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Insurance Exam Prep > Chapter 1 - Application, Underwriting and Delivering the Policy > Flashcards

Chapter 1 - Application, Underwriting and Delivering the Policy Flashcards

1
Q

When does the insurance policy go into effect?

A
  1. Policy is delivered
  2. Premium is paid
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2
Q

When must insurable interest exist in a life insurance policy?

A

At the time of application

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3
Q

What type of report provides information about the applicant’s hobbies, habits and financial status?

A

Investigative consumer report

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4
Q

What entities make up the MIB (Medical Information Bureau)?

A

Insurers

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5
Q

What are the three main instances when insurable interest exists in life insurance?

A
  1. One’s own life
  2. The life of a family member
  3. The life of business partners or someone who has a financial obligation to the policyowner

** Blood or Business

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6
Q

Who must have insurable interest in the insured?

A

The policyowner

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7
Q

What law protects consumers from the circulation of inaccurate or obsolete information?

A

The Fair Credit Reporting Act

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8
Q

Insurance is a contract that protects the insured from what?

A

Loss

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9
Q

If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter’s main concern?

A

The existence of insurable interest between applicant and the insured

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10
Q

How is the information obtained for an investigative consumer report?

A

Through interviews with the applicant’s associates, friends and neighbors

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11
Q

At what point does coverage begin when an agent issues a conditional receipt for a life insurance policy?

A

Either on the date of the application or the date of the medical exam (whichever occurs last)

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12
Q

What two elements are necessary for a life insurance contract to have a legal purpose?

A
  1. Insurable interest
  2. Consent
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13
Q

What does it mean that insurance contracts are unilateral?

A

The insured is not legally bound to any particular action; however, the insurer is obligated to pay for losses covered by the policy

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14
Q

What is insurance underwriting?

A

The process of risk selection and classification

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15
Q

When would a misrepresentation be considered material?

A

When it may alter the underwriting decision

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16
Q

In forming an insurance contract, when does the acceptance usually occur?

A

When the insurer approves a prepaid application

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17
Q

If an applicant does not receive a copy of the new insurance policy, who would be held responsible?

A

The agent

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18
Q

Insurance contracts are prepared by insurers and must be accepted as-is by the insured. What characteristic of an insurance contract does this describe?

A

Contract adhesion

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19
Q

What two factors of misrepresentation on an insurance application result in fraud?

A
  1. Intentional
  2. Material
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20
Q

If the insurer needs to obtain information about the applicant from investigators, what is the insurer required to do?

A

Provide the applicant a Disclosure Authorization Notice

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21
Q

The term “illustration” in a life insurance policy refers to:

A

A presentation of nonguaranteed elements of a policy

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22
Q

What is the purpose of a disclosure statement in life insurance policies?

A

To explain features and benefits of a proposed policy to the consumer

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23
Q

What is a “rated” risk classification?

A

A substandard risk classification with the premium rated-up

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24
Q

Within how many days of requesting an investigative consumer report must an insurer notify the consumer in writing that the report will be obtained?

A

3 days

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25
Q

What is the timeframe for filing relevant SARs (Suspicious Activity Reports)?

A

Within 30 days of initial discovery

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26
Q

What principle has an insurer violated if they neglect to pay a legitimate claim covered under the terms of the policy?

A

Consideration

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27
Q

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is:

A

Conditional

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28
Q

Which report includes information about the cause of death of deceased relatives?

A

The Medical Report

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29
Q

If a consumer requests additional information concerning an investigative consumer report, how long does the insurer or reporting agency have to comply?

A

5 days (one work week)

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30
Q

What are the two types of risk?

A
  1. Pure - potential loss only. This is the only type of risk that is insurable.
  2. Speculative - potential loss OR gain. Not insurable.
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31
Q

What are the three types of hazards?

A
  1. Physical
  2. Moral - tendencies toward increased risk
  3. Morale - state of mind that causes indifference toward loss
32
Q

What is insurance peril

A

The cause of a loss triggering an insurance claim

33
Q

What is the relationship of perils to loss?

A
34
Q

What are the X ways of handling risk?

A
  1. Avoidance
  2. Retention - assuming risk for oneself
  3. Sharing - group insurance
  4. Reduction - e.g. quit smoking
  5. Transfer - this is insurance
35
Q

What are the five elements of insurable risk?

A
  1. Due to chance
  2. Definite and measurable
  3. Statistically predictable
  4. Not catastrophic (to the insurer)
  5. Randomly selected/large loss exposure
36
Q

What are the two types of application statements?

A
  1. Warranties - absolutely true statements the breach of which can void the policy
  2. Representations - true to the best of the applicant’s knowledge but not guaranteed to be true
37
Q

What information section includes basic information and price comparisons about similar policies?

A

The Buyer’s Guide

38
Q

What information section includes specific information about the policy being issued

A

The Policy Summary

39
Q

What are the three parts of an application?

A
  1. General Information
  2. Medical information
  3. Agent’s report
40
Q

Attending Physician Statement

A

Less expensive version of a medical exam that helps insurers ascertain the risk level of the applicant

41
Q

Why would you use policy backdating?

A

To save on premiums even though it adds a premium statement. For example, if applicant is on the age cusp that changes premium amount, backdating can save them on premium even if it adds a premium payment.

** Six months is typically the maximum allowable backdate

42
Q

Cash Value vs Face Value

A

Face Value - this is the death benefit, i.e. the total amount paid to beneficiaries upon the death of the policyowner

Cash Value - the accumulated fund within a permanent life insurance policy that can be accessed by the policyowner while they are still alive

43
Q

What does it mean for a life insurance policy to “endow”?

A

The cash value of a whole life policy has reached the contractual face amount

44
Q

What are a level premium and level term insurance?

A

Level premium is a premium that does not change for the term of the policy

Level term is a death benefit that does not change for the life of term of the policy

45
Q

What are Nonforfeiture Values?

A

Benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses

46
Q

What is Policy Maturity?

A

In life policies, the time when the face value is paid out

47
Q

What is Temporary or Term vs Permanent insurance

A

Term insurance - provides the greatest amount of pure death protection coverage for the lowest premium but carries no cash value

Permanent insurance - lasts your whole life, usually carries a cash value component you can tap into if needed, and is often more expensive than term life

48
Q

What is decreasing term and when is it used?

A

Both level premium and death benefit decrease over time. Used primarily to cover the cost of a decreasing debt (e.g. mortgage) in case the insured dies.

49
Q

What is Return Of Premium (ROP) life insurance?

A

An increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of premium is paid if the death occurs within a specified period of time or if the insured outlives the policy term.

** These policies typically have 25%-50% higher premiums

50
Q

Define renewable

A

This allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability

51
Q

Define convertible

A

This provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability

52
Q

Whole Life vs Universal Life insurance

A

Whole Life:
- fixed premium
- guaranteed cash value that accumulates
- more expensive
- less flexible

Universal Life:
- flexible premium
- variable cash value that’s not guaranteed
- less expensive
- more flexible

53
Q

Joint Life vs Survivorship Life

A

Joint Life pays on “first death”

Survivorship pays the beneficiary after the “second-to-die” or the “last survivor”

54
Q

What is a Mortality Table?

A

It indicates the number of individuals within a specified group (e.g., males, females, smokers, nonsmokers) starting at a certain age, who are expected to be alive at a succeeding age

55
Q

Annuitant

A

Person receiving the benefits of an annuity

** A corporation, trust or other legal entity may own an annuity, but the annuitant must be a natural person

56
Q

What is the accumulation period of an annuity?

A

Also known as the pay-in period, it is the period of time over which the owner makes payments (premiums) into an annuity. Furthermore, it is the period of time during which the payments earn interest on a tax-deferred basis.

57
Q

What is the annuity period?

A

Also known as the annuitization period, liquidation period, or pay-out period, it is the time during which the sum that has been accumulated during the accumulation period is converted into a stream of income payments to the annuitant

58
Q

What are the three types of annuity payouts?

A
  1. Pure/Straight life - income for life
  2. Annuity certain - income for set amount of time
  3. Life/Cash refund - income for life + lump sum to beneficiary upon the death of the annuitant
59
Q

What are the three types of annuity investments?

A
  1. Fixed annuity - guaranteed minimum rate of interest and level benefit payment amount
  2. Variable annuity - variable rates of return on investment amount
  3. Indexed annuity - tied to some index (e.g. S&P 500)
60
Q

Who bears the investment risk on Whole Life insurance?

A

The insurer - because they hold the cash value in their own general account which they use to invest

61
Q

Who bears the investment risk on Variable Life insurance?

A

The policyowner - since the cash value is held in a separate account from which investments are made

62
Q

What are the two phases of an annuity?

A
  1. Accumulation phase - putting money in
  2. Annuitization phase - taking money out
63
Q

What are the three parties involved in an annuity?

A
  1. Annuitant - receives money during the annuitization period
  2. Beneficiary - annuitant during the accumulation period
  3. Owner - puts money into the annuity
64
Q

What are the two ways annuities are funded?

A
  1. Single premium
  2. Periodic (flexible) premium
65
Q

What are the two ways annuities pay out?

A
  1. Immediate
  2. Deferred
66
Q

What annuity settlement option provides income payments to the annuitant for the duration of their life, and also guarantees payment for a specified number of years?

A

Life income with period certain

67
Q

A whole life policy that requires that the policyowner only pays premiums for a specified number of years is known as what kind of policy?

A

Limited-pay whole life

68
Q

What elements of an adjustable life policy can be changed by the policyowners?

A

The amount and payment period of the premium, the face amount, and the period for protection

69
Q

What happens to the cash value when a whole life insurance policy matures?

A

Cash value is paid to the policyowner

70
Q

What type of life insurance policy offers pure death protection?

A

Term

71
Q

The death protection component of a universal life policy is expressed as what type of coverage?

A
72
Q

If the annuitant dies before the annuitization period starts, what will the beneficiary receive?

A

Either the amount paid into the annuity or the cash value, whichever is greater

72
Q

What type of whole life insurance policies only requires a payment of premium at its inception, and in addition to providing insurance protection for the life of the insured, endows at the insured’s age 100?

A

Single premium whole life

73
Q

How soon can income payments begin in an immediate annuity?

A

No later than 1 year from the time of annuity purchase

74
Q

An individual has just borrowed $10,000 on a 5-year note from his bank. The note is due in installments. What type of life insurance policy would be best suited to this situation?

A

Decreasing term

75
Q

An annuity purchased with multiple payments that begin income payments after one year from the moment of purchase is known as what type of annuity?

A

Flexible premium deferred annuity

76
Q

In variable universal life insurance, to what policy component does the term “variable” refer?

A

Cash value and death benefit

Insurance Exam Prep (3 decks)

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