Life Insurance Practice Flashcards

A comprehensive set of vocabulary flashcards covering basic principles, legal concepts, policy types, and regulations of life insurance based on lecture notes.

Insurance

A legal contract that transfers an uncertain risk from one party to another through the pooling or accumulation of funds.

Indemnify

To restore a person to the financial position they experienced prior to the insured loss.

Stock Insurance Company

A company owned by private investors (stockholders) that issues non-participating policies and distributes profits as dividends to shareholders.

Mutual Insurance Company

A company owned by policyholders that issues participating policies, paying out surplus revenue as policy dividends.

Domestic Insurer

An insurer organized and incorporated in the state in which it writes business.

Foreign Insurer

An insurer authorized in one state but organized and incorporated under a different state’s laws.

Alien Insurer

An insurer organized under the laws of a different nation.

Reinsurer

An insurance company that accepts risk from a primary insurer (ceding company) to limit potential losses.

Admitted Insurer

An insurer with a certificate of authority that allows it to do business in a particular state.

Law of Large Numbers

A principle stating that the greater the number of homogenous loss exposures, the more accurately the overall likelihood of loss can be predicted in the aggregate.

Adverse Selection

The tendency for higher-than-average risks to seek out insurance more frequently than lower-risk individuals.

Peril

The immediate and specific cause of a loss, such as death, illness, or an accident.

Physical Hazard

A physical or tangible condition, such as icy roads or poor health, that makes a loss more likely to occur.

Moral Hazard

A condition where loss is more likely due to the dishonest character or intentional wrongdoing of the insured.

Morale Hazard

A state of mind arising from indifference toward potential loss because insurance protection exists.

Pure Risk

A type of risk that is insurable because it offers only the potential for loss, not gain.

Speculative Risk

A type of risk that is not insurable because it offers the opportunity for gain as well as loss.

Consideration

The binding force of a contract; for the applicant, it is the premium paid and representations made; for the insurer, it is the promise to pay claims.

Aleatory Contract

A contract where the values exchanged are unequal, and performance is based on an uncertain future event.

Contract of Adhesion

A contract prepared by the insurer where the applicant must accept all terms without negotiation (take it or leave it).

Unilateral Contract

A contract in which only one party (the insurer) makes an enforceable promise to pay benefits.

Insurable Interest

The financial interest a person must have in themselves or another person at the time of application to purchase legally enforceable coverage.

Warranty

A statement guaranteed to be true in every respect; if found untrue, it can be grounds for revoking the agreement.

Representation

A statement made by an applicant that is true and accurate to the best of their belief but is not guaranteed as exact in every detail.

Estoppel

A legal principle preventing an insurer from escaping consequences of its agent's actions if those actions were within the scope of the agent's authority.

Term Life Insurance

Inexpensive, temporary life insurance that provides pure death protection for a limited period and lacks cash value.

Whole Life Insurance

Permanent life insurance that provides a death benefit for the entire life of the insured, level premiums, and living benefits including cash values.

Universal Life

A flexible-premium whole life variation characterized by adjustable face amounts and cash value accumulation subject to a minimum interest guarantee.

Modified Endowment Contract (MEC)

A policy that is overfunded according to IRS tables and fails the seven-pay test, resulting in lost tax advantages.

Incontestable Clause

A life insurance provision prohibiting the insurer from questioning the validity of the contract after it has been in force for typically $2$ years.

Grace Period

A specified period after a premium is due during which the policy remains in force despite non-payment.

Non-Forfeiture Options

Choices available when surrendering a policy with cash value: Cash Surrender, Extended Term, and Reduced Paid-Up insurance.

Accelerated Benefits Rider

Allows the insured to receive a portion of the death benefit prior to death if certified as terminally ill with a life expectancy of $1$ to $2$ years.

Waiver of Premium Rider

Waives premium payments during a total and permanent disability, keeping the policy in force without providing cash payments.

Contributory Plan

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

Non-Contributory Plan

A group insurance plan where the employer pays the entire premium, requiring $100\%$ participation.

Immediate Annuity

An annuity purchased with a lump-sum payment that begins providing income payments within the first year, typically in $30$ days.

Exclusion Ratio

A formula to determine the taxable portion of annuity benefits: $Exclusion\,ratio = \frac{Investment\,in\,the\,contract}{Expected\,return}$

Primary Insurance Amount (PIA)

The calculation used by Social Security to determine the full amount of retirement benefits for an eligible person at age $65$.

ERISA

The Employee Retirement Income Security Act of 1974, which protects the rights of workers covered under employer-sponsored plans.

Keogh (HR-10) Plan

A retirement plan designed for self-employed individuals, such as doctors or sole proprietors.

Buy-Sell Agreement

A business continuation agreement used to ensure ownership is appropriately transferred upon the death or disability of an owner or partner.