Mass State Life Insurance Exam

pure risk

-a situation that can only result in a loss, there is no opportunity for financial gain -only type of risk that is insurable

legal contract must have: competent parties

-all parties must be of legal competence -must be of legal age, mentally capable of understanding the terms, and not under the influence of drugs or alcohol

Speculative risk

-involves opportunity for either loss or gain -not covered by insurance companies

basic forms of whole life - single premium

A single-premium whole life policy involves a large one-time only premium payment at the beginning of the policy period. From that point, the coverage is completely paid for the full life of the policy. Here are the common traits of a single premium whole life policy: • An immediate nonforfeiture value is created • An immediate cash value is created • A large part of the premium is used to set up the policy's reserve • The advantage offered by a single premium policy is that the policyowner will pay less for the policy than if the premiums were stretched over several years

features of whole life - living benefits

Another unique feature of whole life insurance is the living benefits it can provide. Through the cash value accumulation build-up in the policy, a policyowner has a ready source of funds that may be borrowed at reasonable rates of interest. These funds may be used for a personal or business emergency. For example, they could be used to help pay for a child's education or to pay off a mortgage. It is not a requirement of the policy that the loan be repaid. However, if a loan is outstanding at the time the insured dies, the amount of the loan plus any interest due will be subtracted from the death benefit before it is paid.

whole life premiums

As noted, whole life is designed as if the insured will live to age 100. Accordingly, the amount of premium for a whole life policy is calculated, in part, on the basis of the number of years between the insured's age at issue and age 100. The shorter the payment period, the higher the premium.This time span represents the full premium-paying period, with the amount of the premium spread equally over that period. This is known as the level premium approach. As is the case with level premium term insurance, this approach allows whole life insurance premiums to remain level rather than increase each year with the insured's age.

nonforfeiture options

Cash Surrender Option- Policyowners may request an immediate cash payment of their cash values when their policies are surrendered. The amount of cash value the policyowner receives is reduced by any outstanding policy loans or debts. Insurers are required to make cash surrender values available for ordinary whole life insurance after the first three policy years. However, most policies begin to generate cash values in as little as one year. Reduced Paid-Up Option A second nonforfeiture option is to take a paid-up policy for a reduced face amount of insurance. By doing this, the policyowner does not pay any more premiums but still retains some amount of life insurance. In essence the cash value is used as the premium for a single-premium whole life policy at a lesser face amount than the original policy. When this option is exercised, the paid-up policy is the same kind as the original, but for a lesser amount of coverage. Riders and accidental death benefits from the original policy are excluded. Once the paid-up policy has been issued, the new face value remains the same for the life of the policy, which also builds cash values. Extended Term Option The third nonforfeiture option is to use the policy's cash value to purchase a level term insurance policy in an amount equal to the original policy's face value, for as long a period as the cash value will purchase. When the level term insurance expires, there is no more protection. Moreover, all supplemental benefits included with the original policy, such as a term rider or accidental death or disability benefits, are dropped.

consideration clause

Consideration is the value given in exchange for a contractual promise. In a life insurance policy, the consideration clause states that the policyowner's consideration consists of completing the application and paying the initial premium. The consideration clause or provision in a life insurance policy specifies the amount and frequency of premium payments that the policyowners must make to keep the insurance in force.

decreasing term insurance

Decreasing term policies are characterized by benefit amounts that decrease gradually over the term of protection and have level premiums. A 20-year $50,000 decreasing term policy, for instance, will pay a death benefit of $50,000 at the beginning of the policy term. That amount gradually declines over the 20-year term and reaches $0 at the end of the term.

rights of policy ownership

Generally, the person who pays the premium for an insurance contract is designated as the policyowner or policyholder. Although there are no provisions in a life insurance policy specifically titled "Rights of Ownership", the fact is, owning a life insurance policy does entail important rights. These rights are woven throughout the policy in various clauses and provisions. The most significant rights of ownership include the following: • The right to designate and change the beneficiary of the policy proceeds • The right to select how the death proceeds will be paid to the beneficiary • The right to cancel the policy and select a nonforfeiture option • The right to assign ownership of the policy to someone else

All of these statements concerning universal life insurance are false EXCEPT -Death benefits are normally taxable -Policy loans are not permitted -Premiums or face amount cannot be changed -Policy indicates how much of the premium is used toward company expenses

Policy indicates how much of the premium is used toward company expenses... Premium payments are separated and paid toward the insurance protection. The loading cost and the remaining balance is used to build the cash value.

Dividends from a mutual insurance company are paid to whom?

Policyholders

What type of reinsurance contract between two insurers involves an automatic sharing of the risks assumed?

Under treaty reinsurance, each party automatically accepts specific percentages of the insurer's business.

treatment of risk through- retention

also known as self-insurance: when individuals have the financial ability to fund losses by themselves when they occur

agent's authority

an agent is a licensed insurance producer, whose been appointed to represent an insurance company -as a rep of the insurer, agents are given certain authority to perform acts on behalf of the insurance company -agent is always considered to be acting on the behalf of the insurance company, also referred to as the principal

apparent authority

appearance or assumption of authority given based on the actions or words of the principal -ex. when an insurance company furnishes an agent with a rate book, applications and sales literature, the insurance company cannot later deny that a relationship existed

express authority

authority granted to the agent by the principal, which is the insurance company, as written in the insurance contract

implied authority

authority not expressed or written into the agent contract, but which the agent is assumed to have in order to transact the businesss of the insurance for the principal -it comes from the express authority, since not every single detail of an agent's authority can be spelled out in the agent's written contract

ordinary insurance

individual life insurance that includes many types of temporary and permanent insurance protection plans written on individuals. Premiums are normally paid monthly, quarterly, semiannually, or annually.

conditional

insurance contracts are conditional because certain contracts must be met by all parties when a loss occurs, otherwise the contract would not be legally enforceable -if the policy owner is past due on his payments and the insured dies, the insurance company does not have to pay the death benefit because a condition was not met

personal contract

insurance contracts are personal contracts between an individual and the insurance company, and cannot transfer owner ship without the insurance company's written consent

collateral assignment

one in which the policy is assigned to a creditor as security, or collateral, for a debt. If the insured dies, the creditor is entitled to be reimbursed out of the benefit proceeds for the amount owed. The insured's beneficiary is then entitled to any excess of policy proceeds over the amount due to the creditor.

The State Guaranty Association guarantees

that a claim will be paid if an admitted insurer becomes insolvent

waiver

the act of voluntarily giving up a legal right, claim or privilege

estopel

the legal process used to prevent a party from reclaiming a right or privilege that was already waived

treatment of risk through- transfer

the most effective way to handle risk - risk is transferred to another party - insurance is the most common method of transferring risk from an individual or group to an insurance company

absolute assignment

the transfer is complete and irrevocable, and the assignee receives full control over the policy and full rights to its benefits.

specifal features of insurance contracts: aleatory

there is not an equal exchange of value -premiums paid by the insured are small in relation to the amount that will be paid by the insurance company, in the event of a loss

A business becoming incorporated is an example of risk ____.

transfer

Purchasing insurance is an example of risk

transference

payor provision rider

usually available with such policies, providing for waiver of premiums if the adult premium-payor should die or, with some policies, become totally disabled. Typically, this payor provision extends until the insured child reaches a specified age, such as 21 or 25.

What kind of life insurance policy allows a policyowner the choice of investments along with flexible premium payments?

variable universal life

legal contract must have: offer and acceptance

-an offer is made when the applicant submits an application for insurance to the insurance company -the offer is accepted after it has been approved by the insurance company's underwriters

utmost good faith

-implies that there will be no fraud, misrepresentation, or concealment, between the parties as it pertains to insurance policies -both the insurance company and the policy owner must be able to rely on the other for relevant and accurate information -policy owner is expected to provide accurate information on the application for insurance -insurance company must clearly and truthfully describe policy features and benefits, and they must not conceal or mislead the insured

Law of Large numbers

-insurance is based on the sharing of risks among a large group of people -states that the larger the number of people, the more predictable the actual losses will be -companies use this data to calculate rates

value or indemnity

-life insurance is a valued contract, which pays a stated amount, regardless of the actual loss incurred -health insurance is an indemnity contract (only pays equal to the loss) -with health insurance you are not allowed to make a profit

elements of insurable risk

-must be due to chance -cannot be catastrophic -must be randomly selected • Loss exposure to be insured must be large - Insurance company must be able to predict loss ( based on law of large numbers) - Loss must be definite and measurable - Time, place, amount, and when payable

legal contract must have: legal purpose

-must be legal and not against public policy -has legal purpose if contract has a insurable interests and the insured has provided written consent

nature of insurance

-to provide financial protection against losses that may be incurred due to a chance happening or event such as death, illness, or accident -protection is provided through an insurance policy which is a simple device for accumulating funds to meet these uncertain losses

A survivorship life insurance policy usually covers how many lives?

2

What is a juvenile life insurance policy?

A life policy that covers the life of a minor

Which of the following describes a participating life insurance policy?

A participating life policy is one in which the policyowner receives dividends deriving from the company's divisible surplus

automatic premium loan provision

A provision that is now commonly added to most cash value policies is the automatic premium loan provision. This provision authorizes the insurer to withdraw from the policy's cash value the amount of overdue premium if the premium has not been paid by the end of the grace period.

special use policies

Family Plan Policies - designed to insure all family members under one policy. Coverage is sold in units. For example, a typical plan could insure the family breadwinner for $20,000. The coverage on the spouse and children is level term insurance in the form of a rider. The spouse's and children's coverage is usually convertible without evidence of insurability. family income policies- consists of both whole life and decreasing term insurance. This policy will provide monthly income to a beneficiary if death occurs during a specified period beginning after date of purchase.The family income portion of this type of coverage is supplied by a decreasing term policy. Income payments to the beneficiary begin when the insured dies, and continue for the period specified in the policy, which is usually 10, 15, or 20 years from the date of policy issue, and not from the date of the insured's death. Family Maintenance Policy - consists of both whole life and level term insurance, which provides income for a specific period beginning on the date of death of the insured. Provided the insured dies before a predetermined time, this policy provides income to a beneficiary for a stated number of years from the date the insured dies. Joint Life Policies- covers two or more people. Using some type of permanent insurance (as opposed to term), it pays the death benefit at the first insured's death. The survivors then have the option of purchasing a single individual policy without evidence of insurability. The premium for a joint life policy is less than the premium for separate, multiple policies. The ages of the insureds are "averaged" and a single premium is charged for each life Joint Life and Survivor Policies- also known as a "second to die" policy. This plan also covers two lives, but the benefit is paid upon the death of the last surviving insured. This type of coverage is sometimes referred to as a "survivorship life insurance policy" and normally will cover two lives. As with a joint life policy, the premium for a survivorship life policy is lower than the combined premium for separate life insurance policies Juvenile Insurance -insures the life of a minor. Application for insurance and ownership of the policy rests with an adult (which does not require the minor's consent) , such as a parent or guardian.

grace period provision

Grace periods are common in a lot of other financial products such as consumer loans, mortgages, credit card payments, etc. The grace period in a life insurance policy is meant to protect the insured. If there is a slight lapse in the payment of a premium, it is to prevent the life insurance company from forcing the insured to provide insurability again. In policies for which the premiums are paid monthly, the grace period is one month, but no less than 30 days. If an insured dies during the grace period and the premium has not been paid, the policy benefit is payable. However, the premium amount due is deducted from the death benefits paid to the beneficiary.

increasing term insurance

Increasing term insurance is term insurance that provides a death benefit that increases at periodic intervals over the policy's term. The amount of increase is usually stated as specific amounts or as a percentage of the original amount. It may also be tied to a cost of living index, such as the Consumer Price Index. Increasing term insurance may be sold as a separate policy, but is usually purchased as a cost of living rider to a policy.

reinstatement provision

It is always possible that, due to nonpayment of premiums, a policy may lapse, either deliberately or unintentionally. In cases where a policyowner wishes to reinstate a lapsed policy, the reinstatement provision allows the policyowner to do so with some limitations. With reinstatement, a policy is restored to its original status and its values are brought up to date. Most insurers require the following to reinstate a lapsed policy: • All back premiums must be paid • Interest on past-due premiums may be required to be paid • Any outstanding loans on the lapsed policy may be required to be paid • The policyowner typically will be asked to prove insurability

level term insurance

Level term insurance provides a level amount of protection for a specified period, after which the policy expires. Level term policies are able to offer level premiums because the premiums are averaged over the term of the policy. A $100,000 10-year level term policy, for example, provides a straight, level $100,000 of coverage for a period of 10 years. A $250,000 term to age 65 policy provides a straight $250,000 of coverage until the insured reaches age 65. If the insured under the $100,000 policy dies at any time within those 10 years, or if the insured under the $250,000 policy dies prior to age 65, the insured's beneficiaries will receive the policy's face amount benefits. If the insured lives beyond the 10-year period or past age 65, the policies expire and no benefits are payable.

basic forms of whole life - limited pay

Limited pay whole life policies have level premiums that are limited to a specified number of years. This period can be of any duration. For example, a 20-payment life policy is one in which premiums are payable for 20 years from the policy's inception, after which no more premiums are owed. A life paid-up at 65 policy is one in which the premiums are payable to the insured's age 65, after which no more premiums are owed. This type of coverage would best suit a prospective insured who desires permanent insurance but does not want to pay premiums indefinitely. Keep in mind that even though the premium payments are limited to a certain period, the insurance protection extends until the insured's death, or to age 100.

Which of the following is a syndicate established by a group of insurers to share underwriting duties?

Lloyd's organization

How can an insurance company minimize exposure to loss?

Many insurers are able to minimize exposure to loss by reinsuring risks.

exclusions

Most life insurance policies contain restrictions that exclude from coverage certain types of risks. If there were no exclusions, premium rates would be much higher. Exclusions can be stated in the policy itself or attached as riders. The most common types of exclusions include: • War. This exclusion provides that the death benefit will not be paid if the insured dies as a result of war. This is typically called the results clause. • Aviation. This exclusion is found in older policies. Few policies issued today exclude death as a result of commercial aviation. However, some insurers will exclude aviation deaths for other than farepaying passengers. • Hazardous occupations or hobbies. Individuals who have hazardous occupations or engage in hazardous hobbies may find that their life insurance policies will not pay if death was a result of their occupation or hobby. However, sometimes these risks can be covered with an increased premium charged. •Commission of a felony. Some contracts exclude death when it results from the insured committing a felony. •Suicide. As previously noted, almost all policies exclude payment of the benefit if the insured commits suicide during the specified time period. After that period passes, death by suicide is covered.

Which of the following is NOT an example of risk retention?

Not doing a business deal after deciding it would be too risky

Which of these statements accurately portrays an adjustable life insurance policy?

Policy can alternate between forms of term and whole life insurance

These are all accurate statements regarding universal life insurance EXCEPT -Mortality charge is deducted from the policy's cash value each month -Policy loans are not permitted -Flexible premiums as long as the cost of insurance protection is covered -Policy states what percentage of the premium is contributed to the cash value and which pays for the cost of insurance

Policy loans are not permitted

Straight whole life insurance can be accurately described in all of these statements EXCEPT -Policy protection normally expires at age 65 -Nonforfeiture values are available to the policyowner -Provides level protection with level premiums -Cash value loans are permitted

Policy protection normally expires at age 65

An insurer has a contractual agreement which transfers a portion of its risk exposure to another insurer. What type of contractual arrangement is this?

Reinsurance contracts accept a portion of the risk underwritten by another insurer who has contracted for the entire coverage amount.

ABC Company is attempting to minimize the severity of potential losses within its company. The company is engaged in risk

Risk reduction can reduce the chance that a particular loss will occur, or it can reduce the amount of a potential loss if it occurs.

For insurance purposes, similar objects which are exposed to the same group of perils are referred to as

Similar objects of insurance that are exposed to the same group of perils are called homogeneous exposure units.

cost of living rider

Some companies offer their applicants the ability to guard against the eroding effects of inflation. A cost of living (COL) or cost of living adjustment (COLA) rider can provide increases in the amount of insurance protection without requiring the insured to provide evidence of insurability. The amount of increase is tied to an increase in an inflation index, most commonly the Consumer Price Index (CPI). Depending on the type of base policy, these riders can take several different forms.

policy loan provision

State insurance laws require that cash value life insurance policies include a policy loan provision. This means that, within prescribed limits, policyowners may borrow money from the cash values of their policies if they wish to do so. A policy loan is more an advance on proceeds than a true loan. As such, these "loans" may not be "called" by the company and can be repaid at any time by the policyowners. If not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of claim. If the policy is surrendered for cash, the cash value available to the policyowner is reduced by the amount of any outstanding loan plus interest. • When a life insurance policyowner obtains a policy loan, the collateral for the loan is the cash value of the policy • Interest rates on policy loans vary, but most states stipulate a maximum allowable rate. Some newer policies are issued with a variable interest rate tied to the Moody's corporate bond index. • If the policyowner does not make a scheduled interest payment on a policy loan, the amount of interest due will be added to the loan balance • In the event a policy loan plus interest exceeds a life insurance policy's cash value, the policy is no longer in force

basic forms of whole life - straight

Straight whole life is whole life insurance providing permanent level protection with level premiums from the time the policy is issued until the insured's death (or age 100).

term life

Term life insurance is the simplest type of life insurance plan. Term life provides low-cost insurance protection for a specified period (or term) and pays a benefit only if the insured dies during that period. (three types- level, decreasing, increasing)

incontestable clause

The incontestable clause or provision specifies that after a certain period of time has elapsed (usually two years from the issue date), the insurer no longer has the right to contest the validity of the life insurance policy so long as the contract continues in force. This means that after the policy has been in force for the specified term, the company cannot contest a death claim or refuse payment of the proceeds even on the basis of a material misstatement, concealment, or fraud. Even if the insurer learns that an error was deliberately made on the application, it must pay the death benefit at the insured's death if the policy has passed the contestable period. Although the incontestable clause applies to death benefits, it generally does not apply to accidental death benefits or disability provisions if they are part of the policy. Because conditions relating to accidents vary and are often uncertain, the right to investigate them usually is reserved by the company. • The incontestable clause applies to the policy face amount plus any additional riders that are payable at death • The incontestable clause allows an insurer to contest a claim during the contestable period The time limit for a legal action provision in a contract is limited to no more than 5 years.

misstatement of age or sex provision

The misstatement of age or sex provision is important because the age and sex of the applicant are critical factors in establishing the premium rate for a life insurance policy. To guard against a misunderstanding about the applicant's age, the company reserves the right to make an adjustment if the age of the insured is misstated. Likewise, an adjustment is made if an applicant's sex is incorrectly indicated in a policy because, age for age, premium rates for females generally are lower than for males. Normally, such adjustments are made either in the premium charged or in the amount of insurance. Assume an error in age is discovered after the death of an insured. If the insured was younger than the policy showed, the amount of proceeds would be increased to a sum the premium paid would have bought at the correct age. If the insured was older than the policy indicated, the amount of proceeds would be decreased to whatever the premium paid would have purchased at the correct age.

suicide provision

The suicide provision, found in most life policies, protects the insurer against the purchase of a policy in contemplation of suicide. With this provision, a life insurance policy discourages suicide by stipulating a period of time (usually one or two years from the date of policy issue) during which the death benefit will not be paid if the insured commits suicide. If that happens, the premiums paid for the policy will be refunded. Of course, if an insured takes his own life after the policy has been in force for the period specified in the suicide clause, the company will pay the entire proceeds, just as if death were from a natural cause.

features of whole life- cash values

Unlike term insurance, which provides only death protection, whole life insurance combines insurance protection with a savings element. This accumulation, commonly referred to as the policy's cash value, builds over the life of the policy. This is because whole life insurance plans are credited with a certain guaranteed rate of interest. This interest is credited to the policy on a regular basis and grows over time. Income taxes may be due when the policy is surrendered. The amount of a policy's cash value depends on a variety of factors, including: • The face amount of the policy • The duration and amount of the premium payments • How long the policy has been in force

At what point must a life insurance applicant be informed of their rights that fall under the Fair Credit Reporting Act?

Upon completion of the application

variable products

Variable insurance products do not guarantee contract cash values, and it is the policyowner who assumes the investment risk. Variable life insurance contracts do not make any promises as to either interest rates or minimum cash values. What these products do offer is the potential to realize investment gains that exceed those available with traditional life insurance policies. This is done by allowing policyowners to direct the investment of the funds that back their variable contracts through separate account options. By placing their policy values into separate accounts, policyowners can participate directly in the account's investment performance, which will earn a variable (as opposed to a fixed) return. Functioning on much the same principle as mutual funds, the return enjoyed-or loss suffered-by policyowners through their investment in a separateaccount is directly related to the performance of the assets underlying the separate account. Separate accounts arenot insured by the insurer and the returns on their investments are not guaranteed

At what point are death proceeds paid in a joint life insurance policy?

When the first insured dies

whole life

Whole life insurance is called this because it provides permanent protection for one's entire life-from the date of issue to the date of the insured's death. The benefit payable is the face amount of the policy, which remains constant throughout the policy's life. Premiums are set at the time of policy issue, and they too remain level for the policy's life.

features of whole life - maturity at age 100

Whole life insurance is designed to mature at age 100. The significance of age 100 is that, as an actuarial assumption, every insured is presumed to be dead by then. (While some people live beyond age 100, the number of people who do live that long is not a statistically significant portion of the population.) Consequently, the premium rate for whole life insurance is based on the assumption that the policyowner (usually the insured) will be paying premiums for the whole of life, to the insured's age 100. At age 100, the cash value of the policy has accumulated to the point that it equals the face amount of the policy, as it was actuarially designed to do. At that point, the policy has completely matured or endowed. No more premiums are owed. The policy is completely paid up.

concealment

a legal term for the intentional withholding of information, which is crucial in making a decision -a withholding of information by the applicant that results in an inaccurate underwriting decision and can void the policy

automatic premium loan rider

a standard feature in some life insurance policies. In others, its provisions are added to the policy by rider. In either case, it is available to the policyowner at no additional charge. As previously noted, it allows the insurer to pay premiums from the policy's cash value if premiums have not been paid by the end of the grace period. These deductions from cash values are treated as "loans" and are charged interest. If the loan is not repaid, the interest will also be deducted from the cash value. Should the insured die, the loan plus interest will be deducted from the benefits payable. Automatic premium loans provide that, as long as premiums are not paid, the loan procedure will be repeated until the cash value of the policy is exhausted. When the cash value is depleted, the policy lapses. An automatic premium loan option can be elected at the time of application or, with some insurers, added after the policy is issued.

An agent's authority to bind an insurer to an insurance contract may be granted in the

agent's contract and the insurance company's appointment

specifal features of insurance contracts: adhesion

also known as "take it or leave it agreements" because they're prepared by only one party, the insurance company -accepted or rejected by the other party (the applicant) with no negotiations or changes

industrial insurance

characterized by comparatively small issue amounts, such as $1,000, with premiums collected on a weekly or monthly basis by the agent at the policyowner's home. Quite often it is marketed and purchased as burial insurance.

universal life policy

essentially a term policy with cash value, characterized by flexible premiums and an adjustable death benefit. Part of the premium goes into an investment account that grows and earns interest. You are able to borrow or withdraw your cash value.Universal life allows its policyowners to determine the amount and frequency of premium payments and adjust the death benefit up or down to reflect changes in needs. Consequently, changes may be made with relative ease by the policyowner and no new policies will need to be issued when changes are desired. As premiums are paid and as cash values accumulate, interest is credited to the policy's cash value. This interest may be either the current interest rate declared by the company (and dependent on current market conditions) or the guaranteed minimum rate, specified in the contract. As long as the cash value account is sufficient to pay the monthly mortality and expense costs, the policy will continue in force, whether or not the policyowner pays the premium. Of course, premium payments must be large enough and frequent enough to generate sufficient cash values. If the cash value account is not large enough to support the monthly deductions, the policy terminates. Another factor that distinguishes universal life from whole life is the fact that partial withdrawals can be made from the policy's cash value account.

insuring clause

ets forth the company's basic promise to pay benefits upon the insured's death. Generally, this clause is not actually titled as such, but appears on the cover of the policy. An insuring clause might state that the promise to pay is subject to a policy's provisions, exclusions, and conditions.

entire contract provision

found at the beginning of the policy, states that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract. Nothing may be "incorporated by reference," meaning that the policy cannot refer to any outside documents as being part of the contract.

dividend

ife insurance policies may be either participating or nonparticipating. The major difference between participating and nonparticipating is the presence of policy dividends. At any given age, people who buy participating (par) policies normally pay premiums that are slightly higher than premiums paid by those who purchase nonparticipating (nonpar) policies. This is because an extra charge to cover unexpected contingencies is built into premiums for par policies. At the end of each year, the insurance company analyzes its operations. If fewer insureds have died than was estimated, a divisible surplus results and the company can return to the policyowners a part of the premiums paid for participating policies. A company also can issue returns stemming from positive operating or investment income. These payments are called dividends but should not be confused with the dividends paid on stocks. Policy dividends are really a return of part of the premiums paid. As such, policy dividends are generally not taxable income, unlike corporate dividends, which are reportable for income tax purposes. However, policy dividends can be taxed when they exceed the cost of the policy. • A whole life policy that provides a choice of dividend options must include a statement that dividends are not guaranteed

insurable insterest

most important aspect for establishing a legal insurance contract -to purchase insurance, the policy owner must face the possibility of losing money or something of value when a loss happens -in life insurance, must exist between the policy owner and the person being insured at the time of application -only needs to exist at the time of the original application, but does not need to exist throughout the remainder of the policy

specifal features of insurance contracts: unilateral

one sided agreement in which only one party (the insurance company) is legally bound to do anything -policy owner is under no legally binding promise to pay premiums, however the insurance company is legally bound to pay losses covered by the policy -if the policy owner does not pay their premiums, the insurance company does have the right to terminate the insurance policy

Which of the following can be defined as a cause of a loss?

peril

parol evidence rule

prevents parties from changing the meaning of a written contract by trying to introduce oral or written statements made before the formation of the contract

waiver of premium rider

provides valuable added security for policyowners. It can prevent a policy from lapsing for nonpayment of premiums while the insured is disabled and unable to work. The waiver of premium rider is available on both permanent and term insurance policies. If the company determines that the insured is totally disabled, the policyowner is relieved of paying premiums as long as the disability continues. Some companies include the waiver of premium as part of the contract with the cost built into the overall premium. In other companies, the waiver may be added to a policy by rider or endorsement for a small, additional premium. Some policies specify that an insured must be totally and permanently disabled for the waiver to take effect. It does not apply to short term illnesses or injuries. In fact, an insured generally must be seriously disabled for a certain length of time, called the "waiting period" (usually 90 days or six months). The policyowner continues paying premiums during the waiting period. If the insured is still disabled at the end of this period, the company will refund all of the premiums paid by the policyowner from the start of the disability.

free-look provision

required by most states, gives policyowners the right to return the policy for a full premium refund within a limited period of time after the delivery of the policy.

What is considered the accounting measurement of an insurance company's future obligations to its policyowners?

reserves

Which of the following can be defined as "the potential for loss"?

risk

A group-owned insurance company that is formed to assume and spread the liability risks of its members is known as a

risk retention group

Dividends from a stock insurance company are normally sent to

shareholders

treatment of risk through: avoidance

simply avoiding as many risks as possible -effective but not always practical

treatment of risk through- reduction

since we cannot avoid risk entirely we often attempt to lessen the possibility of a loss by taking acting to reduce the risk -

legal contract must have: consideration

something of value that each party gives to the other -on part of insured: payment of premium -on part of insurance company: promise to pay in event of loss

What type of risk involves the potential for loss and the possibility for gain?

speculative

representation

statements believed to be true, to the best of one's knowledge, but they are not guaranteed to be true for insurance purposes -answers the applicant for insurance gives to the questions on the insurance application -untrue statements on application are considered misrepresentations and could void the contract

warranty

statements that are guaranteed to be true and are a part of the legal contract

treatment of risk through- sharing

when a group of individuals or businesses with similar exposures share the losses that occur within that group -reciprocal insurance exchange is a formal risk sharing arrangement

group insurance

written for employer, employee groups, associations, unions, and creditors to provide coverage for a number of individuals under one contract. Underwriting is based on the group, not the individuals who are insured.

dividend options

• Cash Dividend Option: When dividends become payable, they usually are paid on policy anniversary dates. Policyowners who elect to take their dividends in cash automatically receive their dividend check after the company approves a dividend. • Accumulation at Interest Option: Another option is to leave the dividends with the company to accumulate with interest, available for withdrawal at any time. Note that while policy dividends are not taxable, any interest paid on them is taxable income in the year the interest is credited to the policy, whether or not it is actually received by the policyowner. • Paid-Up Additions Option: Dividends can also be used to purchase paid-up additions of life insurance. These additions will be of the same kind as the original or base policy. The amount of the paid-up addition that is purchased each year is determined by the insured's attained age, the amount of dividend paid, and the type of coverage purchased. • Reduce Premium Dividend Option: Allows a policyowner to use the dividend to pay all or part of the next premium due on the policy. Sometimes called the Reduction of Premium Dividend Option. • One-Year Term Dividend Option: A fifth option, though not utilized as frequently as the others, is to use dividends to purchase as much one-year term insurance as possible.