The Undeniable Truths about the
Revised 9/20/13
1. When you see TERM, think NO CASH VALUE.
2. When you see FLEXIBLE premium, think UNIVERSAL life.
3. When you see SEPARATE ACCOUNTS, think VARIABLE life or annuities.
(But DURING the FREE-LOOK PERIOD think FIXED INCOME account.)
4. When it comes to licensing, NO NAME is ever AUTOMATICALLY APPROVED.
5. Social Security’s Survivors Benefit BLACKOUT PERIOD STARTS when the youngest child reaches 16 and ENDS when the widow(er) reaches 60. No children at all, no benefits till 60.
6. Benefits are also paid to the deceased worker’s unmarried CHILDREN UNTIL they turn 18 (19 if still in high school) and PARENTS of the worker if AT LEAST HALF SUPPORTED BY THE WORKER. Never to the worker’s grandchildren.
7. The only NON DEDUCTIBLE qualified plan is the ROTH IRA. Also has tax-free distributions.
8. TEACHERS and other public school employees get TSA’s as their qualified plan.
9. CAPTIVE INSURERS are insurers owned by a CORPORATION (the parent) to INSURE ITS OWN RISKS.
10. The ACCIDENTAL DEATH BENEFIT (rider), a.k.a. DOUBLE INDEMNITY RIDER, will pay a MULTIPLE of the FACE AMOUNT for accidental deaths.
11. ACCELERATED DEATH BENEFIT pays a PORTION (%) PRIOR to DEATH due to a TERMINAL OR CRITICAL ILLNESSES. Not a multiple.
12. INSURANCE DIVIDENDS are NOT GUARANTEED and NOT TAXABLE.
b. DIVIDEND OPTIONS: Oh CRAP = One year term, Cash, Reduce next premium, Accumulate with interest, and Paid-up additions.
13. INSURANCE DIVIDENDS are REFUNDS of extra premium, therefore NOT TAXABLE to POLICYHOLDER. Policyholders are OWNERS, they vote, they are PARTICIPATING.
14. STOCK DIVIDENDS are distributions of PROFITS, therefore TAXABLE to STOCKHOLDERS. Policyholders are NOT OWNERS, they don’t vote, they are NON PARTICIPATING.
15. When a MUTUAL INSURER BECOMES A STOCK INSURER it is called DEMUTUALIZATION.
16. ANNUAL premiums are CHEAPER in the end, MONTHLY is MORE EXPENSIVE. The more often you pay, the more you pay (more administrative expenses).
17. Any question about WRONG AGE (or gender) means the DEATH BENEFIT payable will be ADJUSTED. This is the one case where the 2 Year Incontestability never applies.
18. BINDERS (binding receipts) provide a limited amount of IMMEDIATE COVERAGE in PROPERTY (not life) insurances. Claim would be paid even during underwriting. If agent gives a binder without authority (ie: to a life client), suspension or revocation of license could result.
19. CONDITIONAL RECEIPTS provide COVERAGE ONCE UNDERWRITING IS COMPLETE in LIFE insurance. The conditions have been met.
20. CHANGE any ADDRESS IMMEDIATELY.
21. DENIAL OF A PREVIOUS LICENSE APPLICATION (or revocation of a license) WITHIN the LAST 5 YEARS means denial WITHOUT A HEARING this time.
22. PUNISHMENTS are all MISDEMEANORS, no felonies.
23. VIOLATION of FIDUCIARY RESPONSIBILITY (proper handling of other’s money) results in THEFT, not fraud. Agents handle a client’s premium in a fiduciary capacity. Don’t steal it.
24. VIATICALS, STOLI’s, and LIFE SETTLEMENTS use an ABSOLUTE ASSIGNMENT to permanently TRANSFER ALL ownership RIGHTS in a policy to another.
25. COLLATERAL ASSIGNMENTS are PARTIAL, temporary TRANSFERS of OWNERSHIP RIGHTS to cover a DEBT (ie: bank loan).
b. The ASSIGNEE (new owner) OF A COLLATERAL ASSIGNMENT is the BANK.
26. Buying life insurance to fund a BUY - SELL AGREEMENT on business partners is a business (personnel) use of insurance, NOT A PERSONAL USE.
27. Any question about business PARTNERS think BUY – SELL agreements.
28. When a rider is added to a cash value policy, the RIDER’S PREMIUM DOES NOT ADD TO THE CASH VALUE. It just buys additional benefits.
29. When an insured is on WAIVER OF PREMIUM due to a disability, the CASH VALUE WILL CONTINUE TO ACCUMULATE and they may still borrow against it like normal. The premium is being paid, but just by the insurance company.
30. WAIVER OF PREMIUM: disability definition is TOTAL & PERMANENT.
31. ORDINARY often means INDIVIDUAL, not group, INSURANCE.
32. GROUP insurances (including credit and blanket) are NEVER ORDINARY.
33. MORTGAGE LIFE (mortgage redemption) is ALWAYS ORDINARY insurance. Other insurances like whole life, endowments, and term can be bought as group or ordinary.
34. DECREASING TERM think PAYOFF A MORTGAGE or other debt.
35. INCREASING TERM think about those concerned about INFLATION or the INCREASING COST OF LIVING.
36. The COST OF LIVING RIDER INCREASES (but never decreases) the DEATH BENEFIT & PREMIUM. Might use the CPI (consumer price index) to gauge inflation.
37. VARIABLE LIFE / ANNUITIES are regulated by the STATE DOI & the SEC, while all other life / annuity products are only state DOI regulated. FINRA licenses the agents who sell securities.
38. EQUITY INDEXED products are not invested in the stock market (ie: variable), but use STOCK MARKET INDEXES like the S&P 500 to INCREASE (but never decrease) the DEATH BENEFIT & PREMIUM.
39. In UNIVERSAL LIFE, a flexible PREMIUM is added to the cash value account, then MORTALITY and general EXPENSES are deducted, and INTEREST is added. Premium = M. I. X.
40. UNIVERSAL LIFE is comprised of two parts; an ANNUAL RENEWABLE TERM plan with a cash accumulation account.
41. Accumulating CASH VALUE, the ability to take a LOAN, and TAX DEFERRED growth are all LIVING BENEFITS of cash value policies. Benefits you can enjoy before death until the death benefit is paid.
42. When you see anything about CONVERSIONS, it’s often from a cheaper plan such as term, group, or juvenile TO a more expensive plan such as CASH VALUE, but NO MEDICAL required.
43. CONVERSIONS (ex: term to whole life) & RENEWALS (term to another term) are different, but are similar in that both REQUIRE NO EVIDENCE OF INSURABILITY (same insurer), both involve THE SAME DEATH BENEFIT as before, and both usually result in an INCREASE IN PREMIUM.
44. When REPLACING a policy, it’s the NEW INSURER (not the agent) who NOTIFIES THE OLD INSURER.
45. REPLACEMENT LAWS applies to CANCELLING / DECREASING ONE POLICY to BUY A NEW ONE. Group & credit (mortgage) insurances are exempt from these laws, as well as activities such as converting coverage with the same insurer.
46. Whole life NON FORFEITURES: REDUCED PAID-UP think a new whole life plan with a LOWER DEATH BENEFIT than before.
47. Whole life NON FORFEITURES: EXTENDED TERM think a new term plan with the SAME DEATH BENEFIT (but for fewer years) than before.
48. If a Non-forfeiture is not chosen by the policyholder, EXTENDED TERM IS THE DEFAULT.
49. NOLO CONTENDERE, think CONVICTED.
50. Under California FREE LOOK rules, a SENIOR is someone who is 60 OR OLDER. They get at least 30 DAYS to reconsider the purchase.
51. The USUAL FREE LOOK for non-seniors is 10 DAYS, unless REPLACING, then it’s at least 20 DAYS.
a. DEATH DURING THE FREE LOOK period results in the CLAIM GETTING PAID if it was not actually canceled during the free look period.
52. NO FREE INSURANCE as an inducement to buy or rent something else.
53. Include LICENSE NUMBER ON ANYTHING a client sees such as Business cards, websites, ads, quotes, etc., in the SAME FONT as the PHONE NUMBER, etc.
54. Every INSURER maintains a FRAUD TEAM / UNIT per their certificate of authority (license) to catch FRAUD BY THEIR INSUREDS.
55. The ENTIRE CONTRACT consists of the POLICY, any RIDERS, and if attached, A COPY OF THE APPLICATION. No outside references.
56. Most statements of the application are REPRESENTATIONS. They may qualify as IMPLIED WARRANTIES.
57. A REPRESENTATION may be WITHDRAWN or changed anytime BEFORE the insurance is IN EFFECT, but not afterwards.
58. A REPRESENTATION IS A MISREPRESENTATION when it AFFECTS THE INSURABILITY of the risk.
59. VIOLATIONS of representations and warranties, or acts of concealment or fraud, result in RESCISSION of the policy.
60. UTMOST GOOD FAITH requires full disclosure, EXCEPT for INFORMATION THE OTHER ALREADY KNOWS, or should know.
61. Applications NEVER require a client’s PERSONAL JUDGEMENT (opinion) of an issue.
62. AGENTS SHOULD KEEP RECORDS of materials used to make a sale, EXCEPT THOSE PRE-PRINTED materials distributed BY THEIR own INSURER.
63. Agent records are AVAILABLE FOR INSPECTION by the commissioner AT ANY TIME.
64. All RECORDS are kept for at least 5 YEARS, except PREMIUM FINANCING which only requires 3 YEARS.
65. PREMIUM FINANCING requires an agent arranging the loan agreement to buy the insurance to DISCLOSE in advance only their FEES, not their sales commissions.
66. The total annual PREMIUM equals the RATE (cost per exposure unit) TIMES the number of UNITS of insurance purchased.
67. When buying ANNUITIES, the monies invested PURCHASE ACCUMULATION UNITS, and when it pays out an income, it uses ANNUITY UNITS. When you see UNITS, think ANNUITIES.
68. People buy ANNUITIES to deal with the RISK OF LIVING TOO LONG; outliving their resources.
69. People buy LIFE INSURANCE to deal with PREMATURE DEATH.
70. LOTTO winners get paid over time with ANNUITIES versus the Lump Sum option.
71. SOCIAL SECURITY is MANDATORY / COMPULSORY, not optional.
72. SOCIAL SECURITY is BY LAW, not by contract.
73. SOCIAL SECURITY provides a MINIMUM FLOOR OF INCOME, not a complete replacement of previous income.
74. SOCIAL SECURITY is financed by the F.I.C.A. tax. Benefits are determined by the P.I.A., primary insurance amount, calculation.
75. SOCIAL SECURITY RETIREMENT age is based upon BIRTHYEAR.
76. SOCIAL SECURITY BENEFITS are available for someone who is FULLY INSURED; they’ve paid taxes for at least FORTY QUARTERS / CREDITS.
77. SOCIAL SECURITY BENEFITS are available to the worker, the spouse, any ex-spouses, disabled children, but NOT THE GRANDCHILDREN.
a. For SPOUSE benefits, the marriage must have lasted 9 MONTHS or longer. EX-SPOUSE = 10 YEARS.
78. The Social Security status of CURRENTLY INSURED allows benefits to be paid to the SPOUSE AND/OR CHILDREN OF A WORKER if taxes were paid for at least 6 OF THE 13 QUARTERS before the worker’s DEATH OR DISABILITY.
79. SOCIAL SECURITY DISABILITY BENEFITS would be paid for those with long term disabilities OCCURRING ON VACATION (not at work).
80. Life insurers are members of, and finance, the MEDICAL INFORMATION BUREAU (MIB) which TRACKS MEDICAL IMPAIRMENTS found during UNDERWRITING.
81. FRAUD results in prison time up to 5 years, and / or fines up to $50,000, or DOUBLE THE AMOUNT OF THE FRAUD, whichever is greater.
82. LONG TERM CARE (LTC) benefits are TRIGGERED BY impairment in 2 or more of the ACTIVITIES OF DAILY LIVING (ADL’s).
83. ADL’s include things like MOBILITY, HYGIENE, DRESSING, TRANSFERRING, & EATING, but not hearing, seeing, speaking, and sleeping.
84. During the LTC (disability insurance) ELIMINATION PERIOD NO BENEFITS are paid. Starts after the insured enters the “nursing home” and ends when the insurance company begins paying benefits.
85. LTC NEVER provides coverage for HOSPITAL ACUTE CARE.
86. Employer Benefit Plans can be SELF-FUNDED for Health Insurance, but NOT LIFE INSURANCE.
87. FAIR DISCRIMINATION is ALLOWED. Only unfair discrimination is prohibited.
88. The IRS considers all investments as either QUALIFIED or NON-QUALIFIED.
89. QUALIFIED PLANS are tax deferred and are often tax deductible, and MAY NOT FAVOR / BENEFIT SHAREHOLDERS and other top employees versus all the employees fairly.
90. ILLUSTRATIONS may use the phrase VANISHING PREMIUMS if GUARANTEED RATES are used, but NOT if NON-GUARANTEED rates are used for the projection.91. A sales or basic ILLUSTRATION is a presentation that INCLUDES both GUARANTEED and NON-GUARANTEED ELEMENTS (premiums, benefits, values, etc.) over a period of time.
92. On applications, DISCLOSE demographic and medical info as well as OTHER LIFE INSURANCE IN FORCE, but not disability or health insurance in force on the applicant.
93. Contract of ADHESION are ones where one party as much more power in writing the contract than the other party. The INSURER CONTROLS THE WORDING of the contract. In other words, CLIENTS BUY INSURANCE AS-IS, without negotiating terms. As a result, if a company writes a “bad contract”, they lose the court case.
94. WHOLE MATURES (endows) at 100. ENDOWMENTS mature at an age SOONER THAN 100; whatever AGE SPECIFIED IN THE POLICY.
95. LIFE PAID-UP AT 65 is a whole life plan where it MATURES AT 100, but PAYMENTS STOP AT 65.
96. ENDOWMENTS TO AGE 65 MATURE AT 65 as well as being paid up at 65.
97. SURVIVORSHIP LIFE is a Second-to-Die policy. It PAYS AFTER THE SECOND, not first, DEATH. Common for estate tax planning.
98. JOINT LIFE is a FIRST-TO-DIE policy.
99. KEY PERSON insurance covers LOST EARNINGS due to the DEATH of an important employee; not disability, retirement, etc.
100. IMMEDIATE ANNUITIES start paying an INCOME WITHIN 12 MONTHS, while DEFERRED ANNUITIES pay an income AFTER 12 MONTHS.
101. ALEATORY means the UNEQUAL (unknown) EXCHANGE OF VALUE. Those who overpay pay for those who underpay. In life insurance, the living pay for the dead.
102. The McCARRAN-FERGUSON ACT supported STATE REGULATION of the insurance industry.
103. OFFER and ACCEPTANCE are keys parts required for an AGREEMENT.
104. VALID CONTRACTS require a LEGAL purpose, AGREEMENT, COMPETENCY, and CONSIDERATION.
105. ERISA PROTECTS PLAN PARTICIPANTS & BENEFICIARIES (employees and their families) and REQUIRES STRICT REPORTING (annual statements).
106. HAZARDS, like slippery floors, are things that INCREASE THE odds of a PERIL happening. Perils are the actual cause of the loss.
107. MORAL HAZARDS are behavior issues such as LYING, CHEATING, & FRAUD.
108. MORALE HAZARDS are attitude issues such as DRUNK & RECKLESS DRIVING.
109. PURE RISK involves situations that can result ONLY IN A LOSS. Insurable.
110. SPECULATIVE RISK involves situations that can result in a LOSS, GAIN, or BREAKING EVEN. ex: gambling & investing. NOT INSURABLE.
111. Client CONSENT (authorization) is always key with sensitive info such as MIB REPORTS, CREDIT REPORTS, HIV TESTING, requesting MEDICAL RECORDS & APS’s (attending physician statements), etc.
112. When MEDICAL RECORDS reveals MEDICAL CONDITIONS that require MORE INFORMATION, the insurer will usually REQUIRE AN ATTENDING PHYSICIAN STATEMENT.
113. The answers given on the NON-MEDICAL APPLICATION DETERMINES IF A MEDICAL / PHYSICAL EXAM IS REQUIRED. Non-Med App’s allow a policy to sometimes be underwritten without a physical exam.
114. QUALIFIED PLANS (created by law) usually have short abbreviated or numbered names such as IRA’s, 401k’s, TSA’s, TSP’s, and SEP IRA’s. While, NON-QUALIFIES PLANS (created by insurance companies) usually have longer, fuller, names for marketing such as EXECUTIVE BONUS, DEFERRED COMPENSATION, and SPLIT DOLLAR PLANS, or NON-QUALIFIED ANNUITIES.
115. ESOP’s allow the EMPLOYEES as a group to BUY SHARES OF THE EMPLOYER’S STOCK.
116. Underwriting: Client works 2 JOBS, rated by the MOST HAZARDOUS.
117. UNDERWRITING SELECTS and EVALUATES the risks (clients). AGENTS IDENTIFY the risks to be sent to underwriting.
118. Underwriters need to avoid ADVERSE SELECTION; the fact that RISKIER PEOPLE SEEK OUT INSURANCE while safer risks are less interested. Underwriters need to balance out the high risks with lower risks. AKA: The profitable distribution of risk.
119. With life insurance INSURABLE INTEREST is only required AT THE TIME OF UNDERWRITING / inception of the policy. At time of purchase. Not when the claim is made.
120. INDEMNITY is most closely RELATED to the concept of INSURABLE INTEREST. Can’t be reimbursed if you have no interest in the person or item to begin with.
121. INSOLVENT means an IMPAIRMENT OF MINIMUM PAID-IN CAPITAL / financially impaired. Also: LOW RESERVES, or CAN’T MEET FINANCIAL OBLIGATIONS.
122. RESERVES are used to pay FUTURE CLAIMS,
123. SHALL = MANDATORY - MAY = PERMISSIVE
124. INDUSTRIAL INSURANCE is marketed to HIGH RISK workers such as miners. Known for having very LOW DEATH BENEFITS and IN-PERSON PREMIUM COLLECTION.
125. SINGLE PREMIUM POLICIES (SP) have the LARGEST initial PREMIUM payment.
126. The Annuity Settlement option LIFE WITH 10 YEARS CERTAIN means the annuitant (or their family) will receive income payments for A MINIMUM OF 10 YEAR (120 months) or the REST OF HIS LIFE if he lives longer than 10 years. CERTAIN = MINIMUM GUARANTEED
127. The LIFE INCOME WITH REFUND option results in the LOWEST ANNUITY SETTLEMENT income payment. This option could be referred as LIFE WITH GUARANTEED MINIMUM.
128. The LIFE (only) INCOME / Straight Life option results in the LARGEST ANNUITY SETTLEMENT (monthly income) payment to the annuitant.
129. The LIFE INCOME annuity settlement option that COULD RESULT in receiving LESS THAN THE ORIGINAL settlement amount. Or, a lot more if a long life.
130. ANNUITY INCOME PAYMENTS are made up of original principal and interest so usually they are HALF TAX FREE and Half TAXABLE. (Cut income payment in half) The actual formula is known as the Exclusion Ratio.
131. When comparing two similar investments, the TAX DEFERRED INVESTMENT option (ie: annuities, IRA’s, etc.) will grow to the LARGER SUM OF MONEY.
132. The portion of the PREMIUM paid by an employer to buy group life insurance for an employee IN EXCESS OF $50,000 is TAXABLE TO THE EMPLOYEE.
133. The 1035 EXCHANGE that is NOT ALLOWED is the transfer of funds from any ANNUITY TO any type of cash value LIFE insurance. (No A.L.; it's Against the Law.)
134. The COMMISSIONER is ELECTED by the citizens every 4 years; but REPLACEMENTS are SELECTED BY THE GOVERNOR until the next regular election.
135. It is the APPLICANT who applies, or who SUBMITS THE APPLICATION to the insurer. If accepted they become the policyowner.
136. The RULE that says as the size of a SAMPLE INCREASES, the accuracy of the PREDICTION made increases is the LAW OF LARGE NUMBERS.
137. LIFE insurance benefits are TAX FREE. ANNUITY benefits are TAXABLE.
138. If an agent does LEGAL ACTS necessary to do their job that were NEVER WRITTEN down in their agent’s contract that is IMPLIED AUTHORITY. Written = express.
139. LICENSED BUT NOT APPOINTED = INACTIVE.
140. An INSURER headquartered in CALIFORNIA = DOMESTIC
In UTAH = FOREIGN
In CANADA = FOREIGN & ALIEN
141. ADVERTISING membership in GUARANTEE ASSOCIATIONS is PROHIBITED.
142. The PRIMARY INSURER purchases REINSURANCE from the REINSURER on risks that exceed the retention limit.
143. The SPENDTHRIFT TRUST CLAUSE PROTECTS the insurance proceeds FROM attachment by the beneficiary’s CREDITORS while held by insurer. ie: when a beneficiary is paid through a settlement option other than lump sum.
144. If the insured and the primary beneficiary DIE TOGETHER (in the same event) the COMMON DISASTER CLAUSE determines that the PRIMARY BENEFICIARY DIED FIRST. This PROTECTS the interest of the CONTINGENT BENEFICIARY.
145. SETTLEMENT OPTIONS can be pre-selected by the policyowner before the death, but is USUALLY CHOSEN BY BENEFICIARY AFTER THE DEATH.
146. An IRREVOCABLE BENEFICIARY has a VESTED INTEREST in the policyowner that no one can impair without the beneficiary’s consent / permission.
147. BROKERS are NOT APPOINTED by insurers. They work for the client.
148. In a DEFINED BENEFIT PLAN benefits are linked to YEARS OF SERVICE.
149. In a DEFINED CONTRIBUTION PLAN the employee elects to make a SPECIFIC CONTRIBUTION (ie: % of each paycheck) to a qualified plan.
150. DEFINED BENEFIT and DEFINED CONTRIBUTION PLANS have DIFFERENT PENALTIES for EARLY RETIREMENT / distribution.
151. The PROBATIONARY PERIOD in group insurance APPLIES TO THOSE THAT JOINED AFTER THE EFFECTIVE DATE OF COVERAGE (ie: new employees who start after the insurance started)
152. The ELIGIBILITY PERIOD (enrollment period) in group insurance ALLOWS AN EMPLOYEE TO ENROLL WITHOUT RESTRICTIONS (pre-existing condition exclusions).
153. The minimum number of EMPLOYEES FOR GROUP LIFE CONTRACTS is 10 (if 10 is not an option, go with 2 in California).
154. CONTRIBUTORY = EMPLOYEE PAYS SOME / ALL of the PREMIUM in group insurance. (ie: The employer and employee share the cost.) Requires 75% of them to ELECT TO JOIN.
155. NON-CONTRIBUTORY = EMPLOYEE PAYS NONE of the premium in a group policy. REQUIRES 100% participation of eligible employees.
156. REPLACEMENT (replacing an old policy with a new one) is LEGAL. Only when the new policy is worse than the original (or misrepresentation are made) would it be considered TWISTING which is ILLEGAL. Replacement laws generally don’t cover group insurance, only individual / ordinary.
157. When an AGENT DIES or a CORPORATION CEASES TO EXIST (goes out of business) their LICENSES (certificate of authority) TERMINATE.
158. Any situation that presents THE POSSIBILITY OF A LOSS is LOSS EXPOSURE
159. RISK is the UNCERTAINTY of LOSS.
160. WEBSITES must disclose the licensee’s NAME, LICENSE NUMBER, and BUSINESS ADDRESS. PHONE NUMBER is NOT REQUIRED. Though it is a good idea, it’s not mandated by law.
161. VESTED means the OWNERSHIP OF THE MONIES in one's RETIREMENT ACCOUNTS.
162. VESTING SCHEDULES:
a. 7 years into the 7 year schedule = 100% vested
b. 4 years into the 5 year schedule = 80% vested
163. FACILITY OF PAYMENT allows payment to a FRIEND OR RELATIVE who is NOT THE BENEFICIARY if they PAID FOR FINAL EXPENSES.
The previous statements are solely my interpretation of exam material and are not endorsed by the State of California
Copyright: Kevin Tuckey, August 2012
