Massachusetts Life and Health Insurance Exam

Insurance

Transfer of Risk

Risk

Uncertainty/ Possibility of Loss

Exposure

Risks for which the insurance company would be liable

Peril

Cause of Loss

Hazard

Something that causes an increase in the chance of loss

Physical Hazard

Hazard that can be seen

Moral Hazard

A belief that intentionally causing a loss is acceptable

Morale Hazard

Carelessness

STARR

Method of handling risk

S- Method of handling risks

Sharing

T- Method of handling risk

Transfer

A- Method of handling risk

Avoidance

R- Method of handling risk

Retention

R- Method of handling risk

Reduction

Contract Policy

An agreement between the insured and the insurer

Law of Large Numbers

The larger the group, the more accurate losses can be predicted

CANHAM Risks

Can be insured with the following characteristics

C- CANHAM Risks

Calculable

A- CANHAM Risks

Affordable

N- CANHAM Risks

Non- Catastrophic

H- CANHAM Risks

Homogeneous

A- CANHAM Risks

Accidental

M- CANHAM Risks

Measurable

Adverse Selection

risks that have a greater than average chance of loss

Reinsurance-

An insurance company sells some of its risk to other insurance companies.

Facultative Reinsurance

the reinsurer evaluates each risk before allowing the transfer

Treaty Reinsurance

the reinsurer accepts the transfer according to an agreement called a treaty

Stock Insurer

An insurer that is owned by its stockholders and formed as a corporation for the purpose of earning a profit for the stockholders.- Issues Non Par Policies

Mutual Insurer

An insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them.- Non Taxable dividends & Participating Polcies

Fraternal Insurer

provides insurance and other benefits

must be a member of the society to get the benefits

Reciprocal Insurers

unincorporated groups of people that provide insurance for one another through individual indemnity agreements

Llyod's Associations

Organizations that provide support facilities for underwriters or groups of individuals that accept insurance risk.

Risk Retention Group

A liability insurance company owned by its members, which are exposed to similar liability risks by virtue of being in the same business or industry.

Risk Purchasing Groups

Groups of people with similar insurance needs who form an organization to buy insurance as a group.

Self-insurance

a business that pays its own claims

Residual Market

insurance from the state or federal government

Insurance Company Locations

Domestic, Foreign, and Alien

Certificate of Authority

state license for an insurance company

Admitted or Authorized

state requires the insurance company to have a certificate of authority

Non-admitted

unauthorized-insurance company not required to have a Certificate of Authority from the state

Surplus Lines

any type of insurance for which there is no available market within the state, and the coverage must be placed with a non admitted insurer

Methods of Marketing

- Independent

- Exclusive or captive

- General agents or managing general agents

- direct writing companies

Agency

The insurance agent acts on behalf of principal (Insurance Company)

Agent Authority

express, implied, apparent

Fiduciary Trust

- Promptly sends premiums to insurer

- Has knowledge of products

- Complies with laws and regulations

- Does not commingle funds

Legal Contract

Consideration, Legal Purpose, Offer (Made by Insured), Acceptance, Competent Parties

Adhesion

Policy written by the insurance company

aleatory

not equal value - small premium for a large amount of coverage

Utmost Good Faith

An obligation to act in complete honesty and to disclose all relevant facts.

indemnity

pay for the loss but with no gain

representation

believed to be true

Misrepresentation

information that is not true, but would not affect the insurance company decision

Material Misrepresentation

- a false statement that changes the outcome of issuing a policy

- generally with the health statement

warranty

guaranteed to be true

concealment

failure to disclose known facts

fraud

intentional act to cheat another

waiver

voluntary giving up of a right

estoppel

actions reasonably relied on by one party cant be denied by the party that accepted the same previously

Fraud and False Stataments

Fine and or imprisonment (10-15 years) *Embezzlement included

Changes in the Application

must be initialed by the applicant

Backdating

Usually no more than 6 months

Required Signatures

- insured

- producer/agent

- applicant (if not the insured)

producers report

- completed by the producer (agent).

- not attached to policy if issued.

Conditional Receipt

Premium with the application; coverage effective as of the date of application or medical exams - whichever is later

Binding Receipt

Temporary, not commmon in life insurance

Underwriting Sources of Information

application, medical exams, physicians statement, AIDS Testing, Medical Information Buereau, Consumer Reports, Investigative Reports

Classification of Risks

Standard, Preferred, Substandard, Declined

Agent Delivery

Usually must get signed delivery receipt

Statement of Good Health

Required if no premium with application, if health changed- agent can't deliver policy

Effective Date of coverage

- Terms of conditional receipt is issued

- Substandard and pays additional premium - date of policy issue

- No receipt - policy issue date if premium paid at delivery

Fair Credit Reporting Act

Third Pary information, notice to applicant requiredm consumers have rights and can dispute information in files

STOLI/IOLI

Banned in most states

Investors named as beneficiaries

US Patriot Act

A U.S. federal act that broadens the surveillance of law enforcement agencies to enhance the detection and suppression of terrorism

ERISA

Act that allows employers to set up insurance plans. Also allows funding for Medicaid

Insurable Interest

Any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially.- must be proven before policy can be purchased

Personal Uses of Life Insurance

-survivor protection

-mortgage payoff

-estate creation

-estate conservation

-liquidity

-cash accumulation

Determining Amount of Life Insurance needed

human life value (current income) needs approach (money for specific needs

Business Uses of Life Insurance

buy sell funding (cross purchase, entity purchase) key person executive bonus deferred compensation

Classes of Life Insurance Policies

- Individual vs. Group

- Term vs. Permanent

- Participating vs. Non-participating

- Fixed vs. Variable

- Industrial & Home Service

premium elements

Mortality

Interest

Expenses

Net Premium (Mortality minus interest) = Net Single

Gross Premium

Net Premium plus expenses, gross annual

Premium Mode

Annual, semi - annual, quarterly, monthly

-annual is the lowest

Level Term Insurance

Death benefit is level, premium level for the term

Decreasing Term

Death benefit decreases, premium remains level

Increasing Term

-death benefit increases

-premium increases

Term features

renewable (No new application required, new preium based upon attained age

Term- Convertible

Can be changed to permanent insurance, no new application required

Traditional Whole Life

Fixed Premium, Fixed & level death benefit, Cash Values *Guaranteed interest, may be surrendered, may be borrowed, endows at 100

*Death Benefit- Amount at risk to the company, plus cash values

Continuous Premium Whole Life

most common type of whole life insurance; stretch premium payments over the whole life of the insured up to age 100

limited-payment life insurance

requires the payment of premiums for a limited time for a lifetime protection// at the end of the term does not pay any more premiums, but has lifetime protection

Single Premium Whole Life

Paid up for life with one large premium payment

Modified Premium Whole Life policy

Same as WL but premium low for 1st 3-5 yrs., THEN has one-time premium increase- levels off afterwards

Graded Premium Whole Life

Lower premiums for designated timeframe (typically 5-10 years); payments rise annually thereafter until leveling off

Indeterminate Premium Whole Life

premiums adjusted by company, guaranteed maximum premium

Interest Sensitive Whole Life

has current interest rate, guaranteed interest rate

Flexible policies

Adjustable life- Adjusts death benefit, adjust premium (Increase required proof of insurability)

Universal Life Insurance

Flexible premium permanent life insurance twith Cash account

Equity Indexed universal Life

tied to performance of equity index (S&P)

Variable Policies

Life insurance plus investments, must have securities license too, investments in separate account *Owner can lose money

Variable Life

- Death Benefit is Variable

- Only one death benefit option

- Premium is fixed

- Mortality Rates are fixed & guaranteed

- Cash Value is Variable & No Guaranteed

- Yes, investment options

- No partial surrenders