Life insurance flashcards

Information Asymmetry: Lemons Problem vs. Adverse Selection

The Lemons Problem occurs when the consumer has less information about the insurer, requiring regulation. Adverse Selection occurs when the applicant knows more about their own risk profile than the underwriter, requiring risk assessment and underwriting.

Pricing Inversion

An operational characteristic in insurance where the price of the policy is set and collected before the actual production costs (claims and loss payments) are known.

Timing and Scope of Insurable Interest in Life Policies

Required strictly at inception, not at claim. It covers one's own life, spouses, parents of minor children, debtor-creditor relationships, key persons, and business partners. A subsequent divorce or dissolved partnership does not void the policy.

Utmost Good Faith (Uberrima Fides)

The legal duty requiring an applicant to disclose all material facts that would influence the judgment of a prudent underwriter. A breach makes the contract voidable by the insurer.

Legal Reason Life Insurance Contracts Are Not Contracts of Indemnity

They are contingency benefit contracts with an agreed value payable upon a defined event. Consequently, the legal doctrines of contribution and subrogation do not apply, and multiple policies can be held and collected in full.

Application of Proximate Cause in Life Insurance

Refers to the active, dominant, and operative cause of death. Unlike general insurance, it is rarely contested in life policies except to enforce suicide exclusions, which typically apply during the first 1 to 2 years.

Human Life Value (HLV) Concept

The present value of an individual's expected future net earnings minus personal maintenance costs (such as food, clothing, and shelter). Developed as a normative economic valuation model by Green and Huebner.

Trigger Events for Guaranteed Insurability Option (GIO)

Specific life milestones—such as marriage, childbirth or adoption, mortgage increases, divorce, or major salary promotions—that allow the policyholder to purchase additional coverage without medical underwriting up to ages 50–55.

With-Profits Policies: Reversionary vs. Terminal Bonuses

Reversionary bonuses are permanently guaranteed once declared and payable at maturity or death. Terminal bonuses are discretionary additions paid only when a claim occurs, reflecting final investment performance.

Pension Annuity vs. Purchased Life Annuity (PLA)

A pension annuity is purchased using registered pension savings (accessible between ages 55–75, with up to 25% tax-free cash). A PLA is bought with non-pension capital, where each payment splits into taxable interest and a tax-free capital return calculated by $\frac{\text{Purchase Price}}{\text{Life Expectancy}}$

Numerical Rating System (NRS) in Underwriting

A credit and debit system where 100% represents standard mortality and up to 125% remains acceptable at standard or preferred rates. Assessments exceeding 125% result in premium loadings, debt liens, or declined coverage.

Net Premium vs. Gross Premium

Net premium incorporates only pure mortality risk and interest discounting. Gross premium adds expense loadings for administration, medical underwriting, broker commissions, reinsurance, contingencies, and insurer profit.

Upfront vs. Aggregated Expense Charging

Under upfront charging, the asset share closely tracks the surrender value from the start. Under aggregated charging, early unamortized expenses cause the initial asset share to exceed the early surrender value.

Key Legal Rules Governing Life Policy Assignment

Must be executed in writing by deed (Howes v Prudential), is legally void if the life assured is already deceased at the time of transfer (Scott v Coulson), and an absolute assignment completely transfers the entire beneficial ownership (Re McKerrell).

Policy Ownership: Joint Tenancy vs. Tenancy in Common

Joint tenancy operates under the principle of survivorship, transferring policy title immediately to the surviving owner without probate. Tenancy in common allocates a distinct share to the deceased owner's estate to be distributed by will or intestacy.

Days of Grace vs. Paid-Up Policy Status

Days of Grace provides a 30-day or one-month window during which full cover remains active despite an unpaid premium. A paid-up policy occurs when premium payments stop permanently and the sum assured is proportionately reduced based on the accrued surrender value.

Core Stages of Life Insurance Claims Validation

Verifying that the policy is in force, premiums are current, the claimant holds legal title and identity, and no policy exclusions apply. Age is validated via birth certificate, and any age misstatement results in a proportional benefit adjustment.

Grant of Probate vs. Letters of Administration

A Grant of Probate is issued by the court to an executor named in a valid will. Letters of Administration are granted to appoint a personal representative when the deceased passes away intestate.

Presumption of Death / Disappearance Rule

The legal presumption that an individual has died after an unexplained continuous absence of 7 years, which may be legally expedited in catastrophic disasters where mortality is certain.

Terminal Illness Benefit

An accelerated payment of the full death benefit triggered prior to death when an appropriate medical specialist certifies that the insured has a life expectancy of less than 12 months.