Life Insurance Exam Vocab

Reserves

Reserves

Funds held by an insurance company to help fulfill future claims

Stock Company

insurance companies owned and controlled by a group of stockholders

Non-participating plan

plan in which the insured is not entitled to share in the divisible surplus of the company (dividends)

Mutual Company

Company that is owned by its policy owners and usually issues participating insurance

Participating Plan

Plan in which policy owners receive shares of the company's divisible surplus (dividends)

Reinsurer

A company that provides financial protection to insurance companies. They handle risks too large for the insurance company to handle on its own.

Fair Credit Reporting Act

A federal law that established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant and properly used.

Policy Summary

A Summary of the terms of the insurance policy; including conditions, coverage limitations, and premiums.

Life Insurance

insurance against loss due to the death of a specific person (insured) upon whose death the insurance company agrees to pay a stated sum to the beneficiary.

Term Insurance

Life insurance coverage for a specified period of time, expires without value if the insured survives the stated period. Designed to provide temporary protection in case a person dies during a specified period of time.

Whole Life Insurance

permanent, level insurance protection for a person's "whole of life"
Characterized by: level premiums, level benefits, and cash values

Group Life Insurance

life insurance that provides a master policy for a group; each eligible group member receives a certificate of insurance

Consideration

Part of an insurance contract that sets forth the amount of the initial and renewal premiums and frequency of future payments

Disability Insurance

A type of insurance that insures the insured's earned income against the risk that a disability renders the insured unable to complete the core functions of their work.

Entire Contract Provision

States that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract

Notice of Claim

Describes the policy owner's obligation to provide notification of loss to the insurer within a reasonable amount of time

Reinstatement

Act of putting a lapsed policy back in force by producing satisfactory evidence of insurability and paying any past-due premiums

Peril

The immediate specific event causing loss and giving rise to risk

Loss

loss of assets resulting from a pure risk

Hazard

Any factor that gives rise to a peril.

Morale Hazard

Hazard arising out of an insured's indifference to loss because of the existence of insurance.

Loss Exposure

Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs.

risk

The probability of loss occurring for an insured or prospect

Pure Risk

a risk that presents the chance of loss but no opportunity for gain; this is insurable

Speculative Risk

a risk that presents the chance of both loss and gain; it is not insurable

Risk Retention

Being aware of the risks involved and taking precautions for financial protection.

Risk Reduction

when the chances of loss are lessened
Ex) Changing one's lifestyle to minimize a known risk

Risk Avoidance

when individuals avoid risk entirely
Ex) If you never get into a car, you can never be in a car accident

Indemnity Contract

agreement by one person, for consideration, to pay another person a sum of money in the event that the other person sustains a specified loss

Law of Large Numbers

the larger the number of individual risks combined into a group, the more certainty there is in predicting the degree or amount of loss that will be incurred in any given period

Moral Hazard

Arises when people behave recklessly because they know they will be saved if things go wrong

Adhesion

The contract has been prepared by one party with no negotiation between the applicant and the insurer
Applicant "adheres" to the terms on a "take it or leave it" basis

Unilateral

Only one party (the insurer) makes any kind of enforceable promise

Legal Purpose

To be valid, the object of the contract and the reason the parties enter into the contract must be legal

Competent Parties

To be valid a contract must be entered into by competent parties:
Competent Insurer: has been licensed and authorized by the state in which it conducts business
Applicants are considered competent unless:
they are a minor
they are mentally infirm
under the influence of alcohol or narcotics

Offer and Acceptance

To be legally binding, a contract must be made with a definite, unqualified proposal (offer) by one party and the acceptance of the exact terms by the other (acceptance).

Concealment

failure by the applicant to disclose a known material fact when applying for insurance

Representation

A statement of fact or opinion made by the insured when applying for insurance, usually in response to a question from the insurer.

Insurable Interest

a person's right to take out insurance on another person because that person can show he or she would suffer financial loss or hardship in the event of the death of the insured or a loss of property

Fraud

when someone knowingly lies to obtain a benefit or advantage to which they are not otherwise entitled or someone knowingly denies a benefit that is due and to which someone is entitled

Elements of a legally binding contract (4)

1) Competent Parties
2) Consideration
3) Legal Purpose
4) Offer & Acceptance

Aleatory

A contract with an element of chance and potential for unequal exchange of value or consideration for both parties

Free Look Provision

gives policyowners the right to return the policy for a full premium refund within a specified period of time if they decide not to purchase the insurance.

Policy Loan

The policy owner is entitled to borrow an amount equal to the available cash value
*If not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of the claim

Grace Period

a defined amount of time after the premium is due in which a policyholder can make a premium payment without coverage lapsing

Consideration Clause

states that the policyowner's consideration consists of completing the application and paying the initial premium

Contestable period

The incontestable clause allows an insurer to contest a claim during this period (usually within the first two years of the policy's life)

Incontestable Clause

states that the insurer can no longer contest the validity of the policy after it has been in force for a specified period of time (typically two years)

Suicide Provision

protects the insurer against the purchase of a policy in contemplation of suicide (suicide period is typically within 2 years of policy's inception)

Misstatement of Age

-This clause protects the insurance company against an applicant who lies about his age
-The insurance company has the right to adjust your face amount up or down to coincide with the face amount or policy limit the correct premium would have purchased if you had not lied about your age

Accelerated Benefits Provision

provides for the early payment of some portion of the policy's face amount should the insured suffer from a terminal, critical, or chronic illness or critical injury. The remaining portion of the policy is payable as a death benefit

Nonforfeiture Options

-Cash Surrender
-Reduce Paid-Up option
-Extended Term option

Absolute Assignment

A transfer by the policyholder of all control and rights to a third party- it is absolute and irrevocable

Payor Provision

typically attached to Juvenile Insurance Policies, provides that in the event of death or disability of the adult premium-payor, the premiums will be waived until the insured child reaches a specified age or until the maturity date of the contract which ever comes first.

Policy Dividends

are paid out by Participating Companies only, If fewer insureds have died than was estimated, a surplus results and the company can return to the policyowners a part of the premiums paid. are a return of part of premiums already paid and as such are not taxable income

Return of Premium Rider

Provides that in the event of the death of the insured within a specified period of time, the policy will pay, in addition to the face amount, an amount equal to the sum of all premiums paid to date.

Waiver of Premium Rider

prevents a policy from lapsing for nonpayment of premiums while the insured is disabled and unable to work, policyowner is relieved of paying premiums for as long as the disability continues

Extended Term Option

use the policy's cash value to purchase a term insurance policy in an amount equal to the original policy's face value for as long a period as the cash value will purchase.

Cash Surrender Options

Policyowners may request an immediate cash payment of their cash values when their policies are surrendered

Insuring Clause

A general statement that identifies the basic agreement made by the insurance company to pay benefits upon the insured's death, usually located on the first page of the policy.

Policyowner

The person who has the right to exercise the privileges and rights in the policy contract.

Owner's right provision

Defines the person who may name and change beneficiaries, select options available under the policy and receive any financial benefits from the policy

Automatic Premium Loan Provision

Authorizes insurer to automatically pay any premium in default at the end of the grace period and charge the amount against the life insurance policy as a policy loan.

general exclusions

-War (referred to as the results clause)
-Private Aviation
-Commission of a Felony
-Hazardous Occupation or Hobbies
-Suicide (first 2 years)

Nonforfeiture Option (Definition)

Allows a policy owner to stop paying premiums and not forfeit any of the equity in the policy

Policy Dividend Options (5 Types)

-Cash Dividend Option
-Accumulation at Interest Option
-Paid-Up Additions Option
-Reduce Premium Option
-One Year Term Option

Guaranteed Insurability Rider

Permits Insured to buy specific amounts of additional insurance at specified intervals without evidence of insurability

Accidental Death Rider

doubles the face amount of life insurance if death occurs as a result of an accident
(Death must occur within a specified time after the date of accident-usually 90 days)

beneficiary

the party designated to receive the policy's proceeds upon the insured's death

Mortality Factor

A measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Interest Factor

when policyowners pay premiums to a life insurance company the funds do not sit idle in the insurers vaults, they are combined with the other funds and invested to earn interest.
*Interest is one of the ways that an insurance company can lower premium rates

Factors that Impact Premium Amounts (5 Types)

-Age
-Gender
-Health
-Occupation
-Hobbies

Premium Mode

the manner or frequency that the policyowner pays the policy premium
*The higher the frequency of payments, the higher the premium

Premium Modes (4 Types)

-Monthly
-Annually
-Semi-Annually
-Quarterly

Death Benefit Payment Options (5 Types)

-Lump Sum
-Interest Only
-Fixed Period
-Fixed Amount
-Life Income

Viatical Settlement

the sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups, who hope to profit by the insured's early death

Tax Treatment of benefit proceeds

Policy Premiums- Not tax-deductible
Lump Sum death benefit- typically tax free
Death Benefit Installments- Principal-tax free/ Interest-taxable

1035 Exchange

An existing life insurance policy is assigned to another insurer for a new contract
*Enables postponement of tax consequences

Beneficiary Order of Succession

1) Primary
2) Secondary
3) Tertiary

Revocable Beneficiary

the policyholder reserves the right to change the beneficiary designation without the beneficiary's consent

Irrevocable Beneficiary

one that cannot be changed without the beneficiary's consent

Underwriting

Process of reviewing the characteristics that make up the risk profile of an applicant to determine insurability

Insurable Interest Exists (Types)

-Unlimited insurable interest in oneself
-Husband/ Wife can insure spouse
-Parents can insure children
-Children can insure parents
-Business can insure key employees
-Business partners can insure each other
-Creditor can insure debtor for term of the debt

Medical Information Bureau (MIB)

An information database that stores the health histories of individuals who have applied for insurance in the past.

Warranties

Statements in the application that are guaranteed true in all respects.

Conditional Receipts

indicates that certain conditions must be met in order for the insurance coverage to go into effect. There are 2 types: insurability receipt or an approval receipt.

Binding Receipts

- States that the effective date of policy is the date of receipt of the initial premium
-Should the applicant die before it is fully processed
• The benefits are full payable
• Will pay this whether or not they would have been approved

Policy Effective Date

it identifies when the coverage is effective, but also it establishes the date by which future annual premiums must be paid. The policy will not be truly effective until it is delivered to the applicant, the first premium is paid, and a statement of continued good health is obtained.

Backdating

purpose is to use premiums based on an earlier age
-make the policy effective at an earlier date than the present

Group Insurance

way to provide insurance coverage to a number of people under one contract
*Typically written for employee-employer groups and is most often written as an annually renewable term policy

Contributory Plan

Employee group insurance plan in which employees share the cost

Noncontributory Plan

The employer pays the entire cost of the plan
*Master policy is issued to employer who is policyholder
*Individual does not own policy- they are issued a certificate of coverage/insurance

Rate Classes

-Preferred-Low Risk-Low Premiums
-Standard- Average Risk
-Substandard-High Risk-Higher Premiums
-Declined-Not insurable

Group conversion to individual insurance

If a member's coverage is terminated, member may convert group coverage to individual whole life coverage, without having to show proof of insurability

Conversion Period

Individual must apply for individual coverage within 31 days after the date of the group coverage termination

Annuitant

Income recipient of an annuity

Single Premium Annuity

An Annuity purchased with one lump-sum payment, generally with after tax dollars.

Deferred Annuity

provides income payments at some future date

Periodic Payments

premiums are paid in installments over a period of time

Immediate Annuities

designed to make its first benefit payment to the annuitant at one payment interval from the date of purchase.(can start taking money out after 1 month) These are funded with one single payment and are often called SPIAs