Module 1 Vocabulary Review. California Life and Health Chapter One Part 1 Insurance Basics.

Module 1

Vocabulary Review

CaliforniaLife and Health

Chapter One Part 1

Insurance Basics

3

What is the definition of life insurancelife insurance?

Pays a specified sum of money to designated beneficiaries if the insured person dies during the policy term

Example: The insured spouse dies, so the insurer pays a death

benefit to the surviving spouse beneficiary.

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Who is the applicant?

Someone wanting to buy insurance ?

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Who is the policy owner?

The person with an ownership interest in an insurance policy

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6

Who is the insured?

The person whose insurable interest is protected under the policy

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What is a beneficiary?

A person who receives the policy proceeds upon the death of the insured

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What is the purpose of an application?

An insurer’s printed form with questions about a prospective insured and the desired insurance coverage and limits

Provides the insurer's underwriter with information for accepting or rejecting the prospective insured and rating the desired policy

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9

What is a policy?

The written forms, endorsements, riders and attachments that make up an insurance contract between an insured and insurer

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10

Give the definition of a rider.

An attachment that modifies an insurance policy or a bond, often by adding or excluding various coverage

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11

What is meant by cancellation?

The termination of an in-force insurance contract by either the insured or the insurer

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12

What is the definition of lapse?

Insurance policy termination due to the insured's failure to make premium payments

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13

What is meant by policy renewal?

Keeping insurance in force by issuing a new policy to replace an expiring policy, or issuing certificates or endorsements to extend the term of an expiring policy

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What is the definition of nonrenewal?

Termination of coverage at the end of the policy period

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What is a grace period?

A specified time (usually 30 days) after a premium payment is due, in which the insured may make the payment and keep the policy in force

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What is meant by the term Limit of Liability in a life policy?

The maximum amount an insured may collect, or for which an insured is protected, under the terms of a policy

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What is the underwriting process?

Underwriters determine acceptance or denial of applications.

Accepted applications are classified according to the type and degree of risk.

Appropriate rates are assigned for the exposure. Underwriting process steps:

1. Gather information2. Identify, develop, and evaluate alternatives3. Select an alternative4. Implement the decision

5. Monitor the exposure

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18

How is an insurance policy defined?

An aleatory contract between an insured and an insurer

The insurer agrees to indemnify the insured for loss caused by specified events

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What is the definition of insurable events?

An event which may cause loss or damage to a person having an insurable interest or create a liability against him/her

Examples: Death – life insurance Illness – health insurance

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20

Define the term risk.

A condition in which a chance of loss exists ?

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Give an example of a loss exposure.

The extent to which one may be affected by a peril Example:

A family breadwinner that has no means to replace income if he or she dies.

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22

Identify the definition of peril.

The potential cause of a loss 3 major categories

Natural Human Economic

Examples: Fire – Flood – Wind Theft Negligence Errors and omissions Illness - Accidents Collision

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What is a hazard?

A condition or situation that creates or increases the probability or extent of a loss from a peril

Examples: Unsafe or unclean conditions Cheap or flammable building materials

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24

Describe a moral hazard.

Circumstances of morals or habits that increase the probability of a loss from an insured peril

Example: An insured previously convicted of arson

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25

Describe a morale hazard.

An increase in the hazards presented by a risk arising from the insured's indifference to loss because of the existence of insurance

Example: An insured fails to repair faulty wiring, believing it is less

expensive to pay insurance premiums than to pay an electrician.

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Describe a physical hazard.

A hazard that results from material or structural features of a risk

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Name the risk management methods.

Reduction Avoidance Retention Transfer Sharing Example:

Risk avoidance – An insured gives away his pet white tiger.

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What are the requisites of an ideally insurable risk?

Predictable Calculable Accidental Financial Exclusions

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What is the meaning of indemnity?

Compensation for an incurred injury, loss, or damage ?

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Explain the law of large numbers.

The larger the number of exposures considered, the more closely will reported losses equal the true probability of loss

The basis for the statistical expectation of loss, which determines premium rates

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31

What is the role of the primary insurer in a reinsurance transaction?

A primary insurer is the original insurer that purchases reinsurance

The primary insurer cedes part of its business to the reinsurer

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What is the meaning of adverse selection?

The insuring of risks that are more prone to losses than the average

Results in a higher general level of premiums

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What is meant by insurable interest?

Any interest a person has that loss or damage to the interest would cause the insured a financial loss or other tangible deprivation

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When is insurable interest required to exist under life insurance polices?

The risk of financial loss must be proved when a life insurance policy is purchased

Once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest continues to exist

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CaliforniaLife and Health

Chapter One Part 2

Life Basics

36

What makes a life insurance policy a par policy?

Distributes dividends by: Cash payments Reduced premiums Units of paid-up life insurance A savings program Purchase of term insurance

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What defines a nonpar policy?

Does not pay policy dividends ?

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What are some personal uses for life insurance?

Survivor protection Estate creation Estate conservation Cash accumulation Liquidity Viatical settlements

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39

Describe the Human Life Value Approach of determining life insurance needs.

Measures the actual future earnings and services of a person at risk

Factors: After-tax annual salary Annual expenses, not to include hobby or habit expenses Value of all personal assets Number of years remaining for the individual’s expected

ability to work Ages of all family members which determines the

dependency period of the family members Value of the individual’s dollar as it depreciates over time Present salaries of all wage earners in the home

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40

Describe the Needs Analysis Approach of determining life insurance needs.

Assumes the death of the individual to be immediate Steps:

Calculate all financial needs caused by an immediate death Subtract any assets available to fund financial needs after

death Purchase life insurance to fill the gap between needs and

available assets

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41

What is a buy/sell agreement?

An agreement, funded by life insurance, among owners of a business that the firm will buy the interest of an owner or partner who dies, and the surviving heirs will sell to the firm or partnership at a price fixed by amount or by formula

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42

What is the purpose of key person insurance?

Protects an employer from the loss of an individual employee whose special skills or experience are vital to the firm

Policy proceeds cover the firm's lost income and the cost of locating and hiring a replacement for the key employee

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43

Describe group life insurance.

An employee or association group provides each qualifying plan participant with life insurance

Participants receive a Certificate of Insurance to a plan’s master policy

Test hint: The employer is the policy owner

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44

What is ordinary life insurance?

Whole life insurance with premiums payable until the insured dies

Synonym: Straight Life Policy

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45

Describe industrial life insurance.

Low-valued life insurance with the premium collected by the salesperson at the home of the insured on a weekly or monthly basis.

Synonyms:  Home Service Insurance Debit Insurance Stipulated Premium Plan Insurance Weekly Premium Insurance

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46

What is the meaning of the statement “Life insurance creates an immediate estate”?

Life insurance helps fill the important gap between the money families need to live in a financially secure way and the amount of money available after the premature death of a breadwinner

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What are the elements of the personal financial planning process?

1. Identify overall financial objectives

2. Develop and implement (including use of risk management techniques) a plan to accomplish the objectives

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CaliforniaLife and Health

Chapter Two

Life Policy Provisions

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What is the purpose of life policy provisions?

Policy provisions provide continuity ?

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List the common provisions of life policies including those required by state law.

Insuring Clause Consideration Payment of Premium Grace Period Reinstatement Ownership Assignment Entire Contract Incontestability Conversion Option Misstatement of Age or Sex Modifications Right to Examine Exclusions Policy Loan Rate

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What information is recorded on the policy title page (Insuring Clause)?

Who is insured by whom The amount of benefit/coverage provided Obligation of the insurer Risk that is considered

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What are the advantages of policy Reinstatement?

May avoid additional underwriting Avoids a new incontestability period

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What is Assignment?

The transfer of a legal right or interest in a contract Most life insurance policies allow a policyholder to

assign benefits freely Example:

A viatical settlement is an absolute assignment

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What are Ownership rights?

Policyowners have the right to all cash values, loans, dividends, and any other benefits

They may change the beneficiary, assign the policy, and exercise all privileges and options of ownership

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What is the effect of the Entire Contract provision?

Eliminates the possibility of either party using outside evidence to modify the contract, such as an alleged oral agreement

The policy terms can be amended or waived only by an endorsement issued by the insurer

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What is the effect of the Incontestability clause?

Once a policy has been in effect for two years, an insurer can no longer contest statements in the policy application in order to deny claims or void coverage

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57

What is the effect of the Suicide clause?

No death benefits will be paid if the insured commits suicide during the first two years that the policy is in force

The insurer will refund the premium paid

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58

What is the Succession of Beneficiaries?

Primary Contingent Tertiary Exam Hint:

The tertiary beneficiary is typically the insured’s estate

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59

What are the four Beneficiary Designation Options?

Named Class Estate Trust

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60

When is a creditor a beneficiary?

In credit life insurance, the creditor is named as beneficiary, and will receive the balance due on a loan in the event of death

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61

What is the Common Disaster Clause?

Presumes that the primary beneficiary died before the insured

Ensures that the owner's wishes are carried out Synonym:

Survivorship / Time Clause

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What is the Spendthrift Clause?

Proceeds of the policy cannot be attacked by creditors before the benefit is distributed

Beneficiary cannot assign or in any other way touch the benefit before receiving it

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