Life and Disability Playbook

Definitions and Terms

Regulation of the Insurance Industry

Paul vs. Virginia (1789)
This landmark court case established that insurance regulation falls under the jurisdiction of individual states.

Southeastern Underwriters Decision (SEU) (1944)
This court ruling shifted the regulation of insurance from the states to the federal government.

McCarran-Ferguson Act (1945)
This legislation reversed the SEU decision, returning primary regulatory authority over insurance to the states, while the federal government oversees certain areas, such as the handling of private, personal information.

Ethical Conduct
In addition to government regulation, the insurance industry also engages in self-regulation, particularly in areas related to ethical conduct.

Insurance Code/Laws/Statutes

State laws regulate insurance through the creation of Departments of Insurance. These laws are known by various names, including the Insurance Code, Insurance Laws, State Statutes, or State Insurance Laws.

In most states, the Insurance Code is divided into five major sections. Some states also have a Code of Regulations, which consists of rules and regulations set or amended by the Insurance Commissioner or Director to clarify the intent of the insurance laws.

There are approximately 20 classes or types of insurance available to the public. Examples include life, fire, marine, and disability insurance. Note that annuities are not classified as insurance.

Insurance Commissioner/Administrator/Superintendent/Director

The Insurance Commissioner (or equivalent title) may be elected by the public or appointed by the Governor, depending on the state. You can review your state’s specifics to understand how this process works.

  • Typically, the Commissioner is allowed a maximum of two four-year terms.
  • If the Commissioner resigns, dies, or becomes disabled, the Governor appoints an interim Commissioner.

The Commissioner enforces insurance laws and statutes but does not have the authority to change them—only the legislature can make changes. If someone violates insurance law, the Commissioner may impose monetary and administrative penalties.

Key Terms for the Exam:

  • “Shall” = Mandatory
  • “May” = Permissive

National Association of Insurance Commissioners (NAIC)

The NAIC consists of all state insurance department leaders, who collaborate to create model laws. These are not enforceable laws but guidelines designed to promote uniformity in insurance regulation across states. This ensures that provisions and procedures are similar, regardless of the state where insurance is sold.

Examples of NAIC Model Laws:

  • 12 mandatory provisions for individual health policies
  • 11 optional provisions for individual health policies
  • 14 Medicare Supplement plans that may be offered

Person

A “person” refers to any legal entity, such as a natural person, association, corporation, partnership, business trust, or organization.

Natural Person
An individual human being.

Insurance

A contract where one party agrees to indemnify another against loss, damage, or liability arising from a contingent or unknown event. On the exam, the key term to look for is “contract.”

Insurance is designed to restore an individual to their financial position before a loss occurred. Unlike most contracts, which do not need to be in writing, insurance contracts must always be written.

Indemnity

Indemnity is the process of restoring someone to the condition that existed before a loss. When a claim is paid, the insured is “indemnified.”

Insurable Interest

To purchase insurance, you must have a legitimate economic or financial interest in the life or property insured. If that life or property suffers a loss, you must be financially affected.

Examples:

  • You can insure your own house because its loss would affect you financially, but you cannot insure your neighbor’s house.

In property and casualty insurance, insurable interest must exist at the time of both the application and the loss. In life and health insurance, it only needs to exist at the time of application. The beneficiary is not required to have insurable interest.

Law of Large Numbers

The principle that combining large numbers of similar risks increases the predictability of future losses. This concept underpins insurance by allowing companies to estimate future losses based on past data.

The law of large numbers does not predict individual losses or profits but helps assess group risk using tools like mortality and morbidity tables.

Loss

A reduction in the quantity, quality, or value of an asset. Losses can result from property damage, liability, or personal injury, and typically involve financial costs to remedy the damage.

Inside Limit

A policy provision that imposes a specific limit on a certain type of loss within the overall policy maximum.
Example: A major medical insurance policy may have a $6 million lifetime limit, but only $10,000 of that can be used for chiropractic care.

Risk

Risk refers to the uncertainty of a loss occurring. Insurance only covers pure risk—the possibility of loss with no chance of gain, such as the risk of a car accident.
Speculative risk, which involves the potential for loss or gain (e.g., gambling), is not insurable.

Methods of Risk Management

  • Sharing (co-insurance/re-insurance)
  • Transfer (buying insurance)
  • Avoid (taking action to prevent risk, like not building a pool)
  • Reduce (mitigating risk, like putting up a fence around a pool)
  • Retain (self-insuring or choosing not to buy insurance)

Co-insurance and Cost-Sharing

Co-insurance involves sharing the cost of a claim, often in an 80/20 arrangement. After the deductible is met, the insured pays the smaller percentage, and the insurance company pays the larger percentage. Deductibles and co-insurance are both forms of cost-sharing.

Reinsurance

Reinsurance spreads risk between insurers. An insurer may “cede” part of a large risk to other companies to avoid being overexposed to one claim.

The Retention Limit is the maximum amount of risk an insurer can assume on a single policy.

If the coverage required exceeds this retention limit, the insurer must reinsure or share the excess risk with other insurance companies.

The original insurer that issues the policy and deals directly with the client is referred to as the ceding company. The arrangement between the ceding company and the reinsuring companies is called a reinsurance agreement or treaty.

Example: If an insurer’s retention limit is $1 million and they issue a $3 million policy, they might cede $2 million to two other companies, sharing the risk across all three insurers.

The agreement between the ceding company and the reinsurance companies is called a reinsurance treaty.

Types of Reinsurance:

  • Facultative Reinsurance: Typically found in property and casualty insurance. Reinsurers select which portions of a risk to cover.
  • Pro-Rata Reinsurance: Common in life and health insurance, where all reinsurers share the risk proportionally.

Peril

A peril is the direct cause of a loss, such as fire, explosion, or illness (e.g., cancer).

Hazard

A hazard increases the likelihood of a loss. Hazards are classified into:

  • Physical Hazards: Structural or tangible risks, like worn-out tires.
  • Moral Hazards: Behavioral risks, like dishonesty.
  • Morale Hazards: Careless or indifferent attitudes toward risk.
  • Legal Hazards: Risks involving excessive litigation or fraudulent claims.

Transacting Insurance

Transacting insurance involves four key activities:

  1. Solicitation: Marketing or advertising to attract prospects.
  2. Negotiation: Discussing policy terms and information with prospects.
  3. Execution: Completing the sale of a policy.
  4. Matters Subsequent: Servicing the policy after the sale, such as adding coverage.

Transacting insurance without a license is a misdemeanor, with penalties up to $10,000 ($50,000 for repeat offenses) and up to one year in jail.

Parts of a Contract (CLAC)

  1. Consideration: Exchange of value, usually money for a promise.
  2. Legal Purpose: The contract must aim to protect against a loss or not create a gain
  3. Agreement: Includes an offer and acceptance.
  4. Competent Parties: All parties must be legally competent (e.g., not minors or intoxicated).

Entire Contract Provision

The policy and the application together make up the entire insurance contract. Courts will review both if a claim dispute arises.

Parts of an Insurance Policy (TICE)

  1. Title Page/Policy Face: The first page, which lists parties, policy dates, and more.
  2. Insuring Agreement: Describes the type and scope of coverage.
  3. Conditions: Outlines the obligations of each party.
  4. Exclusions: Specifies what is not covered.

Parts of an Application

  1. General Information: Basic details about the insured, such as name and address.
  2. Medical Information: Health history of the insured.
  3. Agent’s Report: Additional information from the agent to the underwriter about the proposed insured.

Non-Medical Application

A non-medical application doesn’t always mean no medical exam is required. Simplified issue policies may include some basic health questions, with further underwriting if necessary.

Example: If an insurer’s retention limit is $1 million and they issue a $3 million policy, they might cede $2 million to two other companies, sharing the risk across all three insurers.

Here’s a refined version of the text:

Licenses and Related Topics

Producers
Individuals who sell insurance products. This includes life agents, insurance brokers, insurance solicitors, and more.

Insurance Agent

  • Represents or sells on behalf of an insurance company and earns a commission.
  • Must be appointed by an insurance company via an action notice of appointment.
  • Can transact all types of coverage except life and/or disability insurance.

Insurance Broker

  • Represents the client or acts on behalf of another person to secure coverage from, but not on behalf of, an insurance company. Brokers charge a fee for their services.
  • Must post a $10,000 bond.
  • Can transact all types of coverage except life and/or disability insurance.

Insurance Solicitor

  • A natural person appointed by one broker or agent.
  • Can transact all types of insurance except life and/or disability insurance.

Personal Lines License

  • Limited to selling personal lines insurance products.

Life Agent

  • Represents/appointed by the insurance company and is paid commissions.
  • Sells life and/or disability insurance.
  • Captive or exclusive agents represent only one insurer.
  • Independent agents may have exclusive contracts with many insurers.

Life and Disability Insurance Analyst

  • A fee-based consultant with expertise in life and disability insurance.
  • Must have a good reputation, pass a qualifying exam, and provide written agreements for services.
  • Analyzes a client’s insurance needs, expenses, and investments and gives advice on what type and how much insurance to purchase.

Administrator/Third-Party Administrator (TPA)/Administrative Services Only (ASO) Contract

  • Contracts with one or more insurers to collect premiums and pay claims for life, annuities, and disability coverage in the state.
  • Must have a Certificate of Registration as an Administrator.
  • Often used for self-funded insurance plans.

Managing General Agent (MGA)

  • Responsible for hiring, training, and terminating agents.
  • Must have an agreement with an insurance company.
  • Collects premiums from producing agents.
  • May have the ability to accept and decline risks.
  • May negotiate reinsurance contracts.

Excess or Surplus Lines Broker

  • Represents non-admitted insurance companies.
  • Deals with most risks that are not acceptable on the voluntary market.
  • Must post a $50,000 bond.

Special Lines Surplus Broker

  • Represents non-admitted insurers.
  • Deals with unusual and rare risks that are not acceptable on any other market.
  • Must post a $5,000 bond.

Insurance Adjuster

Assists in settling claims on behalf of an insurance company

Typically, an employee of an insurance company therefore does not need a license

Public Insurance Adjuster

Assists an insured in settling claims with an insurance company

Must be licensed

Exclusive Licenses

  • These include bail, title, or mortgage guarantee insurance licenses.
  • License holders may only sell the specific product associated with their license (e.g., a bail bonds licensee may only sell bail bonds).

Binder

  • An unconditional receipt for initial payment, typically good for 30–45 days (maximum 90 days).
  • Terminates when the policy is issued.
  • Only agents may bind coverage; brokers cannot bind coverage.
  • Binders are typically not used for life or disability insurance.

Covering Note/Conditional Receipt

  • A conditional receipt for initial payment, valid for 90 days and extendable for an additional 60 days (total of 150 days).
  • If a loss occurs while the conditional receipt is in effect, the loss will be covered if the insurer would have issued a policy under normal circumstances.

Tort

  • A legal wrong, excluding crimes and contract breaches.
  • Negligence, which refers to the failure to act as a reasonable and prudent person would, is the largest area of tort law.

Absolute Liability

  • Liability that allows compensation without regard to fault or negligence.

Assumption of Risk

  • Occurs when a person willingly engages in an activity despite knowing the risks involved.
  • Example: Skydiving, where participants acknowledge the potential danger (e.g., a parachute malfunction) and sign a waiver releasing liability.

Life Insurance Products

Fixed Products (General Account)

  • Term Life
  • Whole Life
  • Universal Life
  • Equity-Indexed Universal Life

Variable Products (Separate Account)

  • Variable Life
  • Variable Universal Life

Term Life

  • Provides pure death protection for a limited number of years (e.g., 1, 5, 10, 20, 30 years).
  • Death benefit can be level, decreasing, or increasing.
  • Premiums remain level during the term but increase upon renewal.
  • Has no cash value.
  • Typically less expensive initially.
  • May offer renewal, non-renewable, and conversion options.
  • Most company’s term policies are sold as renewable and convertible to offer more flexibility.

Whole Life

  • A permanent policy offering coverage for the insured’s “whole life” (or up to age 100 for exam purposes).
  • Fixed premiums and level death benefit.
  • Cash value earns a fixed interest rate and is invested in the insurer’s General Account.

Universal Life

  • Flexible premiums permanent insurance
  • Premiums are paid directly into the cash value.
  • Mortality and expenses are deducted from the cash value, with excess interest credited to the cash value at the end of the month.
  • Cash value earns interest at the current rate, with a guaranteed minimum (sometimes called the contract rate)
  • Offers a level or increasing death benefit.
  • Cash value is invested in the insurer’s General Account.

Equity-Indexed Universal Life (Indexed Universal Life)

  • Flexible premium permanent policy
  • Premiums are paid directly into the cash value.
  • Mortality and expenses are deducted from the cash value, with excess interest credited to the cash value at the end of the month.
  • Level or increasing death benefit.
  • Cash value is tied to a specific stock market index (e.g., S&P 500) with a guaranteed minimum return.

Variable Life / Variable Universal Life

  • Offers scheduled or flexible premiums.
  • Level or increasing death benefit.
  • Cash value is invested in a Separate Account, which is tied to stock market performance.
  • The client chooses the investments, with no guaranteed minimum return.
  • Illustrations are limited to a maximum 12% growth projection.

Graded Premium/Step-Rate Policy

  • Convertible term policy with a built-in conversion date.
  • Premiums increase annually for a set period, then level off.

Modified Life

  • Term policy with a preset conversion date to whole life.
  • Features lower premiums for the first 5–7 years, followed by higher premiums.
  • Designed for individuals that want permanent insurance but cannot afford it initially.

Adjustable Life

  • Face amount, premium, length of coverage, and type of coverage can be adjusted based on the policyholder’s needs and premium, using a money purchase concept.

Jumping Juvenile Policy

  • Whole life policy for a child with a small initial face amount.
  • Face amount increases fivefold when the child reaches adulthood, typically at age 21 or 25, without a medical exam or premium increase.

Joint Life (First-to-Die)

  • Designed for couples that want face amounts often over $1 million.
  • Coverage is on both lives and pays out on the death of the first insured.
  • Typically used for estate preservation.

Survivorship Life (Second-to-Die)

  • Covers two people on one policy.
  • The death benefit is paid after both parties die, not on the first death.
  • Generally less expensive than individual policies.
  • Used to leave a large face amount after both parties pass away.  Providing money to preserve the estate.

Family Protection Policy

  • Whole life coverage for the breadwinner, with term riders for family members.

Family Income Policy

  • Provides whole life coverage for the breadwinner with a decreasing term rider.
  • Designed for child rearing years.
  • The whole life pays a lump sum at the time of death.
  • The term rider provides payments should the insured die during the term period.

Family Maintenance Policy

  • Whole life coverage for the breadwinner with a level term rider (costs slightly more than a family income policy).
  • The whole life pays a lump sum at the time of death.
  • The term rider provides payments for a set number of years beginning at the death of the insured.

Mortgage Redemption/Protection

  • Decreasing term insurance designed to cover a mortgage.

Non-Forfeiture Options

When canceling a permanent policy, the policyholder can use the cash value for:

  • Cash Surrender Value: take the cash value as a check (may have tax implications)
  • Extended Term: use the cash value to buy a term policy with the same face amount as the original policy
  • Reduced Paid-Up Insurance: use the cash value to purchase a permanent policy with a smaller face amount.

In all cases, the original policy is forfeited and there is no more premium payments.

Dividend Options

Dividends, paid to policyholders of mutual companies, are not guaranteed. if paid, they can be used for:

  • Cash
  • Reducing premiums: any dividends paid are applied to the current premium
  • Accumulation at interest: dividends are paid into a savings account attached to the policy.  It earns interest to be used anytime.  The insured may add money to the account also.
  • Paid-up additions: the dividends are used to purchase more coverage.
  • Paid-up insurance: dividends are added to the scheduled premium to reduce/shorten the length of time to pay premiums.
  • One-year term insurance: used to buy a one-year term policy to offset a loan.  Thus leaving the beneficiary the full death benefit when a loan is outstanding.

Settlement Options

The default settlement is a lump sum, but other options include:

  • Interest Only: The face amount is left on deposit with the insurer.  Only the earnings are paid, the principle is never touched.
  • Fixed Period (Period Certain): proceeds are paid out over a set period of time, whether the insured lives or dies.
  • Fixed Amount (Amount Certain): a fixed amount is paid to the beneficiary until principle and interest are all exhausted.
  • Life Income (Straight Life): payments are paid to one beneficiary for as long as they live only.
  • Life Income with Period: Certain: pays until the end of the period or until the beneficiary dies, whichever occurs last.
  • Life Income with Amount Certain: pays a specific amount until the money runs out or until the beneficiary dies, whichever occurs last.
  • Joint and Survivor: paid to two beneficiaries and continues after one dies.
  • Joint Life: pays two beneficiaries, when one dies, all benefits end.
  • Joint and Last Survivor: provides payments to one beneficiary, when they die, then it makes payments to the secondary beneficiary until they die.
  • Temporary Annuity Certain: pay for a set period of time or until the beneficiary dies, whichever occurs first.

Riders

Additional charge for additional features to personalize the policy.

  • Waiver of Premium: waives the premium due to a disability (usually after a 6-month period)
  • Accelerated Death Benefit/Living Needs: usually no additional charge.  This can provide an advance on the death benefit due to a terminal illness that leaves the insured with 6-months to a year left to live.
  • Guaranteed Insurability: allows the insured to purchase additional coverage without a medical exam and certain ages, dates, or anniversaries.
  • Cost of Living: increases the death benefit/face amount of a policy to keep up with inflation.
  • Accidental Death Benefit (Double Indemnity): double the face amount is paid if the insured dies by an accident within 90 days of the accident from a direct result of the accident.  Some companies offer triple-indemnity riders.
  • Payor Benefit Rider: similar to the waiver of premium rider, except this is for a juvenile policy.  If the parent/policyowner dies or is disabled, this rider will waive the premium on the child’s policy until they reach age 21-25.  At that time the child can choose to keep the policy by now paying the scheduled premium.

Other Provisions

  • Absolute Assignment: transferring the ownership rights to another party.  This is a complete and total transfer of the ownership rights from one party to another.
  • Collateral Assignment: temporary/partial transfer of ownership rights.  Typically used to secure a loan or construction work done.  Using a portion of the death benefit as collateral.  Transfer for value rule may apply.
  • Transfer for value rule: if death benefit proceeds are used to pay a loan or secure work being done, they will be taxable as income to the recipient.  Generally, life insurance proceeds are income tax free to a beneficiary.  However, if they are used with a collateral assignment to pay a contractor for the work done, it is income for the contractor and therefore taxable.
  • Viatical Settlement/Life Settlement: Selling the policy to a third party for less than the death benefit.  Life insurance is an asset and can be sold for money in come cases.
  • Loans/Withdrawals: Policyholders can borrow against the cash value.
  • Grace Period: Typically 61 days for life insurance policies.
  • Lapse/Reinstatement: A lapsed policy may be reinstated within 3 years by submitting an application, past due premiums, interest, and a medical exam.
  • Automatic Premium Loan: Pays the premium from the policy’s cash value if the premium is overdue.
  • Spendthrift Trust Clause: can be stated to make sure the beneficiary receives the death benefit and not creditors of the beneficiary.

Succession of Beneficiaries

  • Primary: First in line to receive the death benefit.
  • Secondary (Contingent): Receives the benefit if the primary beneficiary predeceased the insured.
  • Tertiary: Third in line.

Uniform Simultaneous Death Act / Short-Term Survivorship / Common Disaster Clause

  • Protects the secondary beneficiary’s rights if the insured and the primary beneficiary die in the same accident within 90 days of the accident from a direct result of the accident.
  • If the insured dies, the proceeds are paid to the primary beneficiary.  Let’s say the primary beneficiary dies within the next three days.  The proceeds would then go to their estate.  The secondary beneficiary may get paid after unsecured creditors got paid.  With the common disaster clause in place, if the insured and the primary beneficiary die within 90 days of each other from the same accident, the proceeds of the policy would be paid to the secondary beneficiary.

Class Designations

For policies with multiple beneficiaries:

  • Per Capita: Divides benefits equally among immediate children.
  • Per Stirpes: Distributes benefits through generations, paying through gaps in the family tree if a beneficiary predeceases the insured.

Annuities

An annuity is a financial product offered by insurance companies that provides a series of periodic payments to an individual, typically as a form of income during retirement. The individual makes one or more payments into the annuity, either as a lump sum or over time (accumulation phase), and in return, the insurance company makes regular payments to the individual (annuitant) over a specified period or for the rest of their life (annuity phase).

Annuities can be classified by:

  • Payment Method: Immediate (payments start shortly after the premium is paid) or Deferred (payments start at a future date).
  • Investment Type: Fixed (provides guaranteed interest and payments), Variable (payments vary based on investment performance), or Indexed (linked to the performance of a stock market index).

Annuities are often used for retirement planning due to their ability to provide steady, predictable income and the benefit of tax-deferred growth during the accumulation phase.

Types of Annuities:

  • Fixed
  • Indexed
  • Variable

Accumulation Period (Paying In)

  • Single Premium: One lump-sum payment.
  • Flexible Premium: Multiple contributions over time.
  • Growth during this period is tax-deferred.

Annuity Period (Taking Out)

  • Immediate Annuities: Payments start after one payment period, typically within 1 year.
  • Deferred Annuities: Payments begin at a later date, such as retirement age.
  • Annuities are not designed for lump-sum payouts.
  • Gains are taxable based on the Exclusion Ratio (the portion of each payment that is taxable).
  • SPIA (single premium immediate annuity)
  • SPDA (single premium deferred annuity)
  • FPDA (flexible premium deferred annuity)
  • There is not such thing as a flexible premium immediate annuity.

Fixed Annuities

  • No securities license required.
  • Money is invested in the General Account of the insurance company.
  • The annuitant is guaranteed a minimum interest rate.

Equity-Indexed Annuities (Indexed Annuities)

  • Requires only a life insurance license.
  • Growth is tied to a stock market index, typically the S&P 500.
  • Insurance companies guarantee a minimum interest rate.
  • Various crediting strategies may be applied.

Variable Annuities

  • Requires both a Securities License and a Life License.
  • Money is invested in a Separate Account, with the owner selecting the investments.

During the accumulation period:

  • Growth is tax-deferred.
  • Accumulation units are purchased, but there is no guarantee of return.

During the annuity period:

  • The owner selects a settlement option.
  • Accumulation units convert to annuity units.
  • The number of annuity units remains constant during the payout period, though payment amounts may vary.
  • Payments are based on the Exclusion Ratio.

Qualified Plans

These plans offer tax-deductible contributions and taxable distributions.  They must be filed and approve by the IRS.  There can be no discrimination (anyone eligible must be allowed to be a part of the plan).

  • 401(k): Elective salary deferral for employees of for-profit companies.
  • 403(b): Elective salary deferral for employees of non-profit organizations (e.g., churches, schools, hospitals).
  • ESOP: Employee Stock Ownership Plan, where employees receive stock in the company they work for.
  • Profit Sharing: Employees share in the company’s profits.
  • Regular IRA: Contributions from earned income.
  • Keogh/SEP: Plans for self-employed individuals.
  • Simple IRA: Designed for small businesses with no more than 100 employees.

After-Tax Contributions with Tax-Free Distributions

  • 529 Plan and CESA: Savings plans for higher education.
  • Roth IRA: Contributions are made from earned income, with tax-free distributions.

Non-Qualified Plans

  • Deferred Compensation Plan: executive benefit, there may be discrimination (example: only executives or officers of a company)

Health Insurance Policies

Basic Medical Insurance

  • First Dollar Coverage: No deductible, but coverage is very limited.
  • Can be medical only, hospital only, surgical only, or packaged as a basic medical expense plan.
  • Hospital only pays a daily benefit due to hospital confinement, such as up to $500 a day.
  • Medical expense plans pay 10 to 20 times the daily hospital benefit towards medical care.
  • Surgical expense plans typically have a schedule of what is paid for each surgical procedure (relative value or relative value unit)

Major Medical Insurance

  • Includes deductibles, co-insurance, and stop-loss provisions.
  • Provides higher dollar limits and covers longer time periods, sometimes called catastrophe insurance.
  • Cost Sharing: Deductibles and co-insurance are part of the cost-sharing structure between the insurer and insured.

Different Deductibles

  • Calendar year deductible
  • Carry-over provision
  • Per-Cause deductible
  • Family deductible
  • Common accident provision/deductible

Supplemental Major Medical

  • Can be purchased to supplement a basic medical expense plan.

Comprehensive Medical Insurance

  • Combines basic and major medical coverage in one plan.
  • Includes a corridor deductible: this is a deductible that sits on top of the basic part of the policy that must be paid before the major medical portion kicks in.

Blue Cross (Hospital Care)

  • A service plan that covers hospital expenses.
  • Members are called subscribers.

Blue Shield (Medical Care/Doctor)

  • A service plan that covers medical and doctor expenses.

Multiple Employer Trust (MET)

  • A legal entity that allows employers to join together and receive better rates for group health insurance plans.
  • You cannot form a group just to get cheaper rates for insurance.  There must be a legitimate reason for the group exist.

Multiple Employer Welfare Arrangement (MEWA)

  • A program that allows employees with two or more part-time employers to seek and get group insurance.

Self-Funded Plan/Stop-Loss Contract

  • A high-deductible group health plan, typically administered by a Third-Party Administrator (TPA) or through an Administrative Services Only (ASO) contract.

Health Maintenance Organizations (HMO)

An HMO (Health Maintenance Organization) is a type of health insurance plan that provides healthcare services through a network of doctors, hospitals, and other healthcare providers. HMOs focus on preventive care and cost efficiency by requiring members to choose a Primary Care Physician (PCP) who acts as a gatekeeper, coordinating care and providing referrals to specialists within the network.

  • Capitation: A fixed payment per patient to providers.
  • Focuses on preventative care.
  • Uses a co-pay system.
  • Different models include the Group Practice Model (the HMO contracts with a group of doctors), Independent Practicing Physicians (the HMO contracts with individual practicing physicians), and the Staff Model (the doctors and physicians are employed by the HMO).
  • HMOs may be Closed Panel (members only) or Open Panel (anyone can seek care).
  • Limited to a defined geographical region called a service area.

Preferred Provider Organization (PPO)

A PPO (Preferred Provider Organization) is a type of health insurance plan that offers more flexibility in choosing healthcare providers compared to an HMO. In a PPO, members are encouraged to use a network of preferred doctors, hospitals, and other healthcare providers, but they have the option to seek care outside the network at a higher cost.

Key features of a PPO include:

  • In-Network vs. Out-of-Network Care: Members can choose to receive care from in-network providers at a lower cost, but they can also use out-of-network providers, though this typically involves higher out-of-pocket expenses.
  • No Primary Care Physician (PCP) Requirement: Unlike an HMO, PPO members are not required to select a primary care physician and do not need referrals to see specialists.
  • Co-Pays and Deductibles: Members may pay co-pays for visits and services, and they usually have an annual deductible that must be met before the insurance starts covering a higher percentage of costs.
  • More Flexibility: PPOs offer greater flexibility in choosing healthcare providers and accessing specialist care without referrals.
  • It’s cheaper to use in-network doctors, but coverage is available for out-of-network providers at higher costs.

Exclusive Provider Organization

  • Similar to a PPO in that there is a list of specialty physicians, however, an insured can only use in-network doctors.
  • Usually cheaper due to the limitation of doctors to use.

Taxation of Medical Insurance

  • If the employer pays premiums (tax-deductible), benefits are tax-free to the employees.
  • If the employee/individual pays the premiums (after-tax), benefits are tax-free.

Cafeteria Plans

A Cafeteria Plan, also known as a Section 125 Plan, is a type of employee benefits program that allows employees to choose from a variety of pre-tax benefits options. Under Section 125 of the Internal Revenue Code, employees can allocate a portion of their salary toward different benefits before taxes are deducted, reducing their taxable income.

Key features of a Cafeteria Plan include:

  • Pre-Tax Contributions: Employees can use pre-tax dollars to pay for eligible benefits, reducing their taxable income and thus lowering their overall tax burden.
  • Flexible Benefits Choices: Employees can choose from a menu of benefits, which may include health insurance, dental and vision coverage, life insurance, disability insurance, dependent care assistance, and flexible spending accounts (FSAs) for healthcare or childcare expenses.
  • Tax Savings: Employers also benefit from reduced payroll taxes because employee contributions are made before taxes.

Cafeteria Plans are named for their flexibility, as employees “pick and choose” from available benefits to customize their package based on their individual needs. However, once an employee chooses their benefits for the year, changes are usually only allowed during a qualifying life event or the annual open enrollment period.

Specified Disease/Dread Disease Policy

  • A limited policy that covers specific illnesses such as cancer or heart disease.
  • Cancer policies are the most common type.
  • Critical Illness Policy: Provides benefits for severe conditions like heart attacks or strokes.

Hospital Confinement/Income/Indemnity Policy

  • Pays a daily benefit while the insured is confined to a hospital.

Franchise Plan

  • Treated as individual policies but offers discounted premium rates for groups.  Usually offered by being part of an association that has negotiated a discount rate.

Blanket Policy

  • Provides coverage for a group or area (such as students or sports teams or campground), with no individual names listed on the policy.

Social Security (OASDI)

Social Security 6.20% and Medicare 1.45%

  • Provides benefits for Retirement, Survivors, Medicare, and Disability Income.
  • Eligibility:
    • Fully insured status: 40 credits (quarters).
    • Partially insured status: 20 credits in the last 40 quarters.
    • Specially insured or Currently insured: 6 quarters out of a 13 quarter period.

Retirement Benefits

  • 62 years of age = 80%

  • 65-67 years of age for full benefits depending on the year you were born

  • 60 years of age if widower (early retirement)

Survivors Benefits

  • Lump sum of $255 for burial
  • Income for your surviving spouse with minor children
  • Blackout Period begins when youngest child turns 16, ends when the surviving spouse turns 60

Disability Benefits

  • Most restrictive definition of a disability
  • Cannot perform any substantial, gainful work activity due to mental or physical disability
  • Expected to last at least 12 months or end in death
  • 5 month waiting period/benefits begin on the 6th full month of disability

Medicare Plans

  • Part A: Hospital coverage.
  • Part B: Medical coverage.
  • Part C (Medicare Advantage): Private insurers offering service plans (HMO or PPO).
  • Part D: Prescription drug coverage.

Medicare Supplements

  • Sold by private insurers to fill gaps in Medicare coverage.
  • Plans range from A–N.
  • Insurers must offer at least Plan A (core benefits).
  • 30-day free look period.

Medicaid

Medicaid is a joint federal and state program that provides healthcare coverage to individuals and families with low income and limited resources. It is designed to help those who cannot afford medical care, including low-income adults, children, pregnant women, elderly adults, and individuals with disabilities.

Key features of Medicaid include:

  • Eligibility: Medicaid eligibility is primarily based on income level, although other factors such as age, disability status, and family size can also affect eligibility. Each state sets its own guidelines within federal requirements.
  • Coverage: Medicaid covers a wide range of healthcare services, including hospital visits, doctor appointments, long-term care, prescription drugs, and preventive care.
  • Costs: Medicaid beneficiaries typically pay little to no out-of-pocket costs, although some states may charge small co-pays or premiums for certain services.
  • State Administration: While Medicaid is funded jointly by the federal and state governments, it is administered by each state, resulting in variations in eligibility and benefits from one state to another.

Medicaid is different from Medicare, which primarily serves older adults and people with certain disabilities, regardless of income. Medicaid is specifically targeted to assist low-income individuals.

  • For individuals under age 18 or over 65 with low income or those who are medically needy or medically indigent.

24-Hour Coverage

  • Combines workers’ compensation (for on-the-job losses) with health/disability coverage for off-the-job incidents.
  • Requires completion of an 8-hour course on workers’ compensation and employer liability.

Disability Income Insurance

  • For individuals with earned income.
  • Covers disabilities resulting from accidental causes, intentional or unintentional.

Types of Disability Definitions:

  • Own Occupation: Most liberal definition, covers inability to work in your specific job.
  • Any Occupation: More restrictive, covers inability to work in any occupation.
  • Social Security Definition: Most restrictive, covers inability to perform any substantial work.

Disability Types:

  • Presumptive Disability: Loss of sight, hearing, speech, or two limbs; full benefit is paid even if the insured finds other work.
  • Permanent: Lasts for life.
  • Temporary: Expected to recover.
  • Partial: Part-time disability.
  • Residual: Cannot earn as much as before the disability.
  • Recurrent: Relapse of a previous disability.

Taxation of Disability Income:

  • If the employer pays premiums, benefits are taxable to the employee.
  • If the employee pays the premiums, benefits are tax-free.

Long-Term Care (LTC) Insurance

  • Not for low-income or high-income individuals.
  • Offered through Individual Policies, Group Contracts, or as a rider on a life insurance policy.

Types of Care:

  • Institutional Care: Nursing home.
  • Home Care: Care provided in the home or community.
  • Comprehensive Care: Includes both institutional and home care, with home care covering at least 50% of nursing home benefits.

Levels of Care:

  • Skilled Nursing Care: 24-hour care in a facility.
  • Intermediate Care: Occasional nursing and rehabilitation.
  • Custodial Care: Non-skilled care by family members and/or friends.

Plans Offered:

  • Tax-Qualified: Federally regulated, requires inability to perform 2 of 6 ADLs (Activities of Daily Living).
  • Non-Tax Qualified: State regulated, requires inability to perform 2 of 7 ADLs.

Triggers for Benefits:

  • Inability to perform 2 ADLs or cognitive impairment (e.g., Alzheimer’s).

Types of Services:

  • Adult Day Care: Daily care for elderly while caregivers work.
  • Hospice Care: End-of-life care.
  • Respite Care: Short-term relief for primary caregivers.
  • Personal Care: Assistance with ADLs like eating, bathing, and dressing.
  • Homemaker Services: Includes cooking and cleaning.
  • Home Health Visits: Occasional visits from a home health aide.

Vision Care

  • Covers corrective vision care such as eyeglasses and contact lenses.
  • Does not cover surgeries, which fall under medical insurance.

HICAP (Health Insurance Counseling and Advocacy Program)

  • A toll-free information service for seniors to get unbiased advice on Medicare, Medicare Supplements, Senior HMOs, and Long-Term Care.
  • Well-trained volunteers provide information but do not sell or endorse products.

Legislature Regarding Health Coverage

Major Risk Medical Insurance Program (MRMIP)

  • A California state program funded by tobacco taxes.
  • There is a waiting list based on the date the completed application is received.
  • Annual deductible: $500
  • Out-of-pocket maximum: $2,500
  • Lifetime benefit cap: $750,000 per member.

Eligibility Guidelines:

  • Must be a California resident.
  • Not eligible for Medicare Part A or B.
  • Not eligible for COBRA or CAL-COBRA.
  • Pre-existing condition denial letter within the last 12 months.

Patient Protection and Affordable Care Act (PPACA)

  • Children are covered until age 26.
  • No pre-existing condition exclusions for children up to age 19.

PPACA Medal Plans

  • Bronze: Covers 60% of healthcare costs.
  • Silver: Covers 70%.
  • Gold: Covers 80%.
  • Platinum: Covers 90%.

California Health Benefits Exchange

  • Starting in 2014, individuals and small groups can compare and purchase health insurance in the private market.
  • Federal healthcare reform provides tax credits and subsidies to Californians with incomes between 133% and 400% of the federal poverty level.
  • Ensures that premiums are spent on healthcare costs, not on administrative costs or profits.
  • Insurers in large groups (101 or more lives) must spend at least 85% of premiums on clinical services and healthcare improvements, or provide a rebate to enrollees.
  • Insurers in small groups (up to 100 lives) must spend at least 80% of premiums on healthcare, or provide a rebate.

Pre-Existing Conditions Insurance Plan (PCIP)

  • Federal version of the MRMIP.
  • Temporary program, extended beyond December 31, 2014.
  • Premiums are lower than MRMIP.
  • Does not cover dependents (individuals 18 or older must apply for themselves).
  • No annual or lifetime maximum benefits.
  • No probationary period after enrollment.

Access for Infants and Mothers (AIM)

  • Low-cost health coverage for pregnant women.

Healthy Families Program

  • Low-cost health, dental, and vision coverage for children up to age 19, if their parents do not have group coverage.

Pregnancy Discrimination Act (PDA)

  • Any benefits offered to short-term disabled employees must also be provided to pregnant women.

Medical Loss Ratios (MLR)

  • The Affordable Care Act (ACA) mandates that health insurers in the individual and small group markets must allocate at least 80% of their premium revenues to clinical care and quality improvements. For the large group market, the Medical Loss Ratio (MLR) requirement is 85%.
  • Insurance companies that overcharge must return excess premiums to subscribers as rebates.

Americans with Disabilities Act (ADA)

  • Alzheimer’s disease is not considered a disability.
  • Obesity symptoms may qualify as a disability.

Family and Medical Leave Act (FMLA)

  • Provides up to 12 weeks of unpaid leave per year for qualifying reasons, such as:
    • Having or adopting a child.
    • Assisting a family member with long-term care needs.
    • Addressing personal medical needs (after using available sick or vacation leave).

Records to be kept

Life AgentsCopies of applications, informational records, financial records

5 years
Policy replacements

3 years
Advertisements

3 years
Life and Disability Analyst Agreements

3 years
Life Insurance Companies

5 years
Unfair Trade Practice Unwillful:  $5,000
Willful:  $10,000
Cease and desist order will be issued
Violation of a Cease and desist order Unwillful:  $5,000
Willful:  $55,000
License suspension up to 1 year
Agent engages in unnecessary Replacement of policies First offense:  $1,000
Subsequent offenses:  $5,000 – $50,000
Insurer violations First offense:  $10,000
Subsequent offenses:  $30,000 – $300,000

Fraudulent Claims

  • Submission of a fraudulent claim is classified as a felony, punishable by up to 5 years in prison and a fine of $150,000 or double the value of the fraud, whichever is greater.

Application for a License

  • A license application may be denied for cause based on a review of the applicant’s history over the past five years, with or without a hearing.
  • All administrative actions (including expunged records) must be disclosed on the application.
  • If any changes occur after submitting the application, they must be reported within 30 days.
  • A license can be suspended or revoked under similar conditions.
  • Immediate notification of any address change is required.
  • A license is valid for 2 years, with an additional 1 year grace period to renew with a 50% penalty fee.
  • 90 days prior to the renewal date, the Department of Insurance will send a notice outlining the required continuing education and the renewal fee.
  • As long as your renewal fee is paid and your continuing education is completed within the 2-year period, you may continue to transact for up to 60 days while waiting for the new license to be issued.
  • 24 hours of continuing education are required every 2 years.
  • A 3-hour ethics course is required as part of the 24-hour continuing education requirement for each licensing period.

Annuities:

  • An initial 8-hour annuities course is required for those offering annuities, followed by a 4-hour annuity course every licensing period thereafter.

Long-Term Care:

  • An 8-hour long-term care course is required for each licensing period if you offer long-term care insurance.

License Status

  • Active: Renewal fees are paid, continuing education is completed, and an appointment with a company is on file.
  • Inactive: Renewal fees are paid and continuing education is completed, but no appointment is on file.
  • Solicitation Prior to Appointment: An agent may solicit business prior to their official appointment, but the company must file the appointment within 14 days.

COBRA (Consolidated Omnibus Budget Reconciliation Act)

  • Applies to employers with 20 or more employees who offer group health coverage.
  • Allows for the continuation of health benefits only.
  • Individuals have 60 days to sign up after being notified.
  • COBRA is not available for individuals that are terminated for gross misconduct.
  • Coverage lasts for:
    • 18 months for termination or reduction in work hours.
    • 36 months for death of an employee, dependent child coverage, divorce, or legal separation.

CAL-COBRA

  • Similar to federal COBRA, but applies to small employers with 2-19 employees in California.
  • Termination for gross misconduct is a disqualifying event.

OBRA (Omnibus Budget Reconciliation Act)

  • 1989: Extends the minimum COBRA coverage period from 18 months to 29 months for certain qualified beneficiaries.
  • 1990: Allows seniors who sign up for Medicare Part B a 6-month window to purchase a Medicare Supplement policy without requiring evidence of insurability.

COB (Coordination of Benefits)

  • Prevents over-insurance when both spouses are covered by group insurance through their respective employers.

Abbreviation/Federal Acts

ADA                        Americans with Disabilities Act

AIM                         Access to Infants and Mothers

ASO                        Administrative Services Only

CCR                         California Code of Regulations

CIC                          California Insurance Code

COBRA                   Consolidated Omnibus Budget Reconciliation Act

DI                            Disability Income

ERISA                      Employee Retirement Income Security Act

FMLA                      Family Medical Leave Act

HICAP                           Health Insurance Counseling and Advocacy Program

LTC                          Long Term Care

MEC                        Modified Endowment Contract

MET                        Multiple Employer Trust

MIB                         Medical Information Bureau

MLR                        Medical Loss Ratios

MRMIP                   Major Risk Medical Insurance Program

NAIC                       National Association of Insurance Commissioners

OASDHI                  Old Age Survivors Disability and Health Insurance

OBRA                      Omnibus Budget Reconciliation Act

PCIP                        Pre-existing Conditions Insurance Plan

PDA                        Pregnancy Discrimination Act

PPACA                    Patient Protection and Affordable Care Act

TAMRA                   Technical And Miscellaneous Revenue Act

TEFRA                     Tax Equity Fiscal Responsibility Act

TPA                         Third Party Administrator