Traditional Life Insurance: Foundations

Traditional Life Insurance

• The e-Learning Portal ALPHA contains courses designed to enhance learning experience and prepare for the licensure exam.
• The courses are highly interactive with end-of-module exams integrated within the course.
• Contact your immediate supervisor or [email protected] for assistance in accessing the licensing review courses.

Program Objectives

• At the end of this course, participants will be able to define fundamental concepts in insurance, explain the relationship of different concepts and pass the traditional licensure exam.

Foundations of Insurance

• Life insurance is a written contract between an insurer and a policyholder/insured.
• The insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured.
• The death benefit is in consideration of the payment of premium by the insured.
• The insurer is the party in an insurance contract undertaking to pay compensation.
• The policyholder/insured is a person or entity who owns an insurance policy.
• Face Amount is a payout to the beneficiary of a life insurance policy, also known as Sum Assured (SA), Sum Insured (SI); refers to the amount of life coverage.
• The beneficiary is someone who is eligible to receive distributions from a life insurance policy in the event of the insured's death.
• The premium is the amount paid for the insurance plan and the continuance of his coverage.

Purpose of Life Insurance

• Life insurance provides financial protection to surviving dependents after the death of an insured.
• Other purposes include savings and investment, health, education, retirement, and estate planning.
• Life Insurance immediately creates an estate for you and your family, providing funds when needed most and helping to ensure a more secure financial future for your loved ones.
• Human economic value is measured by what a person has been able to economically accumulate and what he can reasonably expect to earn in the future. It's a measure of a person's economic value to others.

What Life Insurance Protects From

• Insurance protect individual's goals and dreams, protecting goals and dreams for ourselves and for our loved ones, individuals from risk.

Definition Of Risks

• Risk is uncertainty and the chance something harmful or unexpected could happen.
• Risk involves loss; lost earnings or income.
• Risk in insurance refers to three life events which threaten income: death, disability, old age.
• Death includes the death of the head of the family with unfulfilled financial obligation.
• Disability includes when disabled, a person loses his efficiency to fully carry out his duties, diminishing or stopping income entirely.
• Old Age includes the time when an individual ceases to be economically productive due to a decline in mental or bodily vigor.

Concept of Risk

• Risk exists whenever there is uncertainty about the future.
• Individuals and businesses experience two kinds of risk – speculative and pure risk.
• Speculative risk involves three possible outcomes: loss, gain, or no change, gambling is an example.
• Pure risk involves no possibility of gain; either a loss occurs or no loss occurs.
• An example of pure risk is the death of a loved one or a family member, likely experiencing a financial loss due to lost income.
• Pure risk is the only kind of risk that can be insured.
• Pure risks are insurable, such as travel, retirement, education, shelter, savings, health, food, and clothing.
• The most common method of dealing with pure risk is to transfer it to an insurance company by purchasing insurance.

Risk Sharing Principle

• The individual accepts responsibility for a small portion of the risk by paying the premiums, while transferring the larger portion of the risk to the insurer.
• The practice of risk sharing is traced back to ancient times. A well-known story would be of Chinese Merchants traveling with their cargo across the Yangtze River. As a primary means of reducing risk to individual shippers pooling the risk amongst all of them.
• Cooperative risk sharing means that a group of people put funds and resources together in preparation for life's many risks, notably death.
• Life insurance is a tool used in addressing different financial needs.

Uses of Life Insurance

• It will provide life income for family for the family's need for food, clothing, shelter and other basic necessities.
• Used to meet a clean-up fund for certain obligations, which are demandable upon the death of the breadwinner.
• Provides an emergency fund for future use and a retirement fund for continuance of income even after the working years.
• Provides education fund for the educational needs of the children.

Life Insurance Business

• Life insurance companies contribute to the country's welfare by accumulating capital for investment and commerce, relieving community of the care of dependents and encouraging provisions for the future.
• Theory of Probability: It is the likelihood that a given event will occur in the future.
• This is used to determine the average number of people of a particular age who will live or die within a given period.
• The Law of Large Numbers: The principle of probability also known as the law of large numbers, states that the more frequent a particular event is observed, the more likely that the observed results will approximate the "true" probability of the event happening.
• Mortality Table: A statistical table showing how many people in each age group may be expected to die in a particular year.
• Life Expectancy: It is the number of years that individuals are expected to live on the average as illustrated by the mortality table.
• Actuaries: Actuaries are highly regarded professionals; actuaries are problem solvers and strategic thinkers with a deep understanding of financial systems.
• They measure, manage risk and determine the premiums.
• Premium: The consideration given by the insured in exchange for the promise of the insurer to pay a stipulated amount in the event of a claim or upon the maturity of the life insurance contract.

Determining Premiums through Actuary

• Mortality - Relative incidence of death among a given people.
• Investment Earnings – Refer to the gain obtained by insurance companies.
• Loading – Pertains to operational expenses.
• In determining the premiums, also considered are the age of Insured, gender, type of insurance plan, amount of coverage and policy fee.
• Types of premiums: Single premium, natural premium, level premium.
• Single Premium: Only one premium payment is required throughout the life of the policy.
• Natural Premium: Premium increases as the Insured ages.
• Level Premium: Premium remains the same throughout the duration of the contract.
• Graduated Premium: Premium that increases every year until the 5th year; premium then remains the same as the 5th year throughout the rest of the premium paying period.
• Modified Premium - Premium that increases only on the 5th year of the policy; premium then remains on that level throughout the duration of the premium paying period.
• Fractional Premium - proportionate share of the annual premium (i.e. semi-annual, quarterly).
• Binding Premium Receipt - Initial premium receipt that makes coverage effective immediately but only until the insurance company either rejects the application or approves it, and issued the policy.
• Conditional Premium Receipt - initial premium receipt given in return for the application's first premium payment, acknowledging that the insurance is in force from the date of the receipt.
• It makes coverage effective before a policy is issued only if the proposed insured is found to be insurable.
• Insurance companies in the Philippines fall under the Insurance Commission as its regulatory body, ensuring promises of life insurance's will be delivered.

Reserves

• Sum of money which enables the insurance company to pay policy claims or maturity benefit proceeds to clients. The Insurance Commission requires insurance companies to have reserves that comprise of:
  • Legal Reserve : A fund set up as required by law to address claims that may arise; the total of all policy reserves issued by the company.
  • Policy Reserve – the proportionate share of the policy to the legal reserve.
  • Contingency Reserve: A fund set up by the insurance company from its surplus to meet unexpected and unfavorable claims that may arise.

Basic Insurance Plans

• Basic Plans
  • Temporary/Term Plans
    • Level Term
    • Decreasing Term
  • Permanent Plans
    • Whole Life
    • Endowment
      • Participating
      • Non-Participating
  • Variable Plans
    • Single Pay
    • Regular Pay

Key Aspects of Temporary/ Term and Permanent Plan

• Temporary / Term plans offers purely protection for a limited period, with no savings component.
• Term pays the face amount only in the event of death within the stated number of years, the face amount and premium remain constant.
• Most affordable among all other insurance policies
• Permanent plan offers protection and has a savings component. Life Insurance that remains in force during the insured's lifetime, provided the premiums are paid as specified in the contract.

Level and Decreasing Features of Temporary/Term Plan

• Level: Face amount and premium remain constant throughout the protection period.
• Decreasing: Face amount decreases by a stipulated amount over a period of time; premium remains the same.
• Feature of Renewability applies to temporary/term plan, wherein plan may be renewed for the same number of years before the term ends, without evidence of insurability.
• Feature of Convertibility also applies to temporary/term plan, wherein plan may be converted to a permanent plan before the term ends without evidence of insurability.
• The amount of premium that will be paid should one opt to renew or convert their temporary plan is based on the insured's attained age.
• The face amount is paid whenever death occurs during the entire lifespan or up to the age of 100 of the insured.

Types of Permanent Plan

• Whole Life: A permanent policy that covers an individual up to age 100; has a low level of savings and matures at age 100.
• Three sub-categories of a whole life plan
  • Ordinary/Straight pay: provides insurance protection throughout one's life, premiums that remain level or unchanged
  • Limited pay life: premium payments alloted a specific period of time
    • 10 Pay Life: provides life insurance coverage up to age 100, premiums payable for 10 years from purchase date
    • Paid-up at 65: insured is also covered until 65, premiums payable from date of purchase to age 65 only.
  • Universal Life: a variation of whole-life policy where premiums and benefits are flexible
• Endowment: provides protection and the highest level of savings, emphasis on the savings aspect as living benefits may be given to the insured after a shorter waiting period -pure endowment- does not provide protection, pays the insured if he lives at the end of specified period.

Permanent Plans

• Features cash values as well as dividends.
• Cash value is allocated to the cost of insurance and the remaining deposited into a cash value account.
• Cash values are available only to permanent plans and are loanable amounts to the policy owner.
• Dividends refers to the company's earnings distributed to policyholders.
• Only applies to participating policy, starts at the end of each policy year and are not guaranteed.
• Life insurance plans that do not earn dividends are called non-participating plans.
• Dividend Options: Cash at hand, premium reduction, accumulate at interest, buy paid-up addition and buy a renewable term insurance.
• A permanent policy that covers an individual to age 100; has low level of savings and matures at age 100

Life insurance riders

• A supplementary contract must be attached to a basic plan.
• Riders are an optional, additional feature of enhanced protection for a minimal cost, applicable only for a limited period and terminates at age 60.
• Riders benefit both the policy owner and the insurer because they give both parties flexibility.
• Riders cannot be sold by themselves and their coverage never outlasts that of the basic plan.

Types of Riders

• Waiver of Premium due to Disability.
  • Waives the payment of future premiums and falls due during the continuance of the disability upon receipt and approval of due proof that the insured becomes totally and permanently disabled.
  • Uninterrupted disability for not less than 6 months and prevents from engaging in any gainful occupation, employment or business for which the insured has been educated or trained
  • Premiums waived shall not reduce the amount payable in settlement of the policy.
• Payor's Benefit.
  • Provides for a waiver of premium in the event of the payor-owner who becomes totally and permanently disabled or dies.
  • Continues insurance on the life of the minor stays until 21, even without the premiums being paid
• Accidental Death Benefit.
  • Provides a cash benefit in addition to the proceeds of the basic policy if death is the result of an accident.
  • Additional benefit is known as the principal sum and as double indemnity rider.

Rider Conditions

• Death must occur within 90 or 180 days from the time of accident.
• Death must occur before termination of the rider at age 60
• Death is solely and directly due to accident, independent of other causes.

General Exclusions under rider conditions

• Combat/war
• Acts of God
• Crime
• Self-inflicted injury
• Term Rider: enhances on an individual's policy
• Guaranteed Insurability Rider: Permits policy owner to purchase more insurance for standard rates, no need to apply for insurability.
  • There are six option dates available to the insured to buy; Ages 25, 28, 31, 34, 37, 40
  • Dates may be advanced for two reasons; birth of child or insured's marriage.

Rider Limitations

• Expires at a specified period.
• Ceases when cash values are used as premiums.
• Does not accumulate cash values.
• Can only be purchased before a stated age.
• Does not take effect if specified conditions are not met.

Risk Appraisal And Selection

• Underwriting:
  • The process of evaluation conducted by the insurer to determine the risk brought by a proposed insured.
• Risk Appraisal:
  • To determine the premium price by assessing the likelihood of a policyholder in filing a claim
• Risk Selection :
  • Requires insurer to select and screen his prospects well
• Underwriters:
  • Evaluates the risk of each applicant and ensures the cost of the cover is proportionate to the risks faced by the individual concerned
• Anti-selection:
  • Happens when people with impaired insurability seek life insurance.
  • Also happens whenever people with hazardous occupations or health impairments apply for life insurance.

Factors in Risk Appraisal

• Physical Condition: Age, built, personal medical history, family health history.
• Occupation: Nature of job, work environment or conditions, stability to pay for premium.
• Financial Circumstance: Source of income, amount of coverage applied for.
• Morals: Lifestyle, habits, social relationships, mode of living, reputation.
• Avocation: Types of hobbies, frequency of engaging in activities.
• Residence/ Travel: Living condition, poor health and sanitation; peace and order situation, political instability.

Sources of Information

• Application form provides data regarding the applicant: Age, Occupation, Residence, Status, Medical History
  • Representation: statements in the application form vs
  • Warranties statements in the contract
• Insurance Advisor must directly communicate with the agent
• Agent's Confidential Report must contain habits, morals, general appearance, agent's recommendations and financial worth.
• Attending Physician's report is confirmation from recovered illnesses and Medical exams will establish health and history.
• Inspection is an investigation by the home office about reputation finances
• Financial reports support payment of premiums such as income tax and statements.

Classifications of Risks

• Standard Risk have usual sickness, accident
• Rated as higher and need paying.
• Rated or Standard: Cannot cover specific points of time

Policy Provisions

• Life insurance policy contracts contain provisions that set forth rights and obligations.
• Includes when insured is alive, what happens after quits, and when insured dies.
• Category provisions fall under miscellaneous, forfeiture, loan and general portions.

General Provisions in a Life Insurance Contract

• Enitre contract provisions includes the apoplication and endorsement form.
• When takes effect: upon initial premium payment, during good health, approval and delivery.
• Only policyowner may assign or ammed, and collects dividends.
• Affectivity of Policy means the initial premium gets the insurance going.
• Assignment inolves third parties, the transfer of notarized deed and policy ownership. This includes Collateral assignmnet, which gives policy righs ot bank or nder, and full assignment give ownership rights to any other entity.
• The insurance policy allows any claim contested on misconduct.
• The insurance allows the face value adjusted, premium applicable, if age was incorrect, which is then adjusted. Should that point happen, proceeds are increased while other times proceeds are reduced.
• There is two year limit from issuance of the company before the policy suicide clause is actioned.
• Beneficiary designations are according to rights, which are primary or secondary. In addition to that this means insurance must be established.
• If claims are paid, then they will be paid as premiums with grace being considered.

Policy Loan and Cash

• The insurance policy can be reinstated if lapsed beyond three years, assuming cash or extended payments have been expired.
• Insured gives safety proof and policy, while overdue amounts arre paid.
• The cash vaue allows loans if the proceeds are greater than insurance loan policy. Loans can then be taken.
• Withdrawals and fees also come from it as withdrawals take place.
• After policy is selected the cash is used for the premium due date. In the end that would be implemented because policyhas valid dividends

Lapsation

• Polciy termination happens if non payment occurs, but also when policholder lacks interest in current cover.

Other General Points

• Insureers claim immediate payments equal cost, stops contracts and values to date.
• When a policy owner requests insurwnce payment, they get sam type, despite how small benefits are. For instance premium might be face amount is smaller and they aren't paying or buying insurance. A plan term will allow term coverage for those types of paymwnnts
• Refrs mean company pays premiums to the equal/excess of policy with an auto policy loan.

Miscellaneous Provisions

• Payment of sum is total from lump sum
• A period of payments on set time frames is intrest options. They plus intrest.
• The options from fees and interest occur from the fixed period.
• A payment of payments from the death and amount is life.

General Point

• Presumption is one gets four year to claim. For death four years pass board claims or seven if dissaperance happens. Confirmations happen and beneciaries get money. If beneficiary passes away prior and had insurnace contract it remains.
• Life income is when it benefits in cases of calamity when payments are not met. Beneficiary is given death when claims is proven in specific wills.

Insuarnce Types

• Halth policies covrage for health reasons are offered; includes dis memberments, reimbursement of income losses, covers accidental death with critical conditions
• Insuarance covers what gets payed when work occurs on the job. Also when death or employee happens claims occur within 2 years.

General Group Points

• Enrollment cards allow a minimum payment to occur for 30 hours with employees.
• One master policy is for all, not just representatives. Most policies are renuable a year.
• The insurance payment comes as yearly or renewable. Covers claims at work, insures the members family death but provides no group life. Coverages can be converted within one month assuming proof happens. Insurnace is payed until deaths and premiums
• It combines coverage over different times of live

Annuity Types

• Annuity: contract where one or group make payments and distribute it on fixed time. Retirement plans and contracts offer coverage

Annuity payments

• Contrac must state ownership and a name of all involved

Rules of Ethics

• All Insurance Companies and Agencys are controlled and superintended by Insurance Commission of IC and the Department itself
• Code follows insurance, and the law of regulations itself
• Rules are to help the law become a goal
• Ensure Insurance is able to meet debts when time passes
• Code:
• Insurance ensures business when being insured
• The new life must start before 1B
• New domestic life company business must be high in net at worth.
• This should be shown in the Company's books.
• Solvency and safe claim are safeguards
• Rules state that companies save the minimum paid amount so not Unfavorable results happen. Also means that claim gets adjudicated.
• The IC is to ensure the payment is less than 5,000,000 because the contract is just that high

Types of Business

• Insurance is safegauding to the public for when the set standards are reached agents develop happy customers and are intersted. That way it makes sure that businesses will comply with the atendance and regulations needed. Its to help agents and have education and clean records.
• Unethical behavior occurs with rebates or twisisting
• Agents should not offer rebates or twist. Agents should not under sell while trying to persuade with different comparisons that just cause misreprentation. Also that means they act wrong when applying. To add their issues and actions is wrong that causes viloation on code.

The Right Activities

• Helping client and updating records is best
• Delivierign knowlegable content is ideal/important to give the right business

Important Information for The Involved

• Source more leads by using Business Agents should always be servicing and be helpful
• Use proper and reasonable effort