Ch. 10 - Contract Law and Legal Factors Affecting Underwriting Flashcards
What are the four essential elements of a valid contract?
Offer, Acceptance, Consideration, and Legal Capacity.
What is the role of “consideration” in a life insurance contract?
It refers to the exchange of value—typically the premium paid by the applicant and the promise of benefits by the insurer.
What makes an insurance contract a unilateral contract?
Only the insurer makes a legally enforceable promise (to pay the death benefit), while the applicant has no legal obligation after paying the premium.
What is “insurable interest”?
A legal requirement that the policyholder must have a financial or emotional interest in the life of the insured at the time of policy inception.
When must insurable interest exist?
At the time the insurance policy is issued.
What is material misrepresentation?
A false statement that would have influenced the insurer’s decision to accept or rate the risk.
How does contestability affect life insurance policies?
During the contestability period (usually 2 years), the insurer can investigate and void the policy for misrepresentation or fraud.
What does adverse selection mean in underwriting?
It occurs when individuals with higher-than-average risk are more likely to apply for or maintain coverage.
What is fraud in the context of insurance?
A deliberate misrepresentation or concealment of a material fact to obtain insurance benefits.
What are some legal capacities that may affect the validity of an insurance contract?
Age (minors), mental capacity, intoxication, and duress.
What is the legal impact if a contract is signed under duress?
The contract may be void or voidable, depending on the circumstances.
What is the parol evidence rule in contract law?
It prevents parties from introducing oral or written statements made before the written contract that contradict the final written agreement.
What is the difference between a void and a voidable contract?
A void contract is invalid from the start; a voidable contract is valid unless one party takes action to void it.
What does utmost good faith mean in life insurance contracts?
Both parties must act honestly and disclose all material facts.
What is a waiver in insurance law?
The voluntary relinquishment of a known right (e.g., an insurer waives a requirement and cannot later enforce it).
What is estoppel in insurance law?
A legal principle that prevents a party from denying a fact if their actions led another to reasonably rely on that fact.
Can a policy be contested after the contestability period for fraud?
Yes, fraud can allow a policy to be contested even after the standard contestability period.
Voiding a contract due to material misrepresentation is:
1. reformation
2. estoppel
3. recission
4. waiver
- recission
All of the following statements regarding the suicide provide are correct EXCEPT:
1. The burden of proof that death was due to suicide is the responsibility of the beneficiary
2. Most life insurance policies include the provision
3. The insurer will refund all premiums paid if a claim is denied due to suicide
4. It specifies the period during which a suicide will not be a covered risk
- The burden of proof that death was due to suicide is the responsibility of the beneficiary
Without a properly signed application, a life insurance contract can be which of the following?
A. invalid
B. inadmissible as evidence
C. material representation
A and B only are correct
Purposes of the entire contract provision in a life insurance policy include which of the following?
A. to protect the insurer from misrepresentations made by the applicant
B. to protect the named beneficiary by prohibiting a beneficiary change
C. to protect the policy owner by prohibiting the insurer from making changes to the policy
A and C only are correct
To receive payment under most long-term care (LTC) riders, an insured must be:
1. terminally ill
2. confined to a nursing home for at least six months
3. completely disabled
4. unable to perform two or more activities of daily liver (ADLs)
- unable to perform two or more activities of daily living (ADLs)
