Due Diligence in Sales

Table of Contents

 

Chapter 1 Agent Ethics

1

 

“Suitable” defined

1

 

Adequate Communication Skills

2

 

Investment Vehicles

3

 

Why is Ethical Conduct Necessary?

3

 

Is it possible to teach ethical behavior?

4

 

  Psychological Egoism

5

 

What is the scope of ethics?

7

 

What does it take to be a moral person?

8

 

    Provide quality work & services

9

 

    Creating a legacy

9

 

  Example #1

11

 

  Example #2

11

 

  Example #3

12

 

  Example #4

13

 

What are our responsibilities to other moral persons?

14

 

Required Continuing Education

15

Chapter 2 Client Contact

18

 

Insurance Producer Qualifications

19

 

Setting Appointments

20

 

At the Door

21

 

Adequately Explaining Policy Benefits & Limitations

23

 

      Minimizing misunderstandings

24

 

Policy Replacement

26

 

Product Misconceptions

27

 

When Premiums Seem too High to the Consumer

28

 

Client Signatures

29

 

Keeping in Touch Following the Sale

29

 

Commingling Insurance Funds

31

Chapter 3 Product Selection

32

 

Term Versus Cash Value Life Products

32

 

Amount of Coverage

33

 

What Length of Term Insurance?

33

 

Permanent Life Insurance Policies

34

 

Annuities

34

 

    Example

35

 

Sales Practices

37

 

      Product Replacement

38

 

      Deceptive Sales Practices

38

 

      Full Disclosure

38

 

      Product Knowledge

38

 

      Identifying Suitability Issues

39

 

      It is Not a Liquidity Issue But Rather a Suitability Issue

40

 

A Comprehensive Financial Plan

40

 

    Example

41

 

      Laddering investments

41

 

      Basic Information Requirements

42

Chapter 4 Product Costs

44

 

Adverse Selection

45

 

Purpose of the Insurance

48

 

Risk Categories

48

 

Life Insurance Death Proceeds

49

 

The Terms “Insurance” and “Assurance”

49

 

      Term Insurance

49

 

      Permanent Life Insurance

50

 

      Whole Life Insurance

50

 

      Universal Life Insurance

50

 

Life Insurance Surrender Charges

52

 

Taxation

54

 

Viatical Settlements

54

 

Annuity Costs

55

 

      Annual Variable Annuity Costs

55

 

      Less Risk – Lower Yields

56

 

      No-Load & Front Load Commissions

56

 

      Mortality Fees

57

 

      Investment Advisory Fees

57

 

      Implicit Interest Rate (i%)

57

 

      Delaying Annuitization when Interest Rates are Low

59

 

Equity Indexed Annuity Costs

59

 

      Participation Rates

59

 

      Averaging

60

 

      Caps

61

 

      Spreads, Margins and Administrative Fees

61

 

Annuity Surrender Values and Penalties

61

 

      Education Funding

62

 

      Ethical Responsibility

63

Chapter 5 The Application

64

 

Need for Insurance

65

 

Completing the Application

66

 

      Sample Application

67

 

Agent’s or Broker’s Report

71

 

Temporary Life Insurance Agreement and Receipt

73

 

Fair Credit Reporting Act Disclosure Statement

74

 

Fair Credit Reporting Act Disclosure Statement Sample

76

 

      Consumer Rights

77

 

Read and Understand Your Policy

79

Chapter 6 Beneficiary Designations

80

 

    Spendthrift Clauses

83

 

Competence Required

84

 

Minors as Beneficiaries

84

 

Primary Beneficiaries

84

 

    Community Property States

85

 

Secondary/Contingent Beneficiaries

86

 

Naming Multiple Beneficiaries

86

 

Beneficiary Changes

87

 

Divorce

88

 

Beneficiary Payout

89

 

    Updating Beneficiary Designations

90

 

    Example

91

 

Insurable Interest

91

 

A Company’s Insurable Interest

92

Chapter 7 The Issued Product

94

 

      The Insurer, The Insured, Insurance Contract

94

 

Underwriting & Rating

95

 

Financial Institutions

96

 

A Public Interest

96

 

Annuities

97

 

    Joint and Survivorship Annuities

98

 

    Guaranteed and Life-Time-Certain Annuities

99

 

    Level Annuities

99

 

    Capital-Back Guaranteed Annuities

99

 

    Escalating Annuities

100

 

    Inflation-Linked Annuities

100

 

    Enhanced Annuities

100

 

Annuity Terminology

100

 

Choosing Between Fixed and Variable Annuities

105

 

Lifetime versus Term Annuity Payout

105

 

      Annuitization Options

106

 

Financial Strength of the Insurer

108

 

Premium Protection

108

 

Cost of Living Protection

108

 

Principal Protection

108

 

Tax Efficiency

109

 

Supplementing Other Retirement Income

109

 

Reasons to Buy an Annuity

109

 

Reasons to Avoid Buying Annuities

110

 

Making the Right Annuity Choices

111

 

Fixed Rate Annuities

113

 

    How Fixed Period Annuities Work

113

 

Variable Annuities

115

 

    Funding Variable Annuities

116

 

    Variable Annuity Fees

116

 

    Variable Annuity Death Benefits

116

 

    Surrender Fees

116

 

    Gains in Variable Annuities are Taxed

117

 

Equity-Indexed Annuities

117

 

Determining Need for Life Insurance Products

117

 

Policy Provisions

119

 

The Insurance Contract

119

 

Basic Instruments

120

 

Policy Ownership

120

 

Preventing Money Laundering Activities

121

 

Terrorism Produces Insurer Risk

121

 

       Financial Action Task Force recommendations

122

 

Legal Requirements Adopted

122

 

Broker-Dealer Requirements

124

 

Anti-Money Laundering (AML) Program Requirements

125

 

Know Your Consumer (KYC)

128

 

       Compliance

128

 

       Suspicious Activity Reports Filing Requirements

129

 

A Change in Thinking

129

 

      A Global Problem

131

 

Covered Products

132

 

      Nine Identified Money Laundering (ML) Methods

134

 

Money Laundering Indicators Not Unique to Insurance Products

136

 

Policyholder Characteristics and Behaviors

137

 

      A Known Criminal or Criminal Associate or Relative

139

 

      Erratic or Abnormal Use of Policies

139

 

      High Premiums Compared to Verifiable Income

139

 

      Lack of Concern for Charges or Costs

140

 

      Undue Interest in Payout Options

140

 

      Repeated or Unusual Changes in Beneficiary Designations

140

 

      Insurance on Assets that Appear Inconsistent with Income

141

 

      Early or Suspicious Claims

141

 

Product Characteristics and Maintenance

143

 

Customer Due Diligence (CDD)

144

 

Policy Features and Provisions

147

 

Premiums

147

 

Policy Options

147

 

      Nonforfeiture Options

147

 

      Dividend Options

148

 

      Settlement Options

149

 

State Required Provisions

150

 

      Incontestability

151

 

      Misstatements in the Application

151

 

      Deferment Clause

152

 

      Nonforfeiture

152

 

      Loan Values

152

 

      Grace Periods and Reinstatement

153

 

Allowed Policy Provisions

154

 

      Suicide

154

 

      Aviation

154

 

      War

154

 

General Provisions

155

 

      Deduction of Indebtedness and Premium Refund

155

 

      Assignment

155

 

      Beneficiary Designations

155

 

Policy Payments

156

 

      Cash Values

156

 

      Dividends

156

 

      Proceeds

157

 

      Special Clauses

157

 

Contract Use

159

 

Group Insurance Principles

159

 

Eligible Groups

159

 

      Single Employer Groups

160

 

      Multiple Employer Trusts (MET)

160

 

      Unions, Associations and Other Groups

160

 

      Creditor-Debtor Groups

160

 

Group Underwriting Advantages

161

 

Keeping Current with Business Needs

162

 

The Informed Consumer

163

 

Providing a Quote

163

 

Key Person Insurance

165

 

Buy-and-Sell Agreements

166

 

The Key Person Principle

167

 

      Insurable Interest for Life Insurance

167

 

  Example

168

 

      Disability Insurance on Key Employees and Owners

169

 

The Small Company’s Exposure

171

 

      Loss of the Small Business Owner

171

 

Planning Ahead for Death or Disability

175

 

Private Insurers

175

 

Types of Coverage

176

 

      Property and Liability Insurance

176

 

Government Insurance

177

 

      Voluntary Government Insurance

177

 

      Compulsory Government Insurance

178

 

Mutual Companies

178

 

      Assessment Mutuals

179

 

      Non-Assessable Mutuals

181

 

      Conversions

181

 

Reciprocal or Inter-Insurer Associations

182

 

Stock and Mutual Underwriting

184

 

Factory Mutuals

184

Chapter 8 The Agent’s Role

186

 

The Sale is Completed

187

 

Policy Delivery

188

 

Customer Service Representatives

189

 

Types of Insurance Jobs

191

 

Claim Denial

192

 

Annual Coverage Reviews

194

 

Reviewing Disability Coverage

198

 

      Group Disability Plans

199

 

      Short Term Disability or Long-Term Disability

199

 

      Individual Disability Benefits

199

 

Reviewing Long-Term Care Insurance

200

 

Yearly Client Contact

203

 

 

 

 

 

 

United Insurance Educators, Inc.

8213 – 352nd Street East

Eatonville, WA  98328

 

(253) 846-1155

 

www.uiece.com