Life Insurance Web Class Review

Flashcards covering general insurance concepts, life insurance basics, policy types, riders, provisions, annuities, and federal tax considerations based on the lecture notes.

Mutual Insurer

An insurance company owned by policyholders where the board is elected by policyholders and can return "excess premium" as non-taxable dividends.

Stock Insurer

An insurance company owned by stockholders where directors/officers are elected by stockholders; stockholders may receive taxable corporate dividends as a return of profit.

Pure Risk

A possibility of loss or no loss, for which insurance is designed to protect.

Speculative Risk

A possibility of loss, no loss, or gain; this type of risk is not insurable.

Hazard

A condition that increases the chance of a loss occurring.

Physical Hazard

A physical condition that increases the probability of loss, such as a pre-existing health condition.

Moral Hazard

A hazard arising from dishonesty, such as an insured giving false information on an application.

Morale Hazard

A hazard arising from indifference to loss or failure to take precautions regarding one’s own health and safety, such as failure to wear seatbelts.

Peril

The cause of a potential loss, such as fire, lightning, wind, hail, sickness, disability, and death.

Adverse Selection

The tendency of those with high risk exposures to seek insurance at a higher rate than those with lower risk exposures.

Law of Large Numbers

A principle stating that the larger the number of exposures, the easier it is to predict the probability of loss.

Insurable Interest

A relationship where a person faces potential financial hardship in the event of a loss; it must exist when insurance takes effect and not necessarily when the loss occurs.

Principle of Indemnity

The concept that the insured is restored to the same financial condition as prior to the loss, intended to make one "whole" without profiting from the loss.

Contract of Adhesion

A contract prepared by one party and submitted to the other on a "take-it-or-leave-it" basis without negotiation; ambiguity is construed in favor of the insured.

Aleatory Contract

A contract where the parties exchange unequal amounts of money, such as the premium paid being less than the potential benefit.

Unilateral Contract

A contract where only one party, the insurer, is legally bound to contractual obligations once the premium is paid.

Conditional Contract

A contract where both parties must perform certain duties, such as paying premiums on time, to enforce the contract.

Representation

Statements made in an application that are believed to be true to the best of the applicant’s knowledge.

Warranty

Statements in the application that become part of the policy and are guaranteed to be true; if untrue, the contract may be voided.

Material Misrepresentation

A false statement contained in the application that is material to the issuance of the policy and may void the contract.

Concealment

The willful withholding of material facts pertinent to the issuance of a policy.

Third-Party Ownership

A policy owned by a person other than the insured.

Attained Age

The insured’s age at any point in time, typically used at renewal or conversion of a policy.

Conditional Receipt

A receipt providing that if the premium is paid, coverage is in effect the date of application or medical exam (whichever is later), provided the policy would have been issued as applied for.

Medical Information Bureau (MIB), Inc.

A not-for-profit information exchange used by insurers to alert underwriters to fraud, errors, or misrepresentations; it cannot be used as the sole basis to decline an applicant.

Net Premium Formula

$$\text{Mortality} - \text{Interest} = \text{Net Premium}$$

Gross Premium Formula

$$\text{Net Premium} + \text{Expenses} = \text{Gross Premium}$$

Statement of Good Health

A document the producer must obtain upon delivery if the premium was not paid at the time of application, verifying the insured's health has not changed.

Viatical Settlement

The sale of a life insurance policy by a terminally ill insured to a third party for less than the death benefit but more than the cash value.

Cash Value

Money accumulated in a permanent whole life policy that is considered a living benefit the owner may borrow against.

Face Amount

The amount of protection stated in a policy payable upon death; also called the "limit of liability."

Endow (Mature)

The date at which the cash value equals the face amount and the benefit is paid to the owner.

Decreasing Term

Term insurance where the death benefit decreases over the term but the premium remains level.

Annually Renewable Term

Level term insurance written in one-year increments that automatically renews with premiums increasing annually based on attained age.

Waiver of Premium Rider

A rider that waives premiums if the insured becomes totally disabled after a waiting period of $3-6\,\text{months}$.

Accidental Death Benefit

A rider providing double or triple the face amount (Double or Triple Indemnity) if death is the result of an accident.

Guaranteed Insurability Rider

Allows the insured to purchase additional amounts of insurance without proof of insurability at specified ages or events, typically every $3\,\text{years}$.

Accelerated Death Benefit

Allows early payment of a portion of the face amount if the insured is terminally ill with less than $24\,\text{months}$ to live.

Entire Contract Clause

A provision stating that the policy, riders, and a copy of the application constitute the entire agreement between the parties.

Incontestability Clause

Prevents the insurer from contesting a claim based on material misstatements or fraud in the application after the policy has been in force for $2\,\text{years}$.

Insuring Clause

The insurer's promise to pay upon receiving proof of death, identifying the parties and perils covered.

Free Look Period

A period, usually $10\,\text{days}$, allowing the policyowner to return the policy for a full refund of premiums paid; starts upon policy delivery.

Absolute Assignment

A permanent transfer of all ownership rights in a policy to a new owner.

Collateral Assignment

A temporary transfer of ownership rights, typically used to secure a loan until the debt is repaid.

Automatic Premium Loan (APL)

A provision allowing the insurer to borrow from the cash value to cover a premium payment at the end of the grace period to prevent lapse.

Reinstatement

Allows the owner to restore a lapsed policy (not surrendered) within typically $3\,\text{years}$ by paying back premiums plus interest.

Fixed Policy Loan Rate

The maximum fixed interest rate charged for policy loans, which is $8\%$.

Nonforfeiture Options

Options required in cash value policies to protect against total loss of benefits if the policy lapses, including Cash Surrender, Reduced Paid-Up, and Extended Term.

Reduced Paid-Up Option

A nonforfeiture option where cash value is used to buy a single premium permanent policy with a reduced face amount that lasts to age $100$.

Extended Term Option

A nonforfeiture option using cash value to buy a single premium term policy of the same face amount; it provides the largest death benefit of the nonforfeiture options.

Annuity

A contract designed to protect against outliving retirement income by providing a stream of income for a designated person.

Exclusion Ratio

A formula used in annuity taxation to determine the part of the payment that is a tax-free return of premium versus the taxable part.

7-Pay Test

A test comparing premiums paid during the first $7\,\text{years}$ with $7\,\text{annual net level premiums}$; failure results in the policy being classified as a Modified Endowment Contract (MEC).

1035 Tax-Free Exchange

A tax-free exchange between certain policies, such as life to life, life to annuity, or annuity to annuity, but NEVER annuity to life insurance.