Life Insurance Basics and Policies Session Three Lesson Three. Producer Responsibilities

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1 Life Insurance Basics and Policies Session Three Lesson Three Producer Responsibilities Solicitation and Sales Presentations Advertising - When soliciting prospective buyers of insurance, agents are governed by rules and regulations referred to as Unfair Trade Practices. These principles specify what may not be used or said when selling life insurance. Prohibited Advertising of Life/Health Insurance Guaranty Association. No reference is allowed in advertising by an insurer for the purpose of sales solicitation, or to induce the purchase of insurance covered by the Association. Insurance Guaranty Association - Purpose is to protect policyholders and beneficiaries against failure of contract obligations caused by insolvency or impairment of the member insurer that issued the policy. Sales Presentations - State law, as well as the NAIC Model Life Insurance Solicitation Regulations, requires producer to provide all prospective buyers a policy summary and a buyer s guide before accepting a premium or deposit. If the applicant is purchasing by direct response, the buyer s guide must be given before or at the time the policy is delivered. Policy Summary - Explains the contract being considered. It must include: producer s name and address the full name and address of the insurance company full disclosure of all pertinent information effective policy loan interest rate net payment cost surrender cost for 10 and 20 years suitability Data must be given for at least the first five policy years and enough years afterwards to illustrate sufficiently the pattern of premiums and benefits. The agent is required to show years 10 and 20 and at least one age from 60 to 65 or policy maturity. Buyer s Guide helps the buyer to decide how much and what kind of life insurance to buy and to compare costs of similar policies. This guide explains term, whole life, and endowment policies, pointing out advantages and disadvantages of each. Life Insurance Basics and Policies 7

2 Life Insurance Policy Cost Comparisons Methods Interest Adjusted Net Cost (IANC) - A method of comparing similar permanent life insurance policies that is now widely used, giving a more realistic result by using an index that takes into account the time value of money and interest factors. Replacement: State laws regulate the activities of insurance companies and their agents and brokers when they are replacing existing individual life insurance and annuity contracts. These existing contracts shall be deemed, surrendered, forfeited, lapsed, terminated, converted to reduced paid-up insurance, amended or reissued with reduction in cash value. Replacement Involves: Listing existing policies to be replaced. Comparison statement given to applicant. Copy of proposals and comparison statement given to insurer. Notice to Applicants Regarding Replacement of Life insurance given to the insured. Replacement actions must be in compliance with state regulations. Maintain copies of all proposals, statements, etc. Notice of Information Practice - To protect an individual s right to privacy the Fair Credit Reporting Act of 1970 (FCRA) and Federal Privacy Act of 1974 (FPA)were passed. FCRA ensures fairness with regard to confidentiality, accuracy and disclosure of information obtained on consumers through investigation and credit reports giving an individual the opportunity to inspect the file and/or correct any misinformation. FPA provides that the agencies are responsible for the accuracy of the information. Generally this information cannot be disclosed without the individual s written consent. Underwriting By The Insurer Information Sources and Regulation Application - Form supplied by the insurance company, usually filled in by the producer on the basis of information received from the applicant. It is signed by the applicant and producer and is part of the insurance policy if issued. The application is the basic source of insurability information; therefore, it is the producer s responsibility to see that an applicant s answers to questions are recorded fully and accurately (signatures, changes, etc.). Part I - General Information - Including insured name, address, age, sex, income, marital status and occupation. Also type of policy, amount of insurance, name of beneficiary, other insurance owned. Life Insurance Basics and Policies 8

3 Part II - Medical - Include current health and health history. Part III - Producer s Report - - The section of an insurance application where the producer reports his/her personal observations about the applicant. The producer s report must be completed and signed only by the producer. Attending Physician Statement - Provide details about specific medical conditions of the applicant. Investigative Consumer (Inspection) Report - Provide a picture of an applicant s character and reputation, mode of living, finances and any exposure to abnormal hazards. Used on applicants who apply for large amount of life insurance. Medical Information Bureau (MIB) - Supported by more than 700 member insurance companies to serve as reliable source of medical information concerning applicants and to help disclose cases where an applicant forgets or conceals pertinent underwriting information. Helps prevent misrepresentation and fraud. Medical Examination and Lab Tests Including HIV - Provides, from a physician, the findings of an exam concerning an applicant s present health. Classification Of Risks Preferred - For those individuals considered exceptionally good risks, insurance companies reward lower premium rates (non-smokers, good physical condition, low risk occupation, etc.) Standard - Those individuals bearing the same health, habits and occupational characteristics fitting the insurer s guidelines without special restrictions or additional rating. Substandard (extra) - One who is below the insurer s standard guidelines because of health, age, habits, or occupations. Coverage may be accepted with an adjustment to the premium. Tabular Rating or Extra Percentage Tables - Mortality tables indicating the percentage amount increase of premium for certain impaired health conditions. Flat Extra Premiums - Adding a fixed additional charge to the standard premium. Any extra premium may be removed when insured s health improves and less risk is involved. Life Insurance Basics and Policies 9

4 Lien Plan - A standard premium is paid, but a lien is placed against the policy to reduce the amount of insurance if the insured dies from a cause that classified the substandard rating. Rate-Up in Age - Assuming the insured to be a higher risk because they are more likely to die because of higher age. Declined - When the potential for loss is too great, or a risk is considered not insurable. Selection Criteria Individual Policies - Insurance companies use all of the information above on an individual basis. Group Policies - Insurance companies consider the group as an individual for the criteria above when determining the underwriting. Policy Delivery Receipt Requirements - Usually delivered in person but may be mailed. Premium Collection, Effective Date of Coverage and Receipts - Along with the application, the agent usually collects the initial premium and issues the applicant a premium receipt. (No money collected, no receipt given.) Conditional Insurability Receipt - Coverage effective the later of the date the application was signed or the date of medical exam, on the condition that the applicant proves to be insurable. Conditional Approval Receipt - Coverage effective date application is approved by the insurer, using the application date or the approval date as the inception date of the policy. Unconditional Binding Receipt - Immediate coverage for a specified time period until insurer formally rejects the application. Policy Review - By personal delivery of a policy the agent has an opportunity to review the contract, its provision, exclusions and riders. It also helps reinforce the sale and builds trust and confidence in the agent s abilities. Effective Date of Coverage - The policy goes into effective when the premium has been collected and the policy is delivered. Premium Collection - The first premium is usually collected with the application. Life Insurance Basics and Policies 10

5 Statement of Good Health - In cases where the initial premium is not paid until the delivery of the policy, some companies require the producer to obtain from the insured a signed statement attesting to his or her continued good health. Delivery Receipt Requirements - When a policy is hand delivered to the owner a signed and dated receipt is required. (Policy goes into effect on date of signed receipt. Start of 10 day FREE LOOK period.) Life Insurance Basics and Policies 11