Chapter: Completing the Application, Underwriting, and Delivering the Policy

Elements of a Legal Contract

1. Agreement 2. Consideration 3. Competent Parties 4. Legal Purpose

In order for insurance contract to be legally binding, they must have four essential elements:

1. Agreement (offer and acceptance) 2. Consideration 3. Competent parties 4. Legal purpose

3 Ratings Classification that denote risk levels

1. Standard 2. Substandard 3. Preferred This classification system helps insurers to decide if an insured should pay a higher premium

Adhesion

A contract prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written

Which of the following is the basic source of information used by the company in the risk selection process? A. Application B. Agent's Report C. Warranty D. Consumer report

A. Application

Which of the following is NOT an essential of an insurance contract? A. Counteroffer B. Consideration C. Agreement D. Legal purpose

A. Counteroffer

Which of the following would provide an underwriter with information concerning an applicant's health history? A. The medical information bureau B. A medical examination C. The agent's report D. The inspection report

A. The medical information bureau

Contract

Agreement between two or more parties enforceable by law

Death Benefit

Amount paid upon the death of the insured in a life policy

Who can make a fully deductible contribution to a traditional IRA? A. A person who contributions are funded by a return on investment B. An individual not covered by an employer- sponsored plan who has earned income C. Anybody; all IRA contributions are fully deductible regardless of income level D. Someone making contributions to an educational IRA

B. An individual not covered by an employer- sponsored plan who has earned income.

Which of the following terms means something of value that each party gives to the other under a insurance contract? A. Offer B. Consideration C. Assignment D. Indemnity

B. Consideration

Stranger-originated life insurance (STOLI) policies are in direct of A. Indemnity B. Insurable Interest C. Law of Large Numbers D. Good Fatih

B. Insurable Interest

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

B. Selection, classification, and rating risks

Which of the following best describes insurance? A. The transfer of loss B. The transfer of risk C. The reduction of loss D. The reduction of risk

B. The transfer of risk

Stranger- Originated Life Insurance (STOLI)

BUYING A NEW POLICY ON A STRANGER. NO INSURABLE INTEREST. Insurance arrangement in which a person with no relationship to the insured 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. In other word STOLIs are financed and purchased solely with the intent of selling them for life settlements.

Application

Basic source of information an insurer uses in the risk selection process.

Consideration

Binding force in any contract. Something of value that each party gives to the other

How long is the grace period in individual life insurance policies? A. 10 days B. 14 days C. 30 days D. 60 days

C. 30 days

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What correct characteristic does this describe? A. Conditional B. Personal C. Adhesion D. Unilateral

C. Adhesion

Which of the following is the basic source if information used by the company in the risk selection process? A. Warranty B. Consumer report C. Application D. Agent's report

C. Application

Which if the following individuals would receive the death benefit from a life insurance policy? A. Policyowner B. Insured C. Beneficiery D. Applicant

C. Beneficiary

An applicant who receives a preferred risk classification qualifies for A. Higher premium than a person who receives a sub-standard risk B. Higher premium than a person who receives a standard risk C. Lower premiums than a person who receives a standard risk D. Dividends payable for lack of claims

C. Lower premium than a person who receives a standard risk

Which of the following will be included in a policy summary? A. Comparisons with similar policies B. Primary and secondary beneficiary designations C. Premium amounts and surrender values D. Copies of illustrations and application

C. Premium amounts and surrender values

Most agents try to collect the initial premium for submission wit the application. When an agent collects the initial premium from the applicant, the agent should issue the applicant a A. Backdated receipt B. Warranty C. Premium receipt D. Statement of good health

C. Premium receipt

Which of the following is a risk classification used by underwriters for life insurance? A. Normal B. Excellent C. Standard D. Poor

C. Standard

Which of the following statements is correct about a standard risk classification in the same age group and with similar lifestyles? A. Standard risk require extra rating B. Standard risk is also known high exposure risk C. Standard risk is representative of the majority of people D. Standard risk pays premium than a substandard risk

C. Standard risk is representative of the majority of people

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

C. The policy will be interpreted as if the insurer waived its right to have an answer to the question

Insurer

Company who issues an insurance policy

Insurance Policy

Contract between a policy owner insured and insurance company which agrees pay the insured or the beneficiary for loss caused by specific events.

Life Insurance

Coverage of human lives

Which of the following statements is NOT true concerning insurable interest as it applies to life insurance? A. Business partners have an insurable interest in each other B. A married person has insurable interest in their spouse C. An individual has an insurable interest in their own life D. A debtor has an insurable interest in the life of a lender

D. A debtor has an insurable interest in the life of a lender

A producer must do all the following when delivering. new policy to the insured EXCEPT: A. Explain the policy provisions, riders, and exclusions B. Collect any premium due C. Explain the rating procedure if the policy is rated differently than applied for D. Disclose commissions earned from the sale the policy

D. Disclose commissions earned from the sale of the policy

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 of the following individuals must have insurable interesting the insured? A. Beneficiery B. Underwriter C. Producer D. Policyowner

D. Policy owner

An applicant an application for $25,000 life insurance policy, pays initial premium, and receives a conditional receipt. If the applicant dies the following day, which of the following is TRUE? A. The premium to the insured's estate because the policy was not issued B. The death claim will be rejected C. The application will be voided D. The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy.

D. The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy.

Adverse Selection

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

Fraud

Intentional misrepresentation direct with intent to induce a person to part with something of value

Agent/ Producer

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

Premium

Money paid to the insurance company for the insurance policy

Policy summary

Must be delivered along with the policy and will provide the producers name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years.

Consideration Part of the Insured

Payment of premium and representation made in the application

Applicant or Proposed Insurer

Person applying for insurance

Policy Owner

Person entitled to exercise the rights and privileges in the policy

Benificiary

Person who receives the benefits of an insurance policy

Lapse

Policy termination due to nonpayment of premium

***Insurer's Consideration***

Promise to pay for losses

Conditional Receipt

Provides that when the applicant pays the initial premium, coverage is effective on the condition that the application was signed or the date of the medical examination, if one is required.

Standard risk

Representative of the majority of people in their age and with similar lifestyles. They are the average risk.

Preferred risk category

Reserved for those persons with superior physical condition, lifestyle, and habits

Investor- Owned Life Insurance (IOLI)

SELLING AND EXISTING LIFE INSURANCE POLICY. Another name for STOLI where a third party investor who has no insurable interest in the insured initiates a transaction designed to transfer the policy ownership rights to someone with no insurable interesting the insured and who hopes to make a profit upon the death of the insured or annuitant.

When collecting the initial premium

The agent should issue the applicant a premium receipt.

30 days

The grace period is the period of time after the premium due date that the policy owner has to pay the premium before the policy lapse (usually a month- 30 or 31 days.)

***Insured's Consideration***

The payment of premium & statements on the application.

Consideration on The Part of the Insurer

The promise to pay in the events of a loss.

Transfer of Risk

The transfer of risk from an individual or business entity to an insurance company. The insurance company receives the risk and spreads the costs of unexpected losses to many individuals.

The Underwriting Process

accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates.

Lender

has an insurable interest in the life a debtor, but only to the extent of the debt. The debtor does not have an insurable interest in the life of the lender

Medical Information Bureau (MIB)

provide information about an applicants medical history

Medical Exams

provide information on current health

Agent's report & Inspection report

provide personal information.