California Life with Code and Ethics (32 hours) Online Pre-licensing

Agent/Producer

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Applicant or proposed insured

a person applying for insurance

Beneficiary

a person who receives the benefits of an insurance policy

Broker

an insurance producer not appointed by an insurer and is deemed to represent the client

Indemnity

The main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss

Insurance policy

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Insured

the person covered by the insurance policy. This person may or may not be the policyowner

Insurer (principal)

the company who issues an insurance policy

Law of large numbers

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be

Policyowner

the person entitled to exercise the rights and privileges in the policy

Premium

the money paid to the insurance company for the insurance policy

Reciprocity/Reciprocal

a mutual interchange of rights and privileges

What is insurance?

it is a transfer of risk of loss from an individual or a business entity to an insurance company

risk

It is the uncertainty or the chance of a loss occurring.

2 types of risk

pure and speculative

pure risk

Refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

speculative

Involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Perils

They are the causes of loss insured against in an insurance policy.

Hazards

Conditions or situations that increase the probability of an insured loss occurring.

Three classified hazards

Physical hazards, moral hazards, or morale hazards.

Physical hazards

Individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.

Moral hazards

Tendencies towards increased risk. Refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Morale hazards

They arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without a forethought may cause physical injuries.

Legal hazard

Legal hazard describes a set of legal or regulatory conditions that affect an insurer's ability to collect premiums that are commensurate with (equal to in value) the exposure to loss that the insurer must bear.

Law of large numbers

States that the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.

Exposure

a unit of measure used to determine rates charged for insurance coverage

In life insurance, What determines the rate?

The age of the insured;

Medical history;

Occupation; and

Sex.

Adverse selection

The insuring of risks that are more prone to losses than the average risk. Poorer risks tend to seek insurance or file claims to a greater extent than better risks.

Critical risks

include all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, his or her family, and/or to his or her business;

Important risks

include those exposures in which the losses would lead to major changes in the person's desired lifestyle or profession

Unimportant risks

Include those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes.

Risk Management Techniques

Sharing

Transfer

Avoidance

Retention

Reduction

Risk sharing is...

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group.

Risk transfer

Insurance is the most common method of transferring risk from an individual or group to an insurance company

Risk avoidance

means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane.

Risk retention

assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays.

Purpose of Risk Retention

To reduce expenses and improve cash flow;

To increase control of claim reserving and claims settlements; and

To fund for losses that cannot be insured.

Risk reduction

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss

characteristics or elements before a pure risk can be insured

The loss must be due to chance (accidental)

The loss must be definite and measurable

The loss must be statistically predictable

The loss cannot be catastrophic.

The loss exposure to be insured must involve large homogenous exposure units.

The insurance must not be mandatory (insurer require that certain underwriting guidelines be met)

Insurable events have to go as...

The more predictable a loss becomes, the more insurable it becomes. The more unpredictable a loss, the less insurable it becomes.

Indemnity (reimbursement)

means insureds cannot recover more than their loss

Utmost Good Faith

Implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information.

Consideration

— something of value that each party gives to the other (binding force in any contract)

Fraud

— intentional misrepresentations or deceit with the intent to induce a person to part with something of value

Insurance policy

— a contract between a policyowner and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Lapse

— policy termination due to nonpayment of premium

Misdemeanor

— a minor criminal offense, considered less serious than a felony

Unilateral contract

— a contract that legally binds only one party to contractual obligations (one-sided)

contract

written agreements that are legally enforceable by law.

contract law

Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured person dies. For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.

tort law

a private, civil, non-contractual wrong for which a remedy through legal action may be sought. A tort can be either intentional or unintentional. Insurance generally will only respond to unintentional torts (losses other than those acts by an insured that are deliberate and intended to cause loss or damage).

intentional tort

is any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party

Unintentional Torts (Negligence)

is the result of acting without proper care. This is generally referred to as negligence.

4 elements of a contract

1.-Agreement: offer and acceptance

2.-Consideration: premiums and representations on the part of the insured; payment of claims on the part of the insurer

3.-Competent parties: of legal age, sound mental capacity, and not under the influence of drugs or alcohol

4.-Legal purpose: not against public policy

5 Characteristics of an insurance contract

1.-Adhesion - one party prepares the contract; the other party must accept it as is

2.-Aleatory - exchange of unequal amounts

3.-Conditional - certain conditions must be met

4.-Personal - between the policyowner and the insurance company

5.-Unilateral - only one of the parties to the contract is legally bound to do anything

Representations and Misrepresentations

1.-statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true.

2.-untrue statements, could void contract. Intentional misrepresentation = fraud.

Misrepresentations are under the law, punishable...

According to CIC 782, any person violating this provision is guilty of a misdemeanor punishable by a maximum fine of $25,000, imprisonment in a county jail for a period no longer than 1 year, or by both a fine and imprisonment.

Warranty

a statement considered to be guaranteed to be true and becomes part of the contract.

The concept of materiality

based on the idea that all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract.

Concealment (CIC 330-339)

It's the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. could void a policy.

Rescission

Revocation of the contract

An injured party is entitled to rescind the contract if,

-A false material representation (rescission is effective from the time the representation becomes false);

-Concealment (regardless of whether the concealment is intentional); or

-Violation of a material warranty or any other material provision of a policy.

Application

— A written request for coverage to an insurance company. It must truthfully represent the facts regarding the person or property to be insured. Otherwise the policy will be voided.

Policy

— A contract between a policyowner (often the insured) and an insurance company which agrees to pay for loss caused by specified covered events

Riders

added to a policy to modify provisions that already exist (usually used in Life and Health insurance).

Endorsements

printed addendums to a contract that are used to change the policy's original terms, conditions, or coverages (usually used in Property and Casualty insurance).

Cancellation

is the act of revoking or terminating one's insurance policy.

grace period

is the period of time after the deadline or due date of a premium in which a late premium payment may be made without penalty, or without the policy lapsing.

Who owns stock companies?

Stockholders

What two elements are necessary for a life insurance contract to have a legal purpose?

Insurable interest and consent

According to the Law of Agency, a principal is represented by whom?

Agent or producer

An insurance policy paid a nontaxable dividend to the insured one year, and nothing the next. From what type of insurer did the insured purchase the policy?

Mutual

What type of insurer is formed under the laws of another country?

alien

When does an insurance policy go into effect?

When the policy is delivered and the premium is paid

The type of insurance company organized to return any surplus money to its policyholders is known as what?

mutual company

What entities make up the Medical Information Bureau?

insurers

An insurance company is domiciled in California and transacts insurance in Nevada. What is this insurer's classification in Nevada?

foreign

What are the three types of agent authority?

express, implied, apparent

What document is required for an insurance company to transact insurance?

certificate of authority

In forming an insurance contract, when does an acceptance usually occur?

When the insurer approves a prepaid application

Insurers are classified according to their domicile. What are the three types of insurers?

domestic, foreign, alien

The requirement that agents must account for and promptly remit all insurance funds collected is known as what type of agent responsibility?

Fiduciary

What are the strategies used by underwriters to prevent adverse selection? there are three*

Restriction of coverage,

refusal to accept a risk,

and accepting a risk at a higher rate

Adverse selection

— tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk

Death benefit

the amount paid upon the death of the insured in a life insurance policy

Cash value

— equity amount accumulated in permanent life insurance

Estate

— a person's net worth

Illustrations

— presentation or depiction of nonguaranteed elements of a life insurance policy

Life insurance

— coverage on human lives

Liquidation

— selling assets in order to raise capital

Lump-sum

— payment of the entire benefit in one sum

Solvency

— ability to meet financial obligations (e.g., an insurance company maintains enough assets to pay claims)

LIFE INSURANCE for personal use offers...

1.-Survivor protection - planning for survivor needs

2.-Cash accumulation - permanent policies have living benefits

3.-Estate creation - life insurance creates an immediate estate

4.-Estate conservation - using life insurance proceeds to cover estate taxes

Amount of Insurance is based on

1.-Human life value approach - potential earnings of the insured (considering salary, years to retirement, inflation)

2.-Needs approach - predicted needs of the surviving family (considering debt, income, Social Security blackout, expenses)

Business Uses of Life Insurance

1.-Key person - third-party ownership - business is the owner; employee is the insured

2.-Buy-sell funding - not really insurance, but a business continuation agreement

3.-Executive bonuses - employer gives the employee a wage increase in the amount of insurance premium; employee is the policyowner

annuity

turn money into income retire

vested

right to keep

adhesion

policyholderaccept or reject contract

conservation

try keep policy

erisa

employee retirement