CH 1 - Completing the Application, Underwriting, and Delivering the Policy

Insurance policy

A contract between a policy owner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events.

All the following information about the applicant is identified in the General Information section of life insurance application EXCEPT A. Education B. Age C. Gender D. Occupation

A. Education

Which of the following best details the underwriting process for life insurance? A. Selection, classification, and rating of risk B. Solicitation, negotiations and sale of policies C. Issuance of policies D. Reporting and rejection of risks

A. Selection, classification, and rating of risks

Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as A. Binding contracts. B. Contract of adhesion. C. Unilateral contracts. D. Aleatory contracts.

B. Contract of adheasion.

Which of the following best describes the aleatory nature of an insurance contract? A. Ambiguities are interpreted in favor of the insured B. Exchange of unequal values C. Only one of the parties being legally bound by the contract D. Policies are submitted to the insurer on a "take it or leave it" basis

B. Exchange of unequal values

The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective? A. As of the first of the month after the policy issue. B. As of the policy issue date. C. As of the application date. D. As of the policy delivery date.

C. As of the application date

In terms of parties to a contract, which of the following does NOT describe a competent party? A. The person must not be under the influence of drugs or alcohol. B. The person must be of legal age. C. The person must be mentally competent to understand the contract. D. The person must have at least completed secondary education.

D. The person must have at least completed secondary education.

What is consideration?

Something of value that is transferred between the two parties to form a legal contract and is the binding force in any contract.

Policyowner

The person entitles to exercise the rights and privileges in the policy.

Applicant or proposed insured

A person applying for insurance.

Insured

A person covered by the insurance policy; may or may not be the policyowner.

Beneficiary

A person who receives the benefits of an insurance policy.

An insurer receives a report regarding a potential insured that includes the insured's financial status, hobbies and habits. What type of report is that? A. Inspection Report B. Medical Information Bureau's report C. Agent's Report D. Underwriter's Report

A. Inspection Report

What is rating classification and what are the three classifications?

Rating classification is used to determine whether or not the accepted applicant should pay a higher or lower premium. A prospective insured may be rated as one of the three classifications: standard, substandard or preferred.

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is A. Personal. B. Unilateral. C. Conditional D. Aleatory

C. Conditional

Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all the following elements EXCEPT A. Legal purpose B. Offer and acceptance C. Conditions D. Considerations

C. Conditions

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated? A. Representation B. Adhesion C. Consideration D. Good faith

C. Consideration

What is the definition of a unilateral contract? A. Two or more parties go into a contract understanding there may be an unequal exchange of value. B. One author: the company wrote the contract; the insured must accept it as written. C. If one party makes a condition, the other party can counteroffer. D. One-sided: only one party makes an enforceable promise.

D. One-sided: only one party makes an enforceable promise.

Which of the following individuals must have insurable interest in the insured? A. Beneficiary B. Underwriter C. Producer D. Policyowner

D. Policyowner

Under the Fair Credit Reporting Act, if the consumer challenges the accuracy of the information contained in his or her report, the reporting agency must A. Defend the report if the agency feels it is accurate. B. Change the report C. Send the actual certified copy of the entire report to the consumer. D. Respond tot he consumers complaint.

D. Respond to the consumers complaint.

When would a misrepresentation on an insurance application be considered fraud? A. Any misrepresentation is considered fraud. B. If it is intentional and material. C. Never: statements by the applicant are only representations. D. When the application is incomplete.

B. If it is intentional and material.

What is risk classification?

When classifying a risk, the Home Office underwriting department will look at the applicant's past medical history, present physical condition, occupation, habits and morals.

What is the maximum penalty for habitual willful noncompliance with the Fair Credit Reporting Act? A. Revocation of license B. $2,500 C. $1,000 D. $100 per violation

B. $2,500

Life insurance

Coverage on human lives.

Insurer (principal)

The company who issues an insurance policy.

Premium

The money paid to the insurance company for the insurance policy.

What type of applicants are considered substandard (high exposure) risk?

Applicants that are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits.

Death benefit

The amount paid upon the death of the insured in a life insurance policy.

What applicants are considered preferred risks?

Applicants who have a superior physical condition, lifestyle, and habits. Theses applicants also qualify for lower premiums than the standard risk.

When Y applied for insurance and paid the initial premium on August 14, he was issued a conditional receipt. During the underwriting process, the insurance company found no reason to reject the risk or classify it other than as standard. Y was killed in an automobile accident on August 22, before the policy was issued. In this case, the insurance company will A. Keep the premium and reject the risk on the basis that the applicant died before the policy could be issued. B. Issue the policy anyway and pay the face value to the beneficiary. C. Negotiate a reduced settlement with the beneficiary due to the unusual circumstances involved. D. Return the premium to Y's estate, since it has no obligation to pay the death claim

B. Issue the policy anyway and pay the face value to the beneficiary.

Which of the following is NOT the consideration in a policy? A. The promise to pay covered losses. B. The application given to a prospective insured. C. Something of value exchanged between parties. D. The premium amount paid at the time of application.

B. The application given to a prospective insured.

If an insurer issued a policy based on the application that had unanswered questions, which of the following will be TRUE? A. The insurer may deny coverage later, because of the information mission on the application B. The policy will be interpreted as if the insurer waived its rights to have an answer on the application. C. The policy will be interpreted as if the insured did not have an answer to the question. D. The policy will be void.

B. The policy will be interpreted as if the insurer waived its right to have an answer on the application.

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract? A. Representation B. Warranty C. Concealment D. Indemnity

B. Warranty

An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will the coverage begin? A. When the agent submits the application to the company and the company issues a conditional receipt. B. When the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable Statements of Good Health C. On the designated effective date D. On the application date

B. When the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable Statements of Good Health

An insurance contract must contain all of the following to be considered legally binding EXCEPT A. Consideration. B. Competent parties. C. Beneficiary's consent. D. Offer and acceptance.

C. Beneficiary's consent

If a change needs to be made to the application for insurance, the agent may do all of the following EXCEPT A. Draw a line through the first answer, record the correct answer, and have the applicant initial the change. B. Note on the application the reason for the change. C. Destroy the application and complete a new one. D. Erase the incorrect answer and record the correct answer.

D. Erase the incorrect answer and record the correct answer.

Which is the appropriate action by the insurer if a prospective insured submitted an incomplete application? A. Issue a policy anyway since the application has been submitted B. Ask the producer who solicited the policy to complete and resign the application C. Fill in the blanks to the best of insurer's knowledge D. Return the application to the applicant for completion

D. Return the application to the applicant for completion.

When is the earliest a policy may go into effect? A. When the first premium is paid and the policy has been delivered B. When the insurer approves the application C. After the underwriter reviews the policy D. When the application is signed and a check is given to the agent

D. When the application is signed and a check is given to the agent

Adverse selection

Insuring risks that are more prone to losses than the average risk.

Lapse

Policy termination due to nonpayment of premium.

What type of applicants are considered standard risk?

Representatives of the majority of people of their age with similar lifestyles. They are average risk. Persons who are entitled to insurance protection without extra rating or special restrictions.

Fraud

Intentional misrepresentation or deceit with the intent to induce a person to part with something of value.

Agent/Producer

A Legal representative of an insurance company; the classification of a producer usually includes agents and brokers; agents are the agents of the insurer.

Which is generally true regarding insureds who have been classified as preferred risks? A. They can borrow higher amounts off of their policies. B. They can decide when to pay their monthly premiums. C. They keep a higher percentage of any interest earned on their policies. D. Their premiums are lower.

D. Their premiums are lower.

What does the Fair Credit Reporting Act do/govern?

The Fair Credit Reporting Act governs what information can be collected and how the information can be used.

Which of the following types of risk will result in the highest premium? A. Substandard risk B. Standard risk C. Preferred risk D. All risks pay equal premiums

A. Substandard risk

If a policy includes a free-look period of at least 10 days, the Buyer's Guide may be delivered to the applicant no later than A. With the policy. B. Upon issuance of the policy C. Within 30 days after the first premium payments was collected. D. Prior to filling out an application for insurance.

A. With the policy.

An applicant is denied insurance because of information found on a consumer report. Which of the following required that the insurance company supply the applicant with the name and address of the consumer reporting company? A. Consumer Privacy Act B. Conditional receipt C. Disclosure rule D. Fair Credit Reporting Act

D. Fair Credit Reporting Act