Life, Accident and Health Insurance in the United States

Life, Accident and Health Insurance in the United States

2nd Edition

CAL-STATE EXAMS

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TABLE OF CONTENTS

LIFE, ACCIDENT AND HEALTH INSURANCE IN THE U.S.

LESSON ONE — POLICY PROVISIONS, OPTIONS AND BENEFITS

Life Insurance: Mutual Assent - Mental Competence - Consideration - Lawful Purpose - Obligations and Duties of a Life Insurance Agent - Entire Contract Clause - Insuring Clause - Free Look Provision - Consideration - Policy Owner's Rights - Insurable Interest - Beneficiary Designations - Modes of Premium Payment - Grace Period - Automatic Premium Loan Provision - Reinstatement - Policy Loans - Nonforfeiture Options - Dividends - Dividend Options - Guaranteed Insurability Benefit - Incontestable Clause - Assignments - Suicide Clause - Misstatement of Age Provision - Settlement Options - Payor Clause - Waiver of Premium Provision - Accidental Death Benefit - Dismemberment Provision - Conversion Option - Representation - Warranty - Accident and Health Insurance: Insuring Clause - Free Look Provision - Probationary Period - Deductible - Elimination Period - Co-insurance - Preexisting Conditions - Renewability Provisions - Waiver of Premium Provision - Exclusions - Mandatory Uniform Policy Provisions - Optional Uniform Policy Provisions.

LESSON TWO — TYPES OF INSURANCE POLICIES AND COVERAGES

Life Insurance: Endowment Insurance - Term Insurance - Whole Life Insurance - Universal Life Insurance - Family Policies - Annuities - Accident and Health Insurance: Disability Income Insurance - Business Overhead Expense Insurance - Business Health Insurance - Accidental Death and Dismemberment - Medical Expense Policies - Hospital Expense Policies - Surgical Expense Policies - Hospital Indemnity Benefit V Medicare - Medicaid.

LESSON THREE — GROUP INSURANCE, TAXATION, RETIREMENT

Life Insurance: Third-Party Ownership - Group Life Underwriting - Group Life Conversion Privileges - Standard Policy Provisions - I.R.A.s - Keoghs - Tax Sheltered Annuity Retirement Plan - Social Security - Life Insurance Taxation - Accident and Health Insurance: Characteristics of Group Health Insurance - Basic Forms of Group Health Insurance - Dependent Coverage - Principal Kinds of Group Health Insurance - Underwriting Process - Costs - Occupational vs. Non-occupational Coverage - Total, Partial and Residual Disability - Blue Cross-Blue Shield Plans - Health Insurance Taxation.

LESSON FOUR — BUSINESS INSURANCE

Qualified and Unqualified Retirement Plans - Buy-Sell Agreements - Salary Continuation Plans - Split Dollars Plans - Key Employee Insurance.

LESSON ONE: POLICY PROVISIONS, OPTIONS AND BENEFITS

LIFE INSURANCE

What requirements must be present for an insurance contract to be binding on the parties?

The following requirements must be present for an insurance contract to be binding:

(1) There must be a manifestation of mutual assent to the terms of the contract by each of the parties to the contract;

(2) The parties to the contract must have the legal capacity to make a contract;

(3) The parties to the contract must exchange legal consideration; and

(4) The contract must be for a lawful purpose.

Mutual assent. Whether a contract is made by the parties signing a written agreement or by two parties shaking hands, the parties involved have agreed to something. Such mutual agreement is the basis for the legal requirement of mutual assent. Mutual assent presumes that one party has made an offer and that the other party has accepted it. If the parties have not manifested mutual assent to the promises and terms of the agreement, no legally enforceable contract can exist. Manifestation of assent means that any reasonable person would conclude that there was agreement between the parties involved.

For insurance policies, as well as for other contracts, the requirement of mutual assent is met by the existence of the process of offer and acceptance. In the life insurance, however, several variables must be considered in determining who is the offeror — the one who has made the offer — and who is the offeree — the one to whom the offer has been made.

Legal capacity. In order for a contract to be binding on all parties, the parties must have the legal capacity to make a contract. This requirement, when applied to insurance contracts, means that the insurance company has the legal capacity to issue the policy and that the applicant has the legal capacity to purchase the policy.

Except as otherwise contrary to state laws, contracts made by minors are voidable only at the option of the minor. A minor is a person who has not attained the legal age to make a contract. The legal age to make a contract is called age of majority. While the age of majority is 18 in most states, the age of majority for the purpose of making insurance contracts and exercising policyowners' rights generally is age 16; in most such situations, however, the beneficiary of such a policy must be a member of the minor's immediate family.

Mental competence. If a contract is made by a person who was mentally incompetent at the time, but who had not been declared legally incompetent by a court, then the contract is voidable by that person. If the person later regains mental competence, he or she may either reject the contract or require that it be carried out. The other party to the contract does not have the right to reject the contract and must carry out its terms if required to do so. However, a contract is void from the start if the contract is made by a person who has been declared legally incompetent and has a court- appointed legal guardian.

Consideration. In order for an informal contract to be considered legal, the parties to the contract must exchange consideration; that is, each must give or promise something that will be of value to the other party. The application and the initial premium are given by the policyowner as legal consideration for the life insurance contract. This consideration is given in return for the insurer's promise to pay the benefit if the insured should die while the policy is in force. If the initial premium is not paid, then a valid contract has not been formed between the applicant and the insurance company because the applicant would not have provided the required consideration. Renewal premiums, which are premiums payable after the initial premium, are a condition for continuance of the policy and are not consideration for the policy.

Lawful purpose. No contract can be made for a purpose that is illegal or against public interest; thus, a contract must be made for a lawful purpose. The courts will not enforce an agreement in which one person promises to perform an illegal act. For example, unless there are statutes to the contrary, gambling agreements are not enforceable by law. (The requirement of a lawful purpose in the making of a life insurance contract is fulfilled by the presence of an insurable interest, as the primary purpose of all insurance is to protect against financial loss, rather than to provide a means of possible financial gain.)

OBLIGATIONS AND DUTIES OF A LIFE INSURANCE AGENT

What are the obligations and duties of a life insurance agent?

An agent is a person who acts for another in contractual dealings with third parties. The essence of agency is power. The agent has the power to subject the principal to contractual liability and to create contractual rights for the principal. Acts of the agent within the scope of the agent's power are acts of the principal. Knowledge of the agent is generally considered to be knowledge of the principal where the knowledge concerns the business transacted by the agent for the principal. A person must have contractual capacity to be a principal, but an agent need not have contractual capacity. Corporations can be principals or agents. Partnerships can be agents.

An agency relationship can be created by an express or implied grant of authority to the agent by the principal. Apparent authority also creates an agency relationship. Apparent authority results from the conduct of one person which causes a third person reasonably to believe that a purported agent has authority to contract for the first person (the principal). Finally, an agency relationship can be created by ratification. Ratification is the validation of an unauthorized act by the person on whose behalf it was purported to be done (the principal). An effective ratification binds the principal exactly as if the agent had acted according to the principal's directions.

A principal can limit the agent's authority. Proper limitations, properly communicated to third parties, will be binding on the third parties.

The agent is fiduciary with duties of loyalty and obedience toward the principal. The agent also has a duty to carry out the agency with reasonable care and skill. The principal can take legal action against an agent who violates his or her agency duties.

The principal has a duty to provide the agent with an opportunity to work in some instances. In most instances, the principal has a duty to compensate the agent and to keep accounts of what he or she owes the agent.

The principal is liable to a third person if a contract made by the agent with the third person was within the agent's power. The principal also has the right to enforce the contract against the third person. A principal has a cause of action against a third person who knowingly induces or assists the agent to violate fiduciary duties.

A person who represents that he or she is an agent, when such is not the case, will be liable for harm resulting to a third person to whom the misrepresentation is made. An agent will also be liable for other misrepresentations made to third persons.

An agent's actual authority can terminate by agreement of principal and agent, by an action of the principal or of the agent, or by operation of law. Death of the principal generally terminates the agency. Death of the agency always terminates the agency. The principal's loss of contractual capacity or the agent's loss of a necessary license will cause the agency to terminate. Bankruptcy of principal or agent can also cause the agency to terminate. When an agency terminates, all rights to act for the principal are lost, but the agent has the duty to account to the principal for actions taken prior to the termination.

What does the Entire Contract Clause provide?

The entire contract clause provides that the policy itself and the application, if a copy is attached to the policy, constitutes the entire contract between the parties. The clause also provides that all statements made by the insured in applying for a policy shall, in the absence of fraud, be deemed representations and not warranties, and no statement made by or on behalf of the insured shall void the policy or be used in defense of a claim thereunder, unless it is contained in the application and a copy is attached to the policy when issued.

What is the Insuring Clause of a life insurance policy?

In life insurance, the insuring clause simply states that the insurer (naming it) insures the insured (naming him or her) for a stated amount of insurance to be paid to the beneficiary(s) (naming it or them) upon receipt of due proof of death of the insured.

Explain the Free-Look Provision.

The insurance statutes of most states generally require a free look provision for life insurance contracts. Not all states are uniform with respect to the wording of this provision, although California has a reasonably understandable definition:

"Every individual life insurance policy with a face value of $10,000 or less must provide that the insured or applicant may return the policy within 10 to 20 days of delivery for full premium refund if not satisfied with it for any reason. A policy so returned to the company or its agent is considered void from the beginning. California law allows this provision to be liberalized, but in no case may the time involved exceed 20 days.

The free look privilege typically does not extend to single-premium or non-renewable contracts.

What does the term consideration mean?

Consideration may be defined as the price given or asked in exchange for a promise. It is a technical requirement growing out of the fact that the law will not generally enforce a promise unless the promise has given something of value in exchange for it. Life insurance policies frequently state that the insurance is granted inconsideration of the application and payment of the premium. This is generally held to mean payment of the first or initial premium. In the language of the law, this is adequate consideration. It puts the insurance into effect and thus is the price the promissor bargained for and was willing to accept.

What is meant by policy owner rights, with respect to a life insurance policy?

A life insurance contract consists of a bundle of many rights and the person who can exercise those rights during the lifetime of the insured is the owner of the policy.

Some of the most common ownership rights are the right to designate a beneficiary and to select settlement options for the proceeds; the right to make an absolute assignment or name another owner; the right to make policy loans or to assign the policy for collateral purposes; the right to surrender a policy and receive the cash surrender value; the right to receive proceeds at maturity of an endowment; the right to select dividend options and receive dividends; and the right to select the nonforfeiture provisions to be operative upon non-payment of premiums.

What is insurable interest in life insurance?

In life insurance, insurable interest appears under two major situations: (1) where one applies for insurance on his or her own life, and (2) where one applies for insurance on the life of someone else. It is sometimes said that person has an unlimited insurable interest in his or her own life. Respectively, it is said that the insurable interest requirement does not apply in this situation.

Regardless of the reason, an application for insurance on one's own life does not usually present a problem. When one applies for insurance on the life of another for his own benefit, however, he or she