CA Life & Health cheat sheet

The California Insurance Commissioner is an elected statewide officer serving a 4-year term and heads the California Department of Insurance (CDI), which enforces the Insurance Code, issues licenses, and imposes penalties up to revocation.

Producer licenses are two-year term licenses; a life-only or accident-and-health license must be renewed every 2 years with 24 hours of approved continuing education, including at least 3 hours of ethics.

An insurer must file a notice of appointment with the CDI for a producer, and the producer may act for that insurer only while properly licensed and appointed; an expired license means no soliciting, negotiating, or transacting.

Premiums collected belong to the insurer or the client, not the producer: funds must be held in trust and commingling them with personal funds is prohibited and breaches the producer's fiduciary duty.

Rebating (offering any inducement not stated in the policy), twisting (misrepresentation used to induce replacement), misrepresentation, and false advertising are prohibited unfair trade practices under Insurance Code 790.03.

Free-look periods in California: 10 days for individual life policies, 30 days for individually sold annuity contracts, and 30 days for long-term care policies.

Grace period: 30 days on individual life insurance in California; coverage and benefits remain in force throughout the grace period, and a death during the grace period is payable after the overdue premium is deducted.

Annuity suitability rules apply: a producer must complete an 8-hour annuity training course before soliciting annuity sales, and recommendations must be based on the consumer's needs, financial situation, and objectives.

California Life and Health Insurance Guaranty Association limits per insured: $250,000 for life death benefits, $100,000 for life cash surrender value, $250,000 for annuity present value, and $100,000 for health benefits.

Pure risk involves only the chance of loss and is insurable; speculative risk involves the chance of gain or loss and is not insurable.

Elements of a valid insurance contract: offer and acceptance, consideration, legal purpose, and competent parties; insurance is a contract of adhesion, unilateral, aleatory, conditional, and based on utmost good faith.

Insurable interest must exist at the time of application for life insurance, but only at the time of loss for property insurance.

Life insurance is a valued contract paying a stated face amount, not a contract of indemnity; property and health benefits are indemnity contracts limited to actual loss.

Subrogation gives the insurer the insured's right to recover from a liable third party after paying a claim; it does not apply to life insurance.

Premium = rate x number of exposure units; the gross rate = pure premium (expected losses) + expense loading + profit and contingency margin.

Hazards: physical (icy roads), moral (dishonest intent to cause or exaggerate a loss), and morale (carelessness or indifference to loss).

Adverse selection is the tendency of higher-than-average risks to seek coverage; underwriting, exclusions, and waiting periods control it, while the law of large numbers lets insurers predict losses in a large similar pool.

Reinsurance: the ceding insurer transfers risk to a reinsurer; retention is the amount the ceding insurer keeps; treaty reinsurance covers a class of business automatically, facultative is negotiated case by case.

Term insurance provides a death benefit only with no cash value; common forms are level term, decreasing term, and annually renewable term (ART).

Whole life is permanent with level premiums and guaranteed cash value; universal life separates mortality and expense charges from the cash value and permits flexible premiums and adjustable death benefits.

Variable life and variable universal life cash values are invested in separate-account subaccounts; they are securities, so the producer needs a life license plus FINRA registration and must deliver a prospectus.

Standard provisions: entire contract, 30-day grace period (California), two-year incontestability, reinstatement within three years with evidence of insurability, misstatement of age or sex adjustment, two-year suicide clause, and a 10-day free look in California.

Nonforfeiture options when a whole life policy is surrendered: cash surrender value, reduced paid-up insurance, or extended term insurance.

Dividend options: cash, reduce premium, accumulate at interest, paid-up additions, and one-year term; dividends are a return of premium and generally not taxable until they exceed the owner's cost basis.

Settlement options: lump sum, interest only, fixed period, fixed amount, life income, and life income with period certain; joint and survivor pays until the last annuitant dies.

Beneficiary rules: revocable versus irrevocable, primary versus contingent, per stirpes versus per capita, and common disaster clauses; the policyowner, not the beneficiary, controls all policy rights.

Riders: waiver of premium, guaranteed insurability, accidental death, child term, disability income, accelerated death benefit, and long-term care; a policy failing the 7-pay test becomes a MEC and loans or distributions are taxed LIFO with a 10% penalty before age 59 1/2.

An annuity has two phases: accumulation (premiums grow tax-deferred) and annuitization or payout (the accumulated value is converted into a scheduled income stream).

An immediate annuity begins payments within one payment period of purchase; a deferred annuity postpones the payout to a future date.

Fixed annuities guarantee a declared interest rate; indexed annuities credit interest linked to an external index with a participation rate, a cap, and a floor; variable annuities invest in separate accounts and values fluctuate.

Variable annuities are registered securities: the producer needs a life insurance license plus FINRA registration, and a prospectus must be delivered to the buyer.

Payout options: life only (pure life), life with period certain, installment refund, cash refund, and joint and survivor.

Exclusion ratio = investment in the contract divided by expected return; that fraction of each payment is a tax-free return of basis and the remainder is taxable income.

Nonqualified annuity withdrawals are taxed LIFO (gains first); a 10% federal penalty applies before age 59 1/2, and annuities generally do not permit policy loans.

Early withdrawals may trigger surrender charges that grade down over a schedule of years; most contracts allow a free withdrawal amount, often 10% per year.

California rules: a 30-day free look on individually sold annuities, suitability standards including senior protection provisions, and an 8-hour annuity training course before soliciting sales.

Cost-sharing terms: deductible (paid before benefits begin), coinsurance (percentage the insured pays after the deductible), copay (flat fee per service), and out-of-pocket maximum (cap on covered in-network cost sharing).

Managed care models: HMO uses a primary care gatekeeper and capitation; PPO pays in-network and out-of-network at different rates with no gatekeeper; POS blends both; EPO covers only in-network providers.

ACA market rules: guaranteed issue, no pre-existing condition exclusions, essential health benefits, preventive care with no cost sharing, dependent coverage to age 26, and metal tiers of 60/70/80/90% actuarial value.

Individual health policy provisions: 30-day grace period, two-year incontestability, reinstatement, and a free look; California regulates timely claim payment and requires clear disclosure of limitations.

Disability income replaces roughly 60-70% of income; key terms are own-occupation versus any-occupation, elimination period, benefit period, and residual disability; benefits are tax-free when premiums are paid with after-tax dollars.

Group health: COBRA continuation is 18 months (29 months if disability occurs, 36 months for dependents) and applies to employers with 20 or more employees; HIPAA creditable coverage reduces pre-existing waiting periods.

Medicare: Part A hospital (premium-free with 40 quarters of work), Part B medical with income-related premiums, Part C Medicare Advantage, and Part D prescription drugs; the initial enrollment period is 7 months around age 65.

Medigap: standardized plans identified by letter; guaranteed-issue open enrollment lasts 6 months beginning when Part B starts; Medigap plans do not include prescription drug coverage.

Long-term care insurance pays when the insured cannot perform 2 of 6 activities of daily living without help or has cognitive impairment; features include an elimination period, inflation protection, and California Partnership asset protection for Medi-Cal.