Life Insurance Exam Study Guide

General Insurance Terms

• Insurance: A contract whereby one party (insurer/agent) agrees to indemnify another party (insured/client) against a loss due to a specified future contingency or peril in return for the payment of a premium.

• Risk: The uncertainty of a loss.

  • Pure risk: Insurable because it involves a chance of loss only.
  • Speculative risk: Not insurable because it involves a chance of both loss and gain (e.g., gambling).

• Hazards: Events or conditions that increase the chance of a loss.

  • Physical hazards: Conditions related to the physical body such as medical history, blindness, or deafness.
  • Moral hazards (MO-RAL): Involves dishonest behavior such as lies that increase the likelihood of a loss.
  • Morale hazards (MO-RAH-LEE): Relates to an individual’s carelessness or risky behavior that may lead to loss (e.g., engaging in unsafe activities).

• Peril: The cause of a loss; examples include fire, accidents, or floods.

• Law of Large Numbers: A principle that predicts the number of deaths or losses that should occur within a similar group of people; asserts that the larger the number, the more accurate the prediction of future losses becomes.

• Agents:

  • Captive/Career agent: Works exclusively for one company and sells only that company’s products.
  • Independent agent: Operates independently and sells products for multiple insurance companies.
  • Domestic agent: An agent incorporated in the state where they conduct business (e.g., California).
  • Foreign agent: An agent incorporated in another state (e.g., Oregon or Arizona) but conducting business in California.
  • Alien agent: An agent incorporated in a country outside the United States (e.g., Canada or England) but doing business in California.

• Fiduciary: A person in a position of financial trust, such as an agent who collects premiums and must remit them promptly to the insurance company.

• Appointment: The authorization of an agent/producer by an insurer to represent the company.

• Authorized/Admitted: Refers to all companies (domestic, foreign, alien) that must have a license to conduct business in a state, regardless of where they are incorporated. An authorized company has a Certificate of Authority to conduct business in that state.

• Certificate of Authority: A license granted by the state's insurance authority that allows an insurer the right to conduct business in that state.

• Types of Powers:

  • Expressed: Powers that are specifically stated and written in contracts.
  • Implied: Powers that are not explicitly stated in the contract but are assumed to be necessary for the conduct of insurance business.

• Commissioner: A public official in charge of the state's Department of Insurance who is responsible for regulating the insurance industry by enforcing insurance laws.

Conditional Receipt

• Conditional Receipt: A type of premium receipt indicating that coverage becomes effective either on the date of application or the date of the medical exam, whichever is later, provided that the premium is submitted with the application and that coverage is approved as applied for.

Contract Terms

• Consideration: The value given in exchange for the promise to pay benefits under the insurance contract.

• Insurable interest: A financial interest in the life of another person, which means the policyholder must be in a position to lose something of value if the insured dies. This insurable interest must exist at the time of application.

• Adhesion contract: A contract offered on a "take it or leave it" basis by an insurer, where the only options for the insured are to accept or reject the contract.

• Aleatory contract: A contract where the participating parties exchange unequal amounts; one party may receive far more value than what they paid.

• Conditional contract: An agreement in which both parties must perform certain duties and adhere to rules of conduct for the contract to be enforceable.

• Unilateral contract: A binding contract that legally obligates only one party to contractual obligations after the premium is paid; the insurer is the only party bound to pay benefits if a loss occurs.

• Buy-Sell Agreement: A contract that establishes what will happen to a business in the event of an owner's or partner's death.

• Indemnify: To restore the insured to the same condition as prior to the loss, with the intention of neither gaining nor losing value.

• Utmost Good Faith: A principle that both parties must engage with honesty and transparency, desiring the contract to work effectively.

Insurance Application Terms

• Representations: Statements made by the applicant that are believed to be true to the best of their knowledge (e.g., answers on an application).

• Misrepresentations: Inaccurate statements; essentially, lies made during the insurance application process.

• Concealment: The act of hiding the truth or failing to disclose material facts that could affect the insurance agreement’s execution.

• Warranties: Statements that are guaranteed to be true; these are seen as absolute truths within the context of the insurance agreement.

• Fraud: The act of making a false statement for financial gain.

• Underwriting: The process by which insurance companies evaluate risks and determine the terms and pricing of the insurance policy.

• Proof of Insurability: Documentation or evidence concerning a person’s physical and/or mental health, personal character, occupations, living habits, etc.; this proof is used by the insurance company to assess the risk associated with insuring that individual.