IAI SP2 cheat sheet

Term life: pure protection, no cash value; level term premiums are based on mortality assumption, interest assumption, and expense loading; decreasing term matches declining mortgage balance.

Whole life: level premium for lifetime coverage, guaranteed cash value, and participating (par) or nonpar status; par policies pay dividends that are not guaranteed and are treated as a return of premium for tax purposes.

Universal life: unbounded flexible premium with a cash value credited interest; cost of insurance (COI) deducted monthly based on attained age and net amount at risk; option A (level death benefit) vs option B (increasing death benefit).

Variable life: cash value invested in separate account subaccounts; policyholder bears investment risk; requires prospectus and registered representative licensing; death benefit may be guaranteed minimum or variable.

Pricing formula: net premium = present value of benefits / present value of annuity due of $1; gross premium adds expense loading and profit margin; reserve = present value of future benefits minus present value of future net premiums.

Mortality tables: qx = probability of death in year x; px = 1 - qx; lx = number surviving at age x; dx = lx - lx+1; select and ultimate tables reflect underwriting selection effect.

Reserve methods: net level premium reserve, modified reserve (e.g., preliminary term) permits lower first-year reserve to cover acquisition costs; CRVM and CARVM are regulatory minimum standards.

Nonforfeiture options: cash surrender value, reduced paid-up insurance, extended term insurance; required by standard nonforfeiture law to protect policyholders who lapse.

Riders: waiver of premium, accidental death benefit (double indemnity), guaranteed insurability, child term, accelerated death benefit (living benefit), long-term care rider; each adds cost and may have exclusions.

Field underwriting: agent completes application, observes applicant, reports material facts; agent cannot bind coverage or waive policy requirements.

Application parts: Part I (general information), Part II (medical history), attending physician statement (APS) when medical history warrants; agent's report is separate.

Underwriting classification: preferred plus, preferred, standard, substandard, table rating (e.g., Table 2 = 200% mortality); flat extra premium per $1,000 of coverage for temporary risks.

MIB (Medical Information Bureau) codes report impaired risks; Fair Credit Reporting Act requires disclosure and allows applicant to dispute; cannot be sole basis for declination.

HIPAA authorization required for obtaining medical records; genetic information may not be used for health insurance underwriting but life insurance may use with consent in some jurisdictions.

Risk factors: age, sex (where permitted), tobacco use, build (height/weight), blood pressure, cholesterol, family history, occupation, avocations, foreign travel, driving record, financial underwriting (income replacement, business value).

Financial underwriting: determine insurable interest and appropriate face amount; avoid overinsurance; anti-money laundering (AML) and suitability review for large cases.

Reinsurance: ceding company retains retention limit; reinsurer assumes excess; yearly renewable term (YRT) and coinsurance are common; reinsurer may require facultative underwriting.

Conditional receipt: coverage effective only if proposed insured is insurable under standard underwriting; temporary insurance agreement (TIA) provides interim coverage subject to limits.

Claim process: notification, proof of death (certified death certificate), claimant statement, policy identification, verification of beneficiary, payment; contestability period typically two years from issue.

Suicide clause: typically two-year exclusion; after period, death benefit payable; misstatement of age or sex adjusts benefit to amount premium would have purchased at correct age/sex.

Beneficiary designations: primary, contingent, revocable vs irrevocable; per stirpes vs per capita; minor beneficiary requires guardian or trust; facility of payment clause.

Policy loans: borrow against cash value; interest accrues; unpaid loan plus interest reduces death benefit and cash value; loan may cause lapse if excess indebtedness.

Surrender and lapse: cash surrender value less surrender charges; automatic premium loan (APL) provision prevents unintentional lapse; reinstatement within grace period (typically 3-5 years) with evidence of insurability and back premiums with interest.

Grace period: 30 or 31 days after premium due date; coverage remains in force; if death occurs during grace, unpaid premium deducted from benefit.

Dividend options: cash, reduce premium, accumulate at interest, paid-up additions, one-year term; policyholder may change option.

Settlement options: lump sum, life income, fixed period, fixed amount, interest only; chosen by beneficiary; irrevocable once elected.

Claim denial grounds: material misrepresentation, fraud, lapse, suicide exclusion, war exclusion, illegal act; insurer must provide written explanation and appeal rights.

Distribution channels: career agency (captive agents), independent brokers, personal producing general agents (PPGA), banks, direct response, worksite marketing; each has different compensation and supervision.

Agent licensing: state life insurance producer license; must pass exam, complete prelicensing education, submit fingerprints, and maintain continuing education (e.g., 24 hours every 2 years, including ethics).

Appointment: insurer appoints producer; producer may not solicit until appointed; termination of appointment must be reported to state.

Compensation: first-year commission, renewal commission, bonuses, expense allowances; commission disclosure not required in most states but must not be misleading.

Sales process: fact-finding, needs analysis, presentation, suitability review, application completion, delivery of policy, free-look period (10-30 days).

Supervision: agency manager responsible for training, compliance, and monitoring sales practices; errors and omissions (E&O) coverage recommended.

Advertising rules: illustrations must comply with NAIC Life Insurance Illustrations Model Regulation; guaranteed and non-guaranteed elements must be clearly labeled; prohibited terms include 'profit' and 'investment' for non-variable products.

Replacement: Regulation 60 (or state equivalent) requires notice and disclosure when replacing existing life insurance; producer must provide replacement notice to existing insurer.

Unfair trade practices: twisting, churning, rebating, misrepresentation, coercion, boycott, false advertising; penalties include fines, license suspension, or revocation.

McCarran-Ferguson Act: states regulate insurance; federal antitrust laws apply only to the extent not regulated by states; state insurance departments enforce.

NAIC model laws: Standard Nonforfeiture Law, Standard Valuation Law, Life Insurance Illustrations Model Regulation, Suitability in Annuity Transactions Model Regulation, Unfair Trade Practices Act.

State guaranty association: protects policyholders if insurer insolvent; coverage limits (e.g., $300,000 death benefit, $100,000 cash value) vary by state; funded by assessments on insurers.

Policy form filing: most life policy forms must be filed with and approved by state insurance department before use; some states allow file-and-use.

Reserve and capital requirements: risk-based capital (RBC) formula; reserves based on Standard Valuation Law; actuarial memorandum required.

Privacy: Gramm-Leach-Bliley Act (GLBA) requires privacy notice and opt-out for sharing nonpublic personal information; HIPAA protects health information.

Anti-money laundering: Bank Secrecy Act requires insurers to have AML program, suspicious activity reporting (SAR), customer identification program (CIP).

Suitability: NAIC Suitability in Annuity Transactions Model Regulation requires producer to have reasonable grounds for recommendation; best interest standard in some states.

Complaint and market conduct: state insurance department investigates complaints; market conduct exams; penalties for violations.

Statutory accounting principles (SAP): conservative, focused on solvency; reserves based on Standard Valuation Law; acquisition costs expensed immediately; admitted assets limited.

GAAP accounting: matching principle; deferred acquisition costs (DAC) capitalized and amortized; reserves may use best-estimate assumptions; earnings smoother.

Reserves: statutory reserve = present value of future benefits minus present value of future net premiums using valuation mortality table and maximum interest rate; deficiency reserves if gross premium less than valuation net premium.

Risk-based capital (RBC): formula considers asset risk, insurance risk, interest rate risk, business risk; company action levels: company action, regulatory action, authorized control, mandatory control.

Investments: state laws prescribe permitted asset classes and diversification; NAIC designation categories; life insurers invest in bonds, mortgages, real estate, policy loans.

Cash flow testing: asset-liability management (ALM); required for interest-sensitive products; scenario testing for interest rate changes.

Financial statements: balance sheet (assets, liabilities, surplus), income statement (premiums, benefits, expenses, net income), cash flow statement; surplus = assets - liabilities.

Reinsurance accounting: ceded premiums reduce income; ceded reserves reduce liabilities; reinsurance recoverables are assets; credit for reinsurance requires authorized reinsurer or collateral.

Taxation: life insurance companies taxed on income; reserves deductible; policyholder dividends deductible; deferred tax assets/liabilities.

Fiduciary duty: producer must act in client's best interest, disclose conflicts, and place client needs above compensation; suitability standard applies to recommendations.

Misrepresentation: prohibited; includes false statements about policy benefits, dividends, or insurer financial condition; twisting is misrepresentation to induce replacement.

Rebating: offering inducement not specified in policy (e.g., cash, gifts) to purchase insurance; illegal in most states; exceptions for small promotional items.

Churning: replacing a policy solely to generate new commissions, harming client; requires replacement disclosure and may be unfair trade practice.

Privacy and confidentiality: protect nonpublic personal information; obtain authorization before disclosing; comply with GLBA and HIPAA.

Errors and omissions: professional liability insurance; common claims include failure to place coverage, unsuitable recommendations, failure to disclose policy terms.

Continuing education: ethics component required; state-specific hours; failure to comply may result in license renewal denial.

Professional standards: CPCU, CLU, ChFC designations require ethics training; state insurance departments enforce codes of conduct.

Complaint handling: respond promptly to client complaints; cooperate with regulatory investigations; maintain records of communications.