Chapter 1 - Insurance Basics Flashcards
A document that provides information for underwriting purposes. After the policy is issued, any unanswered question is considered waived by the insurer. The application becomes part of the entire contract.
Application
The party making application, offering himself/herself or another person to be insured by contract.
Applicant
A person’s age at any point or time (age at policy issue, renewal or conversion).
Attained Age
The date when insurance coverage begins (may also be known as the inception date)
Effective Date
A form changing the provisions and attached to a policy.
Rider
The death or maturity benefit payable to a beneficiary or policyowner from a life policy. Sometimes referred to as a limit of liability
Face Amount
The ability of an individual to meet an insurer’s underwriting requirements.
Insurability
This is the person who is covered by the policy. The insured may or may not be the policy owner.
Insured
The individual’s actual or closest age on the policy issue date.
Issue Age
Termination of a policy because a premium has not been paid by end of the grace period.
Lapse
The process of evaluating risk for the purpose of issuing insurance coverage.
Underwriting
The termination of the policy before the end of its term.
Cancellation
The termination of a policy at the end of its term.
Non-renewal
A contract whereby one undertakes to indemnify against loss, damage, or liability arising from a contingent or unknown event.
Insurance
Any event, whether past or present, which may cause loss or damage to a person having an insurable interest or create a liability against him/her.
Insurable Event
A condition in which a chance of loss exists.
Risk
Instances where there is a chance of a loss or gain.
Speculative Risks
Situations where only the chance of loss and no chance for gain exist.
Pure Risk
The extent to which one may be affected by a peril.
Loss Exposure
The cause of a possible loss.
Peril
A specific situation that increases the probability of a loss arising from a peril or that may influence the extent of the loss.
Hazard
Tangible Characteristics (Hazard).
Physical
Dishonesty (Hazard).
Moral
Indifference (Hazard).
Morale
When more insurance is in force than the insured has the potential to lose. The excess amount will not be paid. (Does not apply to life insurance).
Over Insurance
Reducing, but not preventing a risk.
Risk Reduction
Not being involved in the activity that gives rise to the chance of loss.
Risk Avoidance
Retaining the responsibility for the loss.
Risk Retention
Transferring the risk to another (insurance company).
Risk Transfer
Pooling the risk of a large number of persons (corporation).
Risk Sharing
Requisites of Ideally Insurable Risk
- Large number of Like Units.
- Loss must be calculable (definite in cause, time, place, and amount).
- Loss must be accidental.
- Loss must cause financial hardship.
- Policy must exclude catastrophic perils
The insured is restored to the same financial condition as prior to the loss.
Principle of Indemnity
The larger the number of exposures considered, the more closely the reported losses will be to the probability of loss.
Law of Large Numbers
Used by insurers to transfer or share in a risk.
Reinsurance
Company who originates an application (reinsurance).
Ceding Company
Company(ies) who share in the risk with ceding company.
Reinsurance insurers
Ceding company must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium
Automatic Agreements
Allow the ceding insurer and reinsurers to exchange advice on underwriting. May result in a higher premium.
Facultative Agreements
Insuring of risks that are more prone to losses than the average (standard) risk.
Adverse Selection
Contractual agreement removing the liability of one party from a second party.
Hold Harmless Agreement
Insurable Interest
- Possibility of loss due to sickness or death.
- Contracts must have the consent of the insured.
- Insurable interest must exist at the time of the application.
- Insurable interest of one’s own life is unlimited.
- Some insurers consider love and affection as insurable interest.
The written instrument in which the insurance contract is set forth.
Policy
Agreement among owners of a firm that provides the continuation of a business up on the premature death of an owner. Through legal contract, the deceased’s estate must sell the deceased’s interest back to the entity, who must buy at a predetermined price.
Buy-Sell Agreement
Money accumulated in a permanent policy that the policy owner may borrow as a policy loan or receive if the policy is surrendered before maturity.
Cash Value
Insurance policies that do not pay dividends to policyowners.
Nonparticipating Policies (Nonpar)
Policies pay annual dividends to policyowners.
Participating Policies (Par)
The individual who has the ownership rights in a policy.
Policyowner
Personal Uses of Life Insurance
- Survivor Protection.
- Estate Creation.
- Estate Conservation.
- Cash Accumulation.
- Liquidity.
- Viatical Settlements
