Life Insurance Basics

Adverse selection

tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk

Death benefit

the amount paid upon the death of the insured in a life insurance policy

Cash value

equity amount accumulated in permanent life insurance

Estate

a person's net worth

Illustrations

presentation or depiction of nonguaranteed elements of a life insurance policy

Life insurance

coverage on human lives

Liquidation

selling assets in order to raise capital

Lump-sum

payment of the entire benefit in one sum

Minor

a person under legal age

Solvency

ability to meet financial obligations (e.g., an insurance company maintains enough assets to pay claims)

When must the policy summary for a life insurance policy be delivered to the policyowner?

At the time of policy delivery

What is insurance underwriting?

The process of risk selection and classification

What are the personal uses of life insurance?

Survivor protection, estate creation and conservation, cash accumulation and liquidity

Life insurance may be used to pay state inheritance taxes and federal estate taxes eliminating the need to sell assets from the estate. What is this called?

Estate conservation

Who must have insurable interest in the insured?

The policyowner

Who is responsible for the contents of insurance advertisements?

The insurance company

All other factors being equal, which premium payment mode will require an overall higher premium: monthly or annual?

Monthly

What is included in Part 2 of a life insurance application?

Medical information about the prospective insured

What type of life insurance offers an applicant a cash value element?

Permanent insurance (usually, whole life)

What document describes the specific information about a policy?

Policy summary

When must insurable interest exist in a life insurance policy?

At the time of application

What does liquidity mean in a life insurance policy?

Availability of cash value

What is the purpose of the agent's report during the application process?

The agent's report discusses the agent's personal observations about the proposed insured that may help in the underwriting process

What type of report provides information about the applicant's hobbies, habits and financial status?

Investigative consumer report

Can insurers advertise the existence of the guaranty association during solicitation and sale of insurance policies?

No, advertising of the existence of the guaranty association for the purposes of solicitation and sale of insurance policies by insurers is an illegal business practice.

If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter's main concern?

The existence of insurable interest between the applicant and the insured

What term describes the fee a person pays an insurance company to receive coverage?

Premium

When planning for survivor protection in life insurance, what needs to be considered?

The insured's current assets, liabilities and survivor's needs

What are the three factors that determine the premium for a particular life insurance policy?

Mortality, interest and expense

If an insured changes his payment plan from monthly to annually, what happens to the total premium?

It will decrease

What are illustrations in a life insurance policy?

Presentations of nonguaranteed elements of the policy

Who is the beneficiary on a key-person life insurance policy?

The employer

A business is the owner and beneficiary of a key-person life policy. When the business collects the policy benefit, how is it taxed?

The benefit is received tax free

What is the purpose of insurance guaranty associations?

To protect policyowners, insureds and beneficiaries from financial losses caused by insolvent insurers

What is the purpose of key person insurance?

To minimize the risk of financial loss caused by the death of a key employee

At what point does coverage begin when an agent issues a conditional receipt for a life insurance policy?

Either on the date of the application or the date of the medical exam (whichever occurs last)

What are the three main instances when insurable interest exists in life insurance?

Insuring your own life, the life of a family member, or the life of a business partners or someone who has a financial obligation to the policyowner

Mortality tables are used by insurance companies to predict what?

Life expectancy and the death rates for specific groups of individuals

How does the premium mode affect the total premium paid for insurance for the year?

Higher frequency of premium payments will result in higher overall premium

Who must be a member of insurance guaranty associations?

All insurers authorized to write insurance within a state

What is the main responsibility of a company's underwriting unit?

Risk selection

What type of insurance creates an immediate estate?

Life insurance

In calculating the amount of life insurance needed, what is the needs approach based on?

The predicted needs of a family after the premature death of the insured

What is the term that describes the frequency and the amount of the premium payment?

Premium mode

An insurer has placed a notice on its advertising stating that its policies are protected by the Life and Disability Insurance Guaranty Fund. This practice is

Illegal: insurers cannot advertise protection by the Fund

Which of the following is a risk classification used by underwriters for life insurance?

Standard (also substandard or preferred)

Which of the following may NOT be included in an insurance company’s advertisement?

That its policies are covered by a state Guaranty Association

An insurer has just asked an applicant to take an HIV test. How long does the applicant have to decide whether or not to sign a consent form?

10 Days

Which of the following would NOT be considered a deceptive act?

Comparing an insured’s current policy with a potential replacement policy

Which of the following premium modes would result in the highest annual cost for an insurance policy?

Monthly

If an insured changes the premium payment mode from monthly to annually, what happens to the total premium?

Decreases

What is the time period called during which the surviving spouse of the insured does not receive Social Security income benefits?

Blackout period

If a policy includes a free-look period of at least 10 days, the Buyer’s Guide may be delivered to the applicant no later than

With the policy

Which of the following is NOT an example of a business use of Life Insurance?

Workers Compensation

The Life and Disability Insurance Guaranty Fund protects insureds and policyholders if

Insurers lack money to pay off claims

When must insurable interest exist in a life insurance policy?

At the time of application

If someone wants to buy a life insurance policy that will provide lifetime protection against premature death, what type of life insurance policy should that person buy?

Permanent

All of the following information about the applicant is identified in the General Information section of a life insurance application EXCEPT

Education

Reciprocity/Reciprocal

a mutual interchange of rights and privileges

Law of large numbers

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be

Insurer (principal)

the company who issues an insurance policy

Insured

the person covered by the insurance policy. This person may or may not be the policyowner

Insurance policy

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Broker

an insurance producer not appointed by an insurer and is deemed to represent the client

Beneficiary

a person who receives the benefits of an insurance policy

Agent/Producer

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Adverse selection

insuring of risks that are more prone to losses than the average risk

Premium

the money paid to the insurance company for the insurance policy

Pure risk

refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Speculative risk

involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Wagering on a sporting event is known as what type of risk?

Speculative

An insurance policy paid a nontaxable dividend to the insured one year, and nothing the next. From what type of insurer did the insured purchase the policy?

Mutual

Insurers are classified according to their domicile. What are the three types of insurers?

Domestic, foreign, and alien

What type of insurer is formed under the laws of another country?

Alien

The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as what?

Loss

The requirement that agents must account for and promptly remit all insurance funds collected is knows as what type of agent responsibility?

Fiduciary

According to the Law of Agency, a principal is represented by whom?

Agent or producer

If an agent fails to obtain the applicant's signature on the insurance application, what must the insurer do?

Send the application back to the applicant for signature

What are the strategies used by underwriters to prevent adverse selection?

Restriction of coverage, refusal to accept a risk, and accepting a risk at a higher rate

In forming an insurance contract, when does an acceptance usually occur?

When the insurer approves a prepaid application

What two elements are necessary for a life insurance contract to have a legal purpose?

Insurable interest and consent

Insurance is a contract that protects the insured from what?

Loss

What is a warranty in an insurance contract?

An absolutely true statement upon which the validity of the insurance contract is based

Whose responsibility is it to determine that all the questions on an insurance application are answered?

The agent's

An insurance company is domiciled in California and transacts insurance in Nevada. What is this insurer's classification in Nevada?

Foreign

Who owns stock companies?

Stockholders

If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered what type of insurer?

Authorized or admitted

What is the term for the causes of loss insured against in an insurance policy?

Peril

Who is responsible for making sure that an applicant receives the new insurance policy once it's issued?

The agent

The insurer organized to return a profit to the stockholders is what type of insurer?

Stock company

When risks with higher probability of loss are seeking insurance more often than other risks, this is knows as what?

Adverse selection

In insurance, when is the offer usually made on a contract?

When the insurance application is submitted

An applicant conceals relevant health information on the application. The applicant presents what type of hazard?

Moral

Whom does an insurance agent represent?

Insurance company

What are the four elements of an insurance contract?

Agreement (offer and acceptance), consideration, competent parties, and legal purpose

An insurance company that is formed under the laws of another state is known as what type of insurer?

Foreign

A situation in which a person can only experience a loss and no gain presents what type of risk?

Pure risk

What document is required for an insurance company to transact insurance?

Certificate of Authority

What is the best way to handle incomplete insurance applications?

Return the application to the applicant for completion

What are the three types of agent authority?

Express, implied and apparent