chapter 1 pt 2

Consideration

• Value given in exchange for a promise or benefit

• Client gives premiums (payments) to a company for coverage

• Insurer gives insurance in exchange for premiums

Insurable Interest

• Financial interest in the life of another person; able to lose something of value if the insured dies

• Must exist at the time of application between the insured and the policy owner

• Prevents strangers from buying life insurance on each other

• Relationships with insurable interest:

  • Spouse

  • Parents and children

  • Grandparents and grandchildren

  • Business partners (financial interest exists)

  • Creditor owning debtor's policy (one-way)

• insurable interest must exist at the time of application

Contracts

• Components that make up a life insurance policy (policy itself is a contract)

Adhesion Contract

• Offered on a take-it-or-leave-it basis (accept or reject)

• No negotiation

• Relates to the cost of insurance, which depends on:

  • Age (older = more expensive)

  • Health (unhealthy = more expensive)

  • Coverage (more coverage = more expensive)

Conditional Contract

• Both parties must perform certain duties to make the contract enforceable

• Parties: the client (insured) and the insurer (company)

Aleatory Contract

• Parties exchange unequal amounts

• Buying insurance is always an aleatory contract

Unilateral Contract

• Legally binds only one party after the premium is paid

• Insured (client) pays the premium

• Insurer (company) must fulfill its obligations (e.g., pay the death benefit)

Buy-Sell Agreement

• Used for business purposes

• Contract establishing what happens to a business if an owner/partner dies

• Agreement where existing business partner can use a life insurance policy to buy the deceased partner's share

Utmost Good Faith

• Both parties must want the contract to work

• Need both conditional contract (rules) and utmost good faith (good intention)

Indemnify

• To restore to the original condition with no loss and no gain

• Insurance meant to restore to original condition

Parts to an Application

• Life insurance requires an approval process, not an immediate purchase

Three Parts of Application

1. General Information

   • Name, date of birth, SSN, address, occupation, etc.

2. Medical Information

   • Health history, hospitalizations, medications, etc.

3. Agent's Report (Field Underwriters)

   • Not to accept or deny but to be the eyes of the company

   • Sign off on applications to verify the client's condition

Vocab Related to Medical Information Section

• Representation: Statements believed to be true to the applicant's best knowledge

• Misrepresentation: A straight-up lie

• Concealment: Failing to disclose facts

• Warranties: Absolute truth

  • Express Warranties: Written truth

  • Implied Warranties: Assumed truth

Twisting

• Misrepresentation/fraudulent comparison to persuade someone to switch policies which is prohibited.

Rebating

• Giving something of value (bribing) to induce someone to buy insurance.

Fraud

• A lie for financial gain.

Underwriting

• Process of approving a policy by investigators (underwriters)

• Underwriters decide to approve or deny based on proof of insurability

• Proof of Insurability: Proving one's insurable, primarily based on health via:

  • Medical records

  • Physical exam

Medical Information Bureau (MIB)

• Helps underwriters during the underwriting process for medical information

• Prevents fraud and concealment.

Insolvent

• No money in the money bag.

Solvent

• Money in the money bag.

• Companies need enough assets to cover all death benefits if all clients were to pass away

Coverage Amount

• Human Life Value Approach focuses on the probable future earnings of the insured by considering:

  • Wages

  • Inflation

  • Years left for retirement

  • Time value of money

• Needs Approach (Financial Needs Approach) focuses on the needs of a family by considering:

  • Debt

  • Income

  • Mortgage

  • Expenses

Risk Classifications

• Prevents something called selection

• Adverse Selection: Health didn't matter.

• Classify applicants based on factors

• Goal: determine how risky they are

• Examples:

  • Preferred: Healthier than average, gets a discounted premium

  • Standard: Average, same standard price as average

  • Substandard: Unhealthy, pays more than average