life insurance - exam

Contract Characteristics

*Adhesion - take-it or leave-it basis. *Aleatory - exchange of unequal amounts *Conditional - certain conditions must be met (to underwriting being completed. insurance company makes a decision.) *Personal - between the policyowner and the insurance company *Unilateral - one-sided promise insurance company is contractually obligated to pay the claim

Insurable Interest

*Must exist at the time of application *Exists when insuring one's own life, the life of a family member, or a business partner or key employee *Not required of beneficiaries applies to children, grandchildren, spouse, self, aging parents, and special needs adult child. Example of non life insurable interest: A lendor whos is owed debt from the borrower.

warranty

*Warranty is stating that everything is absolutely true. signature says everything is correct. accurately answering reduces your premium. can void application totally if dishonest. *Representations in insurance contracts qualify as implied warranties. *Statements in a policy are considered express warranty= Factual statements in a policy are considered express warranty. Every express warranty becomes part of the insurance contract. Implied warranty is an unwritten or unspoken guarantee presumed to be made based on the circumstances of a transaction. CIC 443, every express warranty made at or before the execution of a policy must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy.

Business is all of the following:

1. applicant 2. policy owner 3. premium payer 4. beneficiary

elements of insurance risk

1. due to chance - chance of loss beyond insured's control 2. definite and measurable - loss must have definite time, place and amount 3. predictable - number of losses must be statistically predictable 4. not catastrophic - there must be limits that the loss can't exceed 5. Large exposure - insurer must be able to predict losses based on the law of large numbers 6. randomly selected exposure: insurer must have a fair proportion of both good and poor risks

6 Specifications for Insurance Policies

1. the parties to the contact 2. the persons or property being insured 3. a statement of the insurable interest that exists if the insured is not the owner 4. the risks insured against 5. the time period during which the policy will be in force or continue 6. the stated annual, semi-annual, quarterly, or monthly premium or a statement of the manner in which a premium rate and total premium will later be calculated, if it can only be determined at the termination or expiration of the contract.

Single Premium

A lump sum payment is made into an insurance company. Develops immediate cash value.

Substandard Risk

An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium.

Medical Information Bureau (MIB)

An information database that stores the health histories of individuals who have applied for insurance in the past. KNOW THIS: insurers cannot refuse coverage solely on the basis of adverse information on an MIB REPORT. he Medical Information Bureau is made up of insurers so the companies can compare the information they have collected on a potential insured with information other insurers may have discovered.

Bequests

An insured may wish to leave funds to their church, school, or other organization at the time of their death.

Business Continuation Plan

Arrangements between the business owners that provide that the shares owned by any one of them who dies or becomes disabled shall be sold to and purchased by the other co-owners or by the business.

Methods of handling risk:

Avoidance, Retention, Sharing, Reduction, & Transfer

profitable distribution of exposures

Balancing poor risks and preferred risks with average risks in the middle creates a profitable distribution of exposures.

Required Signatures

Both the producer and the applicant/insured must sign the application. The applicant is representing that statements on the application are true. If the applicant is a minor, a guardian must sign the application.

Representations

Definition: Statements made by the applicant that are believed to be true, but are not guaranteed to be true. once the policy is issued, it cannot be withdrawn. Representations in insurance contracts qualify as implied warranties. Implied warranty is an unwritten or unspoken guarantee presumed to be made based on the circumstances of a transaction.

characteristics of pure risks

In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic, coverage cannot be mandatory.

Debt cancellation

Insurance may be used to create a fund to pay off debts of the insured such as home mortgage or auto loans

Law of Large #'s

Law of large #'s states that the larger the number of people with similar exposure to loss, more predictable actual losses will be. Statistical prediction of loss which insurance rates are calculated. The basis of insurance is sharing risk among a large pool of people with a similar exposure to loss (a homogeneous group).

Legal Hazard

Legal hazards arise from court actions which increase the likelihood or size of loss (example: growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages

field underwriter =

Life insurance producer responsibilities: 1. proper solicitation of applicants 2. helping prevent adverse selection 3. completing the application 4. obtaining the required signatures 5. collecting the initial premium and issuing the receipt, if applicable 6. delivering the policy

Rescission

Termination of an insurance contract due either to material or misrepresentation by the insured or by fraud Be able to identify when an insurer has the right of rescission. --- Know that either intentional or unintentional concealment entitles an injured party to rescission of a contract

Human Life Value Approach

The Human Life Value Approach to determining the value of an individual's life requires the calculation of probable future earnings of the insured, which involves wages, expenses, inflation, amount of time until retirement, and the time value of money. Predicted needs of the family after the insured's death are used in the needs approach. Example: a 40-year-old insured earns $50,000 a year and is expected to earn the same amount until he retires at age 65. annual income, $40,000 is spent on family needs, and the remaining $10,000 goes to the insured's personal expenses. taking interest and inflation into consideration, the insurance company will determine the right amount of insurance to produce the same annual amount of income for the family if the insured were to die.

Needs Approach

The predicted needs of a family after the premature death of the insured. example: calculating the amount of life insurance needed Which of the following is NOT a type of information that needs to be gathered in order to determine the value of someone's life when using the needs approach? There are four main types of information that an insurer needs to obtain in order to determine the value of someone's life: debt status, income, mortgage, and expenses. Longevity is not a factor in the personal financial planning process.

Retirement Period

The surviving spouse's working income ceases and his Social Security and outside retirement benefits begin.

selling assets or liquidation

a method of raising capital

estate

a persons networth

mortality

a ratio of the number of deaths in a specific population over a certain amount of time vs the number of living people in that population

Exposure

a unit of measure used to determine rates charged for insurance coverage. (determined by: age, medical history, occupation, and sex)

Policy Summary

a written statement describing the features and elements of the policy being issued. provides specific information on the policy being issued. A buyer's guide provides generic information on various types of policies. A policy summary provides specific information on the policy being issued.

solvency

ability to meet financial obligations (insurance company maintains enough assets to pay claims.

permanent protection (whole life)

accumulate cash value that is available to the policyowner during the policy term.

Preretirement Period

after children are no longer dependent upon the surviving spouse for support before surviving spouse qualifies for Social Security survivor benefits (blackout period). = income needs of surviving spouse lessen during this period. Until surviving spouse reaches age 60 SS benefits are not available.

Field Underwriting

agent is the company's front line and is referred to as a field underwriter usually the one who has solicited the potential insured.

risk pool

as the number of risk pool increases, future losses become more predictable.

methods of managing risks

avoidance, retention, sharing, reduction, and transferring

Death of a key employee

business would use the money for the additional costs of running the business and replacing the employee.

indemnity = sometimes referred to as reimbursement)

can only collect for the amount of the loss even if the policy is written with greater benefit limits. 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.

perils

cause of loss insured against in an insurance policy

Conditional Contract

conditional contract requires that certain conditions must be met by the policyowner and the company in order for the contract to be executed, and before each party fulfills its obligations. example: the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.

hazards 3 forms of hazards are physical, moral, and morale

conditions or situations that increase the probability of an insured loss occurring. (conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring) Hazards give rise to a peril. There are 3 kinds of hazards: Physical - physical condition; Moral - a tendency toward increased risk; Morale - an indifference to loss

Binding Receipt

coverage begins immediately for a specific length of time. even if applicant is found to be uninsurable.

Sharing

dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss

Avoidance

eliminating exposure to a loss. example: if one wants to avoid dying in a plane crash, they may avoid flying. seldom practical to avoid risk.

Executive Bonus

employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. tax deductible to the employer & income taxable to the employee. Executive buys the policy and pays the premium, and the employer reimburses the executive for cost (or pays a bonus in the amount of the premium). Since the executive is receiving compensation, the amount paid by the employer would be considered taxable income.

Standard Risk

entitled to insurance protection without extra rating or special restrictions = majority of people at their age and with similar lifestyles. average risks.

cash value

equity amount accumulated in permanent life insurance

Fair Credit Reporting Act

established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. also protects consumers against the circulation of inaccurate or obsolete personal or financial information knowingly and willfully obtains info on a consumer from a consumer reporting agency under false pretenses. if policy is declined or modified because info contained.. consumer has a right to name & address & a copy and identity of those who received it. must respond to consumer's complaint if consumer challenge the accuracy of the information contained in a consumer or investigative report and if necessary re-investigate report

Limit of Liability

face value/amount or death benefit of an individual life insurance policy. minus any outstanding policy loans and interest payments due to the insurer. Face Amount - (Outstanding Policy Loan + Loan Interest) = Limit of Liability

Premium Payment Mode

frequency policy owner pays the premium. premium may be paid annually, semi-annually, quarterly, or monthly. monthly more expensive annually least expensive

information required on the application

general information & medical information

cost indexes

help consumers make educated decisions on purchasing life insurance, the industry developed specific methods and indexes that measure and compare the actual policy costs. comparisons are usually included in policy illustrations.

why insurers attach the application to a life policy?

if application is taken at the time of purchase and a policy is issued = application must be attached to the policy.

illustrations

illustrations are = presentation or depiction of non-guaranteed elements of a life insurance policy Other required items include the name and business address of producer or insurer's authorized representative; the name, age and sex of proposed insured; underwriting or rating classification upon which the illustration is based; and the initial death benefit. name of the primary and secondary beneficiaries is not required.

Ambiguities

in the contract are always resolved in favor of the insured

Physical Hazards or hazards

increase chances of the cause of loss. example past medical history or a condition at birth such as blindness.

Preferred Risk

individuals who meet certain requirements and qualify for lower premiums than standard.

retirement fund

insurance proceeds may be used as a source of retirement income

Family Dependency Period

insured dies prematurely, surviving spouse has dependent children to support. family's income need is greatest at this point.

Adverse Selection

insuring of risks that are more prone to losses than the average risk. (poorer risks tend to seek insurance or file claims to a greater extent than better risks)

Concealment

intentional withholding of information of information on an application that can result in void. According to CIC 380, neglecting to communicate that which a party knows, and ought to communicate is concealment.

Legal purpose

legal and not against public policy, must have both insurable interest and consent without legal purpose considered a void.

Reduction

lessen possibility or severity of loss. examples: install smoke detectors in our homes, having annual physical to detect early on health problems or making a change in your lifestyle. The insureds change in lifestyle and habits would likely reduce chances of health problems. (example: 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 diet = reduction

speculative risk

loss or gain example: gambling (not insurable)

Materiality

material = important information hide or conceal withholding information falls under fraud all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract. In insurance, concealment is the withholding of information that will result in an imprecise underwriting decision. *The insured can reasonably expect coverage based on the agent's words and actions *Material misrepresentations (if intentional), breach of warranties, concealment, fraud - all can void the contract

Utmost Good Faith

means there will be no fraud, misrepresentation or concealment between the parties. both insurer and insured must be able to rely on one another.

moral hazard

moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer

morale hazard

morale hazards arise from a state of mind that causes indifference to loss, such as carelessness.

3 key factors for life insurance

mortality, interest, and expense

Transfer

most effective way to handle risk is to transfer it. relieves insured of financial loss risks bring.

competent parties

must be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Policyowner

must have insurable interest in the life of the insured.

unilateral

only one party is legally bound to do anything. example: insured makes no legally binding promises. Insurer is legally bound to pay losses covered by a policy in force.

pure risk

only result in loss or no change (only type of risk insurance companies except) type of risk thats insurable

Education Funds

paying for children's education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market

Emergency Reserve Funds

paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members

Cash Accumulations

permanent policies have living benefits savings that grown into more cash

Retention

planned assumption of risk by insured through use of deductibles, co-payments or self insurance.

Survivor Protection

planning for survivor needs

Business Overhead Expense

policy that is sold to small business owners who must continue to meet overhead expenses. Such as rent, utilities, employee salaries etc. following disability.

Buy-Sell Insurance

provides coverage in the case of the disability or death of a business partner during the creating, buying, or selling of a business.

buyers guide

provides generic information on various types of policies

life insurance creates an immediate estate

purchase of life insurance creates an immediate estate. example: a person may create an estate through earnings, savings, & investments all of these methods require disciplined action & a significant period of time.

Purpose of retention

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

conditional contract

requires certain conditions must be met by the policyowner and the company in order for the contract to be executed and before each party fulfills its obligations.

Temporary Insurance Agreement

requires payment of the first premium at the time of application, but does not guarantee that a policy will be issued.

retention

retaining of assets

risk, hazard, and peril

risk chance loss will occur, hazard increases probability of loss, and peril is cause of loss.

indemnity

security or protection (remember this term for informational purposes)

Purpose of Underwriting

select only those risks that are considered insurable and meet the insurers underwriting standards. (underwriter prevents adverse selection.)

liquidation

selling assets in order to raise capital (cash value)

surrender charges/ surrender period

surrender meaning: To give up a whole life. in case of surrender, the insurer will pay the insured the cash value the policy has built up. Traditional Net Cost method compares the cash values available to buyers if they surrender the policy in 10 or 20 years. does not take into consideration the time value of money. Interest-Adjusted Net Cost - considers the time value of money (or investment return on the insurance premium had it been invested elsewhere) by applying an interest adjustment to yearly premiums and dividends. Two versions of the interest-adjusted method are the surrender cost index and the net payment cost index.

homogeneous group

the basis of insurance is sharing risk between a large pool of people with similar exposure to loss.

Nonmedical Application (why medical examination may be rquired)

the medical portion of an application which accepts a health questionnaire completed and signed by the applicant and agent. for larger amounts insurer requires medical examination.

Aleatory

there is an exchange of unequal amounts or values. (example: premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.)

misrepresentations

untrue statements on the application could void the contract. The materiality of a given concealment determines the importance of a misrepresentation Which of the following best describes a misrepresentation? Misrepresentation is a written or oral statement that is intended to distract, mislead, or deceive a party to a contract.

Stock Purchase

used by privately owned corporations when each stockholder buys a policy on each of the others

cross purchase

used in partnerships when each partner buys a policy on the other

Stock Redemption

used when the corporation buys one policy on each shareholder

Entity Purchase

used when the partnership buys the policies on the partners

estate conversation

using life insurance proceeds to cover estate taxes