IL Life & Health cheat sheet

The McCarran-Ferguson Act (1945) reserves regulation of the business of insurance to the states; federal antitrust law reaches insurers only where the states do not regulate.

A producer may solicit only in a state where licensed and appointed; the appointment is the insurer's written authorization to act on its behalf and must be filed with the state within the statutory window.

Premiums and funds collected for an insurer are held in a fiduciary capacity; commingling them with personal or agency funds is a license violation.

Twisting is misrepresenting an existing policy to induce replacement; churning is repeated replacement or rewriting to generate commissions. Both are unfair trade practices.

Rebating - offering a client any part of the commission or an inducement not stated in the contract - is prohibited in most states.

Unfair claim settlement practices include failing to acknowledge a claim promptly, denying without a reasonable investigation, and not paying undisputed amounts within the required time.

Life insurance illustrations must separately show guaranteed and non-guaranteed elements and may not project values the insurer cannot reasonably support.

State guaranty associations pay claims of insolvent insurers up to statutory limits, commonly $300,000 in death benefits and $100,000 in net cash surrender value.

An applicant declined or rated because of a consumer report must be told the reason and the reporting source; MIB coded information is disclosed to the consumer on request.

Insurable interest in life insurance must exist at the time of application; unlike property insurance, it need not exist at the time of the insured's death.

Insurance transfers pure risk (loss or no loss); speculative risk, which can produce gain as well as loss, is not insurable.

Law of large numbers: as the number of similar exposure units grows, actual losses converge on predicted losses, which stabilizes pricing.

Contract characteristics: adhesion (insurer drafts the terms), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), conditional, personal, and utmost good faith.

Elements of a valid contract: offer, acceptance, consideration, competent parties, and legal purpose.

A warranty is a statement the insured guarantees to be true; a representation is a belief held true. Material misrepresentation, concealment, or fraud may void coverage.

Producer authority: express (granted in writing or speech), implied (acts reasonably necessary to perform duties), and apparent (a third party reasonably believes it exists). Any of the three can bind the insurer.

Stock insurers are owned by shareholders and issue nonparticipating policies; mutual insurers are owned by policyholders and may pay dividends.

Reinsurance: a ceding insurer keeps a retention and transfers the excess to a reinsurer by treaty (automatic for a class of business) or facultative (case by case).

Needs approach: coverage = income replacement + debts + education costs + final expenses + emergency fund, minus existing resources such as savings, spouse income, and Social Security survivor benefits.

Human life value = the present value of the insured's future earnings and services that dependents lose at death.

Application Part I records general and personal data; Part II records medical history. The producer's report, the MIB report, and a paramedical exam supply additional underwriting evidence.

The MIB is a member-owned data exchange that reports coded medical conditions; it makes no underwriting decision and no adverse action on its own.

Conditional receipt: coverage begins on the application date (or the medical exam date) if the applicant proves insurable under the insurer's ordinary rules; otherwise coverage begins at policy delivery.

Delivery requirements: policy delivered, first premium paid, and a signed statement of good health when the initial premium was not submitted with the application.

Free-look period: commonly 10 to 30 days after delivery, state dependent; replacement transactions usually carry a full 30 days.

Risk classes: preferred, standard, substandard (table-rated with extra premium or reduced benefits), and declined.

Beneficiary rules: a revocable beneficiary can be changed by the owner without consent; an irrevocable beneficiary must consent. Per capita divides equally among surviving named beneficiaries; per stirpes passes a deceased child's share to that child's heirs.

Term insurance builds no cash value; level term holds a constant face, decreasing term reduces the face while the premium stays level, increasing term rises.

Renewable term continues coverage without new evidence of insurability; convertible term exchanges to permanent coverage without new evidence, usually subject to an age or duration limit.

Whole life: level premium for life, guaranteed cash value, guaranteed death benefit, and a scheduled paid-up date; limited-pay (20-pay, paid-up at 65) compresses premiums into fewer years.

Universal life separates the death benefit from the cash value; monthly deductions cover cost of insurance and expense charges, and interest is credited at current or guaranteed rates.

Universal life Option A pays a level face amount; Option B pays face plus accumulated cash value. The guideline premium or corridor test determines whether the policy is a modified endowment contract.

Variable life and variable universal life cash values are held in a separate account; the sale is a registered securities transaction requiring a securities license and a prospectus.

Indexed universal life credits interest by reference to an external index, subject to a floor (often 0%), a cap, and a participation rate.

Group life: one master policy issued to the employer, certificates issued to employees, and underwriting based on the group and actively-at-work rules rather than individual evidence.

Group participation: a contributory plan generally requires at least 75% of eligible employees to participate; a noncontributory plan requires 100%.

Ownership rights: name and change a revocable beneficiary, assign the policy, take policy loans, surrender the policy, and choose settlement options.

Entire contract clause: the policy plus the attached copy of the application make up the whole agreement; outside documents cannot be incorporated.

Grace period: commonly 30 or 31 days; the policy stays in force if the premium is paid within that period.

Reinstatement: usually allowed within 3 years of lapse on payment of overdue premiums with interest plus evidence of insurability; a new contestability and suicide period may run from reinstatement.

Incontestability runs for 2 years from issue, after which the insurer generally cannot rescind for application misstatement; the suicide clause (usually 2 years, 1 in some states) refunds premiums instead of paying the face amount.

Misstatement of age or sex adjusts the death benefit to the amount the premium actually paid would have purchased at the correct age and sex.

Nonforfeiture options: cash surrender, reduced paid-up (lower face, same maturity date), and extended term (full face for whatever period the net cash value buys).

Dividend options: cash, reduce premium, accumulate at interest, paid-up additions, and one-year term.

Settlement options: lump sum, interest only, fixed period, fixed amount, and life income forms (straight life, life with period certain, installment refund, joint and survivor).

Two phases: accumulation (contributions in, values grow tax deferred) and annuitization (liquidation into periodic payments based on the annuitant's life expectancy).

A fixed deferred annuity guarantees a minimum interest rate stated in the contract; the insurer, not the owner, bears the investment risk.

A variable annuity invests in a separate account; the owner bears investment risk, the sale requires a securities license and prospectus, and accumulation units convert to annuity units at annuitization.

An indexed annuity credits interest linked to an index, limited by a floor, a cap, and a participation rate.

Payout options: life only (largest payment, ends at death), life with period certain, installment refund, and joint and survivor.

Exclusion ratio = investment in the contract divided by expected return; it fixes the tax-free portion of each payment until basis is recovered.

Surrender charges decline over the surrender period; many contracts allow about a 10% annual free withdrawal, and a market value adjustment may apply to fixed or indexed contracts.

A Section 1035 exchange moves an annuity or life policy into a like contract without current taxation.

Suitability: deferred annuities fit long-term retirement income goals; early surrender charges and the 10% federal penalty before age 59½ make them unsuitable for short-term money.

Death proceeds paid to a named beneficiary are generally free of federal income tax; interest paid on delayed or interest-only settlements is taxable to the recipient.

Individual life premiums are not deductible; employer-paid group life and health premiums are deductible business expenses.

Cash value grows tax deferred; on surrender, gain over the owner's basis is ordinary income in the year received.

A modified endowment contract fails the seven-pay test; loans and distributions are taxed as income first, with a 10% penalty before age 59½.

Transfer-for-value rule: a policy sold or exchanged for value makes the death benefit taxable income to the buyer, subject to narrow exceptions (insured, partner, partnership, or a corporation of which the insured is a shareholder or employee).

Estate inclusion: proceeds enter the insured's gross estate if the insured held incidents of ownership; an irrevocable assignment or ILIT removes them, subject to a 3-year look-back for policies transferred within three years of death.

Business uses: key person insurance (premiums non-deductible, proceeds generally tax free), buy-sell funding, executive bonus (employer deduction, employee taxable income), and split-dollar arrangements.

Group term life: employer-paid coverage up to $50,000 produces no taxable income; the excess is imputed income valued under the Table I rates.

Qualified plans: traditional contributions are deductible, earnings grow tax deferred, and distributions are ordinary income; a 10% penalty applies before age 59½ with listed exceptions, and RMDs begin at the applicable age (73 or 75 under SECURE 2.0).

Health underwriting prices morbidity (illness and injury) by frequency and severity of claims, rather than mortality as in life insurance.

Cost sharing order: deductible, then coinsurance (commonly 80/20), then the out-of-pocket maximum, after which covered benefits are paid in full.

Renewability ladder from weakest to strongest: cancellable, optionally renewable, conditionally renewable, guaranteed renewable, noncancellable. Noncancellable also bars premium increases; guaranteed renewable allows increases by class.

Under the ACA, individual and small-group plans are guaranteed issue, must cover essential health benefits and preventive services without cost sharing, and must extend dependent coverage to age 26.

HIPAA provides group portability, limits pre-existing condition exclusions when creditable coverage exists, and grants special enrollment rights on events such as marriage, birth, or loss of other coverage.

COBRA continuation: 18 months for termination or reduced hours, 29 months for disability, 36 months for dependents after death, divorce, or Medicare eligibility; applies to employers with 20 or more employees.

Time limit on certain defenses: after 2 years (3 in some states) the insurer cannot contest the application except for fraud; the pre-existing condition look-back is typically 6 months.

Standard claim provisions: notice within 20 days, proof of loss within 90 days, payment within 30 to 45 days, and no lawsuit before 60 days or after 3 years from proof of loss.

Grace period: 7 days for weekly premiums, 10 days for monthly, and 31 days for annual; coverage continues if the premium is paid within the grace period.

Major medical structure: deductible, then coinsurance, then a coinsurance or out-of-pocket maximum, after which the plan pays 100% of covered charges up to any benefit limit.

HMO: closed network, primary care gatekeeper, capitation payments to providers; non-emergency out-of-network care is not covered.

PPO: a network of preferred providers with negotiated rates, no gatekeeper, and out-of-network care covered at a reduced benefit. EPO covers only its network; POS blends HMO and PPO features with a gatekeeper plus an out-of-network option.

Medicare: Part A inpatient hospital, skilled nursing, hospice, and home health; Part B physician and outpatient services (generally 80% after the deductible); Part C Medicare Advantage; Part D prescription drugs.

Medicare eligibility at 65, or after 24 months of disability benefits, or with ESRD; the initial enrollment period spans 7 months (3 before, the birthday month, 3 after), and the annual election period runs October 15 to December 7.

Medigap open enrollment: a 6-month window beginning the month the person is 65 and enrolled in Part B, during which insurers cannot decline or rate up for health status.

Disability income: own occupation pays when the insured cannot perform the duties of the specific occupation; any occupation is stricter and cheaper. The elimination period works like a time deductible, and benefit periods run 2 years, 5 years, to age 65, or lifetime. Benefits are typically 60% to 70% of gross income.

Residual or partial disability pays a proportionate benefit after a drop in income; presumptive disability pays full benefits for loss of sight, hearing, speech, or limbs.

Group health mechanics: one master contract, an eligibility waiting period, an actively-at-work requirement, 75% participation when contributory and 100% when noncontributory, and conversion or COBRA rights at termination.

Dental coinsurance tiers: preventive services (exams, cleanings) often 100%, basic services (fillings, extractions) around 80%, major services (crowns, bridges, dentures) around 50%; an annual maximum caps the plan's payment.

A missing tooth clause excludes replacement of teeth lost before coverage began, and waiting periods delay benefits for major services.

Predetermination: the dentist submits the treatment plan before care, and the insurer returns an estimate of payable benefits.

Long-term care benefit triggers: unable to perform at least 2 of 6 activities of daily living (bathing, dressing, transferring, toileting, eating, continence) for a stated period, or severe cognitive impairment.

Long-term care policy features: elimination period (0 to 365 days), daily or monthly benefit maximum, benefit period, inflation protection, and covered settings such as home care, adult day care, assisted living, nursing home, respite, and hospice.

Tax-qualified long-term care: premiums may be deductible within age-based limits and benefits are received income tax free up to the per-diem limit.

Consumer protections: HIPAA privacy of health information, GLBA privacy notices, ACA internal and external appeal rights, and state unfair claims practices acts with prompt-payment deadlines.

Fraud indicators include stranger-originated life insurance, falsified applications, inflated or fabricated claims, and premium diversion; producers must report suspected fraud to the insurer or the state fraud bureau.

Replacement: the producer must deliver a replacement notice and comparison, and the replacing policy carries a free-look period that is commonly 30 days.