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Recap of Chapter Two

  1. The applicant is the individual who submits the application for insurance, either for himself or herself or on behalf of another person. The applicant may also be the insured, the policyowner, or both. (2.1)

  2. The insured is the person whose death triggers payment of the policy proceeds. (2.1)

  3. The policyowner is the individual who holds ownership rights and control over policy decisions. Although the policyowner and insured are often the same person, they may be different. (2.1)

  4. The beneficiary is the person or entity designated to receive the policy proceeds upon the death of the insured. The insured cannot be the beneficiary; however, the beneficiary may also be the applicant and/or the policyowner. (2.1)

  5. Third-party ownership exists when a life insurance policy is owned by someone other than the insured. (2.1)

  6. The life insurance application is the primary underwriting document. All questions must be answered fully and accurately. (2.3)

  7. Applications must be signed by both the applicant and the producer. If the applicant is a minor, a legal guardian must sign the application. (2.3)

  8. The producer is responsible for ensuring the application is complete and accurate. An incomplete application may delay underwriting. (2.3)

  9. A conditional receipt provides coverage from the date of application or the date of a required medical examination—whichever is later—provided the applicant is determined to be an insurable risk. Coverage does not apply if the applicant is declined or rated as an uninsurable risk. (2.3)

  10. The Fair Credit Reporting Act (FCRA) regulates the collection and use of applicant information obtained from third parties. (2.3)

  11. Producers should maintain Errors and Omissions (E&O) insurance, which provides protection against negligence claims or professional mistakes. Criminal acts are excluded from coverage. (2.3)

  12. The life insurance application consists of two parts:

  • Part I contains general information about the applicant.
  • Part II includes medical history and health-related questions. Both parts become part of the insurance contract when attached to the policy. (2.4)

  1. The Medical Information Bureau (MIB) collects and maintains underwriting information supplied by life and health insurers. (2.4)

  2. An inspection report (or consumer investigative report) reviews lifestyle, financial history, criminal background, and other personal factors. Applicants must be informed of such investigations and their rights under the FCRA. (2.4)

  3. Approved applicants are classified as preferred, standard, or substandard based on risk characteristics. (2.4)

  4. Preferred risks demonstrate favorable health and lifestyle characteristics and receive lower premium rates. Substandard risks present greater risk factors and may be issued rated policies with higher premiums. (2.4)

  5. Life insurance premiums are determined using the formula: Mortality – Interest + Expenses. (2.5)

  6. The gross premium is the total amount paid by the policyowner. The net premium represents the pure cost of insurance (mortality minus interest) and does not include expenses or administrative loads. (2.5)

  7. The mode refers to the frequency of premium payments:

  • Annual (1 payment)
  • Semiannual (2 payments)
  • Quarterly (4 payments)
  • Monthly (12 payments)

  1. Annual premiums are generally the least expensive payment mode. More frequent payment modes typically result in higher total cost. (2.5)

  2. Once a policy is issued, it must be delivered to the policyowner. Delivery may occur in person, by certified or registered mail, or by another state-approved method. The insurer bears the burden of proving delivery. (2.6)

  3. If the initial premium was not submitted with the application, the policyowner must sign a Statement of Good Health at delivery, affirming that no material changes in health have occurred. (2.6)

  4. To determine an appropriate amount of life insurance, producers commonly use two methods:

  • Human Life Value Approach
  • Needs Analysis Approach (2.8)

  1. The Human Life Value method estimates the present value of an individual's projected future earnings based on age, gender, occupation, income, benefits, and planned retirement age. (2.8)

  2. The Needs Analysis approach evaluates financial obligations such as debts, mortgage, income replacement, education funding, and other household financial goals. (2.8)

  3. Industrial life insurance policies typically provide small death benefits and were originally designed to cover funeral expenses. (2.9)

  4. Life insurance policies are classified as either participating or nonparticipating. Participating policies, typically issued by mutual insurers, allow policyowners to receive dividends if declared. (2.9)