NE Life & Health cheat sheet

The McCarran-Ferguson Act (1945) leaves regulation of insurance primarily to the states; federal authority applies only where Congress specifically provides for it.

A state insurance department is headed by the commissioner, superintendent, or director, who issues licenses, approves policy forms and rates, examines insurer solvency and market conduct, and may suspend or revoke licenses.

Domicile classifications: domestic = chartered in this state; foreign = chartered in another state or U.S. territory; alien = chartered in another country. Each must hold a certificate of authority to transact business in the state.

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

Producer licensing requires passing the state exam, being appointed by an insurer, holding a license in the state where the applicant resides or the risk is located, and completing continuing education.

Producers act in a fiduciary capacity: premium funds must be held in trust and may not be commingled with personal funds.

Unfair trade practices include rebating, twisting, misrepresentation, false advertising, coercion, intimidation, boycott, and defamation of an insurer.

Twisting is inducing a policyholder to lapse or replace coverage through misrepresentation; churning is repeated replacement of policies with the same insurer to generate commissions.

Fraudulent insurance acts and willful violations may result in fines, license suspension or revocation, and criminal penalties.

Pure risk involves only loss or no loss and is insurable; speculative risk involves the chance of gain as well as loss and is not insurable.

For a loss to be insurable it must be accidental, definite and measurable, statistically predictable, spread over many homogeneous exposure units, and not catastrophic in nature.

The law of large numbers holds that as the number of similar exposure units increases, actual losses more closely approximate expected losses, making rates more reliable.

Adverse selection is the tendency of higher-than-average risks to buy or retain coverage; underwriting, exclusions, and waiting periods are used to control it.

The indemnity principle restores the insured to approximately the pre-loss financial position and never allows a profit from a loss.

Utmost good faith requires honest disclosure: a representation is believed true to the best of the applicant's knowledge, a warranty is guaranteed true, and concealment of a material fact can void the contract.

Insurance contracts are aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), conditional, and contracts of adhesion in which ambiguity favors the insured.

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

A peril is the cause of a loss; a hazard increases the chance a peril will occur, and may be physical (icy roads), moral (dishonesty such as arson), or morale (carelessness).

Insurable interest in life insurance must exist at the time of application; it need not exist at the time of death, but without it the contract is void.

The policyowner controls the contract and pays premiums, the insured is the person whose life is covered, and the beneficiary receives the death proceeds.

Under the level premium concept the insured pays more than the cost of protection in the early years, building a reserve or cash value that offsets higher mortality costs later.

Premium factors are mortality, interest, and expense: net premium equals mortality minus assumed interest; gross premium equals net premium plus expenses and contingencies.

More frequent premium modes (monthly versus annual) raise the total annual cost because of lost interest earnings and added administrative expense.

Risk classifications are preferred, standard, substandard (table-rated), or declined; rated policies charge an extra premium to reflect higher expected mortality.

A conditional receipt provides coverage only if the premium is paid and the proposed insured proves insurable under the insurer's rules as of the application date; if approved as applied, coverage is retroactive to that date.

The Medical Information Bureau (MIB) is a coded medical database shared by member insurers; applicants may request disclosure of their file and correct errors.

A modified endowment contract (MEC) fails the 7-pay test; withdrawals and loans are taxed income-first and a 10% penalty may apply before age 59½.

Term insurance is pure protection with no cash value that pays only if death occurs during the policy term; forms include level, decreasing, increasing, renewable without new evidence of insurability, and convertible.

Whole life is permanent coverage with a level premium, level face amount, guaranteed cash value, and maturity at age 100 or 121.

Participating (par) whole life pays policy dividends, which are a return of divisible surplus and are not guaranteed.

Limited-pay whole life (for example 20-pay or paid-up at 65) finishes premium payments early while coverage continues for the insured's lifetime.

Universal life offers flexible premiums and an adjustable death benefit; cash value earns current interest subject to a guaranteed minimum and is reduced monthly by cost of insurance.

Universal life death benefit Option A is a level face amount; Option B is an increasing benefit equal to the face amount plus accumulated cash value.

Variable life cash value is invested in separate-account subaccounts, so the owner bears investment risk and cash value is not guaranteed; both a life license and a securities license are required.

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

Survivorship (second-to-die) insurance pays the face amount on the last of two deaths and is used for estate taxes and estate planning.

The entire contract clause states that the policy and the attached application are the whole agreement; the free look provision lets the owner return the policy within about 10 days for a full refund.

The incontestability clause prevents the insurer, after the policy has been in force two years, from contesting the contract for misstatements on the application; nonpayment of premium remains contestable.

The grace period for life insurance is typically 30 or 31 days after the due date; coverage stays in force, and any unpaid premium may be deducted from the claim.

Reinstatement within a stated period (usually 3 to 5 years) requires proof of insurability and payment of overdue premiums with interest, and may start a new contestable period.

A misstatement of age or sex adjusts the death benefit to the amount the premium paid would have purchased at the correct age or sex.

The suicide clause excludes death by suicide for the first two years, during which the insurer typically refunds premiums instead of paying the face amount.

Nonforfeiture options are cash surrender, reduced paid-up insurance, and extended term insurance.

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

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

Annuities liquidate a sum of money over time, protecting against living too long; life insurance creates an estate, protecting against dying too soon.

A deferred annuity has an accumulation phase (pay-in with tax-deferred growth) followed by an annuitization or payout phase.

An immediate annuity is bought with a single premium and begins payments within one payment interval; a deferred annuity begins payments later, often at a stated retirement age.

Fixed annuities guarantee a minimum interest rate and a fixed dollar payout; variable annuities invest in a separate account, the owner bears investment risk, and a securities license is required.

The exclusion ratio determines the tax-free portion of each payment: investment in the contract divided by expected total return. Once the after-tax basis is recovered, payments are fully taxable.

Payout options include life only, life with period certain, installment refund, cash refund, joint and survivor, fixed period, and fixed amount.

During accumulation most contracts permit a free withdrawal of about 10% per year; surrender charges typically decline to zero over 7 to 10 years.

Qualified annuities are funded with pre-tax dollars (IRA, 403(b)) so the entire payment is taxable; nonqualified annuities are funded with after-tax dollars so only earnings are taxed.

A 10% federal penalty generally applies to annuity distributions before age 59½, with exceptions such as death, disability, and annuitization.

Health insurance addresses morbidity risk (sickness and injury) and pays benefits according to policy definitions rather than indemnifying a dollar value of a person.

Basic medical expense coverages are hospital, surgical, and physician/medical; major medical adds a broad benefit period with a deductible and coinsurance; comprehensive plans combine basic and major medical.

Cost-sharing terms: a deductible is paid by the insured before benefits begin, coinsurance is the percentage split after the deductible, a copayment is a flat fee per service, and the out-of-pocket maximum caps the insured's share.

An HMO uses a closed network with a primary care physician as gatekeeper and capitated providers; non-emergency out-of-network care is generally not covered.

A PPO offers a discounted provider network with no gatekeeper and allows out-of-network care at higher cost; a POS plan blends HMO and PPO features, and an EPO has no out-of-network benefits.

Renewability, from least to most favorable to the insured: cancellable, optionally renewable, conditionally renewable, guaranteed renewable, noncancellable.

Limited policies include dental, vision, cancer, critical illness, hospital indemnity, short-term medical, and accidental death and dismemberment.

Utilization review includes preauthorization, concurrent review, and retrospective review; case management coordinates care for high-cost or chronic conditions.

Coordination of benefits rules establish which plan is primary and which is secondary when a person is covered by more than one plan, preventing duplicate payment.

Uniform required provisions in individual health policies include entire contract, time limit on certain defenses, grace period, reinstatement, notice of claim, claim forms, proof of loss, and legal actions.

The time limit on certain defenses (incontestability) bars the insurer after two years (three in some states) from denying a claim for misstatements, except fraudulent ones.

Grace period: 7 days for weekly premiums, 10 days for monthly premiums, and 31 days for all other modes.

Notice of claim must be given within 20 days of loss, claim forms must be furnished within 15 days, proof of loss is due within 90 days, and benefits are paid immediately or within 45 days.

Legal actions may not be brought sooner than 60 days after proof of loss is filed, and not later than 3 years after the required proof is filed.

Reinstatement resumes coverage when the overdue premium is paid; a new waiting period may apply to sickness, while accidents are usually covered immediately.

The change of occupation provision reduces benefits if the insured moves to a more hazardous occupation, and misstatement of age adjusts benefits to the correct premium level.

Other insurance and overinsurance provisions limit total benefits so payments do not exceed the actual expenses incurred.

Common exclusions are pre-existing conditions as permitted by law, war, self-inflicted injury, elective cosmetic surgery, and conditions covered by workers' compensation.

Disability income replaces a portion of earned income, typically 60% to 70%, and the issue limit is based on the insured's income rather than stated need.

The elimination (waiting) period is the time from the start of disability until benefits begin; a longer elimination period produces a lower premium.

An own occupation definition pays when the insured cannot perform the duties of their specific occupation and usually applies only for an initial benefit period; the any occupation definition is stricter and applies afterward.

Residual disability pays a benefit proportional to lost earnings when the insured returns to work at reduced income; partial disability pays a flat percentage for a limited time.

Presumptive disability pays full benefits for losses such as sight, hearing, speech, or two limbs, often without an elimination period.

Recurrent disability: a relapse from the same cause within a stated period (commonly 6 months) is treated as a continuation of the prior claim rather than a new one.

Long-term care benefits are triggered by inability to perform 2 of 6 activities of daily living for at least 90 days, or by severe cognitive impairment, and pay for nursing home, home, and assisted living care.

Business disability coverages include key person disability and business overhead expense (BOE), which reimburses fixed business expenses while the owner is disabled.

Benefits are commonly offset or reduced by Social Security disability and workers' compensation payments.

Group underwriting evaluates the group as a whole (size, industry, prior claims, participation) rather than each individual, and individual evidence of insurability is generally not required.

The employer holds the master policy and employees receive certificates of insurance; eligibility and probationary periods determine when an employee's coverage begins.

COBRA requires employers with 20 or more employees to offer continued group health coverage after a qualifying event: 18 months for termination or reduced hours, 29 months for disability, and 36 months for dependents.

The Affordable Care Act requires guaranteed issue, prohibits pre-existing condition exclusions, mandates essential health benefits, extends dependent coverage to age 26, and bars annual and lifetime dollar limits on essential benefits.

Employer-paid group life premiums are deductible to the employer, but coverage above $50,000 creates taxable imputed income for the employee, calculated with IRS Table I rates.

Life insurance death benefits are generally received free of federal income tax, cash value grows tax-deferred, and policy loans are not taxable unless the policy lapses.

Individual life and annuity premiums are not tax deductible; annuity earnings are tax-deferred, and withdrawals from nonqualified annuities are taxed income-first (LIFO).

When the employer pays disability premiums, benefits are taxable to the employee; when the employee pays with after-tax dollars, benefits are received tax-free.

Employer-paid health premiums are deductible to the employer and excluded from the employee's income, and Section 125 cafeteria plans allow employees to pay their share with pre-tax salary reductions.