Life and Health Insurance and Annuities Comprehensive Review

This set of vocabulary flashcards covers essential concepts from the lecture notes on life insurance policies, health insurance coverage, annuities, regulatory history, and tax treatment.

Multi-line Insurer

A commercial insurance company that sells more than one type of insurance, such as life, health, and property.

Stock Companies

Insurers organized to make a profit for shareholders; they are often called nonparticipating insurers because policyholders typically do not participate in dividends.

Mutual Companies

Insurers owned by their policyholders; they are known as participating insurers because policyholders take part in receiving dividends and electing the board of directors.

Fraternal Benefit Societies

Nonprofit mutual companies formed by religious, ethnic, or charitable organizations to provide insurance exclusively to their members.

Reciprocal Insurers

Unincorporated groups of individual members who provide insurance for each other through indemnity contracts, managed by an Attorney in Fact.

Reinsurers

Companies that make arrangements with other insurance companies to share a portion of their risk; the company transferring the risk is the Ceding Company.

Captive Insurer

An insurer established and owned by its parent company to cover the parent company's loss exposure.

Lloyd's of London

An association where members form syndicates to underwrite and issue insurance-like coverage for unusual and unique risks.

Captive Agents

Insurance producers who exclusively represent one insurer.

Managerial System

A distribution system where branch offices are overseen by a salaried branch manager employed by the insurer instead of a general agent.

Paul v. Virginia (1869)

A U.S. Supreme Court ruling that insurance transactions crossing state lines are not considered interstate commerce.

McCarran-Ferguson Act (1945)

Affirms federal authority to regulate insurance but states the federal government will not do so if states effectively regulate it.

Guaranty Associations

State-established associations that provide a safety net to ensure policyholders receive benefits up to certain limits if an insurer becomes insolvent.

Hazard

A condition or situation that either creates or increases the likelihood of a loss occurring.

Moral Hazard

A hazard pertaining to an individual's character or behavior, such as dishonesty or drug abuse.

Morale Hazard

A hazard characterized by a careless attitude or indifference to potential loss, such as reckless driving.

Peril

The immediate, specific event that triggers a loss, such as an accident or natural disaster.

Pure Risk

A type of risk that only entails the potential for loss without any chance of gain; it is the only type of risk that is insurable.

Speculative Risk

A type of risk that presents both the opportunity for gain and the potential for loss; it is not covered by insurance.

Law of Large Numbers

A mathematical principle stating that as the number of exposures in a group increases, there is more certainty in predicting losses for that group.

Adverse Selection

The tendency for poorer-than-average risks to seek insurance coverage disproportionately, which insurers strive to minimize.

Principle of Indemnity

A legal principle that aims to make an insured whole by restoring them to the same condition as before a loss, preventing unjust enrichment.

Human Life Value Approach

A method to assess insurance needs by calculating the present worth of a person's future earnings, such as multiplying current income by years of protection.

Consideration

One of the four essential elements of a contract; in insurance, the insured provides the premium and the insurer provides the promise to pay benefits.

Contract of Adhesion

A contract with only one author (the insurer) where the customer must accept or reject the terms in full without negotiation.

Aleatory Contract

A contract characterized by an unequal exchange between parties, such as a small premium paid for a potentially large payout.

Insurable Interest

A requirement for insurance contracts emphasizing a valid concern for the well-being of the insured, which must exist at the time of application.

Express Authority

Authority explicitly granted to an agent by an insurer through a written agency contract.

Implied Authority

Unwritten powers granted to an agent to perform incidental acts necessary to execute duties not explicitly stated in the contract.

Apparent Authority

Authority that arises when an insurer leads a customer to believe an agent has power to bind the principal based on their relationship.

Fiduciary Responsibility

The legal and ethical obligation of an agent to handle money on behalf of the insured and insurer without commingling funds.

Term Life Insurance

Insurance that offers pure death protection for a specified duration and does not build cash value.

Decreasing Term Insurance

Term insurance with a face amount that reduces over time while premiums remain level, often used for mortgage protection.

Straight Life

A whole life policy with level face amounts and fixed premiums payable until the insured's death or age $100$.

Limited Pay Life

Whole life insurance where premiums are paid for a limited period, allowing cash values to accumulate faster than straight life.

Family Income Policy

A policy combining whole life and decreasing term insurance to provide monthly income to beneficiaries if the insured dies during a specified period.

Joint Life Policy

Insurance covering two or more people that pays a death benefit when the first person dies.

Credit Life Insurance

Decreasing term insurance designed to cover the life of a debtor and pay off an outstanding loan balance if the debtor passes away.

Universal Life Insurance

A flexible variation of whole life allowing policyowners to adjust premiums and benefits, featuring a minimum interest guarantee on cash value.

Modified Endowment Contract (MEC)

An insurance policy that exceeds IRS funding limits (the $7$-pay test) and loses favorable tax treatment on pre-death distributions.

Variable Whole Life Insurance

A policy where values are invested in separate accounts (stocks/bonds) to counteract inflation, featuring fixed premiums and non-guaranteed cash values.

Insuring Clause

The provision that outlines the insurer's fundamental promise to pay specified benefits for a covered loss.

Grace Period

A provision (usually $30$ days) that allows policyowners to pay overdue premiums without policy cancellation.

Incontestable Clause

A provision prohibiting the insurer from questioning the policy's validity after a specific period, typically $2$ years.

Suicide Clause

A provision that may void the policy and withhold the death benefit if the insured commits suicide within a specified period, usually $1$ year.

Reduced Paid-Up Option

A nonforfeiture option where the policyowner stops paying premiums and the face amount is reduced while remaining in force as permanent coverage.

Waiver of Premium Rider

A rider that allows the policyowner to stop making premium payments if they become totally and permanently disabled.

Accidental Death Benefit Rider

Also known as Double Indemnity, this rider pays an additional sum if death is caused by an accident.

Viatical Settlement

An arrangement where a terminally ill insured (the Viator) sells their policy to a third party for a percentage of the death benefit.

Primary Beneficiary

The first person or entity designated to receive the death benefit proceeds upon the insured's death.

Per Stirpes

A distribution method where benefits are paid to a deceased beneficiary's heirs if the beneficiary dies before the insured.

Medical Information Bureau (MIB)

A central database used by insurers to access medical histories of applicants and identify fraudulent information.

Preferred Risk

A classification for applicants who represent the lowest risk to the insurer and typically receive the lowest premium rates.

Conditional Receipt

A receipt specifying that coverage becomes effective once certain conditions are met, such as being found insurable after a medical exam.

Constructive Delivery

Occurs when an insurance company intentionally relinquishes control over the policy, such as mailing it to an agent for unconditional delivery.

Contributory Plan

A group insurance plan where employees share the cost of premiums, usually requiring at least $75 \%$ participation.

Annuity

A financial contract that converts a lump sum into a series of regular payments, often used as a retirement income strategy.

Accumulation Period

The phase during which a contract owner makes premium payments into an annuity, also known as the pay-in period.

Straight Life Income Payout Option

An annuity payout providing guaranteed income for the annuitant's lifetime, with no further payments to beneficiaries after death.

Exclusion Ratio

A formula ($\text{Investment in the contract} / \text{Expected return}$) used to determine the nontaxable portion of an annuity payment.

Primary Insurance Amount (PIA)

The figure that establishes the Social Security benefit amount, representing the worker's full retirement benefit at age $65$.

Black-Out Period

The period when a surviving spouse's Social Security survivorship benefits cease, starting when the youngest child turns $16$ and ending at age $60$.

ERISA (Employee Retirement Income Security Act)

A $1974$ federal law establishing minimum standards for employer-sponsored pension and benefit plans.

Defined Benefit Plan

A pension plan that provides a specific, predetermined retirement benefit based on years of service and earnings history.

401(k) Plan

An employer-sponsored plan allowing employees to contribute a portion of their salary on a pre-tax basis for retirement savings.

Traditional IRA

A personal retirement account where contributions may be tax-deductible and earnings grow tax-deferred until withdrawal.

Roth IRA

A retirement account funded with after-tax dollars where earnings grow tax-free and qualified withdrawals are income tax-free.

1035 Exchange

A tax-free exchange of one life insurance policy or annuity for another, excluding the exchange of an annuity for a life insurance policy.

HMO (Health Maintenance Organization)

A managed care plan offering prepaid healthcare services through a restricted provider network with Primary Care Physician gatekeepers.

PPO (Preferred Provider Organization)

A network of providers offering discounted services that allows more flexibility for out-of-network care than an HMO.

COBRA (Consolidated Omnibus Budget Reconciliation Act)

A federal law allowing temporary continuation of group health coverage (usually for $18$ to $36$ months) following employment termination.

Health Savings Account (HSA)

A tax-advantaged account for health expenses available to individuals enrolled in a High Deductible Health Plan (HDHP).

Medicare Part A

The component of federal health insurance that covers inpatient hospital stays, skilled nursing care, and hospice.

Medicare Part B

The component of federal health insurance that covers doctor visits, outpatient care, and preventive services for a monthly premium.

Long-Term Care Insurance (LTCI)

Insurance designed to cover costs for extended care, such as nursing home stays, usually triggered by the inability to perform Activities of Daily Living (ADLs).