Life Insurance - Flash Cards

Insurance

Transfer of risk

Risk

Uncertainty or possibility of a loss

Speculative Risk

Chance of loss or gain; not insurable

Pure Risk

Chance of loss only; insurable

Peril

A cause of loss

Hazard

Something that increases the chance of loss

Physical Hazard

A hazard that can be seen

Moral Hazard

A belief that intentionally causing a loss is acceptable

Morale Hazard

Carelessness

STARR

Methods of handling risk: Sharing

Law of Large Numbers

The larger the group

CANHAM

Characteristics of insurable risks: Calculable

Adverse Selection

Risks that have a greater than average chance of loss

Reinsurance

An insurance company paying another insurer to take on some of its catastrophic loss risk

Facultative Reinsurance

The reinsurer evaluates each risk individually before accepting the transfer

Treaty Reinsurance

The reinsurer accepts transfers according to a pre-arranged agreement

Stock Insurer

Publicly owned by stockholders; issues non-participating policies; pays taxable dividends

Mutual Insurer

Owned by policyholders; issues participating policies; returns excess premium as nontaxable dividends

Fraternal Insurer

Provides insurance and other benefits; must be a member of the society to receive benefits

Reciprocal Insurer

Unincorporated insurer where members are assessed for losses; run by an attorney-in-fact

Lloyd's Association

Insurance provided by individual underwriters

Risk Retention Group

Liability insurance company created for and owned by policyholders from the same industry

Domestic Insurer

Incorporated in the state where it operates

Foreign Insurer

Incorporated in a different U.S. state or territory than where it operates

Alien Insurer

Incorporated in a country other than the USA

Certificate of Authority

State license required for an insurance company to operate

Surplus Lines

Insurance sold by non-admitted insurers to certain high-risk insureds

Express Authority

What the agent's written contract with the insurance company explicitly states

Implied Authority

Unwritten authority to do things agents normally do to sell insurance

Apparent Authority

Actions an agent takes that a reasonable person would assume as authorized

Fiduciary Duty

Agent's obligation to promptly send premiums

Adhesion

Policy written solely by the insurer; ambiguities resolved in favor of the insured

Aleatory Contract

Unequal exchange of value; small premium for potentially large coverage

Utmost Good Faith

Both the insured and insurer have the right to expect honesty from each other

Unilateral Contract

Only one party (the insurer) makes a promise to pay

Indemnity

Paying for a loss but with no gain to the insured

Misrepresentation

Untrue information given that would not affect the insurer's decision

Material Misrepresentation

Untrue information given that does affect the insurer's decision; may void coverage

Concealment

Failure to disclose material information; voids coverage only if intentional

Fraud

An intentional act to cheat another party

Waiver

Voluntarily giving up a right

Estoppel

Actions reasonably relied upon by one party cannot later be denied by the other party

Conditional Receipt

Coverage effective on the later of the application date or medical exam date if the applicant is standard or preferred risk

Binding Receipt

Provides temporary coverage; not common in life insurance

Attending Physician Statement (APS)

A report from the insured's doctor used in underwriting

Medical Information Bureau (MIB)

A database of insured information shared among insurers; application cannot be denied solely on MIB info

Fair Credit Reporting Act

Requires notice to applicant when third-party consumer reports are used; consumers can dispute information

STOLI/IOLI

Stranger/investor-originated life insurance; banned in most states; investors named as beneficiaries

U.S. Patriot Act

Designed to prevent and detect money laundering and financing of terrorism

ERISA

Protects participants in employee benefit plans including qualified pensions and group insurance

Gramm-Leach-Bliley Act

Requires financial institutions to offer opt-out of information sharing annually; distinguishes consumers from customers

Insurable Interest

A risk of financial loss; must exist before a policy is purchased

Human Life Value Approach

Determines life insurance need based on current income

Needs Approach

Determines life insurance need based on specific financial needs

Buy-Sell Funding

Business use of life insurance to fund the purchase of a deceased partner's share

Key Person Insurance

Business life insurance covering a key employee whose loss would financially harm the business

Mortality

The element of premium based on the likelihood of death

Net Premium

Mortality minus interest

Gross Premium

Net premium plus expenses

Level Term Insurance

Death benefit and premium remain level for the term

Decreasing Term Insurance

Death benefit decreases while premium stays level

Increasing Term Insurance

Death benefit and premium both increase

Return of Premium Term

Premium is returned to the insured if alive at the end of the term

Renewable Term

Can be renewed without a new application; new premium based on attained age

Convertible Term

Can be converted to permanent insurance without a new application

Traditional Whole Life

Fixed premium

Continuous Premium Whole Life

Premiums paid throughout the insured's lifetime

Limited Payment Whole Life

Premiums paid over a limited number of years; coverage is permanent

Single Premium Whole Life

Paid with one lump-sum premium; generates immediate cash values

Modified Premium Whole Life

Lower premiums for the first 3–5 years then jumps and levels off

Graded Premium Whole Life

Premium starts lower than whole life and increases for 5–10 years then levels off

Indeterminate Premium Whole Life

Premiums adjusted by the company with a guaranteed maximum

Universal Life

Flexible premium policy with a cash account; cost of insurance and fees withdrawn monthly

Universal Life Option A

Level death benefit (insurance amount only)

Universal Life Option B

Increasing death benefit (insurance amount plus cash account)

Equity Indexed Universal Life

Universal life with interest tied to a stock market index; account still guaranteed

Variable Life

Life insurance with investments in a separate account; death benefit can increase but has a guaranteed minimum

Variable Universal Life

Variable life with flexible premiums; no guaranteed death benefit; requires life and securities license

Joint Life (First to Die)

Pays death benefit upon the first insured's death

Survivorship Life (Second to Die)

Pays death benefit upon the death of the last surviving insured

Jumping Juvenile Policy

Juvenile policy that automatically increases the death benefit at age 18 or 21

Waiver of Premium Rider

Waives future premiums while the insured is disabled after a waiting period; reimburses premiums paid during waiting period

Disability Income Rider

Pays the insured a monthly income while disabled

Payor Rider

Pays the premium of a juvenile policy if the adult payor dies or becomes disabled

Accidental Death Rider

Doubles or triples the face amount if death occurs due to an accident within 90 days

AD&D Rider

Pays principal sum for accidental death; capital sum (usually 50%) for dismemberment

Guaranteed Insurability Rider

Allows additional insurance to be purchased at certain ages or life events without proof of insurability

Accelerated Benefits Rider

Advances part of the death benefit while the insured is living if terminally ill or permanently confined to a nursing home

Long Term Care Rider

Advances a stated percentage of the death benefit monthly for nursing home or home care needs

Interest Only Settlement Option

Insurer holds death benefit and pays interest; principal paid at a later date

Fixed Period Settlement Option

Death benefit plus interest paid over a set time period

Fixed Amount Settlement Option

A fixed dollar amount paid until the funds are exhausted

Straight Life Income Settlement Option

Income paid for the beneficiary's lifetime; payments stop at death

Life Income Period Certain

Income guaranteed for life with a minimum guaranteed payment period

Life Income Refund

Income for life; guarantees total payments will at least equal the death benefit

Joint and Survivor Settlement Option

Income paid to two beneficiaries; continues at the same or reduced amount to the survivor

Dividend Options (CARPPO)

Cash

Reduced Paid-Up Insurance

Cash values used to buy a smaller single-premium permanent policy at attained age

Extended Term Nonforfeiture Option

Cash values used to buy term insurance for the same face amount for a limited period; default option

Free Look Period

Usually 10 days from receipt of policy; can return for a full refund