PA Life Insurance Terminology
Terms
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- Transfer of the possibility of a loss
- insurance
- Possibility of a loss
- risk
- Policyowner must face the possibility of losing money or something of value in the event of loss
- insurable interest
- When does insurable interest exist?
- at the time of application
- Types of insurable interest
-
--applicant insuring his/her own life
--applicant insuring the life of a family member
--applicant insuring the life of a business partner, key employee, or someone who has a financial obligation to them - What is an insurance policy?
-
--A contract between an insured and an insurance company
--agrees to pay for the insured or beneficiary for loss caused by specific events - the company who issues a policy of insurance
- insurer (principal)
- person covered by the policy of insurance
- insured
-
--person who pays for the policy of insurance
--has insurable interest - policyowner
- person who receives the benefits from the policy of insurance
- beneficiary
- the money paid to the insuance company for the policy of insurance
- premium
-
--the amount paid when a claim is issued against a policy of insurance
--paid to the benificary -
death benefit
(face amount/face value/coverage) - two types of risk
-
pure risk
speculative risk -
type of risk that...
--refers to siutations that can only result in a financial loss or no change
--no opportunity for financial gain - pure risk
-
type of risk that...
--invovles the opportunity for either loss or gain
--not insurable - speculative risk
- Describe exposure units.
- units of measure used to determine rates charge for insurance coverage
- What factors are considered in determining rates (exposure units)?
-
--age of the insured
--medical history
--occupation
--sex - What is homogeneous?
- large number of units having the same or similar exposure to loss
- What is the basis of insurance?
- sharing risk between a large homogeneous group with similar exposure to loss
- What are hazards?
- conditions or situations that increase the probability of an insured loss occuring
- Name 3 classifications of hazards.
-
physical - occupation or hobby
moral
morale - flippant attitude - What is a peril?
- cause of loss insured against in an insurance policy
- Name examples of perils.
-
heart attack
blunt force trauma
stroke - Describe a loss.
- reduction,decrease, or disappearance of value of the person or porperty insured in a policy, by a peril insured against
-
Name 5 methods of handling risk.
Acronymn - STARR -
sharing
transfer
avoidance
reduction
retention -
How is sharing a method of handling risk?
(reciprocal/exchange) - group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group
- How is transferring risk a method of handling risk?
-
loss is borne by another party
i.e., transfer to an insurance company through purchase of insurance - How is avoidance a method of handling risk?
-
avoiding the risk altogether
seldom practical - How is reduction of a risk a method of handling risk?
- lessens the possibility or severity of a loss
- How is retention of a risk a method of handling risk?
-
accepting the risk and confronting it if and when it occurs
i.e., self-insurance - Name 6 elements of insurable risk.
-
1. loss must be due to chance
2. loss must be definite and measurable
3. loss must be predictable
4. loss cannot be catastrophic
5. loss exposure to be insured must be large
6. the insurance must not be mandatory -
Insurable Risk -
Loss must be due to chance means..... - outside the insured's control
-
Insurable Risk -
Loss must be definite and measurable means.... - how much the benefit will be and when it becomes payable
-
Insurable Risk -
Loss must be predictable means.... -
--statistically predicted
--estimate the average frequency and severity of future losses
--set appropriate premium rates
--use of the mortality tables and morbidity tables -
Insurable Risk -
Loss cannot be catastrophic means.... - will not insure risks that will expose them to catastrophic losses
-
Insurable Risk -
Loss exposure to be insured must be large means.... -
--sufficiently large pool to be insured
--those in pool must be grouped into classes with similar risks
--based on large of large numbers - insuring of risks that are poorer class than the average risk
- adverse selection
- What does an underwriter do?
-
--restriction of coverage
--acceptance only at a higher rate
--refusal to accept the risk -
--larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss
---bassis for statistical prediction - law of large numbers
- one insurance company in consideration of a premium paid to it, agrees to indemnify another insurance company (the ceding company) for part or all of its liabilities from insuranc epolicies it has issued
- reinsurance
- What is the purpose of reinsurance?
- to protect against catastrophic losses
- What is facultative reinsurance?
- purchased on specific policy
- What is a reinsurance treaty?
- reinsurer is bound to accept all risks ceded to it
- Name 5 types of insurers.
-
1. stock companies (nonparticipating)
2. mutual companies (participating)
3. fraternal benefit societies
4. reciprocals/exhcnages
5. Lloyd's Associations -
--owned by the stockholders
--stockholders share in the profits or loss
--earnings distributed to stockholders as dividends on stock or may be kept as "retained earnings" - stock company (nonparticipating)
-
True or False
Dividends from a stock company are taxable. - True
-
--owned by the policyholders
--profits returned to the policyholders nontaxable dividends as return of premiums - mutual company
-
--formed to provide insurance for members
--i.e., affiliated lodge, religious organization with a representative form of government
--do not sell to the public - fraternal benefit societies
-
--insurance resulting from an interchange of reciprocal agreements of indemnity among persons as subscribers
--company put into effect through an attorney-in-fact
--shared risk
--not incorporated - reciprocals / exchanges
-
--brokers deals
--not an insurance company - Lloyd's Associations
- What is the purpose of a government insurer?
- to provide insurance in those areas where private insurers either cannot, or will not, write insurance
- What are examples of a government insurer?
-
Medicare
Federal Crop Insurance
National Flood Insurance - Insurer that is authorized to due qualifying and receiving a Certificate of Authority to transact insurance in the state.
- admitted insurer
- Company that was denied a Certificate of Authority and may not transact insurance in the state.
- nonadmitted insurer
- incorporated (domiciled) in this state
- domestic insurer
- incorporated in another state
- foreign insurer
- incorporated outside the United States
- alien insurer
- What is a general agent?
-
--independent entrepreneur
--empowered by the insurer that he/she represents
--can appoint subagents - Decribe a branch office system.
-
--sales force supervised by a branch manager
--can be employees of the insurer or independent contractors - What is a personal producing general agent (PPGA)?
-
--arrangement between the insurer and selected agents go produce business for the owner
--hiring usually limited by the insurer - Describe law of agency.
- acts of an agent/producer, while acting within the scope of their authority, are the acts of the insurer
- Describe the producer/insurer relationship.
-
--agent represents insurer
--knowledge of the agent is knowledge of the insurer
--if the agent is working within the conditions of his/her contract, the company is fully responsible - Where does an agent look for details regarding the authority he/she has within his/her company?
- agency contract
- Authority that is written in the contract.
- expres authority
- Authority not expressed or written into contract and incidental to express authority.
- implied authority
- Authority that has the appearance of, or the assumptionof, authority based on the actions, words, or dee of the principal or because of the circumstances the principal created.
- apparent authority
- Describe fiduciary responsibility.
- agent obligated to exercise the same degree of care as would be expected from a reasonable, prudent, and competent professional in the field
- What is expected from an agent in a fiduciary relationship?
-
--handles insurer funds in a trust capacity
--does not commingle premiums with his/her own personal funds -
Name the 4 essential elements of a legal contract.
Acronymn - CLOC -
consideration
legal purpose
offer and acceptance
competent parties - What is consideration in regards to a contract?
-
--essential element
--binding force
--thing of value which each party gives to the other
--insured'shealth representation made in application
--insurer's promise to pay in event of a loss - What is legal purpose in regards to a contract?
-
--essential element
--purpose must be legal
--not against public policy - What is offer and acceptance?
-
--essential element of a contract
--definite, unqualified offer by one party
--offer accepted in its exact terms by the other party - Describe competent parties?
-
--essential element of a contract
--both parties of legal age
--mentally compoetent ot understand the contract
--not under the influence of drugs or alcohol - contract of adhesion
-
type of contract that is
--prepared by one of the parties (insurer)
--accepted or rejcted by the other party (insured)
--not drawn up through negotiations
--any ambiguity in a contract should be interpreted in favor of the insured - aleatory contract
-
type of contract that it
--unequal amounts or values are exchanged
--premium paid is small in relation to the amount that will be paid by the insurer in the event of loss - personal contract
-
type of contract that
--covers the applicant's financial interest in the object or person insured - unilateral contract
-
type of contract that
only one of the parties to the contract is legally bound to do anything - conditional contract
-
type of contract that
--certain conditions that must be met by the owner and the company in order fo the contract to be executed - indemnity
- an insured is permitted to collect only to the extent of their financial loss
- utmost good faith
- each party must be able to rely on th eother for valid critical information
- representations
- written reponse to questions or statements made on an application that are tru to the best of your knowledge
- misrepresentations
-
--false statement of a material fact with an intent to defraud
--policy could be voided - warranty statement
- statement to the insurer by the insured upon which the validity of the insurance policy depends (literally true)
- concealment
-
--intentional withholding of information of a material fact
--result in an imprecise underwriting decision - fraud
-
--intentional misrepresentation or intentional concealment of a material fact
--grounds for voiding a life insurance contract if discovered during the first 2 years - contestable
- 2 year period from policy effective date that policy can be voided due to fraud
- waiver
- intentional act of relinquishing a known right, claim, or privilege
- estoppel
- legal process used to prevent a party to a contract from reasserting a right or privilege after that right or privilege has been waived
- What is estate creation?
-
--creates an immediate estate in the event of a death
--important for young families to accumulate assets - liquidity
-
cash surrender and cancel the policy
nonforgeiture option - estate conservation
-
--second-to-die policy or survivorship life
--use to pay state inheritance taxes and federal estate taxes to prevent selling off of assets from the estate to pay these costs - viatical settlements
-
--allow someone living with a life threatening condition to sell their existing life insurance policy
--must be guaranteed renewable & not contestable - viators
-
--purchase life insurance policy's through a viatical settlement
--receive's a percentage of the policy's face value
--continues to maintain premium payments
--will eventually collect the entire death benefit
--taxable to viator - What is human life value approach and how is it calculated?
-
--dollar value on your life
--probable future earnings
--number of years to retirement
--inflation
--time value of money - In the human life value approach, what are the probably future earnings?
-
--after-tax income from the present date until retirement
--deduct annual expenses for food, clothing, medical and other expenses - What is the needs approach?
- a way of determining amount of personal life insurance
- What kind of information is gathered for the needs approach?
-
--debt, income, mortgage, expenses
--determing lump sum needs (post mortem)
--planning for income needs - What does the mneumonic DIME stand for?
-
in the needs approach,
debt
income
mortgage
expenses - social security income "blackout" period
-
in the needs approach
--period of time no ss benefits would be paid to the surviving spouse
--after the youngest child reaches age 16 and rior to surviving spouse reaching 60
--dependent child could be eligible for benefits until age 18 - buy-sell funding
-
--business use of life insurance
--legal contract, what will be done with a business in the event an owner dies or becomes disabled
--agreement among partners of a business or between the owner of a business and a key-employee
--obligate a person withdrawing from the business (or their heirs) to sell their interest to a surviving partner(s) - stock redemption plan
-
--business owns the policies
--pays the premiums
--is the beneficiary - cross purchase plan
-
--policies owned, premiums paid, and the beneficiaries are the other business partners
--not tax deductible - key person insurance
-
--protects company from financial loss because of the premature death of a key employee
--business is the applicant, owner, premium payer, and beneficiary
--no tax deduction for expense of premium
--death paid usually tax free
--employee need to give permission - executive bonuses
-
--employee owned
--employer tax deductible
--employee income taxable
--employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee
--employee owns the policy - deferred compensation funding
-
--any employer retirement, savings, or other plan that is not a qualified retirement plan
--commitment between the employer and employee to pay compensation in future years
--funding made with cash deposits to a life insurance and/or annuity contract - What the two major classes of a deferred compensation funding plan?
-
--addition funding plans
--elective - addition funding plans
- pay an amount in addition to qualified retirement plan
- elective in a deferred compensation plan
- permits the employee to defer part of their salary or bonus as a tax deferred savings
- split dollar plans
-
--'er and 'ee agree to pruchase and fund life insurance on the 'ee
--'er pays the part of the premiums that equals the annual increase in the cash value of the policy
--'ee pays the balance
--'er recovers the total of its payments from the policy proceeds
--balance paid to the 'ees beneficiary - change of insured provisions
-
--only on key person insurance
--key per quits or is terminated
--transfer coverage to the replacement employee, subject to evidence of insurability - What the classes of life insurance policies?
-
--group & individual
--ordinary & industrial
--permanent & term
--participating & nonparticipating
--fixed & variable - group policy
-
--written as master policy
--individuals receive Certificate of Insurance
--rate and coverage based upon group underwriting
--all individuals covered for the same amount and rate - ordinary policy
-
--for larger-sized policies
--require medical underwriting - industrial policy
-
--"home service"
--referred to as "debit insurance"
--for lower income individuals
--face amounts very low
--no medical exam
--premiums usually collected in person by the agent weekly - permanent life
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--whole life
--remain in effect to age 100 so long as premium is paid - term life
-
--temporary
--specific period of time - participating policy
-
--mutual insurance company
--distributed dividends to policy owners - nonparticipating policy
- --does not pay dividends
- How does a participating company (mutual) distribute dividends to policy owners
-
--cash payments
--reduced premiums
--units of paid up insurance (increases death benefit)
--savings program (accumulate interest
--purchase of term insurance - fixed policy
- offer guaranteed minimum or fixed benefits that are stated in the contract
- variable policy
- cash values accumulate based upon a specific portfolio of stocks without guarantees of performance
- general account
-
--where money is held when a traditional whole life company invests reserves in conservative investments
--company can guarantee the policy's cash value and the nonforfeiture options that are based on the cash value - separate account
-
--where reserves are held when a policy owner chooses how the cash values will be invest
--cash values fluctuate, not guaranteed
--insured takes the risk - Describe the regulation of variable life insurance.
-
--variable contracts are securities
--regulated by Securities and Exchange Commission (SED), National Association of Securities Dealers (NASD), Insurance Department
--agent must have life & securities licenses - factors in premium determination
-
--mortality
--interest
--expense - How does interest affect premiums?
- insuranc ecompanies invest premiums in effort to earn interest
- How do expenses affect premiums?
-
--cost of mortality and reducing that cost to account for intrest income
--M - I = net premium
--M - I + E = gross premium - premium payment mode
-
--frequency the policy owner pays the premium
--rates based on premium paid annually - What is the limitation of backdating of policies?
-
--cannot backdate a policy for more than 6 months
--all premiums must be paid from the effective date - life insurance disclosure statement
-
--is a written disclosure statement
given at time of application
--every applicant receives
--provids basic information about the cost and coverage of the insurance - life insurance surrdender comparison index disclosure
-
--given at time of application
--given to applicants for a whole life policy
--cost comparison of the same types of life insurance policies having the same premium payment period and pattern - What do you do with an illustration used in a presentation?
-
--not to be part of or attached to the contract
--may use only the illustrations of an insurer that have been approved
--clearly labeled
--dated and signed by the agent and insurer
--applicant gets copy
--underwriting gets copy - What is replacement of a policy?
- --new life insurance or a new annuity is purchased
- field underwriter
- agent
- duties of the field undewriter
-
--proper solicitation of applicants
--completing the application
--obtaining the required signatures
--collecting the initial premium and issuing the receipt, if applicable
--delivery of the policy and explaining it - adverse selection
-
risks which are more likely to suffer a loss
--applicant's health (current and past)
--occupation
--lifestyle
--hobbies or habits - What the 3 basic sections of an application?
-
Part 1 - General Information
Part 2 - Medical Information
The Agent's Report - What is under Part 1 General Information on an application?
-
--name, address, birth date, gender, income, marital status, occupation
--identifies type of plicy, amountof coverage, beneficiary, other insurance applicant may own - What is under Part 2 Medical Information on an application?
- prospective insured's medical background, present health, any medical visits in recent years, medical status of living relatives, causes of death of deceased relatives
- What is under the Agent's report on an application?
-
--used by agent to discuss his/her personal observations concerning the proposed insured
--include all pertinent facts concerning the applicant truthfully and honestly
--does not become a part of the entire contract - Who signs an application?
-
--both agent and the proposed insured and policy owner (if not the insured)
--parent/guardian applying for insurance on a minor child - What do you do when corrections are needed on an application?
-
--correct the information and have the applicant initial the change or
--complete a new application
--do not erase or use "white-out" on an application - When does a policy go into effect?
-
--when it has been delivered
--first premium has been paid - What are the 3 types of receipts issued when a premium is paid?
-
conditional receipt
approval conditional receipt
unconditional (binding) receipt - Describe the conditional receipt.
-
--coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last
--applicant covered by the insurance as of hte date of the application providing that the insurer subsequently determines the applicant to be insurable as applied for - Describe the approval conditional receipt.
-
--coverage begins only when the application is approved by the insurer before the policy is delivered
--rarely used - Describe the unconditional (binding) receipt.
-
--called temporary insurance agreement
--begins immediately for a specific length of time even if applicant later found to be uninsurable
--cvoerage effective from the date of application for only a specified period of time, i.e., 60 days, or until the company either issues or declines coverage -
True or False
Actual delivery into the customer's hands is needed in order for constructive delivery to take effect. -
False.
When the insurer relinquishes control of the policy by mailing it to the policy owner, legally the policy is considered delivered - What does the agent do during policy review?
-
--makes sure the insured understands all aspects of the contract
--review the contract with the insured involves pointing out any areas, provisions, riders, etc, that may be different than anticipated and explaining what effect they have on the contract - What is the Statement of Good Health?
- statement from an applicant at the time of policy delivery that verifies that the insured has not suffered injury or illness since the application date
- Should an agent accept money or deliver the policy if the health of the insured has deteriorated since the application was completed?
- No.
- delivery receipt requirements
-
--a delivery receipt must be signed when policy delivered by hand
--policy will take effect on the date the receipt was signed - paramedical report
-
--may be required on smaller amounts of insurance when there is no prior medical history of concern
--completed by a paramedic or registered nurse - attending physician's statement
-
--required for higher amounts of coverage
--application raised additional questions concerning the health of the prospective insured
--use their personal medical practioner - investigative consumer (inspection) report
-
--supplement information on the application
--reports of the applicant's finances, character, work, hobbies, and habits
--may ask friends, associates and neighbors to provide information - Medical Information Bureau (MIB)
- nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals
- Disability Income Records System (DIRS)
-
--service provided by MIB
--member company receives disability app for $300/mth for at least 12 mths
--provides information if an individual applied for other disability insurance - medical examinations and lab tests including HIV
-
--common among insurers to require HIV test for more than $50K in coverage
--reveals the use of testing to the application and obtain written consent
--administered using protocol of the US Dept of Health and Human Svcs.
--disclose the test results as authorized by applicant in writing
--if not physician identified by applicant, test results and identify must be forwarded to the state Dept of Health - What are the 3 rating classications of risk?
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Standard
Substandard
Preferred - Standard Risk
-
--aveage risk
--person who is entitled to insurance protection without extra rating or special restrictions
--representative of the majority of people in their age with similar lifestyles - Substandard Risk
-
--high exposure
--not acceptable at standard rates because of physical condition, personal or family history of disease, etc.
--could be issued with higher premium - Preferred Risk
- --individuals who meet certain requirements and qualify for lower premiums than standard risk
- declined
-
--has no insurable interest
--potential for loss is so great it does not meet the definition of insurance
--insurance is prohibited by public policy or is illegal