Flashcards in EXAM PREP Deck (41)
In the insurance business, risk can be be defined as:
-sharing the possibility of a loss
-uncertainty regarding the future
-uncertainty regarding financial loss
-uncertainty regarding when death will occur
**Uncertainty regarding financial loss**
The concept of insurance developed from the need to minimize the adverse effects of risk associated with the probability of financial loss.
Which of the following risks is insurable?
Only pure risks are insurable because they involve only the chance of loss. They are pure in the sense that they do not mix both profits and losses. Insurance is concerned with the economic problems created by pure risks
Buying insurance is one of the most effective ways of:
Through the insurance contract, the burden of carrying the risk and indemnifying the financial loss is transferred from the individual to the insurance company.
Which of the following best describes the function of insurance?
-It is a form of legalized gambling
-It spreads financial risk over a large group to minimize the loss to any one individual
-It protects against living too long
-It creates and protects risks
**It spreads the financial risk over a large group to minimize the loss to any one individual**
The function of insurance is to safeguard against financial loss by having the losses of few paid by the contribution of many who are exposed to the same risk.
All of the following are elements of an insurable risk EXCEPT:
-the loss must be due to chance
-the loss must be predictable
-the loss must be catastrophic
-the loss must have a determinable value
**The loss must be catastrophic**
One of the criteria for an insurable risk is that is NOT be catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property - wars or floods, for example - are typically not insurable
The amount of money an insurer sets aside to pay future claims is called:
- a premium
- a dividend
-an accumulated interest
Reserves can be defined as the amounts that are set aside to fulfill the insurance company's obligation to pay future claims. The reserve is compiled from past premium payments and interest.
Which of the following constitutes and insurable interest?
-The policyowner must expect to benefit from the insured's death
-the policyowner must expect to suffer a loss when the insured dies or becomes disabled
-the beneficiary, by definition, has an insurable interest of the insured.
-the insured must have a personal or business relationship with the beneficiary
**The policyowner must expect to suffer a loss when the insured dies or becomes disabled**
Insurable interest requires the policyowner to benefit from the insured's continuing to live or enjoy good health or to suffer a loss when the insured dies or is disabled.
Which of the following statements describes the parol evidence rule?
-A written contract cannot be changed once it is signed
-An oral contract cannot be modified by written evidence
-A written contract cannot be changed by oral evidence
-An oral contract takes precedence over any earlier written contracts
**A written contract cannot be changed by oral evidence**
The parol evidence rule states that when 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.
Which of the following factors determines whether policy dividends will be paid on a participating policy?
-Reserves and experience
-expenses and claims costs
-interest and benefits
-premiums and renewability
**Expenses and claims costs**
If expenses and claims costs are less than expected, dividends are likely to be paid.
A licensed agent legally represents:
-the state insurance department
-himself or herself
An agent is an individual who has been authorized by an insurer to be its representative to the public and to offer for sale its goods and services
All of the following statements regarding policy replacement are correct EXCEPT:
-replacement involves convincing a policyholder to lapse or terminate an existing policy and to purchase another
-interrupting one cash value insurance plan to begin another could cause serious financial problems for the policyowner
-even if the customer wants to replace his or her existing policy, an agent can effect a policy replacement only by following the replacement regulations in the agent's state
-Premiums for replacement policies are generally lower than premiums for the existing policies they replace
**Premiums for replacement policies are generally lower than premiums for the existing policies they replace
The new policy will probably be at a higher premium rate because it will be based on the insured's then-attained age
With regard to insurable risks, which of the following statements is NOT correct?
-Only pure risks are insurable
-An insurable risk must involve loss that is within the insured's control
-Insurers will not insure risks that are catastrophic in nature
-An insurable risk mus be measurable
**An insurable risk must involve loss that is within the insured's control**
To be insurable, a risk must involve the chance of loss that is fortuitous and outside the insured's control
On August 9, Albert made an application for life insurance that his agent submitted a day later without a premium payment. On August 21, the insurer issued the policy as applied for and on August 24, the agent delivered the policy and collected the initial premium. On what day was the contract offer made?
-August 9th, 10th, 21st, or 24th
If an applicant does not submit an initial premium with the application, the applicant is inviting the insurance company to make a contract offer. The insurer can respond by issuing a policy (the offer) that the applicant can accept by paying the premium when the policy is delivered.
All statements made by an applicant in an application for life insurance are considered to be:
Most states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. A representation is a statement made by the applicant that the applicant believes to be true. A warranty is a statement made by the applicant that is guaranteed to be true. If an insurance company rejects a claim on the basis of representation, the company bears the burden of proving materiality
Which of the following legal terms indicates that a life insurance contract contains the enforceable promises of only one party?
Insurance contracts are unilateral in that only one party - the insurer - makes any kind of enforceable promise
Which of the following types of agent authority is specifically set forth in writing in the agent's contract?
Express authority is the authority a principal gives to its agent. Express authority is granted by means of the agent's contract, which is the principal's appointment of the agent to act on its behalf.
Assume a home catches fire after it is struck by lightning and the fire destroys its structure and contents. By insurance definition, the fire is:
the proximate clause
A peril is the immediate specific event causing loss and giving rise to risk. When a building burns, fire is the peril.
What constitutes "consideration" for a life insurance policy?
Application and initial premium
Adhesion feature of the contract
**Application and the initial premium**
Consideration is the value given in exchange for the promises sought. In an insurance contract, consideration is given by the applicant in exchange for the insurer's promise to pay benefits, and it consists of the application and the initial premium.
Statements made by an applicant for life insurance that are guaranteed to be true are:
A warranty in insurance is a statement made by the applicant that is guaranteed to be true. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Warranties are presumed to be material because they affect the insurer's decision to accept or reject an applicant.
Which of the following insurance companies is owned by its policyholders?
Mutual insurers are owned by the policyholders. Anyone purchasing insurance from a mutual insurer is both a customer and an owner.
With regard to life insurance, all of the following statements are correct EXCEPT
-All individuals are considered to have insurable interests in themselves
-Spouses are automatically considered to have insurable interests in each other
-A creditor has an insurable interest in a debtor
-Insurable interest must be maintained throughout the life of the contract
NOT TRUE - **Insurable interest must be maintained throughout the life of the contract**
Insurable interest is required only when a contract is issued; it does not have to be maintained throughout the life of the contract, nor is it necessary at the time of the claim.
A life insurance company is organized in Orlando where it maintains its home office. In Florida, the company is classified as:
An insurer is termed "domestic" in a state when it is incorporated in that state
A life insurance company is organized in Illinois, with its home office in Philadelphia, is licensed to conduct business in Wisconsin. In Wisconsin, this company is classified as:
A foreign company operates within a state in which it is not chartered and in which its home office is not located
To whom does the cash value of a life insurance policy belong?
The accumulation that builds over the life of a policy is called the "cash value," and it belongs to the policyowner, who may or may not be the insured.
Frank is the insured in a $40,000, 5-year level term policy issued in 2013. He died in 2019. His beneficiary received:
The cash value of the policy
In this case, the insured died after his term policy had expired. As a result, his beneficiary received nothing.
All of the following statements regarding assignment of a life insurance policy are correct EXCEPT:
-To secure a loan, the policy can be transferred temporarily to the lender as security for the loan
-The policyowner must obtain approval from the insurance company before a policy can be assigned
-The life insurance company assume no responsibility for the validity of an assignment
-The life insurance company must be notified in writing by the policyowner of any assignment
NOT TRUE - **The policyowner must obtain approval from the insurance company before a policy can be assigned.
Policyowners actually own their policies and may do with them as they please. They can even give them away, just as they can give away any other kind of property they own. Nevertheless, they must notify the insurance company in writing of any transfers of ownership (assignments). The company must then accept the validity of the assignments without question.
After a family's breadwinner dies, the "blackout period" generally can be defined as the period:
-during which children are living at home
-That begins when the youngest child turns 16 and ends when the surviving parent retires
-During which children are in school
-From the surviving parent's retirement to death
**That begins when the youngest child turns 16 and ends when the surviving parent retires**
The "blackout period" is the time during which no social security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until the spouse retires.
A company with 3 partners is considering a buy-sell plan. All of the following statements pertaining to buy-sell plans and this partnership are correct EXCEPT:
-An insured entity buy-sell agreement designates the partnership as the beneficiary
-If they choose a cross-purchase plan, each partner would have to purchase 2 policies for a total of 6 plans
-No benefits will accrue to the partnership from the buy-sell agreement until one of the partners dies
-If they choose an entity buy-sell agreement, the business would be party to the agreement
NOT TRUE - **No benefits will accrue to the partnership from the buy-sell agreement until one of the partners dies**
A buy-sell plan offers several advantages to the partners while they are all living. The partners know they will have a legal right to buy a deceased partner's share of the business, and the family and heirs of the partners know that the partnership interest will be disposed of at a fair price. Further, the money needed to purchase the deceased partner's interest will be available when needed. All this adds up to security and peace of mind for all involved, including the employees of the business.
Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church?
Bill's estate is responsible
Bill's Church is responsible
No income tax is payable on the death proceeds
Bill's estate and Bill's church split the tax
**No income tax is payable on the death proceeds**
Lump-sum proceeds payable upon the death of the insured are not subject to income tax, no matter who the beneficiary is.