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Life & Health Insurance > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Insurance

A

the transference of risk from an insured to an insurer, who then spreads the risk among other insureds with like exposure

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2
Q

Risk

A

Chance or possibility of a loss (financial value)

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3
Q

Pure Risk vs. Speculative Risk

A

Pure Risk - chance of a loss only; insurable

Speculative Risk - chance of a loss or gain; cannot be insured

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4
Q

Peril

A

a cause of a loss (accidents and sickness)

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5
Q

Hazard

A

increases the chance of a loss

Physical - hazards physical in nature

Moral - based on values and ethics

Morale - deals with carelessness or irresponsibility

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6
Q

Insurers

A

Stock company:

  • owned by its stockholders
  • does not pay dividends to policyholders
  • sell non-participating policies

Mutual company:

  • owned by its policyholders
  • pay dividends to policyholders
  • sell participating policies

Dividends:

  • a return of premium
  • not taxable
  • Cannot be guaranteed
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7
Q

Elements of a Legal Contract

A

All elements must be present to have a legal contract (CLOC):

  • Competent parties
  • Legal parties
  • Offer + acceptance = agreement
  • Consideration
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8
Q

Competent parties

A
  • each party must be legally competent to enter into a contract
  • Examples of those not considered competent:
  • minors
  • mentally unstable
  • intoxicated
  • under the influence of drugs
  • signs of duress
  • *legal age to buy insurance in IN is 16**
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9
Q

Legal Purpose

A

All contracts must be for a legal purpose to be enforced in the court of law

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10
Q

Offer + Acceptance = Agreement

A

Offer:

  • made by the applicant
  • offer to buy

Acceptance:

  • made by the insurer
  • evaluate risk, accept or deny

Counter offer:

  • made by the insurer
  • puts acceptance on applicant
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11
Q

Consideration

A
  • something of value exchanged between the parties in the contract

Applicant:

  • premiums
  • information on the application

Insurer:
- promise to pay

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12
Q

Defining Truth

A

Warranties - promise or guarantee

Representation - truth to the best of one’s knowledge

Misrepresentation - mistruth or lie

Concealment - withholding of the truth

Fraud - misrepresentation with the intent to gain

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13
Q

When does coverage start?

A

Effective date - the date the policy goes into effect

Contract law - coverage does not go into effect until the application is submitted, the premium is paid, and the policy is delivered

Interim insuring agreement - allows the company to provide coverage prior to the delivery date, while the company is completing the underwriting process

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14
Q

Types of interim insuring agreement

A

Conditional receipt - coverage begins either on the date of application or the date of the physical (if required), whichever is last, if the applicant was insurance on that date

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15
Q

Unique characteristics

A

Unilateral - one party in the contract makes a promise (the insurer)

Adhesion:

  • One party (the insurer) is responsible for the wording of the contract
  • ambiguities are interpreted in favor of the insured

Aleatory:

  • contract of unequal exchange
  • one party received more than the other

Conditional Contract:

  • the insurer’s obligations depend on certain conditions being met
  • the conditions will be spelled out in the contract

Valued Contract:
- pays a specified amount that may or may not be related to the extent of the loss

Reimbursement contract:
- reimburse the insured based upon the extent of the loss

Service Contract:
- provides protection in the form of services rather than benefits

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16
Q

Common Elements for Insurance Concepts

A

Endorsement:

  • Change to the policy
  • Also known as riders/attachments

Notice of claims - notifies the insurer of events leading to a possible claim

Proof of Loss:

  • insurer may request insured to give proof of loss
  • insured may submit bills, receipts, police report, to prove need

Loss Settlement:

  • The insurer must give consent of settlement
  • it is their money on the line
17
Q

Cancellation & Nonrenewal

A

Cancellation - coverage ends midterm

  • Short Rate - customer cancelled; short change
  • Pro Rata - insurer cancelled; all unearned premium

Nonrenewal - ends when policy period ends

18
Q

Agency Agreement / Law of Agency

A

Contract between the agent and the insurance company

  • Principal - the insurance company
  • agent/producer - represents the principal

The agents knowledge is deemed to be the knowledge of the insurance company

The agents actions and statements may extend the company’s liability or responsibility to the client

19
Q

Underwriting Basics

A

Underwriters determine:

  • what is the risk for the insurer
  • does the insurer want the risk
  • if the insurer accepts the risk, classify for rating

Adverse Selection - selection of risks that are higher or more likely to have a claim

20
Q

Law of Large Numbers

A
  • The more numbers used to establish a statistic, the more accurate the statistic will be
  • Used by the insurer to evaluate risk and predict the change of claims
21
Q

Sources of Insurability Information

A

Application:

  • First source of underwriting information
  • Any changes must be initialed by applicant
  • If the application is missing information and the policy is approved, the applicant is not held responsible after
  • Agent and applicant both sign the application

Agent/Producer report:
- agent shares information and observations with the insurer

Attending Physician’s Report

  • information for the applicant’s personal medical practitioner
  • Doctor’s notes and past history

Medical Information Bureau (MIB):

  • Collects application information from insurance companies
  • Companies compare basic information from the application only
22
Q

Fair Credit Reporting Act

A

Federal legislation that protects the consumer from the publication of inaccurate and obsolete information

Rights of the consumer:

  • to know who is gathering the information
  • to see the information in order to verify accuracy
  • to have any misinformation corrected
23
Q

Gramm Leach Bliley Act

A

Federal Legislation

Privacy protection:

  • Disclose all nonpublic personal information being shared with third parties
  • Explain privacy practices
  • Provide an opt-out clause
24
Q

Premiums

A

Always paid in advance

Premium mode - frequency of payment

  • monthly, quarterly, semi-annually, annually
  • insurer prefers annually
  • higher frequency, higher premium
25
Q

Risk Classification

A

Rating the Risk:

  • Preferred - lower risk, lower premium (exceptional health)
  • Standard - average risk, normal premium (average health)
  • Substandard - higher risk, higher premium ( unhealthy, likely to file a claim)

In addition to health conditions, these factors are also considered when rating a policy:

  • age
  • gender- tobacco use
  • occupation
  • avocation / hobby
26
Q

Gross Premium

A

The premium the applicant pays

  • Risk - portion of the payment available to pay claims
  • Interest - company invests premiums collected and earn interest before needing the funds to pay for claims
  • Expenses - cost of doing business (load)

Risk - interest + Expenses (load) = gross premium

27
Q

AIDS/HIV

A
  • The insurer may test the applicant, but only with the applicant’s consent
  • The insurer cannot discriminate
  • Test results must be kept confidential
  • Companies may only report “abnormal blood test results”
  • Coverage can be denied if AIDS is detected during underwriting, but it is develops after the policy issue, it is covered like any other sickness
28
Q

Need for Life Insurance

A

Obligations at death:

  • immediate needs - pay off debt
  • final expenses funeral expenses and unpaid medical bills
  • future needs - income needs for survivors and college expenses for surviving children

Method of estate building:
- life insurance creates an immediate estate

Living benefits:
- cash value

Advantages of Property:

  • equity can be used to secure a loan
  • can be sold, given away, or transferred to another person
29
Q

Needs Approach vs. Human Life Approach

A

Needs Approach

  • how much death benefit is needed to meet the needs of the beneficiaries?
  • immediate needs
  • final expenses
  • future needs

Human Life Approach

  • what potential value would the family lose?
  • earning expectations and potential

Life & Health Insurance (13 decks)

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