Chapter 1: Completing the Application, Underwriting, and Delivering the Policy Flashcards
Adverse Selection
Risks that are more likely to suffer a loss
Agent/Producer
A legal representative of an insurance company (AKA broker of the insurer or field underwriter)
Applicant or Proposed Insured
The person applying for insurance
Beneficiary
A person who receives the benefits of an insurance policy
Fraud
Intentional misrepresentation or deceit with the intent to induce a person to part with something of value
Insurance policy
A contract between a policy owner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
Insured
The person covered by an insurance policy (may or may not be the policyowner)
Insurer (Principal)
The company who issues an insurance policy
Lapse
Policy termination due to non payment of premium
Life insurance
Coverage on human lives
Policyowner
The person entitled to exercise the rights and privileges in the policy
Premium
The money paid to the insurance company for the insurance policy
How does insurance work?
Insurance is the transfer of risk of loss from an individual or a business entity to an insurance company which spreads the costs of unexpected loss among the other insureds
Insurance transaction
- Solicitation
- Negotiations
- Sale
- Advising an individual concerning claims or coverage
Solicitation of Insurance
An attempt to persuade a person to buy an insurance policy (in writing or orally)
Example:
- Info about available products
- Describing policy benefits
- Recommendations for specific policies
- Trying to secure a contract between applicant and insurance company
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Illustrations
Illustration
Given to clients to help them understand the policy. It displays the guaranteed and the nonguaranteed benefits of the policy and how it’ll perform over the course of it’s coverage
Interest adjusted net cost method… What are the 2 types?
Considers the time value of money by applying an interest adjustment to yearly premiums and dividends.
- Surrender cost index
- Net payment cost index
Types of risk (2) … Which of the two can you ensure?
Pure risk (loss only) and speculative risk (loss or gain)
You can only insure pure risk
What is a hazard?
something that increases the possibility of a loss
Physical hazard
individual characteristics that increase the chances of the cause of loss
Moral hazard
tendencies towards increased risk (individual’s ethical code in question)
Morale hazard
state of mind that causes indifference toward loss (person relies too much on the insurance)
Peril
The cause of a loss
4 Elements of a Legal Contract
- Agreement - offer and acceptance
- Consideration
- Competent parties
- Legal purpose
Offer and Acceptance … who makes the offer and who makes the acceptance in insurance?
Applicant makes offer & insurer makes the acceptance
Consideration
Something of value that each parts gives to the other. The insured’s consideration is the premium payment. The insurers consideration is the promise to pay in the event of loss.
Contract of Adhesion
Take it or leave it basis by insurer (insurer has more power; insured cant negotiate)
Aleatory contract
John purchases life insurance policy for $50k. The premium is $100. His daughter is the beneficiary. John dies after 2 months into the policy. What happens?
Exchange of unequal amounts or values (Premium paid by insured < amount paid by insurer)
John pays $200 in premium while insurance company pays out $50k to his daughter (aka unequal exchange of values)
Unilateral contract
Only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises.
Conditional contract
Conditions must be met in order for contract to be executed. (Premium and proof of loss in order for insurer to cover the claim)
What is a warranty? What happens in the case of a breach of warranties?
Absolutely true statement. Breach of warranties are grounds for voiding policy or return of premium
Representations
Statements believed to be true to the best of ones knowledge but they are not guaranteed to be true
(AKA answers the insured gives to the questions on an insurance application)
Misrepresentations
Untrue statements on the application
What are the 2 parts to an application?
- General information
- Medical information
Conditional receipt
Prepaid application.. so coverage begins on date of application or date of medical exam, whichever is last
Underwriting
What is the purpose of underwriting?
The risk selection process
To protect the insurer against adverse selection
Insurable interest
The interest that someone has in something that can cause a loss if damaged or taken away - it must exist at the time of application
You depend on the person who’s life is being insured
Consumer reports
Written or oral information regarding a consumer’s credit character reputation or habits collected by a reporting agency from employment records credit reports and other public sources
Investigative Consumer Reports
Information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer
What must happen in order for an investigative consumer report to take place?
The consumer must be advised in writing about the report within 3 days of the date the report was requested. The consumer must be advised that they have a right to request additional information concerning the report and the insurer or reporting agency has 5 days to provide the consumer with the additional information
Consumer Reports cannot contain prohibited information if the report is requested in connection with a life insurance policy or credit transaction of what amount?
$150,000.000
What is MIB?
Medical information bureau. It is a systematic method for companies to compare the information they collected on a potential insured with information other insurers may have discovered
What is HIPAA?
What does it do?
Health Insurance Portability and Accountability Act
It protects health information
Risk & Premium relationship
The higher the risk, the higher the premium
What are the 3 risk classificiations?
- Standard - covered at standard rate; average risk of loss
- Substandard - covered an increased rate; increased risk of loss
- Preferred - covered at reduced rate; reduced risk of loss
Premium Rated-Up
Higher premiums
Declined risks
Applicants who are rejected due to being too risky for loss
STOLI & IOLI
Stranger-originated life insurance: person trying to make money off of life settlements when they have no insurable interest in the insured
Investor-originated life insurance: Another name for STOLIs
What are the three factors used in premium determination?
- Risk (Mortality)
- Interest earnings
- Expense (aka loading charge)
Mortality
The rate of death within a specific group over a certain amount of time
Net single premium (or Net Premium)
What is the equation for Net Premium?
The mortality and interest components necessary to keep the policy in force until maturity
Mortality - interest = net premium
Gross Annual premium (or Gross Premium)
What is the equation for Gross Premium?
The one year cost for mortality plus the cost of operating the company (aka expense loading)
Net Premium + Expense (loading) = Gross Premium
What is expense loading? Provide examples.
The cost of operating the company.
- Commissions
- Rent
- Advertising
- Taxes
What is premium payment mode?
The frequency the policy owner pays the premium
What is the relation between premium payment mode and premium amount?
Higher frequency = higher premium
If you pay monthly rather than yearly, your premium will be higher
Monthly > quarterly > semiannual > annual
Statement of good health
A statement signed by the insured verifying that the insured has not suffered injury or illness since the application date
Gramm Leach Bliley Act
Prohibits insurers from disclosing non public personal information to non affiliated 3rd parties
Fair Credit Reporting Act
Protects consumers against circulation of inaccurate or obsolete personal financial information
USA PATRIOT Act
The uniting and strengthening America by providing appropriate tools required to intercept and obstruct terrorism act
- Fight and prevent terrorist activities
- Anti money laundering (AML) standards
- Suspicious Activity Report (SAR) For any transactions of $5000 or more if they raise suspicion
5 ways of handling risk
- Avoidance
- Retention
- Sharing
- Reduction
- Transfer (insurance)
Elements of insurable risk
- Due to chance
- Definite and measurable
- Statistically predictable
- Not catastrophic
- Randomly selected/large loss exposure
Buyer’s Guide
generic information about insurance policies used to help compare policies and costs; provided at time of application
How far back can you backdate on a policy?
6 months at most
