Practical Insurance

Table of Contents

Chapter 1:  Ethics

  The Importance of Ethics                                                                                                                                                1

  The Big Picture                                                                                                                                                                  2

  Part-Time Agents                                                                                                                                                              2

  Competency                                                                                                                                                                      4

  Education                                                                                                                                                                           5

  Writing the Policy                                                                                                                                                             7

  Health Questions                                                                                                                                                               8

  Proper Terminology                                                                                                                                                          9

  CO-Mingling Funds 9

  When the Prospect sticks with “No”                                                                                                                             11

  Why is it Important to be an Ethical Agent?                                                                                                                12

  Religious Beliefs                                                                                                                                                               13

  Equal Application                                                                                                                                                             14

  Making Choices                                                                                                                                                                15

  Replaced by Technology                                                                                                                                                 17

  Ethics Beyond Philosophers                                                                                                                                            17

  Being Ethically Responsible                                                                                                                                           18

  Thinking of Others                                                                                                                                                            19

  In Conclusion                                                                                                                                                                     21

Chapter 2:  Unfair Trade Practices Act

  Purpose                                                                                                                                                                               22

  Legislative History                                                                                                                                                            22

Insurance Activities Other than Sales                                                                                                                           25

Financial Activities Other than Insurance                                                                                                                    26

  Nondiscrimination                                                                                                                                                            27

  Limitation                                                                                                                                                                           27

  Definitions                                                                                                                                                                          27

  United States v. Southeastern Underwriters Association                                                                                           28

  Developing Legislation                                                                                                                                                    30

  Gramm-Leach-Bliley Act Key Points                                                                                                                           31

  Is It Still Relevant?                                                                                                                                                           33

  Section 5.  Favored Agent or Insurer, Coercion of Debtor                                                                                        46

  Section 7. Defined and Undefined Practices                                                                                                                48

  Section 8. Cease-and-Desist and Penalty Orders                                                                                                         48

  Section 9. Judicial Review of Orders                                                                                                                             49

  Section 11. Penalty for Violation of Cease-and-Desist Orders                                                                                 50

  Section 12.  Regulations                                                                                                                                                  50

  Defining Unfair Trade Practices                                                                                                                                     50

  Unfair Discrimination: Section 4. G.                                                                                                                             52

  Countries Divided by Risk: A, B, C, and D                                                                                                                 55

  Rebates                                                                                                                                                                               59

  NAIC Unfair Trade Practices Act defines rebates                                                                                                      60

  Prohibited Group Enrollments                                                                                                                                        61

Failure to Maintain Marketing and Performance Records                                                                                        61

Failure to Maintain Complaint Handling Procedures                                                                                                 61

  Misrepresentation on Insurance Applications                                                                                                              62

  Unfair Financial Planning Practices                                                                                                                              62

Failure to File or Certify LTC Sales                                                                                                                              63

Failure to Provide Claims History                                                                                                                                 64

Favored Agent or Insurer                                                                                                                                                 64

Chapter 3:  Common Sense

  Integrating Insurance in Retirement Planning                                                                                                              65

  Dealing With Past & Present Mistakes                                                                                                                         66

  Debt Affects Everything, Even Insurance                                                                                                                    67

  Systematic Savings (Get Rich Slowly Scheme)                                                                                                          69

  Required Information Gathering                                                                                                                                    70

Anti-Money Laundering Program & Suspicious Activity Reporting Requirements for Insurers                       71

  1.  Why is the Financial Crimes Enforcement Network issuing a regulation requiring insurers to establish

        anti-money laundering programs                                                                                                                             71

  2. Does the final rule apply to all insurance companies?                                                                                          71

  3.  What are “covered products?”                                                                                                                                  72

  4.  Which insurance products are not “covered products” pursuant to the rule?                                                   73

  5.  Does the final rule require insurance agents and brokers to establish anti-money laundering programs?  73

  6.  What are the requirements for an anti-money laundering program?                                                                 73

       (1) A compliance officer who is responsible for ensuring that the program is implemented effectively.   74

       (2)  Policies, Procedures, and Internal Controls                                                                                                    75

       (3)  Ongoing training of appropriate persons concerning their responsibilities under the program.            75

       (4)  Independent testing to monitor and maintain an adequate program.                                                         75

 7. Is an insurance company required to train all of its employees in-house? What about training of

        brokers and agents?                                                                                                                                                   76

  8.  What resources are available to help an insurance company to establish an adequate program?                76

  9.  When must we implement our Anti-Money Laundering Program?                                                                   76

  10.  Should insurance companies continue to file Form 8300?                                                                                77

  11. Are insurance companies required to file Suspicious Activity Reports as a part of their anti-money

        laundering program?                                                                                                                                                  77

  12.  What are examples of suspicious activities with regard to insurance products?                                           77

  13.  How should suspicious activity involving variable insurance products funded by separate accounts

         that meet definition of a “mutual fund” be reported?                                                                                         78

  14.  Are insurance brokers and agents required to file suspicious activity reports?                                             78

  15  Are joint Suspicious Activity Report filings permissible?                                                                                  79

  16.  If an insurance company files a Suspicious Activity Report voluntarily, will it be protected from

         civil liability?                                                                                                                                                              80

  17.  May we disclose that a Suspicious Activity Report was filed?                                                                         80

  18.  Certain financial institutions participate in information sharing pursuant to section                                    81

  Goal Setting                                                                                                                                                                        81

  Career Choices and Earnings / Action Versus Fantasy                                                                                             82

  Annuity’s Forced Savings Plan                                                                                                                                      83

  Committing Goals to Paper                                                                                                                                             84

  Messengers of Reality / Risk Tolerance                                                                                                                       85

  Determining Quantity of Investment                                                                                                                            86

  Risk Takers                                                                                                                                                                        86

  Individual Choices                                                                                                                                                            87

  Net Worth Work Sheet                                                                                                                                                    91

  Cash Flow Journal to Determine Life Insurance Requirements                                                                              92          

  Which Assets are Financial?                                                                                                                                          93

  Liabilities                                                                                                                                                                            94

  Put and Take Accounts                                                                                                                                                   95

  Consumer or Producer                                                                                                                                                     96

                Living on Less than we Earn                                                                                                                            97

                Dumping the Credit Card Habit                                                                                                                       98

  Thinking Long-Term                                                                                                                                                       99

  Thank God Common Sense is Free                                                                                                                               100

Chapter 4:  The Basics

  Figuring in Inflation                                                                                                                                                        101

  Extra Costs                                                                                                                                                                        102

  Lifestyle                                                                                                                                                                              103

Housing                                                                                                                                                                103

                Dining Out / Travel                                                                                                                                             104

Hobbies and Everything Else                                                                                                                           105

  Income Selection                                                                                                                                                               105

                Single Life or Joint-and-Survivor                                                                                                                   106

  A Third of Our Adult Life                                                                                                                                               107

  Social Security Income                                                                                                                                                    108

  Which Investment?                                                                                                                                                         109

Chapter 5:  Insurance Risk

  Life’s A Gamble / Defining Risk                                                                                                                                  111

  Comfort Level                                                                                                                                                                  112

  Saving Enough for Retirement                                                                                                                                      114

  Insurance Risks, Perils & Hazards                                                                                                                                115

  Insurable Exposures / Chance of Loss                                                                                                                          115

  Morale & Moral Hazards                                                                                                                                                116

  Law of Large Numbers                                                                                                                                                    116

  Types of Risk                                                                                                                                                                    117

  Investment Risk                                                                                                                                                               118

Chapter 6:  Protection Through Insurance

  Of Course We Sell Peace of Mind                                                                                                                                120

  Statistics / Insure the Big Things                                                                                                                                   121

  You Get What You Pay For                                                                                                                                            122

  Big Deductibles Are Usually Good                                                                                                                              123

  Medical Insurance                                                                                                                                                            123

  Medicaid Beneficiaries                                                                                                                                                    125

  Change is Inevitable                                                                                                                                                         125

Chapter 7:  Disability Insurance  

  The Unrecognized Danger                                                                                                                                           128

  Preventing Excess Coverage / Approaching the Disability Subject                                                                       129

  Loss Affects the Pocketbook                                                                                                                                         130

  Protecting the Self Employed                                                                                                                                         130

  Protecting Business Partners from Each Other’s Disability                                                                                     132

  Qualifying for Business Disability Buyout Insurance                                                                                               133

  Specialized Knowledge / Under-Insured / Waiting Periods                                                                                     134

  Durational Periods                                                                                                                                                            135

  Extremely Important: “Disability” Policy Definition                                                                                                135

  Group Disability Policies                                                                                                                                                 136

  Physical Examination / Renewability / Policy Pricing                                                                                         137

Chapter 8:  Long-Term Care Insurance

  Nursing Home Protection                                                                                                                                               139

  Abbreviations                                                                                                                                                                    140

  Long-Term Care Policy Defined                                                                                                                                   140

  Tax-Qualified Plans                                                                                                                                                         142

  Medical Necessity & Cognitive Impairment / Activities of Daily Living                                                              144

  Benefit Triggers                                                                                                                                                                 146

  IRS Notice 97-31                                                                                                                                                              147

 State Versus Federal Law                                                                                                                                                148

  Covered Benefits for the Chronically Ill                                                                                                                      148

  Partnership Long-Term Care Contracts                                                                                                                       150

  Making Benefit Choices                                                                                                                                                 152

  Daily Benefit Options                                                                                                                                                      153

  Expense-Incurred and Indemnity Methods of Payments                                                                                         155

  Determining Benefit Length                                                                                                                                          155

  Asset Protection in Partnership Policies                                                                                                                        155

  Policy Structure / Home Care Options                                                                                                                          156

  Inflation Protection / Simple and Compound Protection                                                                                         157

  Required Rejection Forms / Elimination Periods in LTC Policies                                                                          158

  Policy Type / Preexisting Periods in Policies                                                                                                             159

  Prior Hospitalization Requirements for Medicare’s Skilled Care / Nonforfeiture Values                                   160

  Waiver of Premium / Unintentional Lapse of Policy                                                                                                 161

  Policy Renewal Features / Contract Affordability                                                                                                     162

  Minimum Partnership Requirements                                                                                                                             162

  Benefit Duplication / Partnership Publication / Adequate Policy Benefits                                                           163

  Look-Back Period                                                                                                                                                             166

  The Application / Market Needs                                                                                                                                    167

                Part A (In-Patient Care)                                                                                                                                     168

                Part B (Medical Care)                                                                                                                                        169

                Part D: Prescription Drug Benefits                                                                                                                  169

  Medicaid is a Grant Program                                                                                                                                          170

  Policy Pricing                                                                                                                                                                     173

  Notice to Buyer / Policy Schedule                                                                                                                                 174

  Definitions / Home & Community-Based Care                                                                                                          175

  Bed Reservation / Waiver of Premium                                                                                                                         176

  Alternative Plan of Care                                                                                                                                                  177

  Policy Exclusions                                                                                                                                                              178

  Age Misstatement on the Application / Third-Party Notification / When Premiums are Not Paid                   179

Chapter 9:  Protecting Our Homes

  A Major Asset / Renter’s Insurance                                                                                                                             181

  Homeowner’s Insurance / Two Sections                                                                                                                     182

  Property Exposures                                                                                                                                                          183

  Liability Exposures / Updating Coverage                                                                                                                    184

  As A Recap / 80% Coverage Required                                                                                                                        185

  Fire & Allied Coverages                                                                                                                                                  186

  Three Forms of Homeowner’s Coverage                                                                                                                    187

  Section I of Form #1 (HO-1)                                                                                                                                          187

  Section II of Form #1 / Form #2 (HO-2)                                                                                                                      189

  Form #3 (HO-3)                                                                                                                                                                190

  Policy Conditions                                                                                                                                                             190

  Rates for Fire Insurance                                                                                                                                                  191

  Insurable Conditions                                                                                                                                                        192

  Form #4 (HO-4) Renter’s Insurance / Form #5 (HO-5)                                                                                             192

  Form #6 (HO-6)                                                                                                                                                                 193

  Form #8 (HO-8)                                                                                                                                                                194

  Exceptions in the Homeowner’s Policy                                                                                                                       194

  Exceptions in Liability Coverage / Natural Disasters                                                                                                195

  Moratorium on Insurance                                                                                                                                               197

  Volcanoes / Hurricanes and Tornadoes                                                                                                                        198

  Personal Property / Inventories of Possessions                                                                                                           199

Chapter 10:  Automobile Insurance

  The Insurance Policy                                                                                                                                                       202

  Underwriting Risk / Auto Insurance                                                                                                                             203

  6 Policy Components                                                                                                                                                      204

  Rising Premium Rates                                                                                                                                                     205

  Insuring a New Vehicle                                                                                                                                                    206

  Classic Cars                                                                                                                                                                       207

  Delivery Drivers / RV Insurance                                                                                                                                   208

  Motorcycle Insurance                                                                                                                                                      209

  Mechanical Breakdown Insurance (MBI)                                                                                                                    210

  Foreign Travel                                                                                                                                                                   211

  Pay-As-You-Go Insurance                                                                                                                                              212

  Safe Drivers Pay Less for Insurance                                                                                                                             212

  A New Issue: Legalized Marijuana                                                                                                                              214

  Distracted Driving                                                                                                                                                             217

  Teenage Drivers                                                                                                                                                                 219

  Affordable Coverage                                                                                                                                                        222

  Reading the Auto Policy                                                                                                                                                  228

  Conditions in an Auto Policy                                                                                                                                          229

                The Family Automobile Policy (FAP)                                                                                                             231

  Auto Liability Insurance                                                                                                                                                 232

  Property Damage Liability Insurance                                                                                                                           234

  Medical Auto Insurance                                                                                                                                                  234

  Personal-Injury Protection (PIP) / Collision                                                                                                                 235        

  Comprehensive Coverage                                                                                                                                                236

  Auto Insurance for School-Sanctioned Events                                                                                                            236

  Uninsured and Under-Insured Motorists Coverage                                                                                                    237

  Driving Uninsured: No Pay, No Play Laws                                                                                                                 237

  Towing and Service; Rental Car Reimbursement                                                                                                       238

  Wage Loss and Substitute Services / Determining Auto Rates                                                                                239

  When an Auto Accident Occurs                                                                                                                                     241

  No-Fault Insurance                                                                                                                                                           241

  Deductibles                                                                                                                                                                         243

  Policy Components: 3 Standard Parts                                                                                                                           244

  Broad Form Auto Insurance                                                                                                                                           245

  Insuring Above All Other Liability Policies                                                                                                                 246

  Single-Limit Policies / Split Limit Policies                                                                                                                247

  Umbrella Policies / Judging Liability Insurance Amounts                                                                                       248

  Property Damage / Medical Auto Insurance                                                                                                               249

  Personal-Injury Protection (PIP) in No-Fault States                                                                                                   250

  Wage Loss and Substitute Services                                                                                                                               250

  Reviewing an Issued Policy for Correctness / Policy Layout                                                                                 251

  Negligence Laws / Three Types of Negligence                                                                                                           252

  Loss-Adjustment Provisions / Notice of Loss                                                                                                              253

  Processing an Automobile Claim                                                                                                                                   254

  To Recap Negligence                                                                                                                                                        255

Chapter 11:  Annuities

  Annuities:  Systematic Income                                                                                                                                      257

  Mortality Tables / Three Primary Types of Annuities                                                                                                258

  Four People Potentially Involved                                                                                                                                 259

                The Insurer / The Contract Owner                                                                                                                   259

                The Annuitant                                                                                                                                                     260

                The Beneficiary                                                                                                                                                  261

  Annuity Contract Titles / Annuity Development                                                                                                       261

  The Reinsurance Network                                                                                                                                               262

Annuity Evolvement / Variable Annuities / In the 70’s a Permanent Surrender Charge                                     263

  Bail-Out Annuities Marketed / Indices & Two-Tiered Annuities                                                                            263

  The Application                                                                                                                                                                264

  Options / Immediate Annuities                                                                                                                                       265

  Joint-and-Survivor Annuities / Immediate Variable Annuities                                                                                 266

  Diversification / Deferred Annuities                                                                                                                              267

  Flexibility                                                                                                                                                                           268

  Considering Goals and Objectives                                                                                                                                269

  Annuity Advantages / An Advantage: Safety of Principle and Contractual Guarantees                                     270

  An Advantage: Reserve Requirements for Annuities                                                                                                 271

  An Advantage: Financial Clout                                                                                                                                      272

  Advantages: Tax-Deferred Growth & Fixed Rate Annuity Performance                                                              273

  An Advantage: Professional Management                                                                                                                  274

  An Advantage: Annuity Withdrawal Options                                                                                                             275

  An Advantage: Guaranteed Death Benefit in Variable Annuities                                                                            276

  An Advantage: Avoiding the Probate Process                                                                                                             276

  An Advantage: Avoiding Those Darned In-Laws                                                                                                      277

  Annuities are Not Suitable for Every Investor                                                                                                           278

  Surrender Charges                                                                                                                                                            279

  Fees                                                                                                                                                                                      280

  Annuitization Options (Getting Your Money)                                                                                                            281

  Combining Annuities with Seven-Pay Life Insurance                                                                                               282

  Using Annuities to Fund Legal Actions                                                                                                                       283

  Employer Provided Retirement Options                                                                                                                       283

  Rolling Over the Funds into Something Else                                                                                                               284

  Why Annuitize?                                                                                                                                                                 284

  Bailout Options                                                                                                                                                                  287

  Annuity Variations                                                                                                                                                           288

                Single-Pay Deferred Annuity / Accumulation Annuity / Straight Life Annuity / Refund Annuity     288

                Two-Tiered Annuity / Joint-and-Survivor Annuity                                                                                      289

                Pre-retirement Survivor Annuity / Wrap-around Annuity                                                                           290

                CD-Like Annuity                                                                                                                                                291

  1035 Exchanges                                                                                                                                                                 291

  Split Annuities                                                                                                                                                                   292

  Reverse Annuity Mortgage (RAM)                                                                                                                                293

  Private Annuities                                                                                                                                                               294

  Qualified Annuities                                                                                                                                                           295

  Tax-sheltered Annuities (TSA)                                                                                                                                       296

  Accumulation Periods                                                                                                                                                      297

  Defining the Payout Period / Interest Rates: Portfolio Average & Banding Method                                           298

  Assumed Interest Rate (AIR) / TSA Expenses Explicit & Implicit                                                                         300

  Non-Qualified Annuities                                                                                                                                                  301

Annuity Suitability Training                                                                                                                                       302

  Finding the Right Products                                                                                                                                              302

  Safety of Investment / Funding Retirement                                                                                                                 303

  Structured Settlements / Old Money; New Money                                                                                                     304

  Choosing an Annuity Type Based on Policyowner Risk                                                                                           305

                Variable Annuities                                                                                                                                               305

                Funding Variable Annuities / Variable Annuity Death Benefit / Fixed-Rate Annuities                         307

Declared-Rate Fixed Annuities / Indexed Fixed-Rate Annuities                                                                310

                Two-Tiered Annuities                                                                                                                                         311

                Equity Indexed Annuities  (EIA)                                                                                                                      312

                EIA Annual Expenses / Contract Provisions Affect Consumers                                                                314

                Guaranteed Rates and Returns                                                                                                                         315

                Index Crediting                                                                                                                                                    318

                Participation Rates                                                                                                                                              319

                Averaging / Caps / Spreads, Margins and Administrative Fees                                                                  320

                Returns                                                                                                                                                                  321

                Indexing Formulas                                                                                                                                              322

                Annual Reset Indexing Method (Annual Reset and Ratchet) / High Water Mark Method                   323

                Point-to-Point Indexing Method                                                                                                                      324

                Multiple EIAs with Diversified Indexing Methods / Terminology for EIA Products                            325

              Practice Diversification                                                                                                                                       328

  Annuity Surrender Values and Penalties                                                                                                                      329

  Withdrawal Considerations / Payout Options                                                                                                              331

                Nonhuman Payees Under a Settlement Option                                                                                              333

                Lifetime Income Payout Option / Life-Annuity-Period-Certain Payout Option                                     333

                Joint-and-Last-Survivor Payout Option                                                                                                          334

                Required Distribution / Taxation / Qualified & Non-Qualified Annuity Annuitization                        335

  Financially Sound Insurers                                                                                                                                              336

  State Guaranty Associations                                                                                                                                           337

  Establishing Suitability Standards                                                                                                                                 337

                Determining Suitability                                                                                                                                      338

                Sales Practices / Product Replacement / Deceptive Sales Practices Prohibited / Full Disclosure         340

                Product knowledge / Identifying Suitability Issues                                                                                      341

  It is Not a Liquidity Issue but Rather a Suitability Issue                                                                                           342

  A Comprehensive Financial Plan                                                                                                                                   343

  Suitability Relating to Tax-Deferred Status                                                                                                                 347

                Tax-Deferred Exception                                                                                                                                    348

  Annuity Gifts                                                                                                                                                                     348

  Other Tax Issues / Annuities are (Sometimes) Protected Assets                                                                              349

  Sometimes Annuities are a Bad Idea / Considering Applicant Age                                                                         350

                Surrender Penalties                                                                                                                                             351

  Grasping Fundamental Aspects of the Product                                                                                                           352

                Basic Consumer Information Requirements                                                                                                  353

  General Contract Provisions                                                                                                                                            354

                Entire Contract / Changes and Waivers / Misstatements                                                                             354

                Required Reporting / State Laws / Claims by Creditors                                                                               355

              Other Contract Items                                                                                                                                          356

  Additional Payments                                                                                                                                                        356

  In Conclusion                                                                                                                                                                     357

Chapter 12:  Individual Retirement Accounts

  Personal Retirement / IRAs:  Individual Retirement Accounts                                                                                358

  Two Types of IRAs                                                                                                                                                          359

  The Taxpayer Relief Act of 1997 / The IRS Restructuring and Reform Act of 1998                                          361

  Adding to A Roth                                                                                                                                                             362

  Selecting the Best IRA Form / Staying Within the Dollar Guidelines / Roth IRA Withdrawals                       363

  Roth IRA Advantages                                                                                                                                                      364

Chapter 13:  Life Insurance

  Creating an Estate                                                                                                                                                             366

  Trading a Guaranteed Loss for Protection / Changing Social Times                                                                       367

  Two Basic Insurance Terms:  Premium & Peril / Betting Against the Insurance Company                              368

  A Good Financial Plan Involves Life Insurance                                                                                                         369

  What’s the Insurance For?                                                                                                                                               370

  Beneficiary Payout Options / Estate Planning:  the Use of Procedures, Not Products                                         371

  Providing For Others through Planning                                                                                                                       372

  Using Discipline to Achieve Security / Making the Most of Our Earnings / Turning Dreams into Goals       373

  Clarifying Client Objectives / The Need for Broader Knowledge                                                                            374

  Basic Goals of Life Insurance / Life Insurance Trusts                                                                                               375

  Trust Beneficiaries / Kinds of Life Insurance                                                                                                             376

  An Estate Planning Tool  / Term Insurance: No Money, Just Coverage                                                                377

  Whole Life Insurance:  the Granddaddy                                                                                                                      378

  Endowment Insurance Policies:  Forced Savings / Universal Life: Separating Expenses                                   379

  Variable Life: Few Guarantees                                                                                                                                      380

  Survivorship Life:  Insuring 2 or More People                                                                                                           381

  Single Premium Whole Life                                                                                                                                            382

  Simplified Employee’s Pension Plan / Buy-sell Agreements                                                                                   383

  Company Ratings                                                                                                                                                             384

Chapter 14: The Unusual

  Just About Anything can be Insured                                                                                                                             391

  Types of Issued Policies:  Asteroid/Meteor Insurance                                                                                              392

                Body Parts Insurance                                                                                                                                         393

                Chancel Liability Insurance / Replacement Insurance                                                                                394

                Flight Insurance and Travel Insurance                                                                                                            395

                Immaculate Conception Insurance / Love Insurance / Multiple Births Insurance                                  396

                Pet Insurance                                                                                                                                                       397

                Ransom Insurance                                                                                                                                              399

                Space Alien Abduction Insurance (Includes Impregnation Coverage)                                                     400

                Space Debris Insurance                                                                                                                                     401

                Supernatural or Ghost Insurance / Sensory Insurance                                                                                 402

                Talent Insurance / Touring Caravan Insurance / Wedding Insurance                                                       403

                Unusual Insurance Claims                                                                                                                                 406

                Motor Insurance Quotes from Claim Forms                                                                                                   407