Life Insurance & Annuity Essentials: Key Concepts

Insurance Producer Licensing Requirements

Key Licensing Regulations

• A producer license is required to sell, solicit, or negotiate insurance.
• Temporary licenses are valid for 180 days under special circumstances.
• Licensees must notify the Department of Insurance of contact information changes and continuing education (CE) completion.
• 24 hours of continuing education are required biennially, with 3 hours specifically dedicated to ethics.
• License renewal occurs every two years; licenses can be revoked or suspended for violations.

Life Insurance Policy Fundamentals

Standard Policy Compliance

• Policies must comply with the Standard Nonforfeiture Law for cash value policies.
• This includes adherence to policy forms, required disclosures, and advertising rules.

Understanding Credit Life Insurance

• Covers the borrower for the loan amount; the insurer pays the lender if the borrower dies.
• Typically short-term coverage, often structured as decreasing term insurance.

Life Insurance Policy Replacement Procedures

Replacement Requirements

• The producer must complete a replacement form when a policy is replaced.
• The new insurer must notify the old insurer and provide the buyer with necessary disclosures.

Key Federal Insurance Regulations

Important Federal Acts

• Fair Credit Reporting Act (FCRA): Ensures the privacy and accuracy of consumer information.
• 18 U.S.C. §§ 1033/1034: Felons must obtain written consent to work in the insurance business.
• National Do Not Call List: Must be consulted every 31 days for telemarketing compliance.

Life Insurance Core Concepts

Fundamental Principles

• Insurable Interest: Must exist at the time of application.
• Common Uses: Survivor protection, estate creation, charitable gifting, and addressing business needs.

Assessing Life Insurance Needs

• Human Life Value Approach: Based on an individual's earnings and remaining working years.
• Needs Approach: Based on the actual financial needs of dependents at the time of death.

Life Insurance Premiums and Underwriting

Factors Affecting Premiums

• Mortality

  The statistical likelihood of death based on age, gender, and health. Higher mortality results in a higher premium.

• Interest

  Insurers assume they will earn interest on premium investments, which helps reduce the actual premium cost.

• Expenses

  Includes administrative costs, agent commissions, underwriting, and marketing. Also known as the "loading" factor.

Risk Classifications

• Preferred Risk

  Individuals with excellent health and a low-risk lifestyle. Qualifies for a lower premium.

• Standard Risk

  Individuals with average health and risk. Qualifies for a regular premium.

• Substandard Risk

  Individuals with higher health or lifestyle risks. Results in a higher premium.

• Declined Risk

  Risk is deemed too high; coverage is not offered.

Business Applications of Life Insurance

Key Business Uses

• Buy-Sell Agreement: Funds the buyout of a deceased owner's share.
• Key Person Insurance: Covers the financial cost of replacing a vital employee.
• Executive Bonus Plan: Employer pays the premium, and the employee owns the policy.

Group Life Insurance

• No individual underwriting is typically required; a master contract is issued to the group.
• Employees receive a certificate of coverage.

Life Insurance Policy Provisions & Riders

Standard Policy Provisions

• Free Look Period: Typically 10 or more days to cancel the policy for a full refund.
• Grace Period: Usually 30 or 31 days for late premium payments before the policy lapses.
• Reinstatement: Allows policy restoration with proof of insurability and payment of back premiums.
• Incontestability Clause: Prevents the insurer from denying a claim due to misrepresentation after two years.
• Misstatement of Age/Sex: Benefits are adjusted to what the premium would have purchased at the correct age/sex.

Types of Life Insurance Policies

Term Life Insurance

• Level Term

  The death benefit remains the same throughout the policy term.

• Decreasing Term

  The death benefit decreases over time, often used for mortgage protection.

• Increasing Term

  The death benefit increases over time, used to combat inflation or increasing needs.

Whole Life (Permanent) Insurance

• Ordinary Life

  Provides lifetime coverage with fixed premiums and guaranteed cash value growth.

• Limited Pay Life

  Premiums are paid for a limited time (e.g., 10 or 20 years), but coverage lasts for life.

• Single Premium Life

  Paid with one large upfront premium; builds immediate cash value.

Universal Life Insurance

• Offers flexible premiums and adjustable death benefit options (Option A = level, Option B = increasing).

• Interest-sensitive with adjustable components, allowing for changes in coverage and premiums.

Variable Life Insurance

• Cash value is invested in separate accounts (e.g., stocks, bonds).

• Death benefit and cash value vary based on investment performance.

• Requires a securities license for the producer.

Indexed Universal Life (IUL)

• Cash value growth is tied to a stock market index (e.g., S&P 500).

• Offers a floor (no loss) and a cap (maximum growth) on returns.

Life Insurance Settlement Options

Beneficiary Payout Choices

• Lump Sum

  A one-time, single payout of the death benefit.

• Interest Only

  The death benefit is held by the insurer, and the beneficiary receives regular interest income.

• Fixed Period Option

  The death benefit is paid in equal installments over a set time period.

• Fixed Amount Option

  The death benefit is paid in fixed dollar amounts until the entire benefit is exhausted.

• Life Income Option

  Payments are made to the beneficiary for their lifetime; the amount depends on age and gender.

• Joint and Survivor Option

  Payments are made for two lifetimes and continue to the surviving beneficiary.

Life Insurance Policy Loans and Withdrawals

Policy Loans

• A loan taken against the policy's cash value, with interest charged.

• The policy remains in force unless the loan plus interest exceeds the cash value.

Automatic Premium Loan (APL)

• Automatically pays an overdue premium with a loan from the cash value to prevent policy lapse.

Withdrawals (Partial Surrenders)

• Direct removal of cash value; permanently reduces the death benefit.

• Not a loan, so no repayment is required.

Life Insurance Nonforfeiture Options

Options for Lapsed Policies

• Cash Surrender Value

  Cancel the policy and receive the accumulated cash value.

• Reduced Paid-Up Insurance

  Use the cash value to purchase a smaller, fully paid-up policy of the same type.

• Extended Term Insurance

  Use the cash value to buy term insurance equal to the original death benefit for as long as possible (often the default option).

Life Insurance Dividend Options

Choices for Policy Dividends

• Cash, Reduce Premium, Accumulate at Interest, Paid-Up Additions, or purchase One-Year Term Insurance.

Disability & Additional Life Insurance Riders

Disability Riders

• Waiver of Premium

  Waives future premiums if the insured becomes totally disabled.

• Payor Benefit

  Waives premiums if the policyowner (not necessarily the insured) becomes disabled or dies (common in juvenile policies).

• Disability Income Rider

  Pays a monthly income benefit if the insured becomes disabled.

Additional Insured Riders

• Spouse/Children/Family Term Rider

  Provides term coverage for a spouse, children, or the entire family under the primary policy.

Riders Affecting Death Benefit

• Accidental Death Rider

  Pays an additional death benefit if death is due to an accident.

• Guaranteed Insurability Rider

  Allows the purchase of additional coverage at specified future dates or events without proof of insurability.

• Return of Premium Rider

  Refunds premiums paid if the insured survives the policy term (or adds that amount to the death benefit).

Policy Exclusions

• Suicide (typically within the first two years), war, aviation (non-commercial), and certain hazardous hobbies (if specifically excluded).

Annuities and Payout Options

Annuity Phases

• Accumulation Period

  The time when money is deposited into the annuity and grows tax-deferred.

• Annuity Period (Annuitization)

  The time when regular payouts begin to the annuitant.

Types of Annuities

• Immediate Annuity

  Starts paying income within one year of purchase (usually with a single lump sum premium).

• Deferred Annuity

  Accumulates value over time, with payouts beginning at a later date.

• Fixed Annuity

  Offers a guaranteed interest rate and predictable, fixed payments.

• Variable Annuity

  Invested in sub-accounts; payment amounts vary based on investment performance.

• Indexed Annuity

  Cash value growth is linked to a market index, often with a guaranteed minimum return.

Annuity Payout Options

• Life Only (Pure Life)

  Provides income for the annuitant's life, stopping at death.

• Life with Period Certain

  Guarantees payments for a set time period, even if the annuitant dies sooner.

• Joint and Survivor Annuity

  Provides payments for two lives, continuing to the surviving beneficiary.

Federal Taxation of Life Insurance & Annuities

Taxation of Life Insurance

• Death Benefits

  Generally tax-free to the beneficiary if paid in a lump sum.

• Cash Value Growth

  Grows tax-deferred within the policy.

• Policy Loans

  Loans are generally not taxable unless the policy is surrendered and the loan amount exceeds the basis.

Modified Endowment Contracts (MECs)

• A life insurance policy that fails the 7-pay test.

• Distributions (loans and withdrawals) are taxed on a Last-In, First-Out (LIFO) basis and may incur a 10% penalty if the owner is under 59½.

Withdrawals

• Life Insurance Withdrawals

  Taxed on a First-In, First-Out (FIFO) basis; premiums come out first (not taxable), then gains (taxable).

• Annuity Withdrawals

  Taxed on a Last-In, First-Out (LIFO) basis; gains come out first and are taxable.