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This chapter explained some of the basic principles and processes of life insurance. Let's recap them:
Purchase of Life Insurance
Topic
Key Points
Personal Use
Survivor protection - planning for survivor needs; Cash accumulation - permanent policies have living benefits; Estate creation - life insurance creates an immediate estate; Estate conservation - using life insurance proceeds to cover estate taxes
Amount of Insurance
Human life value approach - potential earnings of the insured (considering salary, years to retirement, inflation); Needs approach - predicted needs of the surviving family (considering debt, income, Social Security blackout, expenses)
Business Uses of Life Insurance
Key person - third-party ownership - business is the owner; employee is the insured; Buy-sell funding - not really insurance, but a business continuation agreement; Executive bonuses - employer gives the employee a wage increase in the amount of insurance premium; employee is the policyowner
Process of Issuing a Life Insurance Policy
Topic
Key Points
Solicitation and Sales Presentations
Illustrations - presentation of nonguaranteed elements; Buyer's guide - generic information about life policies; must be provided at the time of application; Policy summary - description of features and benefits of the policy being issued; must be provided when the policy is delivered
Underwriting
Field underwriting (by agent): Application - completed and signed; Agent's report - agent's observations about the applicant that can assist in underwriting; Premiums with application and conditional receipts. Company underwriting: Multiple sources of information (e.g. application, consumer reports, Medical Information Bureau); Selection criteria - cannot discriminate unfairly; Risk classification - 3 types of risks: standard, substandard, and preferred
Premium Determination
3 key factors for life insurance: mortality, interest and expense; Premium payment mode - the higher the frequency, the higher the premium
Policy Issue and Delivery
Effective date of coverage - policy is delivered and the premium is paid; If the premium not paid with the application, the agent must obtain the premium and a statement of continued good health at the time of policy delivery
Policy Cancellation
Topic
Key Points
Right to Cancel
Insured may cancel a policy at any time; Notice of Right to Cancel must be attached to every insurance policy; Insureds 60 and over have 30 days to cancel; insureds under 60 have between 10 and 30 days
Replacement
Replacing insurer must notify the existing insurer within 3 working days; A 30-day free-look period applies to replacement policies; Violations carry administrative penalties for agents and insurers
Life Settlements
Topic
Key Points
Life Settlement
Owner sells an existing life insurance policy to a third party for compensation, usually cash
Disclosures
Owner must be informed of alternatives, tax consequences, creditor claims, and the right to rescind within 30 days of contract execution or 15 days of receiving proceeds, whichever is sooner
STOLI
Stranger-originated life insurance - buying a new policy on a stranger with no insurable interest, intended for resale as a life settlement; illegal in California