Chapter 1: Basic Principles of Life and Health Insurance

Chapter 1: Basic Principles of Life and Health Insurance

Adjuster

This is the person who investigates claims and arranges for them to be settled or denied.

Alien Insurer

In the United States, this is an insurer whose principal office and domicile location is outside this country.

Admitted Insurer

This is an insurer who has received a certificate of authority from a state’s department of insurance which authorizes them to conduct insurance business in that state.

Agent

This is an individual or organization that’s authorized to solicit, sell, and transact (bind) coverage for specific insurance providers under the terms of one or more agent contracts.

Authorized Insurer

This is an admitted insurer.

Broker

This is a person who represents himself and the insured (i.e., the client or customer). A broker cannot bind coverage on behalf of an insurance carrier because a broker is not appointed as an agent.

Captive Insurer

This is an insurer that’s established and owned by a parent firm for the purpose of insuring the parent firm’s loss exposure.

Certificate of Authority

This is a license that’s issued to an insurer by an insurance department (or equivalent state agency) that authorizes that company to conduct insurance business in that particular state.

Claims Department

This is the department that’s responsible for processing, investigating, and paying claims.

Domestic Insurer

This is an insurer with its principal or home office in the state in which it’s authorized.

Divisible Surplus

This is the amount of earnings that are paid to policy owners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Foreign Insurer

This is an insurer whose principal office or domicile location is in a state that’s different from the state in which it’s transacting insurance business.

Fraternal Benefit Society

This is a non-profit benevolent organization that provides insurance to its members.

Independent Insurance Agency

This is an agency that can represent any number of insurance companies through contractual agreements. Unlike a captive agency, they are not limited to one insurance company.

Insurance

This is the transfer of risk through the pooling or accumulation of funds.

Insured

This is the customer who receives insurance protection under an insurance policy.

Insurer

This is an insurance company.

Lloyds of London

This is NOT an insurer but a group of individuals and companies that underwrite unusual insurance policies.

Marketing Division

This is the division that’s responsible for acquiring prospective applicants through various advertising media.

Monoline Insurer

This is an insurance carrier that only sells one line of insurance.

Multi-Line Insurer

This is an insurance company or independent agent that provides a “one-stop-shop” for businesses or individuals who are seeking coverage for all of their insurance needs. For example, many large insurers offer individual policies for automobile, homeowner, long-term care, life, and health insurance needs.

Mutual Insurance Company

This is an insurance company that’s characterized by having no capital stock, being owned by their policy owners, and typically issuing participating insurance.

Non-Admitted (Unauthorized) Insurer

This is an insurer that has not received a certificate of authority from a state’s department of insurance which authorizes it to conduct insurance business in that state.

Nonparticipating Policy

This is a policy that’s typically issued by stock companies. This type of policy doesn’t allow policy owners to participate in dividends or to elect the board of directors.

Participating Policy

This is an insurance policy that pays policy dividends to policy owners. By receiving dividends, policy owners share in the company’s divisible surplus and also elect the company’s board of directors.

Personal Producing General Agency (PPGA)

This is an agency that represents one or more specific insurers. A PPGA is a similar agency system, but PPGAs don’t recruit, train, or supervise career agents.

Policy owner

This is the person who’s responsible for the payment of premiums and who possesses all ownership rights of the contract. Typically, the policy owner is also the insured.

Private (Commercial) Insurer

This is an insurer that’s owned by private citizens or groups that offer one or more insurance lines. Commercial insurers are NOT government-owned.

Producer

This is an individual who’s licensed by one or more states to sell, solicit, or transact insurance in a given state.

Proposed Insured

This is the person whose life will be covered by an insurance policy

Public Adjuster

This person acts on behalf of a consumer who’s settling an insurance claim.

Reciprocal Insurer

This is an unincorporated organization in which all members insure one another. An attorney-in-fact manages it.

Reinsurance

This is the acceptance by one or more insurers (referred to as reinsurers) of a portion of the risk being underwritten by another insurer that has contracted with a consumer to cover the entire risk.

Reinsurer

This is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to cover on their own and make it possible for insurers to obtain more business than they would otherwise be able to obtain.

Risk Retention Group

This is a group-owned liability insurer that assumes and spreads product liability and other forms of commercial liability risks among its members.

Sales Department

This department acquires clients through one-on-one meetings in which consumers complete applications.

Self-Insurer

This is a company that establishes a self-funded plan to cover potential losses rather than transferring the risk to an insurance company.

Service Representatives

These are customer service employees. Service representatives are not required to obtain a license because they neither sell nor solicit coverage, and they don’t bind coverage.

Solicitors

These are the individuals who solicit and schedule sales meetings between consumers and the producers for whom they work. Some states separately license these individuals.

Stock Insurance Company

This is an insurance company that’s owned and controlled by a group of stockholders (or shareholders) whose investment in the company provides the safety margin necessary in the issuance of guaranteed, fixed premium, nonparticipating policies.

Surplus Lines Insurance

This is non-traditional insurance that’s only available from a surplus lines insurer. This type of insurance provides coverage for substandard or unusual risks and is not available through private or commercial carriers.

Unauthorized Insurer

This is a non-admitted insurer.

Underwriting Department

This is the department within an insurance company that’s responsible for reviewing applications, approving or declining applications, and assigning risk classifications

What is considered to be the primary reason for buying life insurance?

1. Provide death benefits

2. Provide living benefits

3. Provide money for college

4. Provide money for retirement

Correct. The primary reason for purchasing life insurance is to provide death benefits.

Which of the following is NOT considered advertising?

1. A sales presentation

2. An illustration

3. A rating from a rating service company, such as A.M. Best

4. Direct mailing from an agency

A rating from a rating service company, such as A.M. Best

A life insurance company has transferred some of its risk to another insurer. The insurer assuming the risk is called the________ .

1. participating insurer

2. reciprocal insurer

3. mutual insurer

4. reinsurer

reinsurer

A type of insurer that is owned by its policyowners is called?

1. domestic

2. stock

3. in-house

4. mutual

The correct answer is, "mutual". A mutual insurer is owned by its policyowners.

ABC Insurance Company transfers part of their risk to XYZ Insurance Company. This situation is called?

1. reinsurance

2. reciprocity

3. risk transfer

4. conservation

The correct answer is, "reinsurance". Reinsurance is a situation in which an insurer transfers part of their risk to another insurer.

Karen is a producer who has obtained personal information about a client without having a legitimate reason to do so. Under the McCarran-Ferguson Act, what is the minimum penalty for this?

1. $5,000

2. $15,000

3. $0

4. $10,000

The correct answer is, "$10,000". A fine of $10,000 or up to one year in jail is the penalty for any person who obtains information about a client without having a legitimate reason to receive it.

Ken is a producer who has obtained Consumer Information Reports under false pretenses. Under the Fair Credit Reporting Act, what is the maximum penalty that may be imposed on Ken?

1. $5,000

2. $3,000

3. $7,000

4. $1,000

The correct answer is, "$5,000". Under the Fair Credit Reporting Act, the maximum penalty for a producer who obtains Consumer Information Reports under false pretenses is $5,000 and 1 year imprisonment.

What is the primary purpose of a rating service company such as A.M Best?

1. Determine which agent to use locally

2. Determine financial strength of an insurance company

3. Determine which insurer offers the best rates

4. Determine which insurer offers the best policies

The primary purpose of a rating service company is to determine the financial strength of the company being rated.

A nonparticipating company is sometimes called a(n)

1. stock insurer

2. reinsurer

3. alien insurer

4. mutual insurer

The correct answer is, "stock insurer". A stock insurer is referred to as a nonparticipating company because policyholders do not participate in dividends resulting from stock ownership.

A plan in which an employer pays insurance benefits from a fund derived from the employer's current revenues is called _____

1. A multiple-employer plan

2. A blanket plan

3. A self-derived plan

4. A self-funded plan

The correct answer is, "A self-funded plan". This is an example of a self-funded plan.

An insurer's ability to make unpredictable payouts to policyowners is called

1. investment values

2. assets

3. liquidity

4. capital

The correct answer is, "liquidity". Liquidity indicates a company's ability to make unpredictable payouts to policyowners.

What kind of life insurance policy issued by a mutual insurer provides a return of divisible surplus?

The correct answer is, "participating life insurance policy". A mutual insurer issues life insurance policies that provide a return of divisible surplus.

A nonparticipating policy will…???

1. give policyowners special privileges

2. provide a return of premium

3. not pay dividends

4. provide tax advantages

The correct answer is, "not pay dividends". When an insurer offers a policy that is nonparticipating, the insurer's policy does not pay dividends.

A(n) ______ company is owned by its shareholders.

1. mixed

2. stock

3. interactive

4. mutual

The correct answer is, "stock". A stock insurance company is owned by its shareholders.

Fraternal Benefit Society has each of the following characteristics EXCEPT.. ?

1. Exist for the benefit of its members

2. Exist For profit

3. Incorporated

4. Without capital stock

The correct answer is, "Exist For profit". Fraternal Benefit Societies are not-for-profit entities which exist for the benefit of its members.

The Do Not Call Registry offers exemptions for calls placed from all of the following EXCEPT???

1. charities

2. surveys

3. insurance sales calls

4. political organizations

All of these types of calls are exempt from the Do Not Call Registry EXCEPT insurance sales calls.

The Fair Credit and Reporting Act's main purpose is to….

1. assist an insurer in determining an applicant's creditworthiness

2. protect insurers from an applicant's misrepresentation

3. protect consumers with guidelines regarding credit reporting and distribution

4. assist in the underwriting of insurance policies

Correct. The primary purpose of the Fair Credit and Reporting Act is to protect consumers with guidelines regarding credit reporting and distribution.

An insurer's claim settlement practices are regulated by the…?

1. Securities and Exchange Commission (SEC)

2. National Association of Insurance Commissioners (NAIC)

3. State insurance departments

4. National Association of Claims Adjusters (NACA)

The correct answer is, "State insurance departments". Claim settlement practices of insurers are regulated by State insurance departments.

Why are dividends from a mutual insurer not subject to taxation?

1. Because insurance premiums are tax-deductible

2. Because dividends are already subject to capital gains

3. Because dividends are considered to be a return of premium

4. Because dividends are payable directly to the policyholder

The correct answer is, "Because dividends are considered to be a return of premium". Dividends are not subject to taxation because paying dividends is equivalent to returning a premium.

Actuarial Department

This is the department that calculates policy rates, reserves, and dividends.