Due Diligence in Sales

Table of Contents

 

Chapter 1 Agent Ethics

7

 

“Suitable” defined

7

 

Adequate Communication Skills

8

 

Investment Vehicles / Why is Ethical Conduct Necessary?

9

 

Is it possible to teach ethical behavior?

10

 

What is the scope of ethics?

13

 

What does it take to be a moral person?

14

 

    Provide quality work & services

15

 

    Creating a legacy

15

 

  Example #1

16

 

  Example #2

17

 

  Example #3

18

 

  Example #4

19

 

What are our responsibilities to other moral persons?

20

 

Required Continuing Education

22

Chapter 2 Client Contact

24

 

Insurance Producer Qualifications

25

 

Setting Appointments

26

 

At the Door

27

 

Adequately Explaining Policy Benefits & Limitations

29

 

      Minimizing misunderstandings

30

 

Policy Replacement

32

 

Product Misconceptions

33

 

When Premiums Seem too High to the Consumer

34

 

Client Signatures

35

 

Keeping in Touch Following the Sale

35

 

Commingling Insurance Funds

37

Chapter 3 Product Selection

38

 

Term Versus Cash Value Life Products

38

 

Amount of Coverage

39

 

What Length of Term Insurance?

39

 

Permanent Life Insurance Policies

40

 

Annuities

40

 

Sales Practices

43

 

      Product Replacement / Deceptive Sales Practices

44

 

      Full Disclosure / Product Knowledge

44

 

      Identifying Suitability Issues

45

 

      It is Not a Liquidity Issue But Rather a Suitability Issue

46

 

A Comprehensive Financial Plan

46

 

      Laddering investments

47

 

      Basic Information Requirements

48

Chapter 4 Product Costs

50

 

Adverse Selection

51

 

Purpose of the Insurance

54

 

Risk Categories

54

 

Life Insurance Death Proceeds

55

 

The Terms “Insurance” and “Assurance”

55

 

      Term Insurance

55

 

      Permanent Life Insurance

56

 

      Whole Life Insurance

56

 

      Universal Life Insurance

56

 

Life Insurance Surrender Charges

58

 

Taxation

60

 

Viatical Settlements

60

 

Annuity Costs

61

 

      Annual Variable Annuity Costs

61

 

      Less Risk – Lower Yields

62

 

      No-Load & Front Load Commissions

62

 

      Mortality Fees

63

 

      Investment Advisory Fees

63

 

      Implicit Interest Rate (i%)

63

 

      Delaying Annuitization when Interest Rates are Low

65

 

Equity Indexed Annuity Costs / Participation Rates

65

 

      Averaging

66

 

      Caps / Spreads, Margins and Administrative Fees

67

 

Annuity Surrender Values and Penalties

67

 

      Education Funding

68

 

      Ethical Responsibility

69

Chapter 5 The Application

70

 

Need for Insurance

71

 

Completing the Application

72

 

      Sample Application

73

 

Agent’s or Broker’s Report

77

 

Temporary Life Insurance Agreement and Receipt

79

 

Fair Credit Reporting Act Disclosure Statement

80

 

Fair Credit Reporting Act Disclosure Statement Sample

82

 

      Consumer Rights

83

 

Read and Understand Your Policy

85

Chapter 6 Beneficiary Designations

86

 

      Spendthrift Clauses

89

 

Competence Required

90

 

Minors as Beneficiaries

90

 

Primary Beneficiaries

90

 

      Community Property States

91

 

Secondary/Contingent Beneficiaries

92

 

Naming Multiple Beneficiaries

92

 

Beneficiary Changes

93

 

Divorce

94

 

Beneficiary Payout

95

 

      Updating Beneficiary Designations

96

 

Insurable Interest

97

 

A Company’s Insurable Interest

98

Chapter 7 The Issued Product

100

 

      The Insurer, The Insured, Insurance Contract

100

 

Underwriting & Rating

101

 

Financial Institutions

102

 

A Public Interest

102

 

Annuities

103

 

      Joint and Survivorship Annuities

104

 

      Guaranteed and Life-Time-Certain Annuities

105

 

      Level Annuities

105

 

      Capital-Back Guaranteed Annuities

105

 

      Escalating Annuities

106

 

      Inflation-Linked Annuities

106

 

      Enhanced Annuities

106

 

Annuity Terminology

106

 

Choosing Between Fixed and Variable Annuities

111

 

Lifetime versus Term Annuity Payout

111

 

      Annuitization Options

112

 

Financial Strength of the Insurer

114

 

Premium Protection

114

 

Cost of Living Protection

114

 

Principal Protection

114

 

Tax Efficiency

115

 

Supplementing Other Retirement Income

115

 

Reasons to Buy an Annuity

115

 

Reasons to Avoid Buying Annuities

116

 

Making the Right Annuity Choices

117

 

Fixed Rate Annuities

119

 

      How Fixed Period Annuities Work

119

 

Variable Annuities

121

 

      Funding Variable Annuities

122

 

      Variable Annuity Fees

122

 

      Variable Annuity Death Benefits

122

 

      Surrender Fees

122

 

      Gains in Variable Annuities are Taxed

123

 

Equity-Indexed Annuities

123

 

Determining Need for Life Insurance Products

123

 

Policy Provisions

124

 

The Insurance Contract

125

 

Basic Instruments

126

 

Policy Ownership

126

 

Preventing Money Laundering Activities

127

 

Terrorism Produces Insurer Risk

127

 

       Financial Action Task Force recommendations

128

 

Legal Requirements Adopted

128

 

Broker-Dealer Requirements

130

 

Anti-Money Laundering (AML) Program Requirements

131

 

Know Your Consumer (KYC)

134

 

       Compliance

134

 

       Suspicious Activity Reports Filing Requirements

135

 

A Change in Thinking

135

 

      A Global Problem

137

 

Covered Products

138

 

      Nine Identified Money Laundering (ML) Methods

140

 

Money Laundering Indicators Not Unique to Insurance Products

142

 

Policyholder Characteristics and Behaviors

143

 

      A Known Criminal or Criminal Associate or Relative

145

 

      Erratic or Abnormal Use of Policies

145

 

      High Premiums Compared to Verifiable Income

145

 

      Lack of Concern for Charges or Costs

146

 

      Undue Interest in Payout Options

146

 

      Repeated or Unusual Changes in Beneficiary Designations

146

 

      Insurance on Assets that Appear Inconsistent with Income

147

 

      Early or Suspicious Claims

147

 

Product Characteristics and Maintenance

148

 

Customer Due Diligence (CDD)

150

 

Policy Features and Provisions

152

 

Premiums

152

 

Policy Options

153

 

      Nonforfeiture Options

153

 

      Dividend Options

153

 

      Settlement Options

154

 

State Required Provisions

156

 

      Incontestability

156

 

      Misstatements in the Application

157

 

      Deferment Clause

157

 

      Nonforfeiture

158

 

      Loan Values

158

 

      Grace Periods and Reinstatement

159

 

Allowed Policy Provisions

159

 

      Suicide

159

 

      Aviation

160

 

      War

160

 

General Provisions

160

 

      Deduction of Indebtedness and Premium Refund

160

 

      Assignment

161

 

      Beneficiary Designations

161

 

Policy Payments

161

 

      Cash Values

161

 

      Dividends / Proceeds

162

 

      Special Clauses

163

 

Contract Use

164

 

Group Insurance Principles

165

 

Eligible Groups

165

 

      Single Employer Groups / Multiple Employer Trusts (MET)

165

 

      Unions, Associations and Other Groups

166

 

      Creditor-Debtor Groups

166

 

Group Underwriting Advantages

166

 

Keeping Current with Business Needs

167

 

The Informed Consumer

168

 

Providing a Quote

169

 

Key Person Insurance

171

 

Buy-and-Sell Agreements

171

 

The Key Person Principle

173

 

      Insurable Interest for Life Insurance

173

 

      Disability Insurance on Key Employees and Owners

175

 

The Small Company’s Exposure

176

 

      Loss of the Small Business Owner

177

 

Planning Ahead for Death or Disability

180

 

Private Insurers

181

 

Types of Coverage

182

 

      Property and Liability Insurance

182

 

Government Insurance

183

 

      Voluntary Government Insurance

183

 

      Compulsory Government Insurance

183

 

Mutual Companies

184

 

      Assessment Mutuals

184

 

      Non-Assessable Mutuals

187

 

      Conversions

187

 

Reciprocal or Inter-Insurer Associations

187

 

Stock and Mutual Underwriting

189

 

Factory Mutuals

189

Chapter 8 The Agent’s Role

191

 

The Sale is Completed

192

 

Policy Delivery

193

 

Customer Service Representatives

194

 

Types of Insurance Jobs

196

 

Claim Denial

197

 

Annual Coverage Reviews

199

 

Reviewing Disability Coverage

203

 

      Group Disability Plans

204

 

      Short Term Disability or Long Term Disability

204

 

      Individual Disability Benefits

205

 

Reviewing Long-Term Care Insurance

205

 

Yearly Client Contact

207

 

 

United Insurance Educators, Inc.

8213 – 352nd Street East

Eatonville, WA  98328

 

(253) 846-1155

 

www.uiece.com