Chapter 1 Flashcards
Insurance
the transference of risk from an insured to an insurer, who then spreads the risk among other insureds with like exposure
Risk
Chance or possibility of a loss (financial value)
Pure Risk vs. Speculative Risk
Pure Risk - chance of a loss only; insurable
Speculative Risk - chance of a loss or gain; cannot be insured
Peril
a cause of a loss (accidents and sickness)
Hazard
increases the chance of a loss
Physical - hazards physical in nature
Moral - based on values and ethics
Morale - deals with carelessness or irresponsibility
Insurers
Stock company:
- owned by its stockholders
- does not pay dividends to policyholders
- sell non-participating policies
Mutual company:
- owned by its policyholders
- pay dividends to policyholders
- sell participating policies
Dividends:
- a return of premium
- not taxable
- Cannot be guaranteed
Elements of a Legal Contract
All elements must be present to have a legal contract (CLOC):
- Competent parties
- Legal parties
- Offer + acceptance = agreement
- Consideration
Competent parties
- each party must be legally competent to enter into a contract
- Examples of those not considered competent:
- minors
- mentally unstable
- intoxicated
- under the influence of drugs
- signs of duress
- *legal age to buy insurance in IN is 16**
Legal Purpose
All contracts must be for a legal purpose to be enforced in the court of law
Offer + Acceptance = Agreement
Offer:
- made by the applicant
- offer to buy
Acceptance:
- made by the insurer
- evaluate risk, accept or deny
Counter offer:
- made by the insurer
- puts acceptance on applicant
Consideration
- something of value exchanged between the parties in the contract
Applicant:
- premiums
- information on the application
Insurer:
- promise to pay
Defining Truth
Warranties - promise or guarantee
Representation - truth to the best of one’s knowledge
Misrepresentation - mistruth or lie
Concealment - withholding of the truth
Fraud - misrepresentation with the intent to gain
When does coverage start?
Effective date - the date the policy goes into effect
Contract law - coverage does not go into effect until the application is submitted, the premium is paid, and the policy is delivered
Interim insuring agreement - allows the company to provide coverage prior to the delivery date, while the company is completing the underwriting process
Types of interim insuring agreement
Conditional receipt - coverage begins either on the date of application or the date of the physical (if required), whichever is last, if the applicant was insurance on that date
Unique characteristics
Unilateral - one party in the contract makes a promise (the insurer)
Adhesion:
- One party (the insurer) is responsible for the wording of the contract
- ambiguities are interpreted in favor of the insured
Aleatory:
- contract of unequal exchange
- one party received more than the other
Conditional Contract:
- the insurer’s obligations depend on certain conditions being met
- the conditions will be spelled out in the contract
Valued Contract:
- pays a specified amount that may or may not be related to the extent of the loss
Reimbursement contract:
- reimburse the insured based upon the extent of the loss
Service Contract:
- provides protection in the form of services rather than benefits
Common Elements for Insurance Concepts
Endorsement:
- Change to the policy
- Also known as riders/attachments
Notice of claims - notifies the insurer of events leading to a possible claim
Proof of Loss:
- insurer may request insured to give proof of loss
- insured may submit bills, receipts, police report, to prove need
Loss Settlement:
- The insurer must give consent of settlement
- it is their money on the line
Cancellation & Nonrenewal
Cancellation - coverage ends midterm
- Short Rate - customer cancelled; short change
- Pro Rata - insurer cancelled; all unearned premium
Nonrenewal - ends when policy period ends
Agency Agreement / Law of Agency
Contract between the agent and the insurance company
- Principal - the insurance company
- agent/producer - represents the principal
The agents knowledge is deemed to be the knowledge of the insurance company
The agents actions and statements may extend the company’s liability or responsibility to the client
Underwriting Basics
Underwriters determine:
- what is the risk for the insurer
- does the insurer want the risk
- if the insurer accepts the risk, classify for rating
Adverse Selection - selection of risks that are higher or more likely to have a claim
Law of Large Numbers
- The more numbers used to establish a statistic, the more accurate the statistic will be
- Used by the insurer to evaluate risk and predict the change of claims
Sources of Insurability Information
Application:
- First source of underwriting information
- Any changes must be initialed by applicant
- If the application is missing information and the policy is approved, the applicant is not held responsible after
- Agent and applicant both sign the application
Agent/Producer report:
- agent shares information and observations with the insurer
Attending Physician’s Report
- information for the applicant’s personal medical practitioner
- Doctor’s notes and past history
Medical Information Bureau (MIB):
- Collects application information from insurance companies
- Companies compare basic information from the application only
Fair Credit Reporting Act
Federal legislation that protects the consumer from the publication of inaccurate and obsolete information
Rights of the consumer:
- to know who is gathering the information
- to see the information in order to verify accuracy
- to have any misinformation corrected
Gramm Leach Bliley Act
Federal Legislation
Privacy protection:
- Disclose all nonpublic personal information being shared with third parties
- Explain privacy practices
- Provide an opt-out clause
Premiums
Always paid in advance
Premium mode - frequency of payment
- monthly, quarterly, semi-annually, annually
- insurer prefers annually
- higher frequency, higher premium
Risk Classification
Rating the Risk:
- Preferred - lower risk, lower premium (exceptional health)
- Standard - average risk, normal premium (average health)
- Substandard - higher risk, higher premium ( unhealthy, likely to file a claim)
In addition to health conditions, these factors are also considered when rating a policy:
- age
- gender- tobacco use
- occupation
- avocation / hobby
Gross Premium
The premium the applicant pays
- Risk - portion of the payment available to pay claims
- Interest - company invests premiums collected and earn interest before needing the funds to pay for claims
- Expenses - cost of doing business (load)
Risk - interest + Expenses (load) = gross premium
AIDS/HIV
- The insurer may test the applicant, but only with the applicant’s consent
- The insurer cannot discriminate
- Test results must be kept confidential
- Companies may only report “abnormal blood test results”
- Coverage can be denied if AIDS is detected during underwriting, but it is develops after the policy issue, it is covered like any other sickness
Need for Life Insurance
Obligations at death:
- immediate needs - pay off debt
- final expenses funeral expenses and unpaid medical bills
- future needs - income needs for survivors and college expenses for surviving children
Method of estate building:
- life insurance creates an immediate estate
Living benefits:
- cash value
Advantages of Property:
- equity can be used to secure a loan
- can be sold, given away, or transferred to another person
Needs Approach vs. Human Life Approach
Needs Approach
- how much death benefit is needed to meet the needs of the beneficiaries?
- immediate needs
- final expenses
- future needs
Human Life Approach
- what potential value would the family lose?
- earning expectations and potential
