Chapter 1 Flashcards
(83 cards)
1
Q
What is a contract?
A
An agreement between two or more parties enforceable by law
2
Q
What are the four essential elements of a legal contract?
A
- Agreement — offer and acceptance
- Consideration
- Competent parties
- Legal purpose
3
Q
What is the role of offer and acceptance in a contract?
A
There must be a definite offer by one party and acceptance by the other in its exact terms
4
Q
Who typically makes the offer in an insurance contract?
A
The applicant when submitting the application
5
Q
When does acceptance occur in an insurance contract?
A
When an insurer’s underwriter approves the application and issues a policy
6
Q
What is consideration in the context of a contract?
A
Something of value that each party gives to the other
7
Q
What is the insured’s consideration in an insurance contract?
A
Payment of premium and representations made in the application
8
Q
What is the insurer’s consideration in an insurance contract?
A
Promise to pay in the event of loss
9
Q
What does it mean for parties to be competent in a contract?
A
They must be capable of entering into a contract in the eyes of the law
10
Q
What are the requirements for parties to be considered competent?
A
- Legal age
- Mentally competent
- Not under the influence of drugs or alcohol
11
Q
What is the legal purpose of a contract?
A
The purpose must be legal and not against public policy
12
Q
What two elements must a Life Insurance policy have to ensure legal purpose?
A
- Insurable interest
- Consent
13
Q
What is a contract of adhesion?
A
Prepared by one party (insurer) and accepted or rejected by the other (insured)
14
Q
What is an aleatory contract?
A
A contract involving an exchange of unequal amounts or values
15
Q
Provide an example of an aleatory contract in life insurance.
A
John pays $200 in premiums for a $100,000 policy and dies shortly after
16
Q
What is a unilateral contract?
A
Only one party is legally bound to do anything
17
Q
What is a conditional contract?
A
Requires certain conditions to be met before obligations are fulfilled
18
Q
What is a warranty in insurance?
A
An absolutely true statement on which the validity of the insurance policy depends
19
Q
What are representations in insurance?
A
Statements believed to be true to the best of one’s knowledge
20
Q
What happens if there are untrue statements on an insurance application?
A
They are considered misrepresentations and could void the contract
21
Q
What is a material misrepresentation?
A
A statement that would alter the underwriting decision if discovered
22
Q
What distinguishes intentional material misrepresentations?
A
They are considered fraud
23
Q
Fill in the blank: Insured’s statements on the application are _______.
A
representations
24
Q
What is the purpose of the Application in the risk selection process?
A
The Application is the starting point and basic source of information used by the company in the risk selection process.
25
What are the two main parts of the Application?
Part 1 - General Information and Part 2 - Medical Information.
26
What information is included in Part 1 - General Information?
It includes the applicant's name, age, address, birth date, gender, income, marital status, occupation, existing policies, type of policy applied for, amount of coverage, and beneficiary information.
27
What does Part 2 - Medical Information cover?
It includes the prospective insured's medical background, present health, recent medical visits, medical status of living relatives, and causes of death of deceased relatives.
28
What is a nonmedical application?
A nonmedical application occurs when the amount of insurance is relatively small, and the agent and proposed insured complete all medical information.
29
What is the agent's responsibility regarding the application?
The agent must ensure that the application is filled out completely, correctly, and to the best of the applicant's knowledge.
30
What should an agent do if they suspect misrepresentation by the applicant?
The agent must probe beyond the stated questions and inform the insurance company if there is potential misrepresentation.
31
What is the role of the agent in the underwriting process?
The agent is referred to as a field underwriter and is responsible for proper solicitation, preventing adverse selection, completing the application, obtaining signatures, collecting premiums, and delivering the policy.
32
Who must sign the application?
Both the agent and the proposed insured must sign the application, and if the policyowner is different, they must also sign.
33
What should agents do when correcting an answer on the application?
Agents can correct the information and have the applicant initial the change or complete a new application, but should never erase or white out information.
34
What happens if an application is incomplete?
The insurer must return the incomplete application for completion, and if a policy is issued with unanswered questions, the insurer waives its right to those answers.
35
Why is collecting the initial premium important?
Collecting the initial premium increases the chance that the applicant will accept the policy once issued.
36
What is a conditional receipt?
A conditional receipt indicates that coverage will be effective on the date of the application or the medical exam, whichever occurs last, provided the applicant is insurable.
37
What is replacement in insurance?
Replacement is the practice of terminating an existing policy or letting it lapse to obtain a new one.
38
What is underwriting?
Underwriting is the risk selection process that involves selecting only those risks that are considered insurable and meet the insurer's underwriting standards.
39
What is the purpose of underwriting?
The purpose of underwriting is to protect the insurer against adverse selection (risks which are more likely to suffer a loss).
40
What criteria do underwriters use to assess life insurance applicants?
Underwriters assess applicants based on health (current and past), occupation, lifestyle, and hobbies or habits.
41
What is insurable interest?
Insurable interest is the requirement that the policyowner must face the possibility of losing money or something of value in the event of loss.
42
When must insurable interest exist in life insurance?
Insurable interest must exist between the policyowner and the insured at the time of application.
43
Who does not need to show insurable interest for a policy to be purchased?
Beneficiaries do not need to show insurable interest since their well-being is dependent upon the insured.
44
What is the key source of underwriting information?
The insurance application is the key source underwriters use for information about the applicant.
45
What does the agent's report provide?
The agent's report allows the agent to communicate with the underwriter and provide information about the applicant known by the agent.
46
What is an Investigative Consumer Report?
An Investigative Consumer Report supplements the application information and covers financial and moral information about the applicant.
47
What does the Fair Credit Reporting Act establish?
The Fair Credit Reporting Act establishes procedures for consumer-reporting agencies to ensure records are confidential, accurate, relevant, and properly used.
48
What must consumers be notified of regarding investigative consumer reports?
Insurance applicants must be notified in writing whenever insurers request investigative consumer reports.
49
What is the Medical Information Bureau (MIB)?
The MIB is a nonprofit trade organization that collects and maintains important underwriting information on applicants for life and health insurance.
50
Can insurers refuse coverage based solely on MIB information?
Insurers cannot refuse coverage solely on the basis of adverse information on an MIB report.
51
What is required for medical examinations in underwriting?
The underwriter may require a medical examination depending on the coverage amount or health questions raised in the application.
52
What must insurers disclose when requiring an HIV test?
Insurers must disclose the use of testing to the applicant and obtain written consent.
53
What is the purpose of a written disclosure statement?
A written disclosure statement provides basic information about the cost and coverage of the insurance being solicited.
54
What does HIPAA protect?
HIPAA protects health information and provides privacy for certain individually identifiable health information.
55
What factors are considered in risk classification?
The underwriting department considers past medical history, present physical condition, occupation, habits, and morals.
56
What are the three risk classifications?
The three risk classifications are standard, substandard, and preferred.
57
What is a substandard risk?
Substandard risks are applicants not acceptable at standard rates due to health or lifestyle factors.
58
What is Stranger-originated Life Insurance (STOLI)?
STOLI is a life insurance arrangement where a stranger purchases a policy on the insured's life to profit financially upon the insured's death.
59
What is Investor-owned Life Insurance (IOLI)?
IOLI is another name for STOLI, where a third-party investor with no insurable interest initiates a life insurance transaction.
60
What happens after the underwriting process is completed?
The company issues the policy, and the agent delivers it to the insured.
61
What is the best method of delivering an insurance policy?
Personal delivery of the insurance policy.
62
Is mailing the policy to the policyowner acceptable?
Yes, mailing the policy directly to the policyowner is acceptable.
63
When is a policy considered legally delivered?
When the insurer relinquishes control of the policy by mailing it to the policyowner.
64
What is advisable to obtain during policy delivery?
It is advisable to obtain a signed delivery receipt.
65
What opportunity does personal delivery provide the agent?
It allows the agent to ensure that the insured understands all aspects of the contract.
66
What should the agent review with the insured?
The agent should review provisions, riders, and explain the rating procedure.
67
When does coverage begin if the initial premium is not paid?
Coverage does not go into effect until the premium has been collected.
68
What must the agent collect at the time of policy delivery if the premium was not paid?
The agent will be required to collect the premium and possibly a statement of good health.
69
What does the statement of good health verify?
It verifies that the insured has not suffered injury or illness since the application date.
70
When does coverage generally begin if the full premium was submitted with the application?
Coverage generally coincides with the date of application if no medical exam is required.
71
When does coverage begin if a medical exam is required?
Coverage will coincide with the date of the exam.
72
What is a key takeaway regarding premium and coverage?
NO premium, NO coverage.
73
What does the Gramm-Leach-Bliley Act generally prohibit?
An insurance company may not disclose nonpublic personal information to a nonaffiliated third party except under certain conditions.
74
What are the conditions under which an insurance company can disclose nonpublic personal information?
1. The insurance company discloses to the consumer in writing that information may be disclosed to a third party.
2. The consumer is given the opportunity to direct that information not be disclosed.
3. The consumer is given an explanation of how to exercise a nondisclosure option.
75
What disclosures are required by the Gramm-Leach-Bliley Act?
1. When the customer relationship is established (i.e., a policy is purchased).
2. Before disclosing protected information.
76
What additional requirement does the Gramm-Leach-Bliley Act impose on insurance companies?
The customer must receive an annual privacy disclosure and have the right to opt out of having their private information shared.
77
What is the purpose of the USA PATRIOT Act?
To address initiatives to fight and prevent terrorist activities.
78
What does the USA PATRIOT Act enable FinCEN to do?
Require banks, broker-dealers, and other financial institutions to establish new anti-money laundering (AML) standards.
79
What are the minimum requirements of the AML Program implemented by FinCEN?
1. Assimilate policies and procedures based on an in-house risk assessment.
2. File suspicious activity reports (SAR) with Federal authorities.
3. Appoint a qualified compliance officer.
4. Provide continual training for applicable employees.
5. Allow for independent testing of the program.
80
What are the SAR rules?
Procedures must be in place to identify suspicious activity related to money laundering and terrorist financing.
81
What transactions must be reported under SAR rules?
Deposits, withdrawals, transfers, or any business deals involving $5,000 or more if suspicious.
82
What are some red flags indicating suspicious activity?
1. Customer uses a fake ID.
2. Two or more customers use similar IDs.
3. Transactions fall just below reporting thresholds.
4. Customers break one transaction into smaller ones to evade reporting.
5. Customer uses multiple MSB locations on the same day.
83
What is the timeframe for filing relevant SAR reports?
SAR reports must be filed with FinCEN within 30 days of initial discovery.
