THE Life Insurance Exam Practice

Insurance

A contract that transfers specified financial risks from an insured to an insurer in exchange for premiums.

Premium

The payment required to obtain or maintain insurance coverage.

Claim

A request for payment or benefits under an insurance policy after a covered event.

Insurer

The insurance company that issues the policy and assumes the covered risk.

Insured

The person whose life, health, property, or liability is covered.

Policyowner / Policyholder

The person or entity that owns the insurance contract and exercises its ownership rights.

Producer

A person licensed to sell, solicit, or negotiate insurance.

Agent

A producer who represents an insurer and acts within authority granted by that insurer.

Broker

A licensed producer who represents the insurance buyer rather than an insurer.

Principal

The party represented by an agent, usually the insurance company.

Indemnity

Restoring an insured to approximately the financial position occupied before a covered loss.

Indemnity contract

A policy that pays based on the actual covered loss, subject to policy limits.

Valued contract

A policy that pays a stated amount after a covered event instead of measuring actual economic loss.

Immediate estate

The death benefit that life insurance makes available immediately upon covered death.

Commercial / Private insurance

Insurance provided by privately owned insurers rather than government programs.

Government / Social insurance

Insurance or benefit programs operated by government, such as Social Security and Medicare.

Multiline insurer

An insurer offering more than one line of insurance.

Monoline insurer

An insurer specializing in one line of insurance.

Stock insurance company

An insurer owned by stockholders, typically issuing nonparticipating policies.

Mutual insurance company

An insurer owned by its policyholders, traditionally issuing participating policies.

Participating policy

A policy eligible to receive non-guaranteed policy dividends if declared by the insurer.

Nonparticipating policy

A policy that does not give the policyowner a contractual right to participate in insurer profits.

Policy dividend

A distribution of excess premium to a participating policyowner; not a guaranteed benefit.

Shareholder dividend

A distribution of corporate profits to stockholders.

Divisible surplus

The portion of an insurer's surplus available for distribution to participating policyowners.

Mixed plan insurer

An insurer that issues both participating and nonparticipating policies.

Fraternal benefit society

A nonprofit membership organization with a lodge system offering insurance benefits to members.

Reciprocal insurer / Reciprocal exchange

An unincorporated arrangement in which subscribers insure one another and share specified risks.

Subscriber

A member of a reciprocal exchange who participates in the reciprocal insurance arrangement.

Attorney-in-fact

The person or entity authorized to manage a reciprocal exchange's business.

Captive insurer

An insurance company established primarily to insure the risks of its parent organization.

Risk retention group (RRG)

A member-owned insurer formed under federal law to provide liability insurance for members.

Liability Risk Retention Act

Federal law permitting qualifying risk retention groups and purchasing groups.

Reinsurance

Insurance purchased by an insurer to transfer part of its insured risk to another insurer.

Ceding / Primary insurer

The original insurer that transfers some risk to a reinsurer.

Reinsurer / Assuming insurer

The company that accepts risk transferred by another insurer.

Treaty reinsurance

Reinsurance applying automatically to a defined class of risks under an agreement between insurers.

Facultative reinsurance

Reinsurance negotiated and accepted for an individual risk on a case-by-case basis.

Net retention / Net line

The amount of risk the ceding insurer keeps after reinsurance.

Surplus lines insurance

Coverage placed with eligible nonadmitted insurers for unusual or hard-to-place risks.

Service provider

An organization that arranges or provides health services under a coverage arrangement.

Health maintenance organization (HMO)

A health plan providing coordinated care through a network with restricted out-of-network benefits.

Preferred provider organization (PPO)

A health plan using a preferred provider network, allowing out-of-network care at higher cost.

Industrial / Debit life insurance

Traditionally small-face-amount life insurance with frequent premium collection.

Self-insurance

Retaining risk and funding possible losses internally instead of purchasing insurance.

Authorized / Admitted insurer

An insurer holding a certificate of authority to transact insurance in a state.

Unauthorized / Nonadmitted insurer

An insurer without ordinary authorization to transact insurance in a state.

Domicile

The jurisdiction in which an insurer is incorporated or organized.

Domestic insurer

An insurer organized under the laws of the state being discussed.

Foreign insurer

An insurer organized under the laws of another U.S. state or jurisdiction.

Alien insurer

An insurer organized under the laws of a country outside the United States.

Marketing / Sales department

The insurer function that develops business, solicits applicants, and supports selling insurance.

Underwriting department

The insurer function that evaluates applications and determines classifications and premiums.

Claims department

The insurer function that investigates, processes, and pays or denies claims.

Actuarial department

The insurer function that calculates rates, reserves, and other financial assumptions.

Underwriter

A professional who evaluates applicants and classifies insurance risks.

Actuary

A professional who analyzes mortality, interest, and expenses to price coverage.

Adjuster

A person who investigates and helps determine the appropriate settlement of insurance claims.

Solicitor

A person who seeks prospects or applications within permitted legal authority.

Service representative

An employee handling customer service rather than insurance sales.

Career / Captive agency system

A distribution system in which agents generally represent one insurer or insurer group.

Managerial agency system

An insurer's distribution arrangement using managers to recruit, train, and supervise producers.

Personal producing general agent (PPGA)

An independently contracted producer focused primarily on personal sales.

Independent agency system

A distribution system in which agents may represent multiple insurers through separate contracts.

Mass marketing / Direct response

Promoting insurance through channels like websites, mail, or media instead of individual agents.

Paul v. Virginia (1868)

Supreme Court decision treating insurance contracts as outside interstate commerce.

United States v. South-Eastern Underwriters Association (1944)

Supreme Court decision recognizing interstate insurance activity as subject to federal law.

McCarran-Ferguson Act (1945)

Federal law preserving state regulation and taxation of insurance.

Fair Credit Reporting Act (FCRA)

Federal law governing consumer reports, disclosures, and adverse-action notices in underwriting.

Investigative consumer report

A report based on personal interviews about character, reputation, and lifestyle.

Fraud and False Statements provisions / 18 U.S.C. 1033

Federal restrictions on insurance-industry crimes requiring written consent for certain felons.

National Association of Insurance Commissioners (NAIC)

Organization of state insurance regulators that develops model laws and coordinates standards.

National Conference of Insurance Legislators (NCOIL)

Organization of state legislators that develops model insurance legislation.

National Association of Insurance and Financial Advisors (NAIFA)

Professional association supporting insurance and financial professionals.

National Association of Health Underwriters (NAHU / NABIP)

Professional association for health-benefits and insurance professionals.

Risk

Uncertainty about the possibility of financial loss.

Pure risk

A situation with a possibility of loss or no loss, but no opportunity for gain.

Speculative risk

A situation involving possible gain as well as loss, such as gambling.

Loss

An unintended reduction in economic value caused by an event.

Peril

The specific cause of a loss, such as fire or illness.

Hazard

A condition that increases the likelihood or severity of a loss.

Physical hazard

A tangible condition increasing risk, such as faulty wiring.

Moral hazard

Increased risk arising from dishonesty or intentional misconduct.

Morale hazard

Increased risk arising from carelessness or indifference to loss.

Accident

A sudden, unexpected event at a particular time and place.

Occurrence

An event or continuing exposure causing a loss; broader than an accident.

Direct loss

The immediate damage resulting from a peril.

Indirect / Consequential loss

A financial loss resulting from a direct loss, such as lost income.

Named-peril coverage

Coverage for the causes of loss specifically listed in the policy.

Open-peril coverage

Coverage for all causes of loss unless specifically excluded.

Premature death risk

The risk of dying before completing financial responsibilities.

Longevity risk / Superannuation

The risk of living longer than one's financial resources.

Risk pooling / Loss sharing

Spreading the financial burden of losses across many similar exposures.

Exposure unit

A person, property, or other unit exposed to potential loss, used to measure risk.

Homogeneous exposure units

Units sufficiently similar in risk characteristics to support meaningful prediction and pricing.

Law of large numbers

As similar independent exposures increase, actual loss experience approaches expected experience.

Adverse selection

The tendency for people with higher-than-average risk to seek or retain insurance more often.

Adverse-selection controls

Underwriting, truthful applications, and rules used to limit disproportionate high-risk enrollment.

Insurable risk

A risk involving accidental, definite, measurable, and predictable losses with feasible premiums.

Preferred risk

A better-than-average underwriting risk that may qualify for lower premiums.