Insurance Concepts

Question 1

Consideration

Answer 1

For an agreement to be binding, each party must provide the other with some item of value or “consideration.”
An insurance applicant provides the premium and information on the completed application.
The insurer promises to pay legitimate claims.
In an insurance contract, the element that shows each party is giving something of value

Question 2

Aleatory

Answer 2

one party may recover more in value than she has paid
The value of the policy owner’s potential benefit (i.e., claim payment) is generally higher than the value (i.e., premium) that’s received by the insurer.
There’s no guarantee that the insured will receive a benefit. Performance is based on an uncertain future event involving unequal bargaining value.

Question 3

Adhesion

Answer 3

prepared by only one of the parties—the insurance company and offered on a “take it or leave it” basis.

Question 4

doctrine of reasonable expectations

Answer 4

interprets contract terms that may be interpreted more than one way by ascertaining what a “reasonable” consumer would interpret them to mean.

Question 5

unilateral contracts

Answer 5

one party (the insurer) makes an enforceable promise, which is contingent on the policy owner paying the premium.
EXCEPT Life insurance

Question 6

Life Insurance

Answer 6

Life insurance is NOT a personal contract since it can be borrowed against or sold like a transferable asset.

Question 7

Valued contracts

Answer 7

pay a stated sum regardless of the actual loss that’s incurred.

Question 8

Indemnity contracts

Answer 8

pay an amount that’s equal to a loss identified in the policy.

Question 9

void contract

Answer 9

is one that has never really gone into effect because it lacks one of the four essential elements of a contract.

Question 10

parole evidence rule

Answer 10

limits a contract to its written terms.

Question 11

Estoppel

Answer 11

requires an insurer to abide by misleading or incorrect statements that are made by one of its agents, even if it can demonstrate that the governing policy form contradicts the agent.
Estoppel applies when ALL of the following elements are present:
An agent is acting within their authority.
The agent makes an inaccurate representation on behalf of the insurance company.
A consumer relies on the information being correct.
When a circumstance arises that tests the validity of the questionable representation, the insurance company refuses to honor the agent’s words.
The insurer’s decision causes financial harm to the consumer.

Question 12

Subrogation

Answer 12

is an insurer’s right to pursue liable third parties for amounts that are paid out in claims made by the insured.

Question 13

Torts

Answer 13

are private wrongs which mostly involve negligence and are adjudicated in civil court. Civil courts also decide cases involving contract law.

Question 14

What kind of life insurance policy issued by a mutual insurer provides a return of divisible surplus?

Answer 14

participating life insurance policy

Question 15

Fraternal Benefit Society has each of the following characteristics EXCEPT

Answer 15

Exist For profit

Question 16

Under the McCarran-Ferguson Act, what is the minimum penalty for obtaining info on someone without a legit reason

Answer 16

$10,000

Question 17

Under the Fair Credit Reporting Act, the maximum penalty for a producer who obtains Consumer Information Reports under false pretenses

Answer 17

$5,000 and 1 year imprisonment.

Question 18

The authority granted to a licensed producer is provided via the

Answer 18

Law of Agency

According to the Law of Agency, the producer/agent represents the principal/insurer and is granted actual, implied and apparent authority to act on behalf of the insurer. The Law of Agency makes the principal responsible for these acts of the agent.

Question 19

A nonparticipating company is sometimes called a(n)

Answer 19

stock insurer

Question 20

Under a contract of adhesion

Answer 20

the terms must be accepted or rejected in full

Question 21

A plan in which an employer pays insurance benefits from a fund derived from the employer’s current revenues is called

Question 22

An insurer’s claim settlement practices are regulated by the

Answer 22

State insurance departments

Question 23

Why are dividends from a mutual insurer not subject to taxation?

Answer 23

Because dividends are considered to be a return of premium

Question 24

What best describes a conditional insurance contract?

Answer 24

A contract that requires certain conditions or acts by the insured individual
This means that the insurer’s promise to pay benefits depends on the occurrence of an event covered by the contract.

Question 25

Which contract element is insurable interest a component of?

Answer 25

Legal purpose

Question 26

The deeds and actions of a producer indicate what kind of authority?

Answer 26

Apparent

Question 27

Which of the following is an example of the insured's consideration?

Answer 27

A paid premium

Question 28

Which type of clause describes the following statement: "We have issued the policy in consideration of the representations in your applications and payment of the first-term premium".

Answer 28

Consideration clause

Question 29

What is known as the immediate specific event causing loss and giving rise to risk

Answer 29

A peril is defined as the immediate specific event causing loss and giving rise to risk. A peril is the cause of a risk. For example, when a building burns, fire is the peril. When a person dies, death is the peril. When an individual is injured in an accident, the accident is the peril. When a person becomes ill from a disease, the disease is the peril.

Question 30

Morbidity

Answer 30

measures the probability or risk of getting sick or becoming disabled.

Question 31

Accidental Bodily Injury or “Accidental Result”

Answer 31

The insured may undertake the activity leading to the accident voluntarily, or that activity may itself have been unintended (accidental) as well. In either case, the “results” definition applies as long as the resulting outcome (loss) was not intended. (Less Restrictive)

Question 32

Accidental Means

Answer 32

Neither the activity that led to the accident nor the accident itself was intentional. The cause and result must both be accidental.

Question 33

Covered Losses

Answer 33

The five distinct types of covered losses are medical expenses, disability, dental expense, accidental injury, and long-term care.

Question 34

Medical Expense

Answer 34

Medical expense insurance covers the cost of medical care. These contracts are reimbursement contracts that cover one or more of the following losses: ▪ Hospital expenses ▪ Physician expenses ▪ Surgical expenses ▪ Outpatient care

Question 35

Disability Insurance

Answer 35

Disability insurance protects against the loss of a person’s ability to earn an income. ▪ Insureds can decrease premiums by selecting longer elimination periods, which work like deductibles but are stated as lengths of time. ▪ Disability income benefits from individual disability policies are income-tax-free.

Question 36

Accident insurance

Answer 36

pays a benefit when an insured suffers an injury. AD&D insurance pays a lump sum if an accident results in the insured’s death or dismemberment.

Question 37

Private Insurance

Answer 37

Private Insurance refers to self-insurance and coverage through private insurers.

Question 38

Social insurance

Answer 38

Social insurance programs that are provided by the different levels of government include: ▪ Medicaid for low-income persons ▪ Medicare primarily for seniors ▪ Social Security Disability insurance

Question 39

TRI-CARE

Answer 39

the federal government health plan for active duty and retired service members, as well as their families, and survivors.

Question 40

Comprehensive policies

Answer 40

offer a broad range of coverages on an “open-peril” basis.

Question 41

limited health insurance policies

Answer 41

Limited Insurance Policy Types Limited risk policies cover a specific risk and include a “Notice to the Insured,” which states that the contract is a Limited Benefit Policy. ▪ A limited risk policy is different from a special risk contract. ▪ A special risk policy covers an unusual hazard that’s normally not covered. ▪ A limited risk policy covers a common risk but in a limited manner.

Question 42

Accidental death and dismemberment (AD&D) insurance

Answer 42

pays a lump-sum benefit amount in the event of accidental death or dismemberment.

Question 43

Principal Sum

Answer 43

The principal sum is the death benefit that’s payable when death results from an accident. It’s both the policy’s face amount and the maximum benefit paid.

Question 44

Capital Sum

Answer 44

The capital sum is the amount that’s payable (typically 50%) if a person suffers an accident that results in the permanent loss of hearing, sight, or dismemberment.

Question 45

Critical illness

Answer 45

pay a lump sum to the insured upon the diagnosis and survival of critical illnesses, such as heart attacks and strokes. Insureds can use these benefits to cover non-medical expenses.

Question 46

Hospital indemnity insurance

Answer 46

pay a specified amount on a daily, weekly, or monthly basis directly to the insured while she’s in the hospital.

Question 47

Credit disability insurance

Answer 47

covers the cost of monthly debt payments while the insured is disabled. ▪ The lender or creditor is the policy owner and also the beneficiary. ▪ The debtor is the insured and typically pays the premiums.

Question 48

on-renewable, short-term insurance

Answer 48

policies with coverage periods as short as 90 days and as long as 364 days (i.e., just under one year). Short-term plans CANNOT BE RENEWED; however, policyholders may apply for a new policy when coverage ends. Short-term policies are stripped-down versions of a major medical expense contract. Consumers traditionally used these plans as interim coverage to bridge gaps. Short-term policies offer lower premiums but include many restrictions that the ACA eliminated in major medical insurance policies.

Question 49

Scheduled Plans

Answer 49

Scheduled plans provide benefits for specific services and are based on a published schedule. They generally contain no deductibles or co-insurance and provide first-dollar coverage.

Question 50

Non-Scheduled Plans

Answer 50

Non-scheduled plans—also referred to as comprehensive plans—include deductibles and co-insurance. They generally divide services into the following three categories: Routine or basic diagnostic and preventive services – generally covered 100% Restorative services (e.g., fillings, oral surgery, and periodontics) – covered at 80% Major services (e.g., crowns, orthodontics, facial reconstructions, or bridgework) – covered at 50%

Question 51

Blue Cross and Blue Shield (Service Providers)

Answer 51

▪ In return for a premium, service providers offer subscribers health care services from participating providers. ▪ Local Blue Cross and Blue Shield plans (loosely affiliated through their national association) are the dominant U.S. health insurers. ▪ The Blues provide benefits on a service basis, which means that they pay the provider directly for the subscriber’s medical treatment. ▪ Blue Cross pays for hospital care, while Blue Shield covers physician fees. ▪ Traditional service provider plans are considered prepaid because subscribers pay a fixed monthly fee for covered medical services. ▪ Participating health care providers contractually agree to provide services to subscribers for specific costs.

Question 52

Traditional Medical Insurance Policies (Commercial Insurance Companies)

Answer 52

▪ Consumers receive health care services from medical professionals, and insurance carriers cover the cost by reimbursing consumers. ▪ The right of assignment allows insurers to pay providers directly. ▪ These plans are referred to as indemnity plans because they indemnify the insured. ▪ Traditional indemnity plans are national in scope.

Question 53

Health Maintenance Organizations (HMOs)

Answer 53

HMOs offer subscribers comprehensive prepaid health care services. ▪ A distinctive characteristic of HMOs is that they organize and deliver the covered health care services as well as insure them. ▪ A variety of organizations may sponsor HMOs. Characteristics of HMOs ▪ HMOs must provide 24/7 access to their subscribers. ▪ HMOs must provide a 30-day open enrollment period.

Question 54

Federal Requirements for HMOs

Answer 54

▪ Employers must meet the following requirements and guidelines to be eligible to offer an HMO: ‒ Have at least 25 employees ‒ Contribute to the plan ‒ Stress preventive care ‒ Maintain minimum reserves ▪ Employer HMOs must use community-rated premiums and charge no more than commercial insurance plans.

Answer 55

▪ HMOs cover the essential health services as defined in the Affordable Care Act. ▪ HMO services don’t typically include dental coverage or vision care (corrective lens, etc.) ▪ Subscribers pay a fixed periodic fee. ▪ There are some co-payment requirements. ▪ Traditionally, provider compensation was capitated without regard to the amount of care given. ▪ HMOs are known for stressing preventive care. ▪ Insurers may sponsor HMOs. ▪ HMOs may also be self-contained or self-funded. ▪ HMO networks are local or regional but not national. ▪ If an HMO consists of a physician’s group or salaried employees who work out of the HMO’s facility, it is a closed panel network. ▪ If an HMO provides services through a network of physicians seeing subscribers in their own offices, that organization is defined as an open-panel HMO.

Question 56

Preferred Provider Organizations (PPOs)

Answer 56

▪ PPOs offer medical insurance but not care. ▪ PPOs sponsor a network of health care providers. ▪ Network (preferred) providers contract with the PPO to offer discounted services to PPO subscribers in return for referrals. ▪ PPOs don’t assume the role of a healthcare provider. ▪ PPOs assemble networks and finance care. ▪ PPO contract prices represent a discount of what may be considered “usual and customary.” Fee-for-Service ▪ PPOs operate on a fee-for-service basis. ▪ PPOs often require subscribers to pay a percentage of their medical costs, which is referred to as co-insurance. ▪ PPOs provide reduced coverage for out-of-network services, often in the form of increased co-insurance. ▪ Out-of-network providers are not obligated to charge discounted, in-network rates. ▪ The traditional PPO model doesn’t require primary care physician referrals to in-network specialists.

Question 57

Point-of-Service (POS) Plans

Answer 57

A POS plan combines indemnity (traditional major medical) plan features with those of an HMO. It allows subscribers to choose either in-network or out-of-network providers. In-Network Coverage Within the POS network, the care model resembles an HMO. ▪ The insured’s PCP coordinates all care for the insured. ▪ Subscribers must follow the referral requirements to receive full in-network coverage. Out of Network Coverage Insureds who receive out-of-network care pay a higher share of the cost. ▪ Subscribers pay a substantial co-insurance percentage. ▪ POS plans don’t necessarily base their payments on average market prices (usual and customary costs). Instead, they calculate their coverage based on their lower in-network costs.

Question 58

Exclusive Provider Organizations (EPOs)

Answer 58

An EPO is a hybrid of an HMO and a PPO. ▪ Like a PPO, an insured doesn’t need a referral to obtain care from an in-network specialist. ▪ Like an HMO, an insured is responsible for paying out-of-pocket for care from an out-of-network provider.

Question 59

Taft-Hartley Trusts

Answer 59

formed as a result of collective bargaining between a labor union and an employer. The law prohibits employers from directly paying funds to a labor union to provide group health insurance to its members.

Question 60

Misrepresentation

Answer 60

making an untrue or incomplete statement in the course of an insurance transaction.

Question 61

If a Medicare Supplement policy involves replacement, it must be verified on a question located

Answer 61

on the application

Answer 62

The rules and regulations of the Life and Health Insurance Guaranty Association in Minnesota apply to Life and Health policies issued by companies authorized in Minnesota.

Question 63

The waiting period for a pre-existing condition under a Medicare Supplement policy may NOT go beyond

Answer 63

6 months

Question 66

This type of deductible provision waives the deductible for all family members after some of them have satisfied individual deductibles within the same year:

Answer 66

Family maximum deductible