TX Life & Health cheat sheet

The Texas Department of Insurance enforces the Texas Insurance Code; the Commissioner of Insurance heads the department and is appointed by the Governor.

A certificate of authority is the license an insurer must hold to transact insurance in Texas; a producer must hold a state license and be appointed by the insurer.

Texas producers must complete 24 hours of continuing education every two years, including at least 2 hours of ethics or consumer protection.

Insurable risk requires a large number of similar exposure units, accidental and measurable losses, definite loss in time, place and amount, and losses that are not catastrophic.

Law of large numbers: as the number of similar exposure units increases, actual loss experience approaches the expected or predicted loss experience.

Adverse selection is the tendency of higher-risk individuals to buy or retain insurance; insurers control it through underwriting, exclusions, and rating classes.

The principle of indemnity restores the insured to pre-loss financial condition; life insurance is a valued contract and is not limited by indemnity.

Insurance contracts are contracts of adhesion (written by the insurer), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), and require utmost good faith.

Prohibited acts include misrepresentation, twisting, rebating, defamation, boycott or coercion, and commingling of fiduciary funds with personal funds.

Insurable interest in a life policy must exist at the time of application or policy issue, not at the time of the insured's death.

Three premium factors drive life insurance cost: mortality (expected deaths), interest (earnings on reserves), and expense (operating and acquisition costs).

Annual premium mode produces the lowest total outlay; semiannual, quarterly and monthly modes cost more in total because of added billing expense and lost interest.

The human life value approach values the present worth of the insured's future earnings; the needs approach totals survivor needs and subtracts existing resources.

Personal uses of life insurance: survivor protection, estate creation, cash accumulation, liquidity, and estate conservation.

Business uses: key person coverage, buy-sell funding (cross-purchase or entity), executive bonus (Section 162), split-dollar plans, and deferred compensation.

Underwriting sources include the application (Part I general, Part II medical), the agent's report, the MIB, an attending physician's statement, paramedical or medical exams, and inspection reports.

The producer acts as a field underwriter who reports observations on the application, but the insurer's home office makes the final underwriting decision.

A conditional receipt provides coverage from the date of application or medical exam, whichever is later, only if the proposed insured satisfies the insurer's underwriting requirements.

Term insurance provides pure death protection with no cash value and pays only if death occurs during the stated term.

Level term has a constant face amount; decreasing term declines (often matched to a mortgage); increasing term rises; return-of-premium term refunds premiums at expiry.

Renewable term allows continuation without proof of insurability; convertible term allows exchange to permanent coverage without new evidence of insurability.

Ordinary whole life charges level premiums to age 100 or 121; limited-pay (20-pay, paid-up at 65) and single-premium versions compress the payment period.

Universal life is flexible-premium with an adjustable death benefit; the cash value earns declared interest while cost of insurance and expense charges are deducted monthly.

Universal life death benefit Option A (level) pays a constant face amount; Option B (increasing) pays a level amount plus the accumulated cash value.

Variable life cash value is invested in a separate account chosen by the owner; the producer needs a FINRA registration in addition to the state life license.

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

Survivorship (second-to-die) coverage insures two lives and pays at the second death for estate planning; joint life (first-to-die) pays at the first death.

The entire contract provision limits the contract to the policy plus an attached copy of the application and bars incorporation of outside documents.

The incontestability clause bars the insurer from contesting the policy after two years in force during the insured's lifetime, except for nonpayment of premium.

A grace period (commonly 31 days for life insurance) keeps coverage in force after a missed premium; any unpaid premium may be deducted from the death benefit.

Reinstatement is typically available within 3 years of lapse on evidence of insurability and payment of overdue premiums with interest; a new contestable period may apply.

Nonforfeiture options on a cash value policy: cash surrender, reduced paid-up (smaller face, no further premiums), and extended term (same face for a limited period).

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

Common riders: waiver of premium, disability income, accidental death and dismemberment, guaranteed insurability, cost-of-living, term, long-term care, accelerated death benefit, child, return of premium.

Beneficiaries may be primary or contingent and revocable or irrevocable; per stirpes divides by branch of family, per capita divides equally among surviving beneficiaries.

A common disaster clause delays payment briefly so the contingent beneficiary receives proceeds if the primary dies in the same event; a spendthrift clause shields proceeds from beneficiaries' creditors.

Annuities liquidate a sum over time: the accumulation phase builds value, and the annuitization (payout) phase converts it into periodic income.

Immediate annuities begin payments within one payment period of purchase; deferred annuities accumulate first and pay income at a later annuity starting date.

Fixed annuities guarantee a declared interest rate and a fixed payment; variable annuities invest in separate-account subaccounts and shift market risk to the owner.

A higher assumed interest rate (AIR) produces a lower initial monthly variable annuity payment; a lower AIR produces a higher initial payment.

Payout options: life only (largest payment, no refund), life with period certain, installment refund, cash refund, and joint and survivor.

Surrender charges and market value adjustments penalize early withdrawals from deferred annuities; most contracts permit a free withdrawal of roughly 10% per year.

Variable annuity sales require both a state life insurance license and a FINRA securities registration, plus delivery of a prospectus.

Section 1035 allows a tax-free exchange of a life policy or annuity for an annuity or life policy, but not an annuity exchanged into a life policy.

Lump-sum death proceeds are generally excluded from the beneficiary's gross income; interest paid beyond the lump sum is taxable to the beneficiary.

Cash value grows tax deferred; policy loans are not taxable events unless the policy lapses or is surrendered with loans exceeding basis.

A modified endowment contract fails the 7-pay test; loans and withdrawals are taxed income first (LIFO) and a 10% penalty applies before age 59 1/2.

Individual life premiums are not deductible; employer-paid group life premiums are deductible to the employer, and coverage above $50,000 creates imputed income for the employee.

Policy dividends are treated as a return of premium and are not taxable until cumulative dividends exceed total premiums paid.

Death proceeds are included in the insured's gross estate if the insured held any incident of ownership at death, including the right to change the beneficiary.

Nonqualified annuity payments are taxed using the exclusion ratio: investment in the contract divided by expected return is excluded, and the remainder is taxable.

Pre-annuitization withdrawals from a deferred annuity are taxed LIFO (earnings first) with a 10% federal penalty before age 59 1/2, subject to limited exceptions.

Business-owned policies: key person premiums are not deductible and proceeds are generally received income tax free; buy-sell premiums are likewise nondeductible.

Health underwriting measures morbidity (sickness and injury) rather than mortality; adverse selection is controlled through underwriting and policy provisions.

An HMO provides care through a network, requires a primary care physician gatekeeper, emphasizes preventive care, and often pays providers through capitation.

A PPO contracts with a network at discounted fees, allows out-of-network care at higher member cost, and generally requires no referrals.

Basic medical expense policies cover hospital, surgical, and physician expenses; major medical adds broad coverage with a deductible, coinsurance, and a high maximum.

Cost-sharing terms: deductible is paid before benefits begin; coinsurance is a percentage of the bill; a copay is a flat per-service fee; the out-of-pocket limit caps member spending.

ACA metallic tiers reflect actuarial value: bronze 60%, silver 70%, gold 80%, and platinum 90% of covered expenses paid by the plan.

ACA-compliant individual plans are guaranteed issue regardless of health status and must cover the ten essential health benefits with no annual or lifetime dollar limits.

Other coverage types include Medicaid (low income), Medicare (age 65 and disabled), CHIP (children), workers compensation (occupational injury), and COBRA continuation.

Uniform individual health provisions set the grace period at 7 days for weekly premiums, 10 days for monthly premiums, and 31 days for all other modes.

The time limit on certain defenses provision bars the insurer from contesting the policy for misrepresentation after it has been in force two years.

Claim provisions: notice of claim within 20 days, claim forms within 15 days, proof of loss within 90 days, and payment of claims within 30 days after proof is received.

The legal actions provision bars suit against the insurer before 60 days after proof of loss and after 3 years from the date proof is required.

The free look provision gives the policyholder about 10 days after delivery to return the policy for a full premium refund.

The change of occupation provision reduces benefits if the insured moves to a more hazardous occupation; misstatement of age adjusts benefits to what the premium would have purchased.

The relation of earnings to insurance provision prevents an insured from collecting disability income exceeding the actual earnings lost, coordinating with other coverage.

On reinstatement the insurer generally must act within 45 days or coverage is automatically reinstated; the insured must pay overdue premiums and may need evidence of insurability.

Illegal occupation provisions exclude coverage for injury sustained while committing a felony; the insurer may also rescind for fraud or material misrepresentation.

Own-occupation disability pays when the insured cannot perform the duties of their own occupation; any-occupation pays only when the insured cannot work in any occupation for which reasonably fitted.

A split definition pays own-occupation for an initial period (often 2 years) and any-occupation thereafter, a common structure in individual disability policies.

The elimination (waiting) period runs from disability onset to the start of benefits, typically 30 to 180 days; a longer elimination period lowers the premium.

Residual disability pays a benefit proportional to income lost when the insured returns to work at reduced earnings; partial disability may pay a flat percentage instead.

The benefit period is the maximum duration of payments (2 years, 5 years, to age 65, or lifetime); disability income typically replaces 60-70% of pre-disability income.

Disability income generally excludes work-related injury covered by workers compensation; Social Security requires inability to engage in substantial gainful activity expected to last 12 months or end in death.

Business disability coverages include business overhead expense, disability buy-out, and key employee disability.

Long-term care benefits are triggered by inability to perform a specified number of activities of daily living or by cognitive impairment, certified by a licensed health care practitioner.

Group health insurance issues a master policy to the employer; employees receive certificates of insurance and are covered without individual evidence of insurability.

Group underwriting focuses on group size, participation percentage, and employer contribution level; larger groups and higher employer contributions reduce adverse selection.

Eligibility commonly requires a probationary waiting period and being actively at work on the effective date before coverage begins.

Conversion privileges allow a terminated employee to convert group coverage to an individual policy without evidence of insurability, typically within 31 days.

COBRA applies to employers with 20 or more employees and provides up to 18 months for termination or reduced hours, 29 months for disability, and 36 months for dependents.

Coordination of benefits determines primary and secondary plans when a person has dual coverage; the plan covering the person as an employee is usually primary.

Employer-paid group life and health premiums are deductible to the employer and not taxable to the employee; employer-paid disability benefits received by an employee are taxable income.

Group term life coverage up to $50,000 is tax free; the cost of coverage above $50,000 is imputed income using IRS Table I rates.

Self-employed individuals may deduct 100% of health insurance premiums for themselves, their spouse, and dependents, subject to income limitations.