Life Insurance - General Insurance Concepts

Fraternal benefit society

-not for profit organization -benevolent and charitable brotherhood -membership based on religious, national or ethnic lines -must be a member to receive benefits

Mutual insurers

-owned by policyowners (policyholders) -issue participating policies (par) -pays dividends to policy holders which are a refund of excess premiums

Stock insurers

-owned by stockholders -issue nonparticipating policies (nonpar)

Authorized/admitted

-Approved by the Dept of Insurance -Has a Certificate of Authority

What types of risks are insurable?

-Due to chance (out of insured control) -Definite and measurable (loss specific as to cause, time, place, and amount) -Statistically predictable (mortality tables and morbidity tables allow insurer to project losses based on statistics) -Not catastrophic (insurers need to be reasonably sure their losses won't exceed specific limits, like war or nuclear events which are not insurable) -Randomly selected and large loss exposure (sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location)

Unauthorized/nonadmitted

-No Certificate of Authority -Cannot transact business in this state

What are the three types of agent authority?

1. Express: the authority a principal intends to grant to an agent by means of the agent's contract. The authority written in the contract. 2. Implied: authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance with the principal. It is incidental to and derives from express authority since not every single detail of an agent's authority can be spelled out in the written contract. (collecting premiums from the insured and remitting them to the insurer) 3. Apparent: also known as perceived authority, is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. (using insurer's stationery when soliciting coverage)

What is the purpose of risk retention?

1. To reduce expenses and improve cash flow 2. To increase control of claim reserving and claims settlements 3. To fund for losses that cannot be insured

What are hazards?

Hazards are conditions or situations that increase the probability of an insured loss occurring.

What is market conduct?

It's a code of ethics which describes the way companies and producers should conduct their business. Producers must adhere to certain established procedures, and failure to comply will result in penalties. Some market conduct rules include: -conflict of interest -a request of a gift or loan as a condition to complete business -supplying confidential information

What is loss?

Loss is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer loss.

What is avoidance?

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. (avoid planes so as not to die in a plane crash)

What is indemnity?

Sometimes referred to as reimbursement, indemnity is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

Who is the producer?

The agent or individual who is licensed to sell, solicit, or negotiate insurance contracts on behalf of the principal.

What is fiduciary responsibility?

The handling of funds of the insured and the insurer. A fiduciary is someone in a position of trust. It is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.

Who is the principal?

The insurer

What is fraud?

The intentional misrepresentation or intentional concealment of a material fact used to induce another party to make it refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

What is the law of agency?

The law of agency defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer.

What is the principle of utmost good faith?

Utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate info on the app for insurance, and the insurer must clearly and truthfully describe the policy features and benefits, and must not conceal or mislead the insured.

What are the four elements of a legal contract?

1. Agreement - Offer and Acceptance (a definite offer by one party and the other party must accept this offer in its exact terms. Insurance applicants typically make the offer when submitting the application. Acceptance takes place when the underwriter approves the app and issues the policy) 2. Consideration (the binding force in any contract. Something of value that each party gives to the other. Insured's consideration is payment of premiums and representations in the app, insurer's consideration is the promise to pay in the event of a loss) 3. Competent parties (legal age, mentally competent to understand the contract, and not under drug or alcohol influence) 4. Legal purpose (purpose of contract must be legal and not against public policy. Example: insurable interest and consent in life insurance policies)

Three types of Domicile

1. Domestic (this state) 2. Foreign (a different state) 3. Alien (a different country)

What is a contract?

An agreement between two or more parties enforceable by law.

Ambiguities

In a contract, ambiguities are always resolved in favor of the insured

What does insurance do?

Insurance transfers the risk of loss from an individual or business entity to an insurance company.

What is a peril?

Perils are the causes of loss insured against in an insurance policy.

What are the three classifications of hazards?

Physical: individual characteristics that increase the chances of the cause of loss (physical condition, past medical history, condition at birth such as blindness) Moral: tendencies towards increased risk (character and reputation of the proposed insured, such as lying on the application, submitting fraudulent claims) Morale: arise from a state of mind that causes indifference to loss (careless actions such as texting while driving)

What are the two types of risk?

Pure risk: refers to situations that can only result in a loss or no change. Speculative risk: involves the opportunity for either loss or gain (think gambling).

What is a warranty?

An absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties can be considered grounds for voiding the policy or a return of premium. Because of such a strict definition, statements made by applicants for life and health insurance policies, for example, are usually not considered warranties, except in cases of fraud.

Contract characteristics

-Adhesion (one party prepares the contract; the other party must accept it as is) -Aleatory (exchange of unequal amounts) -Conditional (certain conditions must be met) -Personal (between the policyowner and the insurance company) -Unilateral (only one of the parties to the contract is legally bound to do anything)

What is a representation?

A statement(s) believed to be true to the best of one's knowledge, but are not guaranteed to be true (the answers the insured gives to the questions on the insurance app)

What is reduction?

Reduction is an attempt to lessen the possibility or severity of a loss. (smoke detectors, annual physicals)

What is risk?

Risk is the uncertainty or chance of a loss occurring.

What is risk retention?

Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Sharing risk

Sharing is a method of dealing with risk for a group of individual persons or businesses with the same exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

What is concealment?

The legal term for the intentional withholding of info of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of info by the applicant that will result in an imprecise underwriting decision. Concealment May void a policy.

In the law of agency relationship:

-the producer represents the insurer, not the insured -any knowledge of the agent is presumed to be the knowledge of the insurer -if the agent is working within the conditions of their contract, the insurer is fully responsible -when the insured submits payment to the agent, it is the same as submitting a payment to the insurer

The term insurance transaction includes any of the following

Solicitation Negotiations Sale (effectuation of a contract of insurance) Advising an individual concerning coverage or claims

Transfer risk

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.

What is a misrepresentation?

Untrue statements on the app that could void the contract. A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company. If material misrepresentations are intentional, they are considered fraud.