Basic Terminology

Question 1

Adverse Selection (anti-selection)

Answer 1

Selection not in favor of the company. The tendency of high-risk individuals to want insurance more often than standard risks. Insuring these individuals will result in higher premiums for all insureds.

Question 2

Fair Discrimination

Answer 2

If the company can statistically substantiate a higher or different risk, it may deny the application, exclude coverage for a certain risk, or charge an extra (or reduced) premium to cover the extra risk (counter offer).

Question 3

Concealment

Answer 3

The withholding of facts by an applicant for insurance that materially affects an insurance risk or loss

Question 4

Conditional

Answer 4

An act contingent upon another act. IF the policy owner pays premiums, THEN coverage will be provided

Question 5

Endorsement

Answer 5

A form attached to an insurance contract changing part of the contract (this is sometimes called a rider)

Question 6

Rider

Answer 6

A form attached to a policy that modifies the conditions of the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage.

Question 7

Insurance Age

Answer 7

An age upon which current premium rates may be established. It may be based on age at last birthday, age next birthday, age at next birthday, or age at nearest birthday. The nearest age is most common.

Question 8

Attained Age

Answer 8

The present age of the insured

Question 9

McCarran Ferguson Act (Public Law 15) 1945

Answer 9

Federal legislation in which the congress declared that the STATES could continue to regulate the insurance industry. In recent years Congress has expanded the federal government’s role in regulating insurance activities.

Question 10

Life Insurance

Answer 10

Insurance paying a specified amount to a beneficiary or estate upon the death of the insured. Benefits may be paid in a lump sum or in a series of payments (settlement option)

Question 11

Face Value (F.V.)

Answer 11

Set amount of an insurance policy or policy limit. The FV may also be referred to as the face amount. The actual amount paid out is called policy proceeds, death benefit, or benefits paid.

Question 12

Mortality Table

Answer 12

A statistical table showing the number of average deaths for all ages from 0 to 100. This table indicates mortality at various ages and gender. It reflects that as people get older, they get closer to death, causing a higher risk to a life insurance company, thus a higher cost of insurance to the insured/ owner.

Question 13

Twisting

Answer 13

Replacing an insurance policy without full disclosure at the time of purchase. An agent who fails to leave a disclosure statement with the client when replacing an insurance policy is guilty of twisting. Which is a violation and therefore penalties may be imposed on the agent and the replacing insurer.

Question 14

Temporary Coverage

Answer 14

Coverage for a specific period of time. Cost is averaged over the period of risk. Term pays on a contingency basis, contingency is the death of the insured.

Question 15

Renewable Term (aka Guaranteed Renewable)

Answer 15

May be renewed at the end of the term (ex. 5, 10, 20 years) without providing evidence of insurability (no application is required). The new rate will be higher due to attained age at the end of the term. The policy renewal limits up to a certain age or the number of times that it may be renewed.

Question 16

Convertible Term

Answer 16

May be converted to a higher premium permanent policy at any time without providing evidence of insurability. The new rate will be higher due to attained age and conversion to a policy, which consists of a higher cost.

Question 17

Annual Renewable Term (ART)

Answer 17

The least expensive type of term insurance, as the term is one year (low risk to the insurer) Every year the policy is automatically renewed unless cancelled by the insured. The premium (cost) increases, based on the insured’s attained age, due to increased risk (mortality).

Question 18

Level Term

Answer 18

Face Value (F.V.) remains level throughout the term period (ten years, twenty years, etc.) May be renewed for the same “term” as the original policy period. Premiums increase due to attained age of the insured, however, renewal is guaranteed.

Question 19

Decreasing Term

Answer 19

The FV decreases but premiums stay level. Decreasing terms is often sold as credit life or mortgage protection insurance. These are individual policies that are tied to a specific debt transaction and will pay the mortgage or loan in the event of premature death of the debtor. For credit life products, the following rules apply:

The borrower is the insured and the lender is the beneficiary.

FV cannot exceed the mortgage or loan balance.

Question 20

Increasing Term

Answer 20

The FV increases. This is used as a rider to return the equivalent of premiums paid or cash value. Premiums for the increasing terms are incorporated into the basic policy.

Question 21

Return of Premium - Term Life Insurance

Answer 21

Statistically, insured normally live beyond the term of their life insurance. Therefore, no benefit will be paid, even if the insured has paid premiums for several years. For this reason, insurers developed a return of premium term life insurance.
All premiums are returned if the insured survives to the end of the selected term.
A lesser amount is received if the policy is canceled before the end of the term.
An additional mortality charge is added in order to provide this benefit.

Question 22

Whole Life Insurance

Answer 22

Provides insurance coverage for the insured whole life (typically age 100, although some policies go to age 120). WL is considered permanent insurance.
Premium payments are made for life and remain level.
Incorporates a CV which grows inside the policy. A guaranteed interest (3 or 4%) is paid on the CV. Interest paid by the insurer is tax-deferred.
The policy is said to endow when the CV is equal to the FV (typically age 100)
Policies are NOT renewable but may be convertible and they pay on a certainty basis. The death benefit is paid to a beneficiary upon the death of the insured or CV is paid at maturity or cancellation.
All elements are fixed

Question 23

Straight WL

Answer 23

Least expensive way of paying for WL.

Level premiums for the duration of the contract

Question 24

Limited Payment WL (aka limited pay life, paid-up life, paid-up at 65, 20 pay life, etc.)

Answer 24

Higher premium than straight WL but for a shorter period of time.
Builds CV faster than WL
Endows at age 100 (even though the premiums are paid up earlier)

Question 25

Single-Premium WL

Answer 25

Paid-up in one lump sum
Endows at age 100
Generally used to pay estate taxes
May be considered modified endowment contracts and are subject to IRS withdrawal penalties on the CV accumulation

Question 26

Adjustable Life

Answer 26

Combines the elements of term and permanent insurance into a single plan, providing the insured has ultimate flexibility.
May adjust the period of protection, premium amount, length of premium payments, and policy FV. Insurability may be required for an increase in the FV.
May be converted from the term coverage to permanent coverage (age 95), or WL to term ( and back again) as the insured needs or income status changes.
As permanent coverage, cash value earns interest and the policy may pay dividends.
Adjustments only apply to the future and are not retroactive.
Usually more expensive than conventional term or WL.