Quiz 3 Study Guide Flashcards: Insurance Contracts & Life Insurance

This set of flashcards covers insurance contract components, various life insurance types (Term, Whole, Universal, Variable), insurance calculations, and policy provisions/options.

Insurance Contract

A legally binding agreement where the insurer promises to compensate the insured for covered losses in exchange for premium payments.

Declarations Page

The summary page of the contract containing basic information such as the insured's name, address, policy number, coverage limits, deductible, premium amount, and effective dates.

Definitions Section

A part of the policy that defines important words like "You" (policyholder) and "We" (insurance company) to avoid legal arguments over meanings.

Insuring Agreement

Known as the heart of the policy, it explains exactly what protection was purchased and what the insurance company promises to cover.

Endorsements

Changes or updates made to the original insurance policy that can add, remove, or modify coverage.

Deductible

The amount the policyholder must pay before the insurance company pays for a loss.

Deductible Payment Formula

$$\text{Insurance Payment} = \text{Loss} - \text{Deductible}$$

Purpose of Deductibles

To prevent small claims, reduce premiums, reduce moral hazard by making people more careful, and reduce insurer processing costs.

Policy Limit

The maximum amount an insurance company will pay for a covered loss; anything above this limit is the responsibility of the policyholder.

Coinsurance (Property Insurance)

A requirement for the insured to carry insurance equal to a certain percentage of the property's value, usually $80\%$, $90\%$, or $100\%$.

Property Coinsurance Formula

$$\text{Payment} = (\frac{\text{Amount Carried}}{\text{Amount Required}}) \times \text{Loss}$$

Coinsurance (Health Insurance)

A cost-sharing arrangement, often an $80/20$ split, where the patient and insurer split costs after the deductible is met.

Term Life Insurance

Temporary coverage providing protection for a specific period (e.g., $10$, $20$, or $30$ years) with no cash value and the cheapest premiums.

Whole Life Insurance

Permanent life insurance that provides lifetime coverage, builds cash value, and has fixed premiums.

Nonparticipating Whole Life

A whole life policy with a fixed premium, guaranteed death benefit, and cash value, but it does NOT pay dividends.

Participating Whole Life

A whole life policy that receives non-guaranteed dividends if the insurer performs well.

Universal Life

A flexible policy that allows for flexible premiums and death benefits, where the cash value grows with interest but not on a fixed schedule.

Variable Life

A higher-risk policy where the policyholder chooses to invest the cash value in stocks, bonds, or mutual funds, with performance changing based on the market.

Policyholder

The owner of the policy who pays premiums and has the right to change beneficiaries.

Insured

The person whose life is covered by the insurance; the death benefit is paid upon this person's death.

Beneficiary

The person designated to receive the money from the death benefit after the insured dies.

Death Benefit

The money paid to the beneficiary when the insured person dies.

Cash Value

The savings component available only in permanent insurance that is paid to the policyholder if the policy is cancelled.

Human Life Value Approach

A method to estimate the amount of life insurance needed by calculating the future income someone would have earned to replace it.

Needs Approach

Determining insurance needs by looking at survivors' specific financial requirements, such as funeral expenses, mortgage, college, and debt.

Optional Benefits (Riders)

Extra coverage purchased separately, such as an accidental death rider, child rider, or waiver of premium.

Incontestability Clause

A provision stating that after $2$ years, the insurance company cannot deny a claim due to application mistakes, except in cases of fraud.

Grace Period

A period, usually $30$ or $31$ days, during which premiums can be paid late while coverage remains active.

Reinstatement

The process of making a lapsed policy active again, typically requiring payment of past-due premiums, interest, and proof of insurability.

Suicide Clause

A provision stating that if the insured commits suicide within the first $2$ years, only premiums are refunded; after $2$ years, the full death benefit is paid.

Dividend Option: Paid-Up Additions

A participating policy option where dividends are used to buy additional insurance, increasing both the death benefit and cash value.

Nonforfeiture Options

Choices available when stopping premium payments so that accumulated cash value is not lost, including cash surrender, paid-up insurance, or extended term insurance.

Cash Surrender Value

A nonforfeiture option where the policyholder receives the accumulated cash and the policy ends.

Extended Term Insurance

A nonforfeiture option where the cash value is used to buy term insurance with the same death benefit for a limited time without future premiums.

Life Income (Settlement Option)

A death benefit distribution method where the insurance company pays income for the beneficiary's entire lifetime.