Life Insurance: Basic Insurance Concepts and Principals

The protection of the insurer from adverse selection is provided in part by

A profitable distribution of exposures.

When must insurable interest exist in a life insurance policy?

At the time of application

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe?

Avoidance

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called

Avoidance

If a loss occurs, insurance policies pay the proceeds to

Beneficiary

A debtor does not have an insurable interest in the....

Creditor

In order to be characterized as pure risk, the loss must be...

Due to chance, definite, measurable, and predictable, but not catastrophic.

Events or conditions that increase the chances of an insured loss occurring are referred to as

Hazards

Units with the same or similar exposure to loss are referred to as

Homogeneous.

The insurer may suspect that a moral hazard exists if the policyholder

Is not honest about his health on an application for insurance.

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become

Larger

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?

Law of large numbers

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as

Legal Hazard

An individual's tendency to be dishonest would be indicative of a

Moral Hazard

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard?

Morale

In case of a loss, the indemnity provision in insurance policies

Restores an insured person to the same financial state as before the loss.

Insurance is the transfer of

Risk

Peril is most easily defined as

The causes of loss insured against

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss.

When an individual purchases insurance, what risk management technique is he or she practicing?

Transfer

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about

Whether an insurable interest exists between the individuals.

The causes of loss insured against in an insurance policy are known as

Perils

Who must have an insurable interest in the insured?

Policyowner

What is the term for the fee a policyowner must pay to the insurance company to maintain coverage?

Premium

Which of the following is the most common way to transfer risk?

Purchase insurance

The risk of loss may be classified as

Pure risk and speculative risk.

According to California Insurance Code, which of the following can be classified as an insurable event?

Pure risks

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?

Reduction

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Reduction

Adverse selection is a concept best described as

Risks with higher probability of loss seeking insurance more often than other risks.

Events in which a person has both the chance of winning or losing are classified as

Speculative risk.

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

Indemnity