Explain Decisions in Mixed Cases

Introduction

Some questions mix several topics into one story: a policy, a job change, a loan, a gift, a sale. Most of the facts are true and sound important, but only one or two decide the answer. This lesson teaches a short routine for finding those facts. You will practice explaining why an answer is right, catching the tempting wrong answer, and turning your mistakes into a review plan.

This lesson adds no new rules. It brings together rules from earlier lessons and shows how they work when they appear in the same case.

By the end of this lesson, you should be able to:

• Name the controlling fact in a mixed case, and the facts that only sound important.
• List the missing facts that would change the answer.
• Explain a tempting wrong conclusion and correct it using the rule from the right earlier lesson.
• Keep a specific error log entry for each mistake, including mistakes on questions you answered correctly.
• Build a mixed-practice schedule spread over several days.

Before you start: You should have finished the earlier lessons in this course. You should already know the difference between the owner, the insured and the beneficiary (Who is insured, who owns the policy, and who receives the money?), and between a contract feature, a product type and a Nevada rule.

All people, policies, dates and amounts in this lesson are fictional and stipulated. They are teaching cases, not real exam items. Actual policies follow their own written terms.

The Routine: Decision, Control, Missing, Mistake

A controlling fact is the fact that decides the answer. If you change it, the answer changes. A nearby fact sounds relevant but does not change the answer, such as the person's age in a question about when a clock starts.

A missing fact is one the case does not tell you, but the answer would depend on it. Saying "I would need to know X" is often the most accurate answer you can give.

Use four steps for every mixed case:

1. Decision. What is actually being decided? Examples: Is this a replacement? Was the rescission effective? How much can be converted?
2. Control. Which rule governs that decision, and which fact in the story does that rule look at?
3. Missing. What fact, if it were different or known, would change the answer?
4. Mistake. What wrong conclusion is tempting, and which nearby fact makes it tempting?

Step 1 matters more than it looks. Many wrong answers come from correctly answering a different question than the one asked.

Case 1: Renewal or Conversion Under a Stipulated Policy

Renewal means continuing the same term coverage for another period. Conversion means changing term coverage into permanent coverage. Under a policy that grants these privileges, both can be done without proving good health again, but only on the policy's terms. Renewal premiums are usually higher, and the conversion period is usually shorter than the term coverage. (See Match temporary coverage to a time-limited need.)

Stipulated policy (invented for this lesson): A 20-year level term policy that is renewable to age 70 and convertible until age 60. These ages are invented. They are not Nevada limits, and real policies set their own.

Case: Jordan owns this policy on Jordan's own life. Jordan is now 63, and Jordan's health has gotten worse. Jordan wants coverage for at least five more years and asks to "switch to permanent coverage without a medical exam."

• Decision: Which privilege, if any, is available now?
• Control: Jordan's age compared with each deadline in the policy. At 63, Jordan is past the conversion deadline of 60 but before the renewal limit of 70.
• Result: Under these terms, conversion is no longer available. Renewal is available without new health evidence, probably at a higher premium. Five more years takes Jordan to 68, which is still within the renewal limit.
• Nearby fact: Jordan's poorer health. It does not decide the answer, because neither privilege requires new health evidence. Health would matter only if Jordan applied for a brand-new policy.
• Tempting mistake: "Convertible means Jordan can convert any time." In fact, the conversion right has its own deadline, separate from the renewal limit.

Change one fact: Jordan is 58 instead of 63. Now both privileges are open, and Jordan can convert to permanent coverage without new health evidence. Nothing else in the story changed. Age compared with the deadline controls the answer.

Try it: Same stipulated policy. Casey is 71, healthy, and wants to renew. What controls, and what is the result?

Answer: Explanation

Age controls again. At 71, Casey is past both the conversion deadline of 60 and the renewal limit of 70. Under these terms, neither privilege is available. Casey's good health is a nearby fact. It might help Casey qualify for a new policy through underwriting, but it does not revive a privilege that has expired. If you answered "renew, because Casey is healthy," you answered a different question: whether Casey could be insured at all.

Case 2: Group Conversion When Employment Ends

The group life rules here come from Handle credit and group life contexts. They apply to Nevada group life policies other than policies issued to creditors to insure their debtors.

When group life insurance ends because a person's employment ends, or because they leave the eligible class, the person may convert it:

• No proof of good health is needed. The person gets an individual policy without disability or other supplementary benefits.
• Deadline: The person must apply and pay the first premium within 31 days after the termination.
• Form: Any form the insurer customarily issues at that age and amount, except term insurance.
• Amount: No more than the coverage that ended, minus any group life the person is or becomes eligible for within 31 days.
• Premium: The insurer's then-customary rate for that form and amount, the person's current class of risk, and the age the person has reached. It is not the old group rate, and it is not free.
• Death pending conversion: If the person dies during the conversion period, before an individual policy takes effect, the amount they could have converted is payable as a claim under the group policy. This is true even if they never applied or paid.

Case: Rowan had $90,000 of employer group life. Rowan left the job, and coverage ended on the termination date. Within 31 days, Rowan became eligible for $30,000 of group life at a new employer. Assume Rowan received timely notice of the conversion right. On day 18 after termination, Rowan died without having applied.

• Decision: Is anything payable, and how much?
• Control: Death occurred inside the conversion period, before any individual policy took effect.
• Amount: $90,000 − $30,000 = $60,000, payable as a claim under the old group policy.
• Tempting mistake: "Rowan never applied or paid, so nothing is owed." The death-pending-conversion rule pays whether or not Rowan applied. The application-and-payment deadline controls whether Rowan gets an individual policy. It does not control this death claim.
• Second tempting mistake: "$90,000 is payable." That ignores the subtraction. The rule caps the amount at what Rowan could have converted.

Change one fact: Rowan instead died on day 45 and never applied or paid. Day 45 is outside the 31-day period. Because notice was timely, this case gives no reason for extra time, so no death-pending-conversion claim applies. The date of death compared with the conversion period controls the answer.

Try it: Sam's $50,000 of group life ends when Sam leaves the eligible class. Sam becomes eligible for no other group life. On day 10, Sam applies and pays the first premium, and chooses a 10-year term policy. What is wrong with this request, and what is the most Sam can convert?

Answer: Explanation

The amount is fine: up to $50,000, because nothing is subtracted. The problem is the form. Conversion may be to any form the insurer customarily issues except term insurance, so Sam must choose a permanent form. The timing is fine, because Sam applied and paid within 31 days. Sam's premium will be based on Sam's current age and class of risk at the insurer's customary rate, not on the old group rate.

Not Every "30 Days" Is the Same Clock

A common error is treating every deadline near 30 days as the same rule. Each clock answers three questions: When does it start? How long is it? What must happen inside it? A wrong answer to any one of the three gives a wrong result.

The 3-working-day row, which starts when the application is received, covers replacements sold through an agent. A direct-response replacement uses a different trigger, explained in Replace a policy responsibly and use the free look.

Under the free-look rule, a refund covers premiums paid plus any policy fees or other charges. The free-look rule does not apply to industrial life policies.

Try it: Taylor applied for a replacement policy on October 1. The policy was delivered to Taylor on October 9. On November 2, Taylor returns the policy with a written cancellation request. Taylor says, "I'm too late. It's been more than 30 days since I applied." Is Taylor right?

Answer: Explanation

No. The free-look clock starts at delivery, not at application. October 9 to November 2 is 24 days, which is inside the 30-day replacement free look. The application date is a nearby fact. Note also that the 10-day period would be the wrong clock here, because this is a replacement policy. Cancelling the new policy during the free look deals only with the new policy. It does not, by itself, tell you what happened to the old one. That depends on what was actually done to the old policy.

Amounts Need a "Per What"

A dollar amount or a percentage means nothing until you know what it is measured against. Ask: per whom, over what period, and is it a total?

Gifts (see Recognize prohibited conduct and handle client money): For life insurance, annuities and health insurance, Nevada generally prohibits knowingly offering, giving or accepting rebates or other inducements that are not stated in the contract. Gifts, prizes, meals, event tickets and similar items are allowed up to $100 in total value per policyholder or prospective policyholder per calendar year. This allowance covers gift items. It is not permission to rebate premium. A discount on the premium is still a rebate, even if it is small.

Case: An agent gives a prospect a $70 gift card in February and $40 event tickets in November of the same year. Each item is under $100, but the total for that person that year is $110. That is over the allowance.

Change one fact: The tickets are given in January of the next year instead. Each calendar year now totals under $100 ($70 in the first year, $40 in the second). The year controls the answer, not the size of either item.

Borrowing and replacement: The replacement threshold for loans is also a total measured against a base. It applies when an existing policy is pledged or borrowed against for an aggregate (total) amount that is more than 25 percent of the loan value stated in the policy. The base is the policy's loan value, not its death benefit and not its cash value. You also add all the borrowing together.

Replacement When the Old Policy Stays in Force

See Replace a policy responsibly and use the free look. Under Nevada's definition, a replacement occurs when a new policy is to be purchased and the agent or insurer knows, or should know, that because of the transaction an existing policy will be any of the following:

• lapsed, forfeited, surrendered (fully or partly), assigned to the replacing insurer, or otherwise terminated
• converted to reduced paid-up or extended term coverage, or otherwise reduced in value through nonforfeiture benefits or other policy values
• amended to reduce benefits or shorten the coverage period
• reissued with less cash value
• pledged or borrowed against for a total of more than 25 percent of its stated loan value
• used in a financed purchase

Several of these branches leave the old policy in force. "The old policy still exists" does not mean "no replacement."

When a replacement is involved, the replacing insurer may not issue the new policy until a signed copy of the replacement notice is attached to the application. In an agent-sold replacement, if it is not the existing insurer, it must also send a copy of the notice to the existing insurer within 3 working days after receiving the application.

Case: Lee owns a whole life policy with a stated loan value of $16,000. The agent is selling Lee a new policy. As part of that new-policy transaction, Lee will borrow $3,000 from the old policy now and $2,500 in spring. Lee will use the borrowed money to pay for a roof repair, not to pay the new policy's premiums. Stipulate that this borrowing happens as a result of the agent's new-policy transaction. It is not unrelated roof borrowing that Lee would do anyway. Assume no replacement exemption applies. This lesson does not review exemptions.

• Threshold: 25% × $16,000 = $4,000.
• Total borrowing: $3,000 + $2,500 = $5,500, which is more than $4,000.
• Result: This is a replacement under the borrowing branch, even though the old policy stays in force. The borrowing counts because it results from the new-policy transaction. The insurer cannot issue until the signed notice is attached. The new policy gets the 30-day free look from delivery.
• Tempting mistake: Comparing each loan to the threshold separately. Each loan is under $4,000, but the rule looks at the total.

Change one fact: Lee plans to borrow only $3,000 in total. That is under $4,000, so the borrowing branch is not triggered. The answer is not automatically "no replacement," though. Now the missing facts matter. Will the old policy be lapsed, reduced or surrendered? Would borrowed money pay the new premiums, which could make it a financed purchase? If none of the other branches applies, this is not a replacement. Note that a total of exactly $4,000 also does not exceed 25 percent.

Try it: An insurer receives a replacement application on Monday. The agent says the signed notice "will follow next week," and asks the insurer to issue the policy now so the client is covered. What should the insurer do?

Answer: Explanation

The insurer should not issue yet. The controlling rule says the replacing insurer may not issue the policy until a signed copy of the replacement notice is attached to the application. The client's wish for quick coverage is a nearby fact. It does not create an exception. Separately, because this is an agent-sold replacement, if the insurer is not the existing insurer, its 3-working-day clock for sending the notice to the existing insurer started when it received the application.

Viatical Rescission: Notice and Repayment

See Recognize fraternals and policy settlements. A viator is the policy owner who sells the policy in a viatical settlement. The viator has an unconditional right to cancel, called rescinding, during the rescission period. That period ends at the earlier of two dates: 60 days after all parties sign, or 30 days after the viator receives the proceeds.

Rescission is effective only if both of these happen inside the period:

1. The viator gives notice to the provider or broker, and
2. The viator repays the provider all proceeds, plus any premiums, loans and loan interest paid on account of the settlement or on the provider's behalf.

If the insured dies during the rescission period, the settlement is treated as rescinded. All of those amounts must be repaid to the provider within 60 days after the death.

Case: All parties sign Morgan's settlement on day 0. Morgan receives the proceeds on day 12. Morgan sends notice on day 20 and repays on day 50.

• Period: 60 days after signing is day 60. 30 days after proceeds is day 12 + 30 = day 42. The earlier date is day 42.
• Result: The notice on day 20 was on time, but the repayment on day 50 was late. The rescission is not effective.
• Tempting mistake: "Morgan gave notice in time, so Morgan rescinded." Notice alone is only half of the requirement.

Change one fact: Morgan receives the proceeds on day 40 instead. The two dates are now day 60 and day 40 + 30 = day 70. The earlier date is day 60. Notice on day 20 and repayment on day 50 both fall inside the period, so the rescission is effective. Only the proceeds date changed, and it changed which date ended the period.

Formation: Was There Insurable Interest When the Policy Was Made?

Under Nevada's insurable-interest rule, a competent person may buy insurance on their own life for anyone's benefit. A person may not buy insurance on another person's life, or cause it to be bought, unless the benefits are payable to the insured, the insured's personal representatives, or someone who had an insurable interest at the time the contract was made.

• Close relatives by blood or by law have an interest based on love and affection.
• Others must have a lawful and substantial economic interest in the insured staying alive, not an interest that only arises from or grows with the insured's death.
• A trust may not buy or hold a policy on someone's life unless each trust beneficiary has an insurable interest, or is an irrevocably named charitable, benevolent, educational or religious institution.

Case: A group of investors with no family or business tie to Avery sets up a trust to obtain a policy on Avery's life. The investors are the trust beneficiaries. Two years later, the trust sells the policy through a licensed provider.

• Decision: Was the policy properly formed?
• Control: Who the trust beneficiaries were when the contract was made. Here they were investors whose only interest grows with Avery's death. That fails the trust rule.
• Tempting mistake: "The later sale was done properly, so the policy is fine." The insurable-interest test looks at the moment of formation. A later transfer cannot supply an interest that was missing then. This kind of arrangement is sometimes called stranger-originated life insurance. If benefits are paid under a contract made in violation of the rule, the insured or the insured's estate may sue to recover them from whoever received them.

Change one fact: Years ago, Avery bought the policy on Avery's own life and named Avery's spouse as beneficiary. Later, Avery sells it as the owner through a viatical settlement. Formation was proper, because a person may insure their own life. The sale is judged under the settlement rules, such as rescission and disclosures. It does not reach back and make the original purchase invalid.

Mixed Practice

Use the four steps for each case. Write down your decision, controlling fact and missing facts before you open the answer.

Practice A: Quinn's employer group life of $40,000 ends when Quinn's job ends. Within 31 days, Quinn becomes eligible for $40,000 of group life at a new job. Quinn also gets a $60 dinner from an agent in May and a $30 gift card from the same agent in August, while considering an individual policy. What can Quinn convert, and is the gift total within the allowance?

Answer: Explanation

These are two separate decisions, so answer them separately. Conversion: $40,000 − $40,000 = $0. Quinn has no amount left to convert. Quinn's new group coverage replaces it. Gifts: $60 + $30 = $90 for Quinn in that calendar year, which is within the $100 total. If you mixed the two topics, for example by thinking the gifts affect conversion, go back to step 1. Each decision has its own controlling fact.

Practice B: All parties sign Riley's viatical settlement on day 0. Riley receives the proceeds on day 5. On day 30, Riley sends notice and repays all proceeds. However, the provider had paid one premium on the policy after signing, and Riley did not repay it. Is the rescission effective? What fact would you want to confirm?

Answer: Explanation

The period ends at the earlier of day 60 and day 5 + 30 = day 35, so it ends on day 35. The timing on day 30 works. However, repayment must include any premiums paid on account of the settlement or on the provider's behalf. Riley left out the premium, so the repayment was incomplete. If Riley does not complete the repayment by day 35, the rescission is not effective. The fact to confirm is whether that premium was in fact paid on account of the settlement or on the provider's behalf.

Practice C: A new policy replaces Drew's old policy, which Drew will surrender. The policy is delivered on June 3. On June 10, Drew decides to cancel, but Drew only phones the agent. By June 20, Drew has still sent nothing in writing. Has Drew cancelled?

Answer: Explanation

Not yet. Because this is a replacement, the period is 30 days from delivery, which runs to about July 3. Cancelling requires returning the policy with a written request. A phone call alone does not meet that requirement. Drew still has time, since June 20 is well inside the period. The tempting mistakes are using the 10-day clock (wrong, because this is a replacement) or treating the phone call as enough (wrong, because a written request is required).

Correct Is Not the Same as Complete: Your Error Log

A correct guess is not mastery. If you got an answer right but could not name the controlling fact, you may miss the same idea next time with different numbers. Log those questions too.

For each item, record:

• Case: One line, in your own words.
• My answer and the correct answer.
• Controlling fact I missed, or could not name.
• Wrong rule or wrong clock I used, if any.
• Lesson to reread: The specific lesson that teaches the rule.
• My changed-fact case: A new version of the case that changes one fact, with its answer.
• Retest dates.

Model entry:

• Case: Viatical rescission. Notice on day 20, repayment on day 50, proceeds on day 12.
• Mine/correct: Effective / not effective.
• Missed: I used 60 days. The 30-days-after-proceeds date came first (day 42).
• Wrong rule: I treated notice alone as enough.
• Reread: Recognize fraternals and policy settlements.
• My changed-fact case: Proceeds received on day 40, so the period ends on day 60, and repayment on day 50 is effective.
• Retest: In 2–3 days, then in about a week.

Try it: You answered the Lee replacement case correctly ("replacement"), but your reason was "because the client is buying a new policy." Write the error log entry.

Answer: Explanation

A strong entry would look like this:

• Case: As part of the agent's new-policy transaction, Lee borrows $3,000 + $2,500 for a roof repair from an old policy with a $16,000 loan value.
• Mine/correct: Replacement / replacement, but my reason was wrong.
• Missed: The total borrowing ($5,500), which results from the new-policy transaction, exceeds 25% of the loan value ($4,000). Buying a new policy alone does not make it a replacement.
• Wrong rule: "Any new purchase is a replacement."
• Reread: Replace a policy responsibly and use the free look.
• My changed-fact case: Total borrowing of $3,000, with no other branch triggered, is not a replacement.
• Retest: Scheduled.

This entry earns its place in the log because the right answer came from a rule that would fail on the changed-fact case.

A Delayed Mixed-Practice Plan

Mixing topics and spacing out review are planning choices, not guarantees. This plan cannot tell you whether you will pass. It gives you a structure for finding and fixing specific weaknesses. You can fit it into the plan from Understand the exam and make a study plan.

• Today: Work the mixed practice above. Log every miss and every right answer you could not fully explain.
• 2–3 days later: Redo each logged case from memory without your notes. Then work your own changed-fact versions.
• About 1 week later: Write two new mixed cases that combine different topics, such as group conversion with gift rules, or replacement with viatical rescission. Exchange cases with a study partner, or swap the order so you don't recognize them.
• About 2 weeks later: Retest only the log items you missed again. Mark an item resolved when you can state its controlling fact and correct the tempting mistake without looking.

If one lesson keeps appearing in your log, reread that lesson before your next session instead of doing more mixed practice.

What to Remember

• Name the decision first. Then find the one fact the rule actually looks at.
• Nearby facts, such as health, a client's urgency or a later lawful sale, often feel important but do not change the answer.
• Every clock has a start, a length and a required action: 31 days to apply and pay for group conversion; 10 or 30 days from delivery for the free look; the earlier of 60 days after signing or 30 days after proceeds for viatical rescission, which requires notice and repayment.
• Amounts need a base: $100 total per person per calendar year for gifts; total borrowing over 25% of stated loan value for replacement.
• A replacement can occur while the old policy stays in force. The insurer may not issue until the signed notice is attached.
• Insurable interest is judged when the contract is made. A later transfer does not fix a bad start.
• Log questions you got right for the wrong reason, and retest them days later in mixed form.