Chapter 1, Section 2: Contract Terms

Flashcards covering contract terms and key insurance concepts from Chapter 1, Section 2.

What is consideration in the context of insurance?

A value given in exchange for the promise to pay the benefit.

When must insurable interest exist, and between whom?

It must exist at the time of application between the insured and the policy owner.

What relationships typically have insurable interest?

Spouse, parents and children, grandparents and grandchildren, business partners, and creditor owning their debtor's life insurance.

What is an adhesion contract?

A contract offered on a take it or leave it basis, with no room for negotiation.

What three factors determine the cost of insurance?

Age, health, and coverage amount.

What is a conditional contract?

An agreement in which both parties perform certain duties and follow rules of conduct to make the contract enforceable.

What is an aleatory contract?

A contract in which participating parties exchange unequal amounts (relate to insurance).

What is a unilateral contract?

A contract that legally binds only one party to contractual obligations after the premium is paid.

What is a buy-sell agreement?

A contract that establishes what will be done with a business in the event that an owner or partner passes away.

What is utmost good faith in contracts?

Both parties must want the contract to work and have good intentions.

What does indemnify mean?

To restore to the original condition; to make whole again with no loss, but also no gain.

What are the three parts to an insurance application?

General information, medical information, and the agent's report.

What is a representation in insurance applications?

Statements believed to be true to the applicant's best knowledge.

What is a misrepresentation?

A straight up lie on an insurance application.

What is concealment?

Failing to disclose facts on an insurance application.

What are warranties?

The truth, absolute truth (can be expressed or implied).

What is twisting?

A misrepresentation or incomplete/fraudulent comparison of insurance policies to persuade someone to switch policies.

What is rebating?

Anything of value given by an agent to a client as an inducement to buy insurance (basically bribing).

What is fraud?

A lie for life or financial gain.

What is underwriting?

The process of approving a policy; involves underwriters investigating the applicant.

What is proof of insurability?

Proving you are insurable, typically through medical records and physical exams.

What is the Medical Information Bureau?

An organization that stores information from insurance companies and makes it available during underwriting to help prevent fraud and concealment.

What does insolvent mean?

No money (company doesn't have enough funds to cover their policies).

What does solvent mean?

There is money (company has enough funds to cover their policies).

What is the human life value approach to determining coverage?

Focuses on the probable future earnings of the insured, considering wages, inflation, years left for retirement, and the time value of money.

What is the needs approach (financial needs approach) to determining coverage?

Focuses on the needs of a family (debt, income, mortgage, and expenses).

What are risk classifications?

Classifying applicants based on how risky they are to prevent a situation where health doesn't matter.