Basic and General Insurance Terms

What are the 4 elements of a contract?

1. Offer and Acceptance 2.Consideration 3. Legal Purpose 4.Competent Parties

5 recognized areas of insurable interest

1. Own life 2. Family members 3. Business partners 4. Key employees 5. Financial obligation

An insurer must acknowledge receipt of a Notice of Claim within how many days?

15

The validity of coverage under a life insurance policy may not be contested, except for nonpayment of premium, after the policy has been in force for at least how many years?

2 years

The Commissioner of Insurance issues a Cease and Desist Order to an agent. If the agent wishes to contest the charges in court, how many days after the order was issued does the agent have to make the request?

30 days

In the event a policy lapses due to nonpayment of premium, within how many days would the policy be automatically reinstated once the outstanding premium is paid?

45 days

If a consumer requests additional information concerning an investigative consumer report, how long does the insurer or reporting agency have to comply?

5 days

What percentage of continuing education hours must be in a classroom setting?

50%

The minimum number of credits required for partially insured status for Social Security disability benefits is

6 credits

If an agent does not fulfill their continuing education requirements or pay the necessary fees then their license will expire within _____ days of the due date.

90

Describe Fixed-period settlement option

A specific period of years is selected, and equal installments are paid to the recipient. Both the principal and interest are liquidated together over the selected period of time

The financial statue of insurance companies is rated by:

AM Best, Fitch, Standard and Poors, Moody's and Weiss

Define VIATICAL SETTLEMENT; what would the beneficiary receive upon death?

Allows someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when and where they need it most, before death. The policyowner sells it for a percentage of the face value; Nothing

What are the legal interpretations affecting contracts?

Ambiguities in a contract of adhesion, reasonable expectations, indemnity, utmost good faith, statements of the insured

What is a foreign insurer?

An insurer with a home office in another state

The LEAST expensive first-year premium is found in what policy?

Annually Renewable Term

A form of level term insurance that offers the most insurance at the lowest costs

Annually renewable term

Purest form of term insurance. The death benefit remains level but the premium increases annually according to the attained age as the probability of death increases.

Annually renewable term (ART)

What kind of authority is the appearance of, the assumption of; because of the circumstances the principle created?

Apparent (apparently there is a relationship between the agent and the insurance company)

Information received from the applicant's private physician is known as an __________________________________________.

Attending physician's report

The _____________________ is the person who receives the benefits from the insurance policy.

Beneficiary

Variable life insurance is regulated by whom?

Both the state and federal government, as well as the insurance department and the SEC (securities and exchange commission)

True or false

Breach of warranties can be considered grounds for voiding the policy or a return of premium

Two business partners own life insurance on each other. If one partner dies, which contract would allow the surviving partner to use the death benefit to purchase the deceased's business interests?

Buy-Sell Agreement

What are the business uses of life insurance?

Buy-Sell funding, Key Person and Executive Bonus

Under which nonforfeiture option does the company pay the surrender value and have no further obligations to the policyowner?

Cash surrender; once the value is paid, the contract is over.

What does it mean that loss cannot be catastrophic?

Certain types of perils are unpredictable and thus uninsurable; such as war, nuclear risk, floods

As an agent, you are the legal representative of the ______________________.

Company

List the Distinct Characteristics of a Legal Contract

Contract of Adhesion, Personal Contract, Unilateral Contract, Conditional Contract

A __________________________________ is prepared by one of the parties (___________________) and accepted or rejected by the other party (___________________).

Contract of adhesion; insurer; insured

Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as

Contracts of adhesion

Define Joint Life Policy

Covers the lives of the two insureds; rates are blended. Upon the death of the first insured, the policy ends.

When must insurable interest exist?

Date of the application

Name the 3 types of incorporation

Domestic (state) Foreign (outside state) Alien (outside the US)

The interest rates of _______________________________ Annuities are tied to the standard and poor's index.

Equity Indexed

What authority is granted in means of the agent's contract?

Expressed

What is a person called who holds a position of special trust and confidence?

Fiduciary

What is it called when someone deliberately conceals or misrepresents a material truth on an application?

Fraud

A mandatory provision found in all life and health insurance policies that provides coverage for a period of time after the premium becomes past due

Grace period

The _____________________________________ option allows the insured to purchase specific amounts of additional insurance at specific times without proving insurability.

Guaranteed insurability option

______________________________ is the promise to pay for losses; ___________________________ is the premium and statements on the application.

INSURER'S consideration; INSURED'S consideration

What kind of authority not expressly granted but in which the agent is assumed to have authority in order to transact business?

Implied

Define HAZARD. What does it cause?

Increases the likelihood of a loss; such as smoking; causes a PERIL

Stranger-originated life insurance (STOLI) policies are in direct opposition to the principle of _____________________________________.

Insurable interest

The person covered by the insurance policy is known as the __________________.

Insured

The insurance company who provides the policy is known as the ________________.

Insurer

Who makes up the Medical Information Bureau?

Insurers

With the _____________________________ settlement option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, seminannually, or annually).

Interest Only

____________________________ investigate an applicant's finances, character, work, hobbies, and habits. Credit, employment records and public sources are also taken into consideration.

Investigative Consumer Reports

What is the benefit of choosing extended term as a nonforfeiture option?

It has the highest amount of insurance protection

Most common type of temporary protection purchases; death benefit and premium remain the same throughout the life of the policy

Level Term Insurance

Name the 6 elements that make pure risk insurable.

Loss must be due to chance Loss must be definite and measurable Loss must be statistically predictable Loss cannot be catastrophic Loss exposure must be large Insurance must not be mandatory

Define OFFER

Made by the applicant with application and acceptance of policy

The _________________________________ receives and maintains medical information from insurance companies. Allows companies to compare information they have collected on potential insured. Protects the company from ___________________________.

Medical information bureau (MIB); adverse selection

Owned by the policyowner

Mutual Companies

Which RISK is considered insurable? WHY?

PURE; loss must be financial and uncertain. No financial fain can occur.

What is another term for the accumulation period of an annuity?

Pay-in period; period of time over which the annuitant makes payments into an annuity

Define ADVERSE SELECTION

People in bad health keep their policy in force longer than people in good health.

What causes a loss?

Peril; such as fire, accident or flood.

The person who pays for the insurance policy is known as the _____________________.

Policyowner

Define LAW OF LARGE NUMBERS

Predicts number of deaths that should occur within a similar group of people (exposure) within a given period of time

Those individuals who meet certain requirements and qualify for lower premiums than the standard risk; have superior physical condition, lifestyle, and habits

Preferred risks

True or false

Premiums paid for life insurance are tax deductible.

What are the two types of loss?

Pure and speculative

Which option allows the policyholder to apply policy dividends toward the next year's premium? The dividend is ______________________ from the premium amount, yielding the new premium due for the next year.

Reduction of premium; subtracted

________________________ is an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid.

Return of Premium

Define PERIL

Serious or immediate danger

Explain reasonable expectation

Some coverage's must be provided by the insurance company, even though they are not specifically stated in the policy

If an applicant is acceptable, the underwrite must determine the risk or rating classification. A prospective insured may be rated as one of three classifications. What are they?

Standard, substandard, or preferred

Owned by the shareholder

Stock Companies

A life insurance arrangement in which a person with no relationship to the insured (a stranger) purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies.

Stranger-Originated Life Insurance (STOLI)

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

Substandard (high exposure) risk

______________________ is excluded for a specific period of years and covered thereafter; Within a certain period, the insurer is not obligated to pay the death benefit.

Suicide

Why do people buy life insurance?

Survivor protection, Estate Creation, Viatical (death) Settlements

Children's riders attached to whole life policies are usually issued as what type of insurance?

TERM

Who must sign the application?

The agent (producer; field underwriter) The applicant The policyowner

Define COUNTER OFFER

The company offering an insurance policy with higher premiums due to the increase risk of the applicant

Which of the following describes the tax advantage of a qualified retirement plan?

The earning in the plan accumulate tax deferred

Define FAIR CREDIT REPORTING ACT

The federal legislation that protects the applicant's right to be notified in the event that their credit history may be investigated. Consumer has the right to know reporting agency and reason for denial and modification of coverage. Does not have to have an actual copy.

Which of the following is NOT a feature of a noncancellable policy?

The insurer may terminate the contract only at renewal for certain conditions

An insured has chosen joint and 2/3 survivor as the settlement option. What does this mean to the beneficiaries?

The surviving beneficiary will continue receiving 2/3 of the benefit paid when both beneficiaries were alive

What is a risk?

The uncertainty of financial loss

What is the purpose of the buyer's guide?

To allow the consumer to compare the costs of different policies

What is the purpose of the Life Insurance Guaranty Association?

To help protect policyowners and beneficiaries against financial loss caused by the insolvency of an insurance company

In which instance would decreasing term policies be purchased?

To insure the payment of a mortgage or other debts if insured dies prematurely.

Define insurance.

Transfer of the possibility of loss (RISK) to an insurance company

In a ________________ contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

Unilateral

What is it called when both parties are trusted to reveal relevant facts?

Utmost Good Faith

When is the earliest a policy may go into effect?

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

What is the most common type of permanent insurance? DEFINE.

Whole life; a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insures (or until age 100) as long as the premium is paid

Can policies be backdated in order to lower premiums? How far can they be backdated?

Yes; no more than 6 months

Define annuity

a contract that provides income for a specified period of years or life; not life insurance but a vehicle for accumulation of money and the liquidation of an estate; do not pay a face amount upon the death of said annuitant

Define MISREPRESENTATION

a false statement given to the insurer with the intent to defraud

To which of the following situations does the Replacement Regulation apply? a)Group life insurance b)An immediate annuity purchased with proceeds from an existing policy c)Coverage under a binding receipt issued by the same company d)A whole life policy reissued with reduction in cash value

a whole life policy reissued with reduction in cash value

what are the 4 essential elements of a legally binding contract?

agreement - offer and acceptance; consideration; competent parties; and legal purpose

Insurance contracts are ___________________, which means what?

aleatory; there is an exchange of unequal amounts or values; the premium paid is in small relation to the amount that will be paid by the insurer in event of a loss

What is a contract?

an agreement between two or more parties

Define KEY EMPLOYEE

an employee who could not be replaced without considerable expense in which the company might consider buying a life insurance policy on that individual

The basic source of information used in the company's risk selection process is the _________________________

application

An agent is ready to deliver a policy to an applicant but has not yet received payment. Upon delivery, the agent collects the applicant's premium check, answers any questions the applicant may have, and then leaves. What did he forget to do?

ask her to sign a statement of good health

An ______________ insurance company is admitted to do business in a state

authorized

Underwriting _________________________________________________________________________________________

cannot unfairly discriminate based on race or national origin

Any policy that has a death benefit must also have a

change of beneficiary provision

Parties to a contract are required to be

competent, of legal age, sane and sober

An insurance contract requires that both the insured and the insurer meet certain conditions in order for the contract to be enforceable. What contract characteristic does this describe?

conditional

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is

conditional

An insured pays an annual premium to his insurer. In return, the insurer promises to pay benefits in accordance with the terms of the contract. This is called

consideration

The __________________ clause states that the value offered by the insured is the premium and statements made in the application, so it will include the information about the amount and frequency of premium payments

consideration clause

Which of the following provisions states the insurer's right to change premium amounts?

continuation provision

Which of the following statements about occupational vs. nonoccupational coverage is TRUE? a)Group medical expense policies and individual medical expense policies always cover both occupational and nonoccupational injuries b)Individual disability policies never cover nonoccupational injuries c)Only group disability income policies can be written on an occupational basis d)Disability insurance can be written as occupational or nonoccupational.

disability insurance can be written as occupational or nonoccupational

For a retirement plan to be qualified, it must be designed for the benefit of

employees

The provision which states that both the policy and a copy of the application form the contract between the policyowner and the insurer is called the

entire contract

When the policyowner specifies a dollar amount in which installments are to be paid, he/she has chosen which settlement option?

fixed amount

If a beneficiary wants a guarantee that benefits paid from principal and interest would be paid for a period of 10 years before being exhausted, what settlement option should the beneficiary select?

fixed period

All of the following are dividend options EXCEPT a)Paid-up additions b)Fixed-period installments c)Accumulated at interest d)Reduction of premium.

fixed period installments (is a settlement option, not dividend option)

Which of the following riders would NOT increase the premium for a policyowner? a)waiver of premium b)multiple indemnity rider c)impairment rider d)payor benefit rider

impairment rider; it excludes a specified condition from coverage, therefore, reducing benefits. An insurance company will not charge extra for a rider that reduces benefits

Issue age policy premiums increase in response to which of the following factors?

increased benefits

To ensure legal purpose of a Life Insurance policy, it must have both what?

insurable interest and consent

To by insurance, the policyowner must have _____________ _________________ in the insured at the ______________________________________________________________________________________________________________________.

insurable interest; time of purchase but not at time of insured's death.

Which of the following is TRUE regarding the annuity period? a)It may last for the lifetime of the annuitant b)During this period of time the annuity payments grow interest tax deferred c)It is also referred to as the accumulation period d)It is the period of time during which the annuitant makes premium payments into the annuity.

it may last for the lifetime of the annuitant

A married couple owns a permanent policy which covers both of their lives and pays the death benefit only upon the death of the first insured. Which policy is that?

joint life policy

The premium of a survivorship life policy compared with that of a joint life policy would be

lower

An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?

mutual

An applicant for a health insurance policy returns a completed application to her agent, along with a check for the first premium. She receives a conditional receipt two weeks later. Which of the following has the insurer done by this point?

neither approved the application nor issued the policy

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are

not taxable since the IRS treats them as a return of a portion of the premium paid

Which Universal Life option has a gradually increasing cash value and a level death benefit?

option A

A rider attached to a life insurance policy that provides coverage on the insured's family members is called the

other-insured rider

Traditional IRA contributions are tax deductible based on which of the following?

owner's income

An insured has a continuous premium whole life policy. She would like to use the policy dividends to pay off her policy sooner than would have been possible otherwise. What dividend option could she use?

paid up option

A _____________________________ is completed by a paramedic or registered nurse for small amounts of insurance and for applicants with no prior medical concern

paramedical report

Which of the following is another term for the accumulation period of an annuity?

pay in period

An insured pays her Major Medical Insurance premium annually on March 1. Last March she forgot to mail her premium to the company. On March 19, she had an accident and broke her leg. The insurance company would

pay the claim

Mutual Companies are owned by

policyowners

Which of the following will be included in a policy summary?

premium amounts and surrender values

The applicant's consideration consists of __________________________________________. The insurance company's consideration is the ________________________ contained in the policy.

premium and statements on the application; promise to pay

What are statements made by an applicant that are true to the best of their knowledge?

representations

An insured wants to name her husband as the beneficiary of her health policy. She also wishes to retain all of the rights of ownership. The insured should have her husband named as what type of beneficiary?

revocable

A domestic insurer issuing variable contracts must establish one or more

separate accounts

Which two terms are associated directly with the way an annuity is funded?

single payment or periodic payments

Which of the following determines the length of time that benefits will be received under the Fixed-Amount settlement option?

size of each installment

Are representative of the majority of people at their age and with similar lifestyles; average risk.

standard risks

Which of the following terms describes the specified dollar amount beyond which the insured no longer participates in the sharing of expenses?

stop-loss limit

Which of the following policies would be classified as a traditional level premium contract?

straight life; Straight whole life policies have a level guaranteed face amount and a level premium for the life of the insured.

Insurance contracts are offered on a ______________________________ basis by an insurer. Meaning what?

take-it-or-leave-it; The insured has little to say about its provisions.

The binding force in any contract is known as __________________________________

the consideration

Which of the following is NOT a feature of a guaranteed renewable provision?

the insurer can increase the policy premium on an individual basis

What is the purpose of a fixed-period settlement option?

to provide a guaranteed income for a certain amount of time

If an emergency fund is set up in the needs approach what should it be used for

unexpected expenses

If an insurer knowingly or frequently commits an act that neglects or deceives an insured, its behavior falls under the category of

unfair claim settlement practice

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe?

unilateral

Insurance contracts are _________________ because only one party, the _____________________________________, makes any legally enforceable promises.

unilateral; insurance company

What is the name of a clause that is included in a policy that limits or eliminates the death benefit if the insured dies as a result of war or while serving in the military?

war or military service

A ____________________ is the literal or absolute truth.

warranty

Define CONCEALMENT

when an applicant fails to disclose known material facts

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 coverage begin?

when the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable statement of good health

Define ESTOPPEL; AKA ____________________________________

when you are denied the right to enforce a legal right that you have previously given up; aka the Loss of Defense

Define WAIVER

when you voluntarily give up your legal right