Agents Licensing Course (ALC) Manual

FOUNDATION OF LIFE INSURANCE

 Income – is the recurrent flow of cash in exchange for service rendered or goods manufactured.

 Sources:
 Man at work
 Money at work
 Donations/Charity

 Definition of Life Insurance

Life Insurance is a unique legal contract which for a stipulated consideration called Premium,
insures the life of a particular person, called the Insured. Upon the insured’s death, the insurance company
(Insurer) agrees to pay a stated sum of money (Sum Insured) to the beneficiary.

 Value of Life Insurance

Life insurance contains solutions to the problem of protecting human life values against inevitable
economic loss through death, disability and old age.

 It is a pooling of risk;
 A cooperative risk sharing scheme;
 Group sharing of losses;
 Substitutes certainty for uncertainty and;
 Is family protection

Pure risk – a risk that involves no possibility of gain

Speculative risk - a risk that involves three possible outcomes:
 Loss
 Gain
 No change

 Purpose of Life Insurance

Insures the continuance of income despite life risks if - die too soon, be disabled or live too long.

 How Life Insurance Works

 Clean-up Fund – a fund to liquidate burial expenses, outstanding personal loans and illness
expenses.
 Life Income for the widow
 Education Fund
 Retirement Fund
 Emergency Fund
 Planned Insurance Estate

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 *** Insurance also contributes to the welfare of the country by:
 Accumulating capital for investment and commerce
 Partially relieving the community of the care of dependents
 Encouraging provisions for the future

 Tools in Insurance
 Principle of Large Numbers – a theory of probability that states that the more times a particular
event is observed, the more likely it is that the observed results will approximate the “TRUE”
probability that the event will occur.
 Mortality Table – Charts that display the incidence of death, by age among a given group of people.
 Life Expectancy – Number of years that the person will live on the average as shown by the
mortality table. (Female has longer life expectancy than male)
 Law of Probability – Estimate or predict the chances that a person will still be alive after a given
number of years

 Basic Life Insurance Terms

 Insured - person whose life is covered under a life insurance policy.

 Beneficiary – person who receives the life insurance proceeds upon death of the insured.
 Face Amount – the amount payable to the beneficiary, as stated in the life insurance policy upon
the death of the insured.
 Premium – money that must be paid regularly as stated in the policy to the insurance company to
keep the insurance policy in-force.
 Policy – the written contract between the insured and the insurance company.
 Policyowner/Payor – the person who owns and pay for the premium of the insurance policy.

 Basic Factors that Affects Premium

 Mortality Rates
 Mortality Table - Statistics of life expectancy, expected number of deaths per age
group.
 Law of Large Numbers – the more figures there are to study, the more likely it is
that our study will approximate the “true” probability of the event.
 Actuary – sets the premium rates and develops life insurance products.

 Interest on Investment
 Premiums are invested to earn interest
 Company assumes that investments earn a specific rate of interest.

 Safety Margin Requirement – money set aside by the insurance company to meet adverse claims

 Expenses or Loading - Overhead expenses incurred by an insurance company such as rent, salaries,
purchase of equipment, etc. It is computed and built into the Policyowners premium rate.

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  How premiums are determined
 Age
 Type of Plan
 Riders
 Amount of Coverage
 Sex/Gender
 Policy Fee

 Types of Premium

 Natural Premium – increases yearly with the rising rate of mortality.

 Level Premium – premiums remain at a constant level throughout effectivity of the insurance
policy.
 Single Premium – only one premium is required
 Graduated Premium – premiums that increases every year until 5th year then remains on that level
throughout the duration of the premium paying period
 Modified Premium – premiums that increases only on the 5th year of the policy then remains on
that level throughout the duration of the premium paying period.
 Fractional Premium – proportionate share of the annual premium
Formula : Annual Premium x Conversion Factor = Desired Modal Premium)

 Types of Premium Receipt

 Binding Premium Receipt – initial premium receipt that makes insurance coverage effective
immediately but only until the insurance company either rejects the application or approve it and
issues a policy.
 Conditional Premium Receipt – premium receipt given when the applicant pays the initial premium
and under which the life insurance will become effective before a policy is issued only if the
proposed insured is found to be insurable

 Reserves – the sum of money which will enable the company to pay all its policy claims or maturity.

 Types of Reserves
 Legal Reserves – fund set up by insurance company as required by law to the claims that may arise.
 Policy Reserve – the proportionate share of the policy to the legal reserve
 Contingency Reserve – fund set by the insurance company from the surplus to meet unexpected
and unfavorable claims that may arise

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 BASIC PLANS
 Policies according to line
 Individual – issued to individual applicants
 Industrial – premiums are payable daily, weekly or monthly
 Group – several individuals are insured under one master policy
 Universal Life – coverage depends upon the amount of premium and investment performance of
the insurance company

 Basic Plans

 Permanent – Whole Life – provides lifetime protection (age 100) at a level rate, it contains a
savings element (cash values) and matures at age 100 of the insured.

 Ordinary Life – payable up to age 100

 Limited-Pay Life – payable up to a certain number of years only
 Permanent-Endowment – provides protection at a specified future time or age and matures at the
end of the coverage period (before age 100). Rapid build-up of cash values.

 Regular Endowment - payable throughout the coverage period

 Limited-Pay Endowment – payable up to a certain number of years before the
coverage period expires
 Term Plans – provides death benefit if the insured dies during a specified period or age, it does not
accumulate cash values. It has renewability and convertibility feature. It gives the highest amount
of insurance protection with the least amount of premium.

 Level Term – provides death benefit that remains the same over the period of
coverage
 Decreasing Term – death benefit decreases in amount over the period of coverage

 Surplus Distribution (dividends)

 Participating – a type of policy wherein the policyholder receives policy dividends
 Non-Participating – a type of policy wherein the policyholder does not receive dividends

 Dividend Options
 Cash Payment
 Premium reduction
 Accumulate at interest
 Buy paid-up addition
 Buy a renewable term insurance

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 RIDERS
 Definition of Riders

Also known as supplementary contracts, riders are attached to a basic policy to provide additional
benefit not offered by the basic policy. The coverage is up to a specific age or upon the policy’s full payment.

 Types of Riders

 Waiver of Premium
 Premiums due are waived upon insured’s total and permanent disability
 Total and Permanent Disability – prevents the insured from performing any gainful
occupation, employment or business for which he is fitted by education or training
 Requires a waiting period of 6 months
 Exclusions:
- Self-inflicted injuries
- Combat activities
 Payor’s Benefit
 In the event of the payor’s death or disability, premiums due will be waived up to policy
maturity or up to age 25 of the child whichever comes first
 Attached only to a juvenile policy
 Accidental Death Benefit
 Pays an additional amount if the insured dies due to an accident
 Death must occur within 90 days from the date of accident
 The benefit ceases upon policy’s full payment

 Term Rider
 Usually a 1 year, 5 year or 10-year plan attached to a permanent policy
 Greatly increases the benefit or coverage with minimal additional premium
 Family Income Rider
 Guarantees monthly installments in addition to the face amount
 A modified decreasing term insurance

 Guaranteed Insurability Rider

 It allows purchase of additional policies without evidence of insurability

 Health Insurance Rider
 Daily Hospital Income Benefit
 Accident Reimbursement
 Critical Illness

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 RISK SELECTION
 Definition and Purpose of Underwriting

It is a systematic evaluation of an insurance applicant for the purpose of determining the

classification of risk for possible coverage.

All insurance companies practice risk selection or underwriting to maintain quality business and
prevent anti-selection.

 Underwriting Factors
 Physical:
 Age
 Built
 Condition
 Personal medical history
 Family history
 Occupational
 Financial
 Moral
 Avocation/Hazardous pursuits
 Residence/Travel

 Sources of Information
 Application Form
 Agent’s Confidential Report
 Inspection Report
 Financial Statements
 Medical Records
 Attending Physician Statement
 Medical Impairment/Information Bureau (MIB)

 Classification of Risks
 Standard
 Mortality is normal
 Average life expectancy
 Substandard or Rated
 Higher than normal mortality
 Shorter than average life expectancy
 Due to occupational hazards, illnesses, and/or unwise habits
 Declined
 Unacceptable risk due to poor health, extremely hazardous occupation
 Postponed – if 7 months pregnant or undergoing therapy

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  Anti-selection
Occurs when individuals with impaired health or with hazardous occupations and/or avocations becomes
keen to purchase life insurance.

LEGAL ASPECTS
 Life Insurance Contract

A contract whereby a party, for a consideration agrees to pay another a certain sum of money in the event
of the latter’s death from any cause not excepted in the contract, or upon surviving a specified period of time
or otherwise contingent of the continuance or cessation of life.

 Parties to contract

 Policyowner/Insured
 Must be at least 18 years’ old
 Must have sound mind

 Insurance Company/Insurer
 Registered with Securities and Exchange Commission and the Insurance Commission
 A corporation who holds a certificate of authority from the Insurance Commission to issue
insurance policies

a. Foreign –incorporated under foreign laws and whose respective home office is located
outside of the Philippines

b. Domestic –incorporated under Philippine laws and whose respective home office is
located within the Philippines.

Stock–derive capitalization from sale of stocks. The owners are stockholders

1. Mutual–Owned by Policyowner. The dividends that are realized by the company go to
the Policyowner.

 Insurer’s Representative:
 Insurance agent - Any person who for compensation, solicits or obtains an insurance on behalf of
any insurance company

 Insurance broker - Any person who aids in soliciting or negotiating the making of any insurance
contract or in placing risk on behalf of an insured other than himself.

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  Characteristics of Life Insurance Contract

 Unilateral Contract - Only one party (the insurer) makes a legally enforceable promise.

 Aleatory Contract - Values exchanged (premiums Vs. Benefits) are not necessarily equal. The
insured may receive more than what he has given.

 Contract of Adhesion - The terms and conditions of the contract are drafted only by one party (the
insurer).

 Conditional Contract - The insurer’s obligations and promises describe in the contract are subject
to certain conditions (i.e. exclusions, liens).

 Contract of Utmost Good Faith - Each party must depend on the utmost good faith of the other
concerning the risk to be transferred.

 Valued Contract - An agreement to pay a given amount on the occurrence of a stated contingency
or survival after a specified period. No indemnity is attempted because nobody can place a
monetary value on life.

 Elements of Contract

 Obligation - The insurer is obliged to pay the proceeds if all conditions in the contract have been
met by the insured.

 Consideration - The sum of money given by the insured as a consideration for the insurer’s promise
to pay in the event of a contingency or after a specified period.

 Contingencies - The contingencies in a life insurance contract are DEATH, OLD AGE and DISABILITY.

 Legal Purpose - Life insurance as a contract affect public interest. Therefore, the object or legal
purpose of the contract must be in accordance with the provisions of the law.

 Mutual Consent - Both parties agreed to enter into a contract, accepting each other’s rights,
limitations and obligations as specified in the policy.

 Insurable Interest - Is the relationship that exist where one suffers (financially) in the destruction
of the other, or continually gains from the existence of the other.

 Beneficiary According to:

 Priority

 Primary - Has priority over the death proceeds of the policy

 Secondary / Contingent - The beneficiary who will receive the death proceeds if
the primary beneficiary (ies) predeceases the insured and no other primary
beneficiary is named

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  Estate - Becomes the beneficiary if there are no persons named as beneficiaries or
if there are no more living primary nor contingent beneficiaries
 Right

 Revocable - A beneficiary whose right in the policy are subject to the insured’s
reserved right to change, or add more beneficiaries or to do anything else with the
policy even without the beneficiary’s consent.

 Irrevocable - A beneficiary who has vested right to the proceeds of the policy and
therefore, the policyowner cannot exercise his rights over the policy without the
written consent of his beneficiary.

 Estate Taxes - Tax levied on the transfer of ownership from the deceased property owner to his heirs. The
death proceeds being subject to estate tax depends on the beneficiary designation.

 Taxes in Insurance

 Death Proceeds - It is not subject to income tax, because it is not considered as INCOME. But if the
proceeds are left to earn interest, the interest earnings will be deemed as income and therefore
taxable.

 Maturity Proceeds - Any amount in excess of the total premiums paid are considered income and
therefore taxable.

POLICY PROVISIONS

 Entire Contract Clause

Provision states that the policy along with a copy of the application form constitutes the entire
contract. Made up of the APPLICATION FORM, ENDORSEMENT and the POLICY

 Effectivity of the Policy

WHILE THE INSURED LIVES, the life insurance contract becomes effective only upon:

 Approval and delivery of the policy

 During the lifetime and good health of the insured

 Upon payment of the first premium in advance

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 Ownership Provision

A Policyowner has the right to:

 Assign
 Amend
 Change beneficiaries
 Collect cash values and/ dividends
 Exercise all allowed options

 Premium Payment
Policyowner binds the insurance company to its promise – to pay upon death of the insured, the face
amount of the policy as a death benefit to named beneficiary – through the payment of premiums.

 Modes of Premium Payment;

 Annual
 Semi-Annual
 Quarterly
 Monthly
 Single Pay (Lump Sum)

 Modal Factor – a multiplying factor to determine the premiums charged for each mode of
payment.

 Grace Period – the insured has 30 days from due date to pay for his premium. The insured remains covered if
the insured dies within the grace period the face amount less the unpaid premiums will be given.

 Automatic Premium Loan – premium not paid beyond the grace period will automatically be paid by making a
loan against the cash value of the policy provided that there is enough cash value to cover the premium due.
Loan taken against the policy’s cash values are subject to interest to replace investment income.

 Policy Loan - Policyowner may be allowed to make a policy loan, but should not exceed nor equal the cash
value, dividends if any will not be affected.

 Assignment
 Partial or Collateral assignment (bank loans)
 Absolute or Complete assignment (transfer of ownership)

 Misstatement of Age - If the age of the insurance has been misstated, the amount of insurance will be adjusted
to the amount which the premium would have purchased at the correct age, applicable risk class and applicable
premium rates as of the policy date.

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  Incontestability Clause
WHEN THE INSURED DIES, provides that the policy and any claims can be contested by the insurance
company on the grounds of material misrepresentation or material concealment within 2 years from the date the
policy was issued or reinstated.

 Suicide Clause - Provides that if the insured commits suicide within 2 years from the date the policy was issued
or reinstated the company’s liability is limited to a return of premiums paid.

 Settlement Option
 Lump Sum
 Interest Option
 Fixed Period Option
 Fixed Amount Option
 Life Annuity Option

 Non-forfeiture Options
 Cash Surrender Value
 Reduced Paid-Up Insurance – cash values are used to purchase paid-up insurance (at the same
kind) but with a reduced face amount.
 Extended Term Insurance – purchase term insurance with same coverage but length of insurance
protection is shortened.

 Beneficiaries
 Insurable interest – exist when a Policyowner/beneficiary is likely to suffer financial loss if the
person who is insured dies. It should only exist upon the inception of the policy.

Examples:
 Ties of love and affection
 Creditor-debtor
 Key person insurance
 Business relationship

 Anyone may be designated as a beneficiary except those expressly prohibited by law to receive
donations.

Priority:
 Primary
 Secondary/ Contingent
 Estate

Rights:
 Revocable
 Irrevocable

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 Lapsation
 Non-payment of premium

 Loan + Interest exceeded the cash value

 Policyholder doesn’t value the insurance policy

 Reinstatement - Provides for a revival of a lapsed policy, if the policy has not lapsed for more than 3 years,
subject to the following conditions:

 The policy has not been surrendered for cash or converted to Extended Term Insurance which has
expired.

 Satisfactory proof of insurability of the insured is given to the company.

 Payment of all overdue premiums and outstanding indebtedness with interest in advance equal to
12% compounded annually.

 Types of Reinstatement

 Pure or Straight – policyowner pays back all past due premiums plus interest due.
 Redating – a new premium will be charged to the policyowner based the new policy effectivity
year

ANNUITIES
 Annuity - A purchase of income with no insurance coverage

 Important Terms

 Annuitant – recipient of the annuity

 Vesting date – the date when the annuity income begins
 Accumulation Period – period calculated before vesting date

 Types of Annuities

 Single Premium
 Single Premium Deferred
 Installment Deferred

 How are annuities received?

 Straight Life - Provides an income for life and upon his death liability of the company ceases.

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  Life Income with Guaranteed Period - Provides life income to the annuitant with guaranteed
payment for a definite period

 Limited Installment - Provides payment for a definite period as specified in the contract.

 Refund Life - Provides life income to the annuitant with a guaranteed amount of payment equal to
the total payments made.

HEALTH INSURANCE
A type of insurance policy that provides protection against the risk of financial loss resulting from the
insured’s: sickness, accidental injury or disability.

INDUSTRIAL INSURANCE
 The face amounts are very small

 Sold by agents who go to the policyholder’s home to collect premiums, usually on a weekly or monthly
basis

 All industrial life policies have a built in accidental death benefit (granted at no extra cost)

GROUP INSURANCE

 Definition of Group Insurance

A type of insurance that provides protection for a group of individuals that was not formed for the
purpose of obtaining insurance.

A group can be employees within a company and may be classified according to location, pay,
duties, department, and length of service.

 Issuance of Group Insurance

 One Master Policy – Employer

 Enrollment Card – to signify intent of employee to join the group insurance

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  Certificate of Coverage
 Non-contributory – only the employer pays the insurance
 Contributory – employer and employee shares in paying premiums

 Conversion Privilege

 Usually 31 days
 From group coverage to an individual policy
 Premiums apply to their age at the time of conversion
 No proof of insurability is required

 Group Insurance provides:

 Group Yearly Renewable Term Insurance (GYRT) - It is the most common type of group insurance
in Philippines and has the least initial cash outlay, but premiums tend to increase every time policy
is renewed.

 Group Medical Insurance

 Group Permanent Insurance

 Group Creditor’s Life (mortgage insurance)

 Group Retirement

 Characteristics of Group Policies

 Covers death of employees regardless of cause except for suicide during the 1 yr or 2 yrs.

 Enrollment cards are used instead of application forms.

 Every member of the group should be working for a minimum of 30 hours per week.

 Certificate of Insurance are issued to the individual members and 1 Master Policy to the
representative of the group (employer).
 Most group policies are on a yearly renewable basis.

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 INVESTMENT IN LIFE INSURANCE

 Sources of Income

 Premiums
 Investment

 Types of Investment

 Bonds - Represent a promise on the part of its ISSUER to repay the borrowed sum of money (the
principal) to the BONDHOLDER (the investor) at a stated time in the future (the maturity date) and
to pay interest to the bondholder at a specified rate (interest).

 Mortgage Loans - Is a legal instrument under which the property pledged can be claimed by the
lender if the borrower cannot repay the loan on the due date.
Note: Loanable value is 70% of market value

 Stocks - Certificate of ownership of a company

 Common stockholder

o Has voting rights

o Share in the profits
o Share in the distribution of assets upon liquidation

 Preferred stockholder

o No voting rights
o First priority in dividends & distribution of assets upon liquidation

 Real Estate

 Buys or builds properties

 Acquires real estate through foreclosure of properties or mortgage

ETHICAL STANDARDS

 Capitalization Requirements

 P100M, P75MPaid-up and P25M for surplus

 Reserve requirement

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  Company loan - Must not exceed 70% of market value of such real estate

 Margin of solvency - Must not be less than P500,000

 Public Interest
 Supervision of Insurance Industry by the Insurance Commission

 If an agent develops a large number of satisfied clients

 If a company insists upon its agents working to high standards of performance and integrity

 Client’s Interest

 Observes the “golden rule” in conducting a sale.

 Does not recommend a plan because it has the highest commission rate

 Does a complete Needs Analysis before offering a plan?

 Maintains a “Fiduciary Relationship” such as with a Broker and a Potential Investor

 Unethical Practices

 Knocking - Making derogatory remarks against competitors.

 Overloading - Selling more insurance than what is warranted by a client’s resources.

 Alteration - Altering an application without the written approval of the applicant

 Misrepresentation - Giving false or misleading statements about the product, company, services,
and himself (credentials).

 Material concealment - Considered to be material if the insurance company would have altered
its risk appraisal decision had the truth been known

 Other Facts
 Orphan Policyowners - are good source of prospects and new sales.

 Quality Business - are policies which are persistent and demonstrate good mortality experience.

 Conservation of Life Insurance Policy - is dependent on the quality of agent’s prospecting habits,
the use of effective needs selling, agent’s service oriented attitude and pressure selling.

 Record Keeping - is essential for agents who sell all life and health insurance.

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