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Addendum: for use with South Dakota Life and Health online ExamFX courses and study guide versions 21368en/21369, per exam content outline updates effective January 4, 2018.

Please note that effective 1/4/2018, all insurance exams in South Dakota will be administered by a new testing provider, Pearson Vue. For additional information about the exam please review the Candidate Handbook at https://wsr.pearsonvue.com/sd/insurance/.

New exam breakdowns:

South Dakota Life Insurance Examination

90 Total Questions (75 scored; 15 pretest)

Time Limit: 2 hours

South Dakota Accident and Health or Sickness Insurance Examination

90 Total Questions (75 scored; 15 pretest)

Time Limit: 2 hours

South Dakota Life and Accident & Health Insurance Examination

145 Total Questions (130 scored; 15 pretest)

Time Limit: 2.5 hours

Note that the practice tests and the state exam will be broken into two sections: General Knowledge and State Law;however, you will receive one overall score. Passing score for all exams is 70%.

The following are additions to the existing text as indicated:

LIFE:

Completing the Application, Underwriting, and Delivering the Policy

Stranger-originated Life Insurance (STOLI) and Investor-originated Life Insurance (IOLI)

Stranger-originated life insurance (STOLI) is a life insurance arrangement in which a person with no relationship to the insured (a "stranger") purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies. In other words, STOLIs are financed and purchased solely with the intent of selling them for life settlements.

STOLIs violate the principle of insurable interest, which is in place to ensure that a person purchasing a life insurance policy is actually interested in the longevity rather than the death of the insured. Because of this, insurers take an aggressive legal stance against policies they suspect are involved in STOLI transactions.

Note that lawful life settlement contracts do not constitute STOLIs. Life settlement transactions result from existing life insurance policies; STOLIs are initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in the life of the insured at the time of policy origination.

Investor-owned life insurance (IOLI) is another name for a STOLI, where a third-party investor who has no insurable interest in the insured initiates a transaction designed to transfer the policy ownership rights to someone with no insurable interest in the insured and who hopes to make a profit upon the death of the insured or annuitant.

USA PATRIOT Act and Anti-Money Laundering

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, also known as the USA PATRIOT Act was enacted on October 26, 2001. The purpose of the Act is to address social, economic, and global initiatives to fight and prevent terrorist activities. The Act enabled the Financial Crime Enforcement Network (FinCEN) to require banks, broker-dealers, and other financial institutions to establish new anti-money laundering (AML) standards. With new rules in place, FinCEN incorporated the insurance industry into this group.

To secure the goals of the Act, FinCEN has implemented an AML Program that requires the monitoring of all financial transactions and reporting of any suspicious activity to the government, along with prohibiting correspondent accounts with foreign shell banks. A comprehensive customer identification and verification procedure is also to be set in place. The AML program consists of the following minimum requirements:

• Assimilate policies, procedures and internal controls based on an in-house risk assessment, including:
  • Instituting AML programs similar to banks and securities lenders; and
  • File suspicious activity reports (SAR) with Federal authorities;
• Appointing a qualified compliance officer responsible for administering the AML program;
• Continual training for applicable employees, producers and other; and
• Allow for independent testing of the program on a regular basis.

Suspicious Activity Reports (SARs) Rules

Any company that is subject to the AML Program is also subject to SAR rules. SAR rules state that procedures and plans must be in place and designed to identify activity that one would deem suspicious of money laundering, terrorist financing and/or other illegal activities. Deposits, withdrawals, transfers or any other business deals involving $5,000 or more are required to be reported if the financial company or insurer “knows, suspects or has reason to suspect” that the transaction:

• Has no business or lawful purpose;
• Is designed to deliberately misstate other reporting constraints;
• Uses the financial institution or insurer to assist in criminal activity;
• Is obtained using fraudulent funds from illegal activities; or
• Is intended to mask funds from other illegal activities.

Some "red flags" to look for in suspicious activity:

• Customer uses fake ID or changes a transaction after learning that he or she must show ID;
• Two or more customers use similar IDs;
• Customer conducts transactions so that they fall just below amounts that require reporting or recordkeeping;
• Two or more customers seem to be working together to break one transaction into two or more (trying to evade the Bank Secrecy Act (BSA) requirements); or
• Customer uses two or more money service business (MSB) locations or cashiers on the same day to break one transaction into smaller transactions (trying to evade BSA requirements).

Relevant SAR reports must be filed with FinCEN within 30 days of initial discovery. Reporting takes place on FinCEN Form 108.

Types of Life Policies

Term Life – Special Features

Most term insurance policies are renewable, convertible, or renewable and convertible (R&C).

Renewable

The renewable provision allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability. The premium for the new term policy will be based on the insured's current age. For example, a 10-year term policy that is renewable can be renewed at the end of the 10-year period for a subsequent 10-year period without evidence of insurability. However, the insured will have to pay the premium that is based on his or her attained age. If an individual purchases a 10-year term policy at age 35, he or she will pay a premium based on the age of 45 upon renewing the policy.

Convertible

The convertible provision provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability. The premium will be based on the insured's attained age at the time of conversion.

Interest-Sensitive Whole Life

Interest-sensitive whole life, also referred to as current assumption life, is a whole life policy that provides a guaranteed death benefit to age 100. The insurer sets the initial premium based on current assumptions about risk, interest and expense. If the actual values change, the company will lower or raise the premium at designated intervals. In addition, interest-sensitive whole life policies credit the cash value with the current interest rate that is usually comparable to money market rates, and can be higher than the guaranteed levels. The policy also provides for a minimum guaranteed rate of interest.

Interest-sensitive whole life provides the same benefits as other traditional whole life policies with the added benefit of current interest rates, which may allow for either greater cash value accumulation or a shorter premium-paying period.

Indexed Life

The main feature of indexed whole life (or equity index whole life) insurance is that the cash value is dependent upon the performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. The policy's face amount increases annually to keep pace with inflation (as the Consumer Price Index increases) without requiring evidence of insurability. Indexed whole life policies are classified depending on whether the policyowner or the insurer assumes the inflation risk. If the policyowner assumes the risk, the policy premiums increase with the increases in the face amount. If the insurer assumes the risk, the premium remains level.

Taxes, Retirements, and Other Insurance Concepts

Third-Party Ownership

Most insurance policies are written where the insured and owner of the policy is the same person. However, there are situations in which the contract may be owned by someone other than the insured. These types of contracts are known as third-party ownership. Third-party owner is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it. Most policies involving third-party ownership are written in business situations or for minors in which the parent owns the policy.

Life Settlements

The term life settlement refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash. A life settlement would require an absolute assignment of all rights to the policy from the original policyowner to the new policyowner.

Policyowners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy. In many cases, however, life settlement transactions are offered to senior citizens who may have a life threatening illness and a short life expectancy. In these situations, the owner may elect to sell the policy to a life settlement provider for an amount greater than what they would receive if they surrendered the policy for cash value.

Definitions

Because Life Settlements are not involved in the establishment of new life insurance coverage, the Life Settlement Act defines terms that are not in conflict with the sale of the original life insurance coverage, but which accurately identify the distinctions in the Life Settlement business. Some of the more important definitions are as follows:

The term business of life settlement refers to any activity relating to the solicitation and sale of a life settlement contract to a third party who has no insurable interest in the insured.

The term owner refers to the owner of the life insurance policy who seeks to enter into a life settlement contract. The term does not include an insurance provider, a qualified institutional buyer, a financing entity, a special purpose entity, or a related provider trust.

Insured is the person covered under the policy that is considered for sale in a life settlement contract.

Life Expectancy is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors (an arithmetic mean).

Life Settlement Contract establishes the terms under which the life settlement provider will pay compensation to the policyowner, in return for the assignment, transfer, sale, or release of any portion of any of the following:

• The death benefit;
• Policy ownership;
• Any beneficial interest; or
• Interest in a trust or any other entity that owns the policy.

Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners, and have a fiduciary duty to the owners to act according to their instructions and in their best interest.

Life Settlement Provider is a person (other than the owner) who enters into a life settlement contract with the owner.

Group Life Insurance – Contributory vs. Noncontributory

The employer or other group sponsor may pay all of the premiums or share premiums with the employees. When an employer pays all of the premiums, the plan is referred to as a noncontributory plan. Under a noncontributory plan, an insurer will require that 100% of the eligible employees be included in the plan. When the premiums for group insurance are shared between the employer and employees, the plan is referred to as a contributory plan. Under a contributory plan, an insurer will require that 75% of eligible employees be included in the plan.

Business Insurance Needs

Businesses use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured.

The most common use of life insurance by businesses is as an employee benefit, which serves as a protection for employees and their beneficiaries. There are also other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees.

Key Person

A business can suffer a financial loss because of the premature death of a key employee — someone who has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.

With this coverage, the key employee is the insured, and the business is all of the following:

• Applicant;
• Policyowner;
• Premium payer; and

In the event of death of a key employee, the business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage.

Buy-sell Funding

A buy-sell agreement is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

There are several types of buy-sell agreements that can be used for partnerships and corporations:

• Cross Purchase — used in partnerships when each partner buys a policy on the other;
• Entity Purchase — used when the partnership buys the policies on the partners;
• Stock Purchase — used by privately owned corporations when each stockholder buys a policy on each of the others;
• Stock Redemption — used when the corporation buys one policy on each shareholder.

HEALTH:

Types of Health Policies

Disability Income – Business Overhead Expense Insurance

Business overhead expense (BOE) insurance is a unique type of policy that is sold to small business owners who must continue to meet overhead expenses such as rent, utilities, employee salaries, installment purchases, leased equipment, etc., following a disability. The business overhead expense policy reimburses the business owner for the actual overhead expenses that are incurred while the business owner is totally disabled. This policy does not reimburse the business owner for his or her salary, compensation, or other form of income that is lost as a result of disability. There is usually an elimination period of 15 to 30 days and benefit payments are usually limited to one or two years. The benefits are usually limited to covered expenses incurred or the maximum monthly benefit stated in the policy. The premiums paid for BOE insurance are tax deductible to the business as a business expense. However, the benefits received are taxable to the business as received.

Health Policy Provisions, Clauses and Riders

Pre-authorizations and Prior Approval Requirements

Some health insurance policies will require the pre-authorization or prior approval of certain medical procedures, tests, or hospital stays. The insured must obtain the insurer's approval before the procedure, test, or hospital stay to be sure the policy will cover the expenses.

Usual, Reasonable, and Customary (URC) Charges

Some medical expense insurance plans contain a benefit schedule, which very specifically states exactly what is covered in the plan and for how much. Other plans may incorporate the term usual/reasonable/customary. Usual/reasonable/customary means that the insurance company will pay an amount for a given procedure based upon the average charge for that procedure in that specific geographic area.

Lifetime, Annual, or Per Cause Maximum Benefit Limits

The maximum benefit is the largest benefit amount a policy will pay. This may be expressed as a lifetime limit, an annual limit, or a per-cause limit.

• The lifetime limit specifies a benefit amount that is the most a policy will pay during the lifetime of the insured.
• An annual limit is the most a policy will pay each year that policy is in force.
• The per-cause limit is the most a policy will pay for expenses incurred from the same or related causes.

Impairment Rider

The impairment (exclusion) rider may be attached to a contract for the purpose of eliminating coverage for a specifically defined pre-existing condition, such as back injuries. Impairment riders may be temporary or may become a permanent part of the policy. Attaching this rider excludes coverage for a condition that would otherwise be covered. Often a person's only means of purchasing insurance at a reasonable cost when they have an existing impairment is through a policy which excludes coverage for the specific impairment.

For example, a physician may have suffered from a back injury prior to applying for a disability policy. The company may agree to issue a disability policy, but with an exclusion rider, excluding coverage for any claim related to his back. The policy would cover any other disability he may incur in the future, as long as it is not related to his back. This may be the only way the insured is able to obtain coverage. The underwriter makes a decision when writing the contract whether to make the exclusion permanent, or, for a short time only (such as if the insured is able to go a specified period of time with no further treatment). The terms of the rider will be clearly stated in the policy.

Most riders in both life and health insurance add some form of additional coverage; often there is extra cost added to the premium for the rider. The impairment (exclusion) rider is an exception in that it takes something away from standard coverage. There is no extra charge for this, nor is the premium reduced to reflect a reduction in coverage.

Other Insurance Concepts

Workers Compensation

Workers Compensation is a benefit offered and regulated by the states, and will vary to some degree from state to state.

To be eligible for Workers Compensation benefits, the worker must work in an occupation covered by Workers Compensation and have had an accident or sickness that is work related. Workers Compensation benefits are payable when a worker is injured by a work-related injury, regardless of fault or negligence.

Workers Compensation laws provide four types of benefits:

1. Medical benefits;
2. Income benefits;
3. Death benefits; and
4. Rehabilitation benefits.

Subrogation

Subrogation is the legal process by which an insurance company seeks recovery of the amount paid to the insured from a third party who may have caused the loss. Through subrogation, the insured cannot collect twice.

LIFE & HEALTH STATE REGULATIONS:

Please review the state rules and regulations chapters in the online course:

• South Dakota Statutes, Rules and Regulations Common to All Lines;
• South Dakota Statutes, Rules and Regulations Pertinent to Life Insurance; and
• South Dakota Statutes, Rules and Regulations Pertinent to Accident and Health Insurance Only

Addendum: for use with South Dakota Property & Casualty, and Personal Lines online ExamFX courses and study guide versions 21328en/21383 (P&C) and 21439en (Personal Lines), per exam content outline updates effective January 4, 2018. 

Please note that effective 1/4/2018, all insurance exams in South Dakota will be administered by a new testing provider, Pearson Vue. For additional information about the exam please review the Candidate Handbook at https://wsr.pearsonvue.com/sd/insurance/

New exam breakdowns:

South Dakota Property Insurance Examination

90 Total Questions (75 scored; 15 pretest)

Time Limit: 2 hours

South Dakota Casualty Insurance Examination

90 Total Questions (75 scored; 15 pretest)

Time Limit: 2 hours

South Dakota Property and Casualty Insurance Examination

90 Total Questions (75 scored; 15 pretest)

Time Limit: 2 hours

Note that the practice tests and the state exam will be broken into two sections: General Knowledge and State Law;however, you will receive one overall score. Passing score for all exams is 70%.

The following are additions to the existing text as indicated:

Types of Property Policies

Mobile Home 

The mobilehome endorsement alters the homeowners policy to cover a mobilehome and other structures on land owned or leased by the resident of the mobilehome. The limit of liability for Coverage B (other structures) is changed to $2,000 or 10% of the Coverage A limit, whichever is greater. This does not reduce the Coverage A limit.

The additional coverage of property removed is changed to add up to $500 for reasonable expenses incurred in the removal and return of the mobilehome when it is necessary to avoid damage or endangered by a peril insured against. The additional coverage of ordinance or law is removed.

To be eligible, the mobile home must be designed for year round living and must meet certain size requirements.

The coverage structure of the Mobile Homeowners Policy follows the structure of the Homeowners policy:

• Coverage A — States the limit of liability for damage to the mobile home;
• Coverage B — Other covered structures;
• Coverage C — Personal property of the insured*
• Coverage D — Loss of use coverage;
• Coverage E — Personal Liability;
• Coverage F — Medical Payments to Others.

* Note: Unlike the HO forms, the Mobile Homeowners Policy provides 40% of Coverage A. Items included in the unit (at the time of sale) are classified as Coverage A property.

The mobile homeowners policy changes the language for the Additional Coverage Property Removed. The policy will pay up to $500 if the insured moves the mobile home to a safer area to protect it from loss by a covered peril. If the insured wishes to move the mobile home in a situation in which it is not threatened by an insured peril, they must contact the insurer and obtain, for additional premium, a Transportation/Permission to Move Endorsement. This endorsement adds the perils of collision, upset, and stranding and sinking to the perils insured against in the policy. Coverage under this endorsement applies for a period of 30 days anywhere in continental United States or Canada. The mobile homeowners policy endorsement deletes the additional coverage for Ordinance or Law.

Watercraft

Watercraft endorsement provides liability protection for bodily injury or property damage caused by the ownership or use of watercraft (excluding when used to carry persons for a fee or when rented to others).

Windstorm

Most standard homeowner policies will cover wind damage from minor natural events. This does not usually apply, however, to areas that are considered high risk, such as coastal regions, which are susceptible to hurricanes, and inland areas that are at risk from tornadoes. In these high-risk areas, certain windstorm coverage is removed from the homeowner policy and homeowners are either required or encouraged to purchase a separate windstorm policy.

The terms wind and windstorm have specific definitions that will make it easier to understand the coverages provided by homeowner and windstorm policies. Wind is defined as a natural and perceptible movement of air parallel to or along the ground. A windstorm is defined as a storm with high winds or violent gusts but with little or no rain. Wind and windstorm may be different causes of loss, so even though a homeowner policy covers wind damage, it may not cover damage from a windstorm.

Private insurance companies sell specialty coverage such as "wind and hail" or "windstorm" policies, but in states where there are no offerings from private insurers, state-sponsored insurance pools provide windstorm insurance for these areas. Windstorm policies are written with different classifications that are tied to "trigger" events. Examples of these trigger events include

• A hurricane or tornado watch issued by the National Hurricane Center or National Weather Service;
• Sustained winds of 74 or more miles per hour; and
• A specific, declared geographic location.

Types of Casualty Policies, Bonds, and Related Terms

Cyber Liability and Data Breach – added to Professional Liability section

The ISO has recently introduced a new line of insurance that covers cyber risks, called the Internet Liability and Network Protection Policy. The policy includes 5 separate agreements listed below:

1. Website publishing liability — provides coverage against Internet-related publishing perils, including libel, and copyright, trademark, or service mark infringement;
2. Network security liability — protects the policyowner against claims for failing to maintain the security of a computer system;
3. Replacement or restoration of electronic data — covers the cost of replacing or restoring data lost due to a virus, malicious instruction, or denial-of-service attack;
4. Cyber extortion — covers expenses, including ransom payments, incurred from extortion threats; and
5. Business income and extra expense — provides coverage for expenses incurred as a result of an extortion threat or e-commerce incident.

Each agreement offers its own aggregate limit of coverage, subject to an overall policy limit. Defense expenses are included within the policy limits. All coverage is written on a claims-made basis, and allows the additional of endorsements for worldwide protection.

Bonds – Fidelity

Fidelity bonds are used to guarantee honesty and trust as opposed to surety bonds that guarantee performance.

In almost any type business there is some risk of loss resulting from dishonesty (infidelity) of employees. Fidelity bonds may be used to cover these types of losses. A typical fidelity bond covers losses caused by theft, embezzlement, forgery, misappropriation, or any other dishonest or fraudulent act.

Every fidelity bond is written with a stated limit called a limit of liability. The coverage applies to acts committed during the bond period. Normally fidelity bonds are written with no expiration dates and stay in force until cancelled. Most also have a discovery period in which losses are covered if discovered within a time period after the bond has terminated or coverage for a dishonest employee has terminated. Typically, the discovery period is 1 year (2 years for blanket position).

Fidelity bonds are "one bite" bonds. As soon as an employer becomes aware of an employee's dishonesty which could lead or has led to a claim, coverage for that employee terminates immediately. The act could have occurred before the current bond period or even with a different employer. This prevents second chances for anyone who has committed the kind of act covered by the bond.

Employee fidelity bonds may be written as any of the following:

• Individual — covers 1 employee named on the bond;
• Name schedule — covers several employees named on the bond for varying amounts;
• Position schedule — covers anyone occupying a scheduled position, listed by job title rather than name;
• Commercial Blanket — covers all employees and limits of liability on a per loss basis no matter how many employees may have been involved; or
• Blanket position — covers all employees and the limit of liability on a per employee basis no matter how many employees may have been involved.

PROPERTY AND CASUALTY STATE REGULATIONS:

Please review the state rules and regulations chapters in the online course:

• South Dakota Statutes, Rules and Regulations Common to All Lines;
• South Dakota Statutes, Rules and Regulations Pertinent to Property Insurance; and
• South Dakota Statutes, Rules and Regulations Pertinent to Casualty Insurance