PA Life, Accident, & Health Insurance Exam

Insurance

defined as the transfer of PURE risk to the insurance company in consideration for a premium.

The chance of loss without any chance of gain is called

pure risk

Speculative risk

has the possibility for gain or loss and is not insurable.

Risk is defined as the

chance of loss.

A condition that could result in a loss is known as an

exposure

A hazard is something that increases

the chance of loss.

The presence of a physical hazard

increases the chance of a loss occurring.

A peril is

defined as a cause of loss, such as fire.

To be insurable,

losses must be calculable.

The law of large numbers

allows insurers to predict claims more accurately.

The law of large numbers applies to

groups of people, not to individuals.

The more people in the group,

the more accurate the predictions are.

Most insurers buy reinsurance

to protect themselves in the event of a catastrophic loss.

Insurance laws are not required

to be uniform from one state to another.

A stock insurer

may pay dividends to its shareholders (stockholders), but they may not be guaranteed.

A reciprocal insurance company is managed by an

attorney-in-fact.

An unincorporated association of individuals who insure each other is known as

a reciprocal insurer.

The government offers insurance primarily based upon

social needs, such as flood insurance and workers compensation, but does not offer insurance for the purpose of preventing fraud.

A foreign company

has their home office in another state.

An insurer incorporated outside of the U.S. who sells in the U.S. is

an alien company.

A producer may be personally liable when

violating the producer's contract.

Producers represent

the insurance company, not the insured.

Independent producers

own their own accounts and are not insurance company employees.

Producers have

express, implied and apparent authority.

The authority a producer

has that is written in his or her contract is known as express authority.

A producer's binding authority (if any)

is expressed (written down) in the producer's contract with the insurer the producer represents.

The authority not expressly (written) granted,

but is actual authority the producer has to transact normal business activities, is known as implied authority.

The elements of a legal contract may be remembered

by the acronym C-O-A-L (consideration, offer, acceptance, legal purpose and legal capacity).

A requirement for a valid contract

is offer and acceptance, or mutual agreement.

Advertising the availability of insurance is not

considered to be an offer.

A specific and definite proposal to enter into a contract is known as

an offer.

The consideration on a policy need

not be equal.

A policy may not be voided

due to unequal consideration.

Under the consideration clause,

something of value must be exchanged.

Because insurance contracts are contracts of adhesion,

policy ambiguities always favor the insured.

Insurance policies are considered

to be unilateral contracts, in that only one party makes an enforceable promise the insurer.

The principle of indemnity states

the purpose of insurance is to restore the insured to the same position as before the loss occurred.

The principle of utmost good faith states

that all parties to an insurance transaction are honest.

A representation is defined as

the truth to the best of one's knowledge.

A warranty is defined as

a sworn statement of truth, guaranteed to be true.

A breach of warranty

may void a contract.

Concealment is defined as

the failure to disclose a material fact.

When an insurer voluntarily gives up the right to obtain information that they are entitled to,

they have made a waiver.

Insurable interest

must exist at the time of application, but not necessarily at the time of a claim.

Insurable interest may be based on

economics or family relationships.

An insurable interest exists if

someone would benefit if another person continues to live.

Buying a life insurance policy

creates an immediate estate.

When life insurance is used to pay estate taxes

it is known as estate conservation.

A life settlement contract is between

the life insurance policyowner and a third party.

The human life value approach was created to

establish what a family would lose in income upon the death of the sole or chief income provider.

The needs approach to life insurance does not

consider future earnings.

Stockholders in small, privately held closed corporations often enter into

buy/sell agreements with the corporation that are funded by life policies.

A policy that provides for business continuation in the event that a business partner dies is based upon a

cross-purchase buy/sell agreement.

A corporation may buy a policy on a shareholder to provide for stock redemption in the event of the

shareholder's death.

A stock redemption plan is an

agreement whereby a corporation agrees to buy back the stock of a deceased shareholder.

Examples of third-party policyownership include

key person and partnership insurance, as well as a policy written on the life of a spouse or minor child.

Under an executive bonus,

the premium paid to the employee as a bonus is deductible by the business and the amount paid to or for the employee is reportable as taxable income to the employee.

When life insurance is purchased as an executive bonus for a corporate employee,

the policy belongs to the employee.

Life insurance mortality tables are based upon

people and time.

Life insurance premiums are based on

mortality (death) plus company expenses minus interest earned on company investments.

Agents (producers) are also known as

field underwriters.

If a producer gives an applicant a conditional receipt and the underwriter rejects the application,

there is no coverage.

Conditional or binding receipts are used in

life and health insurance.

Binders are used in

property and casualty insurance.

A conditional receipt is not given to an applicant unless

the initial premium has been paid.

Applicants may backdate a life insurance application

for up to a specified number of months (usually 6 months) in order to obtain a lower premium.

An incomplete application is

usually returned.

However, should the underwriter approve it,

coverage begins and the company has waived its ability to contest a claim.

The earliest that coverage could start would be

the day of application, assuming the applicant paid the first premium, had no conditions to fulfill, and had not lied on the application.

Coverage can NEVER begin unless

the premium has been paid.

The HIV consent form states that the results of an HIV test will

only be shared with certain individuals, such as the underwriter.

Life insurers may discriminate

based upon physical hazards (age and health) of the applicant.

The company underwriter determines the

final rating classification, not the producer.

A preferred risk is likely to receive

a premium discount.

A standard risk is

one with an average life span. Most applicants are standard risks.

A rated policy is one

issued to a substandard risk with dangerous hobbies or health problems.

An increasing term policy's

limits increase each year. Sometimes called a return-of-premium policy.

Term insurance is

renewable without a physical examination, up to a certain age.

Term insurance may be converted to

whole life, but not the reverse

Conversion is based on

the insured's current age.

Convertible term is

convertible based upon the current or attained age of the insured.

On term life insurance,

the re-entry option is contingent upon the insured passing a physical exam.

In a level term policy,

the premium and the amount of coverage are level throughout the term.

On an annual renewable level term policy,

the premium will increase every year, although the face amount will remain the same.

The face amount of a mortgage protection life insurance policy will

decrease at the same rate as the mortgage balance declines.

It is the face amount that decreases on a decreasing term policy,

not the premium.

Decreasing term is the

type of life insurance provided in mortgage redemption insurance.

Whole life policies must contain

a table showing their guaranteed cash value at the end of each year (anniversary date) for the first 20 years. It is shown per unit (per thousand).

Whole life benefits are

bundled (packaged).

Universal life benefits are

transparent (stand-alone).

Whole life and limited pay life both reach maturity at

the same time (age 100).

In a traditional whole life policy premiums

are due until the insured dies or reaches age 100.

Conversely, in a limited pay policy, the premiums

are paid for a shorter period of time.

Straight or traditional whole life has

a level premium and will provide coverage until the insured dies or reaches age 100.

Whole life insurance will pay

the face amount upon death or age 100, whichever comes first.

Limited pay whole life insurance has limits

that pertain either to the number of years payments must be made, such as 20 pay-life, or the age by which all premiums must be paid, such as life paid-up at 65.

Limited pay whole life policies,

though paid up earlier, do not mature until the insured reaches age 100.

On a 20-pay life,

the cash value will equal the face amount at maturity.

A single premium

may buy a policy that is paid up for life.

A single premium policy has an immediate

cash value.