide coverage for a minimum of 48 hours of inpatient care after a normal delivery, and a minimum of 96 hours of inpatient care after a cesarean section, for a mother and her newborn infant.

Pap Smears

Any individual or group health insurance policy must provide coverage for annual gynecological exams, mammograms, and routine pap smears (cervical cancer testing).

Mammograms

Any insurer offering insurance in North Carolina must provide coverage for breast cancer screening mammography. Coverage is as follows:

• One baseline mammogram for women between ages 35-39

• One mammogram every 2 years between ages 40-49, or more frequently if recommended by her physician

• One mammogram a year for women age 50 and older

Any policy that provides coverage for a mastectomy must also provide coverage for reconstructive breast surgery following the mastectomy.

PSA Testing

Every accident and health insurance policy will provide coverage for prostate-specific antigen (PSA) tests for the presence of prostate cancer.

Chemical dependency

Coverage for chemical dependency will be in included in all group health plans ($8,000 minimum benefit for the year; $16,000 for lifetime of contract).

Other Mandatory Benefits and Provisions

No insurer licensed in this State shall refuse to issue or deliver any policy due to the fact that a person possesses sickle cell trait or hemoglobin C trait nor may charge a higher premium for such reasons, as well. In addition, policies issued in this State providing medical expense benefits must also include coverage for the treatment of diabetes.

Pharmacy of Choice

It is illegal to prohibit an insured or beneficiary from selecting a pharmacy of his or her choice in North Carolina.

Nurse Services

No agency, institution or physician providing a service for which payment or reimbursement is required to be made under a policy governed by State law shall be denied such payment or reimbursement on account of the fact that such services were rendered through a registered nurse acting under authority of regulations adopted by the North Carolina Medical Board and the Board

Unpaid Premiums

Upon the payment of a claim under this policy, any premium due and unpaid or covered by any note or written order may be deducted from such payment.

Readjustment of Premium

As long as it is based on 12 months experience, a Group Health Policy can provide for readjustment of the premium rate once every 6 months after the first year.

Conformity with State Statutes

Any provision of this policy which is in conflict of the state in which the insured resides on the date of issue is understood to be amended to conform to the statutes of that state.

Physical Exams and Autopsies

The insurer has the right to examine the insured during the claim process, and to perform an autopsy when death is involved and where it is not forbidden by law.

Genetic Testing

Discrimination based on genetic information is prohibited.

Cancellation by the Insured

If an insured changes occupation to a less hazardous one than stated in the policy, the insured can, upon written request, either:

• Cancel policy and receive a refund of the unearned premium

• Reduce the premium accordingly and refund prorated unearned premium from the date of change

Intoxicants and Narcotics

The insurer shall not be liable for any loss sustained or contracted in consequence of the insured's being intoxicated or under the influence of narcotics, unless administered on the advice of a physician.

Illegal Occupation

The insurer shall not be liable for any loss to which a contributing cause was the insured's commission of or attempt to commit a felony, or to which a contributing cause was the insured's being engaged in an illegal occupation.

Affordable Care Act (ACA)

"Exchanges" are created by the Affordable Care Act (ACA) health reform bill to help individuals and small businesses purchase health insurance coverage. The purposes of the exchange include:

• Reduce the number of uninsured in the state

• Facilitate the purchase and sale of qualified health plans in the individual market

• Assist qualified employers in the state in enrolling their employees in qualified health plans

• Assists individuals in accessing public programs, premium tax credits, and cost-sharing reductions

• Under the Affordable Care Act (ACA), the health insurance exchange will perform all of the following roles:

• Certify health plans as qualified, based on pre-determined criteria

• Utilize individual, unique formats for presenting health benefit plan options

• Verify and resolve inconsistent information provided to the exchange by applicants

Essential health benefits

Beginning January 1, 2014, the exchange shall allow any qualified plans that meet the minimum standards established by the exchange to be offered in the exchange. All plans must include the following:

• Ambulatory patient services

• Emergency services

• Hospitalization

• Maternity and newborn care

• Mental illness, chemical dependency and substance use disorder services, including behavioral health treatment

• Prescription drugs

• Rehabilitative services and devices

• Laboratory services

• Preventative and wellness services and chronic disease management

• Pediatric services, including oral and vision care

Metal levels

There are four tiers of "qualifying health plans" you or your employer can purchase on the exchange. They range from lower quality, but more affordable "Bronze plans", to "Silver plans", to a more expensive plan with better coverage called a "Gold plan". There is also a "Platinum plan" which is the highest quality and cost plan. Lower premium plans will have higher deductibles, less benefits, and larger out of pocket costs. The actuarial level is calculated as the percentage of total average cost for covered benefits that a plan will cover.

• Bronze Plans: 60% actuarial level of coverage provided

• Silver Plans: 70% actuarial level of coverage provided

• Gold Plans: 80% actuarial level of coverage provided

• Platinum Plans: 90% actuarial level of coverage provided

Preexisting conditions

Health plans cannot limit or deny benefits or deny coverage for a child younger than age 19 because of preexisting conditions. This applies to both group and individual policies

Lifetime and annual limits

The ACA prohibits health plans from putting lifetime dollar limits on most benefits that are received by an insured.

• For plans starting on or after September 23, 2012, but not before January 1, 2014, the annual dollar limit is $2 million. After January 1, 2014, there are no annual dollar limits.

• Plans are allowed to put an annual dollar limit on health care services that are not considered essential.

Grandfathered Plans

Grandfathered plans are plans that were purchased before March 23, 2010. These plans do not have to follow the ACA’s rules and regulations or offer the same benefits, rights, and protections as new plans. An exception to this is:

• A grandfathered plan cannot impose lifetime limits on how much health care coverage people may receive.

Other ACA requirements

• Any legal resident, except those incarcerated, can purchase a plan through the Marketplace.

• As defined by the Affordable Care Act, the MAXIMUM amount an individual can contribute to a Flexible Savings Account is $2,500.

• Under the Affordable Care Act (ACA), parents can insure their dependent adult children up to their 26th birthday, even if they are married or not living with their parents.

• Low-income individuals and families whose incomes are between 100% and 400% of the federal poverty level will receive federal subsidies on a sliding scale if they purchase insurance via an exchange.

• Beginning January 1, 2014, the Patient Protection and Affordable Care Act (ACA) will require adjusted community rating in the small group market. Small group health plans will be allowed to vary rates only based on whether the policy covers an individual or family, geographic area, age, and tobacco use.

• If an insurer fails to adhere to the Affordable Care Act requirements related to internal appeals, the internal appeal may be deemed exhausted for purposes of submitting an external review.

• According to the Affordable Care Act, if a large employer does NOT provide health insurance and owes an employer mandate penalty, the annual penalty is calculated by multiplying $2,000 by the number of full time employees minus 30.

Dental

• A pre-treatment estimate of the cost of dental services may be required whenever the patient requires dental treatment.

• Comprehensive dental plans usually provide routine dental care services without deductibles or coinsurance to encourage preventative care (such as teeth cleanings, fluoride treatments, etc.).

• Indemnity plans pay benefits based on a predetermined, fixed rate set for the services provided, regardless of the actual expenses incurred.

• Prosthodontics dental procedures involve the treatment of missing or deficient teeth using biocompatible substitutes, such as bridgework or dentures.

To prevent adverse selection in a group dental expense plan, the plan may require any of the following:

• probationary periods, waiting periods, or evidence of insurability.

• Periodontal treatment is treatment for gum disease, often performed by a gum and implant specialist or periodontist.

• Periodontal cleaning involves a special cleaning often referred to as a “deep cleaning” to remove plaque and tarter deposits on the tooth and root surfaces

►Medical Treatment in Tax-supported Institutions

Medical treatment in tax-supported institutions must be treated on the same basis as medical treatment in other private or public institutions. Coverage must include costs for:

• Cerebral palsy,
• Other orthopedic and crippling disabilities,
• Mental and nervous diseases or disorders,
• Intellectual disability,
• Alcoholism and drug or chemical dependency, and
• Respiratory illness