Chapter 1 - Insurance Basics

Question 0

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.

Answer 0

Application

Question 1

The party making application, offering himself/herself or another person to be insured by contract.

Answer 1

Applicant

Question 2

A person’s age at any point or time (age at policy issue, renewal or conversion).

Answer 2

Attained Age

Question 3

The date when insurance coverage begins (may also be known as the inception date)

Answer 3

Effective Date

Question 4

A form changing the provisions and attached to a policy.

Answer 4

Rider

Question 5

The death or maturity benefit payable to a beneficiary or policyowner from a life policy. Sometimes referred to as a limit of liability

Answer 5

Face Amount

Question 6

The ability of an individual to meet an insurer’s underwriting requirements.

Answer 6

Insurability

Question 7

This is the person who is covered by the policy. The insured may or may not be the policy owner.

Answer 7

Insured

Question 8

The individual’s actual or closest age on the policy issue date.

Answer 8

Issue Age

Question 9

Termination of a policy because a premium has not been paid by end of the grace period.

Answer 9

Lapse

Question 10

The process of evaluating risk for the purpose of issuing insurance coverage.

Answer 10

Underwriting

Question 11

The termination of the policy before the end of its term.

Answer 11

Cancellation

Question 12

The termination of a policy at the end of its term.

Answer 12

Non-renewal

Question 13

A contract whereby one undertakes to indemnify against loss, damage, or liability arising from a contingent or unknown event.

Answer 13

Insurance

Question 14

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.

Answer 14

Insurable Event

Question 15

A condition in which a chance of loss exists.

Answer 15

Risk

Question 16

Instances where there is a chance of a loss or gain.

Answer 16

Speculative Risks

Question 17

Situations where only the chance of loss and no chance for gain exist.

Answer 17

Pure Risk

Question 18

The extent to which one may be affected by a peril.

Answer 18

Loss Exposure

Question 19

The cause of a possible loss.

Answer 19

Peril

Question 20

A specific situation that increases the probability of a loss arising from a peril or that may influence the extent of the loss.

Answer 20

Hazard

Question 21

Tangible Characteristics (Hazard).

Answer 21

Physical

Question 22

Dishonesty (Hazard).

Answer 22

Moral

Question 23

Indifference (Hazard).

Answer 23

Morale

Question 24

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).

Answer 24

Over Insurance

Question 25

Reducing, but not preventing a risk.

Answer 25

Risk Reduction

Question 26

Not being involved in the activity that gives rise to the chance of loss.

Answer 26

Risk Avoidance

Question 27

Retaining the responsibility for the loss.

Answer 27

Risk Retention

Question 28

Transferring the risk to another (insurance company).

Answer 28

Risk Transfer

Question 29

Pooling the risk of a large number of persons (corporation).

Answer 29

Risk Sharing

Question 30

Requisites of Ideally Insurable Risk

Answer 30

1. Large number of Like Units.
2. Loss must be calculable (definite in cause, time, place, and amount).
3. Loss must be accidental.
4. Loss must cause financial hardship.
5. Policy must exclude catastrophic perils

Question 31

The insured is restored to the same financial condition as prior to the loss.

Answer 31

Principle of Indemnity

Question 32

The larger the number of exposures considered, the more closely the reported losses will be to the probability of loss.

Answer 32

Law of Large Numbers

Question 33

Used by insurers to transfer or share in a risk.

Answer 33

Reinsurance

Question 34

Company who originates an application (reinsurance).

Answer 34

Ceding Company

Question 35

Company(ies) who share in the risk with ceding company.

Answer 35

Reinsurance insurers

Question 36

Ceding company must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium

Answer 36

Automatic Agreements

Question 37

Allow the ceding insurer and reinsurers to exchange advice on underwriting. May result in a higher premium.

Answer 37

Facultative Agreements

Question 38

Insuring of risks that are more prone to losses than the average (standard) risk.

Answer 38

Adverse Selection

Question 39

Contractual agreement removing the liability of one party from a second party.

Answer 39

Hold Harmless Agreement

Question 40

Insurable Interest

Answer 40

1. Possibility of loss due to sickness or death.
2. Contracts must have the consent of the insured.
3. Insurable interest must exist at the time of the application.
4. Insurable interest of one’s own life is unlimited.
5. Some insurers consider love and affection as insurable interest.

Question 41

The written instrument in which the insurance contract is set forth.

Answer 41

Policy

Question 42

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.

Answer 42

Buy-Sell Agreement

Question 43

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.

Answer 43

Cash Value

Question 44

Insurance policies that do not pay dividends to policyowners.

Answer 44

Nonparticipating Policies (Nonpar)

Question 45

Policies pay annual dividends to policyowners.

Answer 45

Participating Policies (Par)

Question 46

The individual who has the ownership rights in a policy.

Answer 46

Policyowner

Question 47

Personal Uses of Life Insurance

Answer 47

1. Survivor Protection.
2. Estate Creation.
3. Estate Conservation.
4. Cash Accumulation.
5. Liquidity.
6. Viatical Settlements