Chapter 1, Section 2: Contract Terms

Chapter 1, Section 2: Contract Terms

• Focus: Vocab, basic info.
  • Consideration: Value given in exchange for a promise/benefit. Highlight keywords.
  • Client gives premiums (payments) for coverage from the insurer (company).
  • Insurer expects premiums in return for providing insurance.
• Insurable Interest: Very important; expect multiple questions.
  • Financial interest in another person's life; must exist at application time.
  • Insured: Person covered by the policy.
  • Policy Owner: Owns and pays for the policy; has full rights and control.
  • Third-Party Ownership: Someone other than the insured owns the policy, permissible if insurable interest exists between insured and policy owner.
  • Insurable Interest Relationships:
  • Spouse
  • Parents and Children
  • Grandparents and Grandchildren
  • Business Partners: Due to financial interest.
  • Creditor owning Debtor's life insurance: One-way relationship.
  • Relationships must exist at the time of application.

Contracts

• Components that make up a life insurance policy.
  • Adhesion Contract: Take it or leave it basis; no negotiation.
  • Relates to the cost of insurance, which depends on: age, health, and coverage amount.
  • Cost of insurance cannot be negotiated.
  • Conditional Contract: Both parties (client/insured and insurer/company) must perform duties and follow rules for the contract to be enforceable.
  • Aleatory Contract: Participating parties exchange unequal amounts.
  • Buying insurance is an aleatory contract.
  • Unilateral Contract: Legally binds only one party (insurer) after the premium is paid by the insured (client).
  • Client's job is to pay the policy.
  • Company must fulfill its part (e.g., pay death benefit).
  • Buy Sell Agreement: Used for business purposes; a contract specifying what happens to a business if an owner/partner dies.
  • Similar to a will, but for business purposes.
  • Utmost Good Faith: Both parties must want the contract to work.
  • Similar to conditional contract, requires both conditions/rules and good intentions.

Indemnify

• To restore to the original condition; make whole again with no loss, but also no gain.
  • In life insurance, meant to restore financial condition; not to create profit from a death.

Parts to an Application

• Approval process required.
  • General Information: Name, DOB, SSN, address, occupation, etc.
  • Medical Information: Health questions, history, etc.
  • Agent's Report: Agent is a "field underwriter"; provides the company with their perspective on the applicant.
  • Agent's signature verifies applicant's apparent condition.
  • Representation: Statements believed to be true to the applicant's best knowledge.
  • Misrepresentation: A deliberate lie.
  • Concealment: Failing to disclose facts.
  • Warranties: Absolute truth.
    • Express: Written truth.
    • Implied: Assumed truth.
    • Representation: Implied warranties.
  • Twisting: Misrepresentation to persuade someone to switch policies; prohibited.
  • Rebating: Bribing someone to buy insurance; prohibited.
  • Fraud: A lie for financial gain.
  • Underwriting: Process of approving a policy.
    • Underwriters: Investigators who decide whether to approve or deny an application based on proof of insurability.
    • Proof of Insurability: Proving you are insurable (health).
    • Medical Records and Physical Exams
    • Medical Information Bureau: MIB stores data from insurance companies to prevent fraud.
    • Insolvent: No money to back up coverage.
    • Solvent: Enough funds.