Basic Principles Flashcards
Admitted Insurer
someone who has received a certificate of authority from a state’s department of insurance authorizing them to conduct insurance business in that state
Captive Insurer
an issuer established and owned by a parent firm for the purpose of insuring the parent firm’s loss exposure.
Certificate of Authority
a license issued to an insurer by a department of insurance, which authorizes that company to conduct insurance business in that particular state.
Industrial Insurer
make up a specialized branch of the industry, primarily providing policies with small face amounts with weekly premiums. Other names for industrial insurers include home service or debit insurers.
Lloyds of London
group of individuals and companies that underwrite unusual insurance.
Help its associates settle claims and disputes, and through its member underwriters, provide coverages that might otherwise be unavailable in certain areas.
Multi-line insurer
one stop shop insurer
Mutual Insurance Company
insurance company characterized by having no capital stock, being owned by its policy owners, and usually issue participating insurance.
Non particitpating policy
do not allow policyowners to participate in dividends or electing the board of directors.
- typically issued by stock companies.
Participating plan
an insurance policy under which the policy owners share in the company’s earnings through receipt of dividends and also elect the company’s board of directors.
Reciprocal Insurer
an unincorporated organization in which all members insure one another.
Reinsurance
Acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contract by another insurer who has contracted for the entire coverage
Reinsurer
provides financial protection to insurance companies
Risk Retention Group
mutual insurance company formed to insure people in the same business, occupation, or profession.
Pooling risks
Self- Insurer
establishes a self funded plan to cover potential losses instead of transferring the risk to an insurance company.
Surplus Lines Insurance
offer coverage for substandard or unusual risks not available through private or commercial carriers. only available from a surplus lines insurer.
How insurance is sold
Career Agencies recruit, train, and supervise agents through managers or general agents. They primarily build staff.
Personal Producing General Agencies (PPGA) do not recruit, train, or supervise agents. They primarily sell insurance.
Independent agents (American Agency System) represent any number of insurance companies through contractual agreements.
What kind of life insurance policy issued by a mutual insurer provides a return of divisible surplus?
Participating life insurance policy.
Ken is a producer who has obtained Consumer Information Reports under false pretenses. Under the Fair Credit Reporting Act, what is the maximum penalty that may be imposed on Ken?
$5,000 and 1 year imprisonment.
Why are dividends from a mutual insurer not subject to taxation?
Because dividends are considered to be a return of premium.
An insurer’s claim settlement practices are regulated by the
State Insurance Departments.
Non participating Insurer
policy holders do not participate in receiving dividends or electing the board of directors, unless they are
Adverse Selection
selection against the company. It includes the tendency of people with higher risks to seek or continue insurance to a greater extent than those with little or less risk. Adverse selection also includes the tendency of policyowners to take advantage of favorable options in insurance contracts.
Homogeneous Exposure Units
Homogeneous exposure units are similar objects of insurance that are exposed to the same group of perils.
Indemnity contract
Contract of indemnity attempt to return the insured to their original financial position
Law of Large Numbers
a fundamental principle of insurance that the larger the number of individual risks
Moral Hazard
hazard brought on by the effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual’s general insurability
Morale Hazard
hazard arising from indifference to loss because of the existence of insurance. Morale hazards are often associated with having a careless attitude.
Reinsurance
acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.
Risk Retention
act of analyzing the loss exposure presented by a risk and determining that the potential loss is acceptable. Risk retention is often associated with self-insurance.
Principle of Indemnity
Their purpose is to make the insured “whole” again financially; Accident, health, property, and casualty insurance contracts are all contracts of indemnity. Their purpose is to make the insured “whole” again financially; to reimburse the loss while not making the insured better off than they were prior to the loss.
LAW OF LARGE NUMBERS (SPREAD OF RISK)
The law of large numbers states that larger groups provide an increased degree of accuracy in loss predictions, based on past experience. The higher the exposure, the more likely the event can be predicted.
Adverse Selection
tendency for higher-than-average risks to seek out insurance
indirect loss / consequential loss
If John were to die of a heart attack while receiving treatment for the broken leg, his accidental death policy will probably NOT pay the policy’s death claim as the death was a direct result of a heart attack. The fact that the heart attack may have been a consequence of the accident is irrelevant if the policy only covers direct loss from an accident.
Morale hazard
is created based as a result of the personal or subjective thought process of the insured. It can arise from a state of mind related to the indifference of an insured to whatever loss may occur. The insured unintentionally creates a loss situation on an unconscious level. They just do not care about loss prevention since the property is insured.
Special or Open Peril
insurance policies do not name the perils they cover but instead begin by saying they cover all direct causes of loss.
For example, comprehensive medical insurance and standard life insurance usually will cover medical bills and pay death claims related to perils other than those expressly excluded. Examples of perils commonly excluded in life and health contracts include suicide, acts of war, and injury or death sustained while committing an illegal act.
Homogeneous exposure units
similar objects of insurance that are exposed to the same group of perils. The larger the number of homogeneous units (similar risks), the easier it becomes to predict loss.
speculative risk
not insurable
risk that presents the chance for both loss and gain.
Investing in the stock market and gambling are a speculative risk
Pure risk
presents a potential for loss only with no possibility of g
Elements of insurable risk
- Loss must be due to chance (accident)/ outside of control
- Loss must be definite and measurable - can document time, place, amount, and when payable for example.
- Loss must be predictable - can estimate the average frequency and severity
- loss cannot be catastrophic - must be reasonable, a one trillion dollar life insurance policy is not reasonable
- Loss exposure to be insured must be substantial - law of number to help insurance companies predict loss
- loss must be randomly selected - avoid adverse selection.
Standard risk
average potential for loss. Standard risks are typically insured with a predetermined standard premium.
Substandard risks
considered to be a poor risk for the insurance company and have a higher potential for loss. Substandard risks may be insured with an increased premium, a lower benefit, or could be declined altogether.
Preferred risks
lower potential for loss. Preferred risks may be offered a lower premium for the transfer of their risk.
Law of large numbers
help insurance companies predict the increase of indvidual risks
Adhesion
Take it or leave it
A contract of adhesion describes a contract that has been prepared by one party (insurance) with no negotiation between the applicant and insurer.
Agent
represents themselves and the insurer at the time of application.
Aleatory
presents the potential for an unequal exchange of value or consideration between both parties.
Aleatory contract are conditioned upon the occurrence of an event.
Apparent Authority
appearance of the insurer providing the agent authority to perform unspecified tasks based on the agent insurer relationship.
Broker
broker represents themselves and the insured at the time of application.
Competent Party
capable of understanding the contract being agreed to.
All parties must be of leal competence,
- Must be of legal age
- mentally capable of understanding the terms and not influenced by drugs or alchohol.
Concealment
Failure of the applicant to disclose a known material fact when applying for insurance.
Consideration
part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments
estoppel
legal impediment to one party denying the consequences of its own actions or deeds of such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.
Express Authority
explicit authority granted to the agent by the insurer, as written in the agency contract.
Fiduciary
position of trust with regards to the funds of their clients and the insurer.
Responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients.
Indemnity contract
contract of indemnity attempt to return the insured to their original financial position.
insurable interest
financial, economic, and emotional impact associated with a person experiencing a specified loss. A person has a insurable interest in a loss if they have more to gain by not suffering the loss.
Parol Evidence Rule
involved parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by parol (oral) evidence.
Policy rider or endorsement
an amendment added to an insurance contract that overrides terms in the original policy, endorsements may add or remove coverages, change deductibles, or revise any other policy feature.
Unilateral
only one party, the insurer, makes any kind of enforceable promise.
Utmost Good Faith
Involves the belief that both the policyowner and the insurer must know all material facts and relevant information
valued contract
life insurance contracts are valued contracts.
Valued contract pays a stated sum regardless of the actual loss incurred.
Consideration clause
policyowner’s consideration consists of completing the application and paying the initial premium.
Aleatory Contract
an insurance contract is an aleatory contract since one party may recover more in value than he or she has parted with based upon a possible future event.
Insurable Interest
only required at the time of the application. Insurable interest does not have to continue throughout the duration of the policy, nor does it have to exist at the time of claim.
Stranger Originated Life Insurance
life insurance arrangements where investors persuade individuals typically seniors to take out new life insurance, naming the investors as beneficiaries.
Tort law
full compensation for proved harm.
Insurance carrier
responsible for assembling the policy forms for the insured person
What makes an insurance policy a unilateral contract?
Only the insurer is legally bound. Insurance contracts are unilateral, meaning that only the insurer makes legally enforceable promises in the contract.
A professional Liability for which producers can be sued for mistakes of putting a policy into effect is called
Errors and Omissions
Which contract element is insurable interest a component of
Legal purpose
A paid premium
example of the insured’s consideration
industrial life insurance
issues very small face amounts, such as $1,000 or $2,000.
Convertible term
a provision that allows policy owners to convert their term insurance into permanent policies without showing proof of insurability.
Renewable term
term insurance that guarantees the insured the right to continue term coverage after expiration of the initial policy period without having to prove insurability.
Term Rider
type of life insurance product which covers children under their parent’s policy.
A term rider is always level term.
Whole life insurance
provides death benefits for the entire life of the insured. It also provides living benefits in the form of cash values. It matures at age 100 and Normally has a level premium. All whole life has the same type of benefits.
Whole Life - Straight Life Insurance
premiums are payable throughout the insured’s lifetime, and coverage continues until the insured’s death.
Whole life - Limited Pay
coverage remains on a limited - pay life policy until age 100 or death.
if you were to purchase a 20-pay policy, premiums would need to be paid for 20 consecutive years. After that, you would not be required to make any additional premium payments, and your coverage would be guaranteed until death or age 100.
Whole Life - Modified
Modified whole life has all of the same features of ay other whole life except the premium for the first few years will be cheaper.
Whole life - Modified Endowment Contract (MEC)
best described as a policy that exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract.
Joint Life policy
covers the lives of 2 individuals and save on premium cost by averaging the ages of the two insureds.
Joint Survivor or Last Survivor Life Policies
cover the lives of two individuals and saves on premium costs by averaging the ages of the two insured. For example, say B and M purchase a joint life survivor policy. If B were to die first and then M died 10 years later, no benefits would be paid out from the policy until M died.
Family Maintenance policy
monthly income from the date of death of the insured to the end of the preselected period.
Family income policy
pay an income beginning at the insured’s death and continues for a period specified from the date of policy issue.
For example, G purchased a Family Income policy at age 40, with a 20-year rider period. If G were to die at age 50, G’s family would receive an income for 10 years.
Adjustable Life Policy
owner is usually looking for a policy offering flexible premiums.
Universal Life insurance policy
flexible premiums and an adjustable death benefit.
Variable life insurance policies
require a producer to have proper FINRA and National Association of Securities Dealers (NASD) securities registration prior to selling any variable policy contract
If a policy owner or applicant was looking for a policy to offset inflation, they would
Credit Policies
typically purchase using a decreasing term life insurance policy
Variable Universal Whole Life, (VUL)
policyowner controls the investment of cash values and selects the timing and amount of premium payments.
Equity Index Universal Life Insurance
Equity Index Universal Life Insurance or Equity Indexed Life combines most of the features, benefits and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index.
Universal Life Death Benefit Options
Option A: policyowner may designate a specified amount of insurance. Death benefit equals the cash value plus the remaining pure insurance.
Option B: death benefit equals the face amount plus the cash values. To comply with the Tax Code’s definition of life insurance, the cash values cannot be dispoportionately larger than the term insurance portion.
Limited payment whole life policy provides
Lifetime protection
The type of policy which pays on the death of the last person is called
survivorship life
Julie has a $100,000 30 year mortgage on her new home. What type of life insurance could she purchase that is designed to pay off the loan balance if she dies within the 30 year period
Decreasing term insurance.
Variable universal life insurance
Policyholder has the right to select the investment which will provide the greatest return
When a decreasing term policy is purchased, it contains a decreasing death benefit and
decreasing premiums.
Adjustable Life
allows the policyowner to change two policy features, premium and face amount.
Reggie purchased a life insurance policy with a face amount of $500,000. After 15 years, the cash value has accumulated to $100,000 and the policy’s face amount has become $600,000. What type of life insurance
Universal Life.
level premium permanent insurance accumulates a reserve that will eventually
become larger than the face amount.
when a decreasing term policy is purchased, it contains a decreasing death benefit and
level premium.
Family term insurance
death benefit it the spouse of the insured dies.
Which of the following is not part of an insurance contract?
- Policy
- Application
- riders
- Certificate of Authority
Certificate of Authority
allows an insurer to conduct business in a state. It is not part of an insurance contract.
Accelerated Death Benefit Option
benefit can be offered as a rider at a specific cost or may be at no cost.
Accelerated Death Benefit options are offered with no increase in premium.
Reinstatement Clause
provide evidence of insurability, pay past due premiums.
