Terms
Insurance Basics
Risk → The chance something bad might happen.
Peril → The actual cause of a loss (death, fire, accident).
Hazard → Anything that makes a loss more likely.
Physical Hazard → A physical condition that increases risk (icy sidewalk, faulty wiring).
Moral Hazard → Someone acts dishonestly because insurance exists.
Morale Hazard → Someone becomes careless because insurance exists.
Indemnity → Restoring someone financially after a loss.
Insurable Interest → You would suffer financially or emotionally if the insured died.
Transfer of Risk → Moving financial risk from yourself to the insurance company.
Valued Contract → Pays a stated amount when a covered loss occurs (life insurance).
Contract Law
Consideration → What each side gives to make the contract valid.
Applicant’s Consideration → Premium payment and truthful statements.
Insurer’s Consideration → Promise to pay benefits.
Aleatory Contract → One party may pay little and receive a lot.
Adhesion Contract → Insurance company writes the contract.
Unilateral Contract → Only the insurer makes a legally enforceable promise.
Conditional Contract → Benefits are paid only if conditions are met.
Competent Parties → People legally able to enter a contract.
Legal Purpose → Contract must be for a legal reason.
Offer and Acceptance → One party offers, the other agrees.
Underwriting
Underwriting → Evaluating risk and deciding whether to insure someone.
APS (Attending Physician Statement) → Medical records from a doctor.
MIB → Database used by insurers to verify medical information.
Inspection Report → Background information gathered on applicant.
Field Underwriting → Agent’s observations of applicant.
Producer Report → Agent’s notes submitted to insurer.
Preferred Risk → Better-than-average risk.
Standard Risk → Average risk.
Substandard Risk → Higher-than-average risk.
Rated Policy → Higher premium because of higher risk.
Declined Risk → Application denied.
Adverse Selection → High-risk people seek more insurance.
Policy Provisions
Grace Period → Extra time to pay a premium after due date.
Reinstatement → Restoring a lapsed policy.
Incontestability Clause → After 2 years, insurer generally can’t contest statements.
Entire Contract Clause → Policy and application make up the contract.
Misrepresentation → False statement on application.
Concealment → Leaving out important information.
Fraud → Intentional deception.
Warranty → Statement guaranteed true.
Representation → Statement believed to be true.
Material Fact → Information affecting underwriting decisions.
Waiver → Giving up a legal right.
Estoppel → Prevents someone from changing their position after others relied on it.
Beneficiaries
Beneficiary → Receives death benefit.
Primary Beneficiary → First in line.
Contingent Beneficiary → Backup beneficiary.
Revocable Beneficiary → Can be changed anytime.
Irrevocable Beneficiary → Requires permission to change.
Class Beneficiary → Group designation such as “my children.”
Minor Beneficiary → Beneficiary under legal age.
Trust Beneficiary → Trust receives proceeds.
Per Stirpes → Deceased beneficiary’s share goes to their descendants.
Per Capita → Living beneficiaries split proceeds equally.
Ownership & Rights
Policyowner → Person who controls the policy.
Insured → Person whose life is covered.
Assignment → Transfer of rights.
Absolute Assignment → Transfers all ownership rights.
Collateral Assignment → Uses policy as loan collateral.
Ownership Clause → Explains owner rights.
Policy Types
Term Life Insurance → Temporary coverage only.
Whole Life Insurance → Permanent coverage with cash value.
Universal Life Insurance → Flexible permanent coverage.
Variable Life Insurance → Permanent coverage with investments.
Ordinary Whole Life → Premiums paid for life.
Limited Pay Whole Life → Premiums paid for a set number of years.
Single Premium Whole Life → One large premium payment.
Modified Premium Whole Life → Lower premiums at first, higher later.
Renewable Term → Renew without proving health.
Convertible Term → Convert to permanent insurance without proving health.
Level Term → Same death benefit throughout.
Increasing Term → Death benefit increases.
Decreasing Term → Death benefit decreases.
Cash Value & Nonforfeiture
Cash Value → Savings component inside a permanent policy.
Cash Surrender Value → Amount received when policy is canceled.
Policy Loan → Borrowing against cash value.
APL (Automatic Premium Loan) → Cash value pays overdue premium.
Nonforfeiture Options → Ways to keep value after lapse.
Cash Surrender Option → Take the cash.
Reduced Paid-Up Insurance → Smaller permanent policy.
Extended Term Insurance → Same death benefit for limited time.
Riders
Waiver of Premium Rider → If you become disabled, the insurance company pays your premiums.
Accidental Death Rider → Pays extra money if death is caused by an accident.
Guaranteed Insurability Rider → Lets you buy more insurance later without a medical exam.
Payor Benefit Rider → If the person paying for a child’s policy dies or becomes disabled, premiums are waived.
Accelerated Death Benefit Rider → Lets a terminally ill insured receive part of the death benefit while still alive.
Cost of Living Rider (COLA) → Increases benefits over time to help offset inflation.
Return of Premium Rider → Returns premiums paid if you outlive the term policy.
Universal & Variable Life Terms
Flexible Premium → Policyowner can adjust premium payments.
Flexible Death Benefit → Death benefit can be adjusted.
Interest-Sensitive Cash Value → Cash value grows based on current interest rates.
Separate Account → Investment account used for variable policies.
General Account → Insurance company’s main account used for fixed policies.
Prospectus → Document explaining investment risks and objectives.
Securities Registration → License required to sell variable products.
Investment Risk → Risk that investments lose value; in variable policies, this risk belongs to the policyowner.
Dividends
Participating Policy → Eligible to receive dividends.
Nonparticipating Policy → Not eligible to receive dividends.
Dividend → Return of excess premium, not considered taxable income.
Dividend Options
Cash Option → Receive dividend in cash.
Reduce Premium Option → Use dividend to lower premium.
Accumulate at Interest → Leave dividend with insurer to earn interest.
Paid-Up Additions → Buy additional insurance.
One-Year Term Option → Purchase one year of term insurance.
Annuities
Annuity → Product designed to provide income, usually during retirement.
Owner → Person who owns the annuity.
Annuitant → Person whose life determines payment amount and duration.
Accumulation Period → Time when money grows.
Annuitization Period → Time when income payments begin.
Accumulation Unit → Measure of value before payout.
Annuity Unit → Measure of value during payout.
Immediate Annuity → Payments start within 12 months.
Deferred Annuity → Payments start later.
Fixed Annuity → Guarantees a specific interest rate.
Variable Annuity → Payment amount varies with investments.
Indexed Annuity → Growth tied to a market index.
Annuity Payout Options
Life Only (Straight Life) → Highest payment; stops at death.
Life with Period Certain → Guaranteed payments for a minimum period.
Joint and Survivor → Continues until the last covered person dies.
Refund Life → Refunds unused premium after death.
Lump Sum → Entire amount paid at once.
Fixed Amount → Set dollar amount paid regularly.
Fixed Period → Paid over a specific period.
Interest Only → Beneficiary receives only interest earnings.
Life Income → Guaranteed income for life.
Group Life Insurance
Group Life Insurance → Coverage for a group of people under one policy.
Master Policy → Main policy issued to employer.
Certificate of Insurance → Evidence of coverage given to employees.
Contributory Plan → Employees help pay premiums.
Noncontributory Plan → Employer pays all premiums.
Group Underwriting → Underwriting based on the group rather than individuals.
Conversion Privilege → Convert group coverage to individual coverage without proving health.
Eligibility Period → Time before an employee qualifies for coverage.
Retirement Plans
Qualified Plan → Meets IRS requirements and receives tax advantages.
Nonqualified Plan → Does not meet qualified plan requirements.
401(k) → Employer-sponsored retirement plan.
IRA → Individual Retirement Account.
Roth IRA → Contributions taxed now; withdrawals generally tax-free later.
SEP IRA → Retirement plan for self-employed individuals and small businesses.
Keogh Plan → Retirement plan for self-employed individuals.
Taxation Terms
Death Benefit → Usually received income-tax free.
Premiums → Generally not tax deductible.
Cash Value Growth → Grows tax deferred.
Cost Basis → Total premiums paid into policy.
1035 Exchange → Tax-free exchange of one insurance product for another qualifying product.
Modified Endowment Contract (MEC) → Overfunded life insurance policy with different tax treatment.
Business Insurance
Key Person Insurance → Business insures an important employee.
Buy-Sell Agreement → Plan for transferring business ownership.
Cross-Purchase Plan → Owners buy policies on each other.
Entity Purchase Plan → Business owns policies on owners.
Insurance Company Types
Stock Company → Owned by shareholders.
Mutual Company → Owned by policyholders.
Fraternal Benefit Society → Insurance for members of a social or religious group.
Reciprocal Insurer → Group of individuals or businesses sharing risk.
Domestic Insurer → Incorporated in Ohio.
Foreign Insurer → Incorporated in another U.S. state.
Alien Insurer → Incorporated outside the United States.
Reinsurance → Insurance company buys insurance from another insurer.
Ceding Insurer → Company transferring risk.
Assuming Insurer → Company accepting risk.
Exam Favorites to Memorize
Insurance = Transfer of Risk
Life Insurance = Valued Contract
Mortality = Death
Morbidity = Sickness
Grace Period = 31 Days
Incontestability = 2 Years
Convertible Term = No proof of insurability required
Variable Policies = Policyowner assumes investment risk
Noncontributory Group Plans = 100% participation required
1035 Exchange = Tax-free transfer
Dividends = Return of premium
Twisting = Misleading replacement
Rebating = Illegal inducement
Waiver of Premium Rider = Insurer pays premiums during disability
Conditional Receipt = Coverage may begin before policy delivery
Application & Policy Delivery
Application → Form used to apply for insurance.
Completed Application → Required before underwriting can begin.
Policy Delivery → Giving the policy to the insured.
Statement of Good Health → Confirms health has not changed before policy delivery.
Conditional Receipt → Coverage may start before policy delivery if conditions are met.
Binding Receipt → Provides temporary coverage immediately (more common in P&C).
Juvenile Insurance
Juvenile Policy → Life insurance on a child.
Jumping Juvenile Policy → Death benefit automatically increases when child reaches a certain age.
Payor Clause → Waives premiums if the person paying for the child’s policy dies or becomes disabled.
Life Insurance Needs Analysis
Human Life Value Approach → Estimates the value of future earnings lost if someone dies.
Needs Approach → Calculates how much money a family would need after a death.
Income Replacement → Replacing lost income after death.
Estate Creation → Creating an estate immediately through life insurance.
Estate Conservation → Preserving assets for heirs.
Liquidity → Having cash available when needed.
Final Expense Fund → Money set aside for funeral and burial costs.
Company Financial Terms
Reserve → Money insurers set aside for future claims.
Surplus → Assets exceeding liabilities.
Solvency → Ability to pay claims and financial obligations.
Premium Terms
Net Premium → Cost of insurance before expenses.
Gross Premium → Actual premium charged.
Loading → Administrative expenses added to premiums.
Mode → How often premiums are paid.
Authority of Agents
Express Authority → Authority specifically granted by insurer.
Implied Authority → Authority necessary to carry out duties.
Apparent Authority → Authority clients believe an agent has.
Producer Activities
Soliciting → Attempting to sell insurance.
Negotiating → Discussing policy terms.
Selling → Completing an insurance transaction.
Fiduciary Responsibility → Duty to handle client money honestly and responsibly.
Unfair Trade Practices
Twisting → Misleading a client to replace a policy.
Churning → Using policy values to buy unnecessary new policies.
Rebating → Offering unapproved incentives to buy insurance.
Defamation → False statements about competitors.
Boycott → Refusing to do business to pressure someone.
Coercion → Forcing someone to buy insurance.
Intimidation → Threatening someone into a purchase.
Risk Management Methods
Avoidance → Eliminate the risk.
Reduction → Reduce the chance of loss.
Retention → Keep the risk yourself.
Transfer → Shift risk to another party (insurance).
Viatical Settlements
Viator → Terminally ill person selling their life insurance policy.
Viatical Settlement Provider → Company that purchases the policy.
Beneficiary Clauses
Common Disaster Clause → Determines payment if insured and beneficiary die together.
Spendthrift Clause → Protects benefits from beneficiary’s creditors.
Facility of Payment Clause → Allows insurer to pay someone other than the beneficiary in certain situations.
Exam Terms People Often Forget
Utmost Good Faith → Both parties must be honest.
Law of Large Numbers → Larger groups make losses more predictable.
Mortality Table → Chart showing expected death rates.
Life Expectancy → Average remaining years a person is expected to live.
Issue Age → Age used to calculate premiums.
Backdating → Dating a policy earlier to obtain a lower age.
Replacement → New policy takes the place of an existing one.
Conservation → Effort to keep an existing policy in force.
Controlled Business → Insurance written primarily on yourself, family, or business associates.
Free-Look Period → Time to review and return a policy for a full refund.