Back-dating ***
MR. WATSON: Let's go over backdating . Backdating allows you to save age. Who has a birthday coming up in the next six months? How old are you going to be?
STUDENT: 61.
MR. WATSON: She's 60 now, will be 61. In what month?
STUDENT: Within the next six months.
MR. WATSON: If she wanted to buy insurance from some companies, she would pay as a 61-year-old woman right now, even though she's only 60. They would round up to the nearest birthday. That doesn’t sound like much, but insurance companies price your age based on your class, which is a 5-year age bracket. So even though she’s technically in the class of women age 56 to 60, they would price her as if she’s in the class of women age 61 to 65. When you get into your 50’s, 60’s, and so on, the difference in price from one age bracket to the next can be substantial.
MR. WATSON: So some companies will allow her to backdate the application to make it closer to her last birthday. We’re going to make it look like she bought it 6 months ago when she was closer to age 60, so we would have rounded down. This puts her in that lower bracket and gives her a lower premium. Over time, that could be a lot of money. And, we would issue a policy based on a 60-year-old woman from the backdated date. If you’re going to look like you bought the policy up to 6 months ago, then the company needs the premiums as if you bought it back then. The next anniversary of the policy, and annual premium due date, would be as early as 6 months in the future. Does that make sense?
Preliminary Term
MR. WATSON: All right. The preliminary term for interim term insurance lasts "1 to 11 months." What's the shortest type of term policy that you can buy that we have discussed so far?
STUDENT: One year.
MR. WATSON: One-year term. Now look. Very, very wealthy people do not have a lot of liquid cash. They have orange groves and buildings and things like that. Can we agree with that?
STUDENT: Yes.
MR. WATSON: Let's say a guy has a premium of $100,000. He needs to get that policy this week to fund a buy/sell agreement or an estate-planning case or whatever. But he needs $100,000 for the premium this week. He doesn't have $100,000 in cash. But he can buy a temporary policy, interim term insurance, that lasts for one month-it would be very, very cheap-for the same amount of coverage. The reason it’s so cheap is because it’s such a short time frame. The chance of him dying in a month or a couple months is very, very low.
MR. WATSON: Let's say it's a $20 million policy, and the premium is going to be $100,000. He can buy a temporary policy, maybe for $5,000 in premium, for the same $20 million of coverage. Agree? That will allow him to arrange the financing for that $100,000 premium. He can do it for 2 months or he can buy a temporary policy for 3 months. All the way up to 11 months.
MR. WATSON: If he bought one for a year, he might as well have just purchased an annual renewable term policy. You got it? He can do it for 1 to 11 months. Does that make sense?
STUDENTS: Yes.
Policy Issue and Delivery
Constructive Delivery ***
MR. WATSON: Constructive Delivery. "Constructive delivery, which satisfies the legal interpretation, is technically accomplished if the insurance company intentionally relinquishes control over the policy and turns it over to somebody acting on behalf of the client, including the company's own agent." Mailing the policy to the agent for unconditional delivery also constitutes "constructive delivery," even if the agent never delivers it. Unconditional means “as is.” We are mailing the policy “as is” to the agent so the agent can get it to the customer “as is.” We already have everything we need from the customer. If the company wanted a medical exam, that’s been done. Everything is done. The key point is, unconditional delivery, the company can not make any changes after constructive delivery. Does that make sense?
STUDENTS: Yes.
MR. WATSON: Listen up. When does the insurance contract become a unilateral contract? When does it become a contract that the insurance company cannot get out of? At what point in time does it become an aleatory contract or a contract of adhesion? We need to know this.
MR. WATSON: Let's just say this fellow applied for life insurance with Met Life for a $1,000,000. Met Life has done all the underwriting. The fellow gave the agent an application and money and Met Life, the underwriter, has a policy number issued on this policy. The home office underwriter is holding the policy in his hand. The minute he puts it in that mail cart that comes around, for delivery to the agent, we have constructive delivery. The company cannot get out of it.
MR. WATSON: Should Met Life find out this gentleman has entered an arrow catching contest they are now bound to the terms of the contract. There is nothing they can do.
MR. WATSON: Can the underwriter get it out of the mail cart? No. At that point in time, you have constructive delivery, and the insurance company can't get out of it. Even mailing the policy constitutes "constructive delivery." Does that make sense?
STUDENTS: Um-hmm.
Obtaining a Statement of Insured's Good Health ***
MR. WATSON: Let's talk about a signed statement of the insured's good health.
MR. WATSON: This is important. I will give you a couple examples here that will explain this. Obtaining the statement of the insured's good health. Now, listen to this, guys. Lebanon gives me money and an application, and he's in great health. You agree? Great health. When I deliver the policy to him he is on his death bed. What am I to do with that policy? His health has obviously changed. Do I give it to him?
STUDENTS: Yes.
MR. WATSON: When he gives me money and the application, after that point in time, as long as he didn't need an exam-
STUDENTS: -- he's covered.
MR. WATSON: Once he gives you the money and the application you are not concerned with what happens to his health after that.
MR. WATSON: Second story: He gives me an application but no money. He's in great health. I show up and again later to deliver the policy and collect the first premium but he's on his death bed. What am I to do?
STUDENT: Take the policy back.
MR. WATSON: You void the policy you were about to deliver and take a new application. You are going to see that. Did you hear that? He gave me an application but no money, and his health had changed. When I show up to deliver the policy and collect the premium, his health has clearly deteriorated. You void the policy you were about to deliver and take a new application.
STUDENTS: Yes.
MR. WATSON: The third one. He gives me an application and no money. He's in great health. Agreed?
STUDENT: Um-hmm.
MR. WATSON: When I show up with the policy, he appears to still be in great health. I am to obtain what from him?
MR. WATSON: A check. And a statement attesting to his continued good health. We have a right to know that his health has not changed from the time he gave me the application up until the time he gave me money. Important question: At what time would you obtain a statement of an insured's good health?
STUDENT: At the time of delivery of the policy?
MR. WATSON: That's the time but only if he hasn’t given you money yet. When an applicant fills out the application but has not given you money, then you collect that at the time of policy delivery. You are going to see that. Does that make sense?
STUDENT: So when you give him the policy is when you have to have the statement?
MR. WATSON: Right. But only if he gave you no money with the application.
STUDENT: But if they have already given you the money, then-
MR. WATSON: If they give us the application and money together, then it doesn’t matter because he’s been covered since the date of the premium in this case. We never said he needed a medical exam, so in this story he’s been covered since the premium payment with the application. Do you agree?
STUDENTS: Um-hmm.
MR. WATSON: But if they give us an application and no money, we are still concerned with their health up to the time they give us money. Does that make sense? So at the time when I collect the check is when I get a statement of the insured's good health.
As we said before, this is a heavily tested chapter. Many of the questions you will see for this are scenario questions where you are presented with a story and then asked a question about the story. Many times they will give you more information than what you need, so keep the QUESTION in the front of your mind. Don’t try to answer the story - answer the question.
This is part of why we teach with so many stories, is to help you learn and to help prepare you for the type of questions you will see.
The practice tests, video library, & Tuesday night Webcast are invaluable tools that should be used exhaustively!!!
