Supplemental Background Material - SOFE

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Supplemental Background MaterialAFE 1Life and Health Insurance Fundamentals(Passing grade for this exam is 70)Please note that this study guide is a tool for learning the materials you need to effectively study for thisexamination. As new editions of the textbooks are published, the SOFE Testing committee makes everyeffort to update the page references in this guide, but it is not always possible to keep it current. Therefore,it is the student’s responsibility to see the topic listed in the study guide and find it in the required textbooks.But if it is not on the page indicated, then you need to go the textbook’s table of contents or index and locatethe topic. If you are unable to locate the topic anywhere in the textbook you are using, please e-mail SOFEheadquarters at [email protected] and tell us the topic you cannot locate, where that topic is in the study guideand what version of the textbook you are using.The following textbooks are required for this course:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III 15th Edition(Lucretian, LLC, 2015) SOFE 2018Permission to reproduce all or part of this publication is granted for the limited purpose of the user inpreparing for the corresponding examination.

Unit # per thisstudy guide1182NameSection # 1 - (7 questions)Chapter 1: The Economics of Life InsuranceChapter 2: An Overview of Life InsuranceChapter 12: The Regulation and Taxation of Life Insurance CompaniesSection # 2 - (17 questions)Chapter 3: Personal Life Insurance Products: I2Chapter 4: Personal Life Insurance Products: II2Chapter 5: Life Insurance Policy Provisions and Riders3Chapter 6: Retirement Products445679910101111111212121212Chapter 7: Health Insurance Products I: Medical Expense InsuranceChapter 8: Health Insurance Products II: Disability Income and Long Term CareInsuranceSection # 3 - (8 questions)Chapter 09: Life Insurer ManagementChapter 10: Life Insurance MarketingChapter 11: Life Insurance UnderwritingSection # 4 - (8 questions)Chapter 13: Life Insurer Financial Reporting and SupervisionChapter 14: Life Insurer Financial ManagementChapter 15: Life Insurance Actuarial FundamentalsChapter 16: Life Insurance Actuarial ApplicationsSection # 5 - (10 questions)Chapter 17: Life Insurance Advisor and Company EvaluationChapter 18: Life Insurance Policy Evaluation I: Legal AspectsChapter 19: Life Insurance Policy Evaluation II: Performance ComparisonsChapter 20: Personal Financial PlanningChapter 21: – Life and Health Insurance Product TaxationChapter 22: Life Insurance in Estate Tax PlanningChapter 23: Retirement PlanningChapter 24: Life Insurance in Business Planning2

Society of Financial ExaminersLife and Health Insurance FundamentalsUnit:1Topic:A History and Overview of Life InsuranceText Required:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III15th Edition(Lucretian, LLC, 2015)Objectives:To introduce the new examiner to the basic principles on which life and healthinsurance are based; to develop an understanding of the role and importance oflife and health insurance in our society; and to provide an introductory overviewof life and health insurance products and pricing concepts.Assigned Readings:Chapter 1 – The Economics of Life InsuranceChapter 2 – An Overview of Life InsuranceAssignment Outline:Chapter 1 – The Economics of Life InsuranceA. IntroductionB. A Brief History of Life InsuranceC. The Language of Insurance1. Social versus Private Insurance2. Life versus Nonlife Insurance3. Personal versus Commercial InsuranceD. The Importance of Life Insurance1. Life Insurance Internationally2. The Role of Life Insurance in Economic Developmenta. Promotes Financial Stabilityb. Substitutes for and Complements Government Security Programsc. Facilitates and Motivates Savingsd. Fosters a More Efficient Allocation of Capital3. The Costs of Insurance to Society3

E. Life Insurance Markets1. Economic Efficiency as a Social Goal2. Imperfections in Insurance Marketsa. Market Poweri.Barriers to Entry or Exitii. Economies of Scale or Scopeiii. Product Differentiation and Price Discriminationb. Externalitiesi.The Nature of Externalitiesii. Externalities and Insurancec. Free Rider Problemsd. Information Problemsi.Buyer Ignoranceii. Adverse Selectioniii. Moral Hazardiv. Agency Problemsv. Asymmetric Information Problems and Tradeoffs3. Why Private Markets Fail to Insure Some Exposures4. Determinants of Insurance Consumptiona. Priceb. Economic Factorsi.Income and Wealthii. Inflationc. Demographic Factorsd. Social Factorse. Political and Legal Factorsf.GlobalizationF. Economic Concepts of Life Insurance Consumption1. The Concept of Human Capital2. The Human Life Value Concept3. Economic Theories of Consumption and Insurancea. Economic Theories of Consumptionb. Consumption Theories and InsuranceG. Conclusion4

Chapter 2 – An Overview of Life InsuranceA. IntroductionB. Means of Dealing with the Financial Consequences of Death1. Relatives2. Savings/Investments3. Employer-Provided Death Benefits4. Government-Provided Death Benefits5. Individual Life InsuranceC. Evaluation of Life Insurance as a Financial Instrument1. Advantages2. CostsD. Policies Sold by Life Insurance Companies1. Mortality-Based Policiesa. Life Insurancei.Term Life Insuranceii. Cash Value Life Insuranceb. Annuities2. Morbidity-Based Policies3. Medical Expense Insurancea. Long Term Care Insuranceb. Disability Income InsuranceE. Requisites for Private Insurance1. Large Number of Independent, Homogeneous Exposure Unitsa. Independent Exposure Unitsb. Homogeneous Exposure Unitsc. Large Number of Exposure Units2. Accidental Losses3. Payment Amounts Easily Determinable4. Economically Feasible Premiums5

F. Introduction to Life Insurance Pricing1. Pricing Objectivesa. Adequacyb. Equityc. Economically Feasible2. Pricing Elementsa. Mortality Chargesb. Interest Crediting Ratec. Loading Chargesd. Persistency6

Society of Financial ExaminersLife and Health Insurance FundamentalsUnit:2Topic:Life Insurance ProductsText Required:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III15th Edition(Lucretian, LLC, 2015)Objectives:To provide an overview of the main types of life insurance policies sold by lifeinsurance companies; to familiarize the examiner with the form and content oflife insurance policies; and to identify common riders that may be optionallyincluded in life insurance policies.Assigned Readings:Chapter 3 – Personal Life Insurance Products: IChapter 4 – Personal Life Insurance Products: IIChapter 5 – Life Insurance Policy Provisions and RidersAssignment Outline:Chapter 3 – Personal Life Insurance Products: IA. IntroductionB. Term Life Insurance1. Nature of Term Life Insurance2. Key Features of Term Life Insurancea. Renewabilityb. Convertibilityc. Reentry3. Types of Term Life Insurancea. Personal Term Life Policiesi.Policies that Provide a Level Death Benefitii. Policies that Provide a Non-Level Death Benefit7

b. Group Term Life Policiesi.Individual Eligibility Requirementsii. Duration of Coverageiii. Approaches to Benefit Amountsiv. Conversion Privilege4. Uses and Considerations of Term Life InsuranceC. Universal Life Insurance1. Origins and Growth2. Nature of Universal Life Insurance3. Operational Details of Universal Life Insurance4. Key Features of Universal Life Insurancea. Death Benefit Pattern and Changesb. Guaranteed and Nonguaranteed Policy Elements5. Uses and Considerations of Universal Life InsuranceD. Variations of Universal Life Insurance1. Variable Universal Life Insurancea. Nature of Universal Life Insuranceb. Operational Details of Variable Universal Life Insurancec. Uses and Considerations of Variable Universal Life Insurance2. No-Lapse Guarantee Universal Life Insurancea. Operational Details of No-Lapse Guarantee Universal Life Insuranceb. Uses and Considerations of No-Lapse Guarantee Universal Life Insurance3. Equity-Indexed Universal Life Insurancea. Operational Details of Equity-Indexed Universal Life Insuranceb. Uses and Considerations of Equity-Indexed Universal Life InsuranceE. ConclusionsChapter 4 – Personal Life Insurance Products: IIA. IntroductionB. Whole Life Insurance1. Nature of Whole Life Insurance8

2. Key Featuresa. Importance of Cash Valuesb. Participating and Nonparticipating Whole Life Insurancei.Nature of Dividendsii. Dividend Options3. Types of Whole Life Insurancea. Ordinary Life Policiesb. Limited Payment Whole Life Policiesc. Current Assumption Whole Life Policiesd. Variable Life Policiesi.Natureii. Policy Provisions Unique to Variable Lifeiii. The appropriateness of Variable Lifee. Other Whole Life Policiesi.Modified Life Insuranceii. Enhanced Ordinary Life Insuranceiii. Graded Premium Whole Life Insuranceiv. Indexed Whole Life Insurancev. Special Purpose Whole Life Insurance4. Uses and Considerations of Whole Life InsuranceC. Life Insurance on Multiple Lives1. Second-to-Die Life Insurance2. First-to-Die Life InsuranceD. Specialized Life Insurance for Insureds with High Net Worth1. Proprietary Life Insurancea. Private Placement Life InsuranceE. Endowment Life Insurance1. Nature of Endowment Insurancea. Mathematical Conceptb. Economic Concept2. Types of Endowment Policies3. Uses and Considerations of Endowment InsuranceF. Summary of Attributes of Common Personal Life Insurance PoliciesG. Conclusions9

H. Appendix A4-1: Attributes of Term and Cash Value Life Insurance PoliciesChapter 5 – Life Insurance Policy Provisions and RidersA. IntroductionB. Overview: Policy Content and FormatC. Life Insurance Policy Provisions1. Provisions that Make Payment More Securea. Entire Contract Clauseb. Incontestable Clausec. Premium Provisiond. Grace Period Provisione. Reinstatement Clausef.Nonforfeiture Provisiong. Participation/Policy Value Provisionh. Misstatement of Age or Sex Provision2. Provisions that Make Payment Less Securea. Suicide Clauseb. Delay Clausec. Exclusion Clausesi.Aviation Exclusionii. War Exclusion3. Provisions that Provide Flexibilitya. Right to Return Policyb. Death Benefit Provisionc. The Beneficiary Clausei.Nature of Designationsii. Changing the Beneficiaryiii. Simultaneous Death of Insured and Beneficiary10

d. Settlement Optionsi.CashiiInterest Optioniii. Fixed Period Optioniv. Fixed Amount Optionv. Single Life Income Optionvi. Joint and Survivorship Life Income Optionvii. Other Settlement Arrangementse. Nonforfeiture Optionsf.Policy Loan Provisioni.Policy Loan Interest Rateii. Automatic Premium Loansg. Dividend Optionsh. Assignment/Ownership Provisioni.Absolute Assignmentsii. Collateral AssignmentsD. Common Life Insurance Policy Riders1. Riders Providing Life Insurance Coveragea. Term Ridersb. Family Ridersc. Accidental Death Benefit Ridersd. Guaranteed Insurability Option2. Living Benefit Ridersa. Terminal Illness Coverageb. Catastrophic Illness Coveragec. Long Term Care Riders/Combination Plans3. Riders Protecting against Policy Lapsea. Waiver of Premium/Charges Ridersb. Overloan Protection Ridersc. No Lapse Guarantee Riders4. Enhanced Cash Value RidersE. Conclusions10

Society of Financial ExaminersLife and Health Insurance FundamentalsUnit:3Topic:Retirement Annuity ProductsText Required:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III15th Edition(Lucretian, LLC, 2015)Objectives:To introduce the concept of longevity risk and to provide an overview of thetypes of retirement annuity contracts sold by life insurance companies to addressthat risk.Assigned Readings:Chapter 6 – Retirement ProductsAssignment Outline:Chapter 6 – Retirement ProductsA. IntroductionB. The Nature of the Retirement RiskC. Nature of Annuities1. Purpose of Annuities2. Annuity DemandD. The Structure of Fixed Annuities1. Purchase Basisa. General Account Fixed Annuityb. Equity-Indexed Annuitiesc. Inflation-Indexed Annuitiesd. Long Term Care Annuity Riderse. Market Value Adjusted Annuityf.Certificate of Annuity2. Liquidation Basisa. Number of Livesb. Refund Features11

The Structure of Variable Annuities1. Separate Account Performancea. Guaranteed Minimum Death Benefitb. Guaranteed Minimum Accumulation Benefit2. Variable Income Benefits3. Regulation and Suitability of Variable AnnuitiesE. Guaranteed Minimum Withdrawals1. Guaranteed Lifetime Withdrawal Benefita. Deferral Periodb. Liquidation Period2. Contingent Deferred Annuities3. Importance and Suitability of GuaranteesF. Substandard Mortality Annuities1. Structured Settlement Annuities2. Substandard AnnuitiesG. Retirement Plans1. Benefits and Requirements2. Special Investment Arrangements12

Society of Financial ExaminersLife and Health Insurance FundamentalsUnit:4Topic:Health Insurance ProductsText Required:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III15th Edition(Lucretian, LLC, 2015)Objectives:To familiarize the examiner with the three categories of health insurance(medical expense insurance, disability income insurance, and long term careinsurance); to provide an overview of the various health insurance policies offeredby life insurance companies; and to develop an understanding of the policyprovisions and benefits associated with those coverages.Assigned Readings:Chapter 7 – Health Insurance Products I: Medical Expense InsuranceChapter 8 – Health Insurance Products II: Disability Income and Long TermCare InsuranceAssignment Outline:Chapter 7 – Health Insurance Products I: Medical Expense InsuranceA. IntroductionB. The Economics of Health Care1. Cost/Benefit Measurement Problems2. Information Problemsa. Buyer Ignoranceb. Adverse Selectionc. Moral Hazard3. Market Powera. Barriers to Entryb. Economies of ScaleC. The Health Care Environment1. U.S. Medical Care Cost Trends2. Employer Responses to Rising Costs13

D. Health Insurance ProvidersE. Basic Medical Expense BenefitsF. Comprehensive Medical Insurance Coverage1. Deductibles and Coinsurance2. Maximum Benefits, Coordination of Benefits, and SubrogationG. Individual Medical Insurance1. Need for Individual Medical Expense Insurance2. Special Individual Insurance Coveragesa. Hospital Confinement Indemnity Policiesb. Specified Disease Policiesc. Medicare Supplement Policies3. The Health Insurance Contract4. The Individual Health Insurance MarketH. Group Medical Insurance Coverage1. Distinguishing Characteristicsa. Group Underwritingb. Group Policyc. Lower Costd. Flexibilitye. Experience Rating2. Advantages and Limitations of Group Mechanism3. Eligible Groups4. Alternatives to Fully Insured Group Benefit Plan Fundinga. Self-Funded Plansi.Administrative Servicesii. Stop Loss Reinsuranceb. Minimum Premium Plans5. Managed CareI.MedicareJ. The Patient Protection and Affordable Care Act1. Basic Mechanics of Health Care under the Affordable Care Act2. Impact on Private Health Insurance3. Responsibilities of the NAIC under Health Care Reform14

K. Other Federal Laws Affecting Group InsuranceL. ConclusionChapter 8-Health Insurance Products II: Disability Income and Long Term Care InsuranceA. IntroductionB. Disability Income Insurance1. Overview of Disability Income Policies2. Important Definitionsa. Injury and Sicknessb. Preexisting Conditionc. Disability3. Basic Components of the Benefit Provisiona. The Elimination Periodb. The Benefit Periodc. The Benefit Amount4. Basic Benefit Arrangements5. Supplemental Benefitsa. Residual Disability Benefitb. Partial Disability Benefitc. Social Insurance Supplementd. Return of Premium Ridere. Inflation Protection Benefitsf.Provisions for Increased Future Benefit Amounts6. Extra-Contractual Settlement Offers7. Governmental Sources of Disability Income Coveragea. Social Securityb. Workers’ Compensationc. State Temporary Disability PlansC. Long Term Care Insurance1. Sources of Long Term Care Coverage2. Long Term Care Insurance Policiesa. Defining Long Term Care15

b. Coveragei.Nursing Home Careii. Community Carec. Benefitsd. Premiumse. Other Contract Provisions3. State Involvement in Long Term Care Insurance4. The Limited Demand for Long Term Care InsuranceD. Conclusions16

Society of Financial ExaminersLife and Health Insurance FundamentalsUnit:5Topic:Life Insurance Company OperationText Required:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III 15thEdition(Lucretian, LLC, 2015)Objectives:To make the examiner aware of the different types of life insurance providers; toprovide an overview of life insurance company management and departmentfunctions; and to identify the types of risks faced by life insurance companies.Assigned Readings:Chapter 9 – Life Insurer ManagementAssignment Outline:Chapter 9 – Life Insurer ManagementA. IntroductionB. Life Insurance Providers1. Commercial Life Insurance Companies2. Life Insurers in Conglomerates3. Other Life Insurance ProvidersC. Corporate Management1. The Board of Directors (Trustees)2. Levels of Authority and Organizational Structure3. Agency and Corporate GovernanceD. A Functional Overview of Life Insurer Management1. The Production Process2. Departmental Staff Functions3. Legal and Ethical ResponsibilitiesE. Financial and Actuarial Intermediation1. Life Insurers as Both Actuarial and Financial Intermediaries2. Redefining Risk for Financial Intermediaries17

F. A Short History of the Life Insurance Industry and RiskG. Life Insurer Assets and Liabilities1. Assets2. Liabilities3. Constructing Liability-Appropriate Investment PortfoliosH. How Life Insurers Make MoneyI.Life Insurer Enterprise Risk Management1. An Enterprise Risk Management Framework for Insurers2. Risks Faced by Life Insurers3. Special Risks in Financial Intermediationa. Leverage Riskb. Asset – Liability Riski.Liquidity Riskii. Liquidity Risk and Policyowner Behavioriii. Reinvestment Risk and Policyowner BehaviorJ. Conclusions18

Society of Financial ExaminersLife and Health Insurance FundamentalsUnit:6Topic:MarketingText Required:Life InsuranceKenneth Black, Jr., Harold D. Skipper, and Kenneth Black, III15th Edition(Lucretian, LLC, 2015)Objectives:To provide an overview of the life insurance company marketing function; toidentify the various types of product distribution channels utilized; and toacquaint the examiner with typical marketing compensation arrangements usedby life insurance companies.Assigned Readings:Chapter 10 – Life Insurance MarketingAssignment Outline:Chapter 10 – Life Insurance MarketingA. IntroductionB. The Marketing Program1. Market Segmentation2. The CompetitionC. Life Insurance Product Development1. Product Designa. The Environmentb. Screening2. Product Implementation3. Product Life CyclesD. Distribution Channels1. Affiliated Distribution Channelsa. Career Agenciesb. Multiple-Line Exclusive Agentsc. Home Service19

d. Salaried2. Independent Distribution Channelsa. Brokerageb. Personal-Producing General Agentsc. Independent Property/Casualty Agentsd. Independent Marketing Organizations3. Financial Institution Intermediariesa. Deposit Taking Institutionsb. Investment Banksc. Other Financial Institutions4. Direct Response Channelsa. Media Channelsb. Associations and Commercial Firms5. Trends in DistributionE. Compensation in Marketing1. Management Compensation2. Agent Compensationa. Compensation in Affiliated Distribution Channelsb. Compensation in Independent Distribution ChannelsF. Promotion1. Advertising and Publicity2. Sales Promotion3. Personal Salesa. Identification of Qualified Clientsb. Identification of Client Needsc. Continuing Client ServiceG. The International Dimensions of Distribution1. Life Insurance Distribution Worldwidea. The Americasb. Europec. Asia – Pacific Region2. The Role of Multinational Insurers3. International Participation of United States Life Insurers20

H. The Future of Life Insurance Marketing1. The Production Challenge2. Possible Compensation Alternatives3. Mandatory Compensation Reform Movement in International Markets4. The Life Insurance Market of the Future5. Life Insurer Products of the Future21

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2 Unit # per this study guide Name Section # 1 - (7 questions) 1 Chapter 1: The Economics of Life Insurance 1 Chapter 2: An Overview of Life Insurance 8 Chapter 12: The Regulation and Taxation of Life Insurance Companies Section # 2 - (17 questions) 2 Chapter 3: Personal Life Insurance Products: I 2 Chapter 4: Personal Life Insurance Products: II 2 Chapter 5: Life Insurance Policy Provisions .