Life Insurance Principles, Products and Policy Provisions
Licensing and North Carolina Insurance Law: Producer Duties and Prohibited Practices
Becoming and staying licensed
To be licensed in North Carolina a producer must be at least 18, complete an approved prelicensing course for each line requested, pass the state exam, submit fingerprints for a criminal background check, and pay the fee. The license must be appointed by an insurer before the producer can submit business for it. Licenses are renewed every two years, and renewal requires continuing education - 24 hours per biennium, including 3 hours of ethics. A producer must notify the Commissioner within 30 days of any administrative action against a license or any criminal prosecution in any jurisdiction. An insurer terminating an appointment must notify the Commissioner and the producer.
Fiduciary duties
The producer holds premiums in trust for the insurer and the insured. Commingling premium funds with personal or agency operating money is prohibited, as is failing to remit premiums as the agency contract requires.
Prohibited practices (NC Unfair Trade Practices)
- Rebating - offering anything of value not stated in the policy (cash, gifts, paying a premium) to induce a sale. Illegal even if the buyer asks for it.
- Twisting - misrepresentation that induces a policyholder to lapse or surrender existing coverage.
- Misrepresentation, false advertising, defamation, boycott/coercion, unfair discrimination.
- Paying or splitting commissions with an unlicensed person.
NC-specific consumer protections
- Free look: at least 10 days on a life policy from delivery; 30 days on Medicare supplement and long-term care policies.
- Replacement: a replacing producer must give the required replacement notice/comparison so the buyer can compare.
- NC Life and Health Insurance Guaranty Association protects policyholders of insolvent member insurers - up to $300,000 in death benefits, $100,000 in cash surrender value, and $250,000 in annuity present value per life.
Trap: A "small gift" to close a sale is a rebate. So is paying a client's first premium.
Rule of thumb: Anything of value the buyer receives that is not printed in the policy = a rebate = a license problem.
Life Insurance Products and Policy Provisions
Two families of coverage
Term insurance buys protection for a stated period and builds no cash value; it pays only if death occurs while in force. Shapes include level, decreasing (mortgage protection), annually renewable (ART), and renewable/convertible term.
Permanent insurance lasts for life. Common forms: ordinary (straight) whole life with level premiums to 100 or 121; limited-pay (20-pay, paid-up at 65); single premium; universal life (flexible premium, unbundled cost of insurance, two death benefit options - level = Option A, increasing = Option B); variable life (cash value in a separate account, registered as a security, requiring a securities license); indexed UL (credited by an index with a floor and cap); and survivorship (second-to-die) coverage.
Annuities accumulate and then annuitize; they may be immediate or deferred, fixed or variable. The exclusion ratio determines how much of each payment is tax-free return of principal.
Provisions that generate the trickiest questions
- Incontestability (typically 2 years): bars rescission for misrepresentation, but never bars the insurer for nonpayment of premium.
- Suicide clause (typically 2 years): the insurer refunds premiums rather than paying the face amount.
- Misstatement of age or sex: never voids the policy - the insurer adjusts the benefit to what the premium paid would have purchased at the correct age/sex.
- Policy loans: reduce both cash value and death benefit; unpaid interest can lapse the policy.
- Nonforfeiture options: cash surrender, reduced paid-up, extended term (extended term keeps the full face amount for a shorter period).
- Dividends are not guaranteed and are a return of premium.
Worked example: Insured states age 40 but is actually 45; he dies five years later. Because contestability expired, the insurer cannot void the policy - it pays the benefit the premium would have bought at age 45.
Rule of thumb: Two years governs contestability and suicide; "adjust, don't void" governs age and sex errors.