Chapter 2 - Life Insurance Basics

Question 1

Adverse Selection

Answer 1

The tendency of individuals with higher probability of loss to purchase insurance more than those who present a lower risk

Question 2

Beneficiary

Answer 2

A person who receives the benefits of an insurance policy

Question 3

Death benefit

Answer 3

The amount paid upon the death of the insured in a life insurance policy

Question 4

Cash Value

Answer 4

Equity amount accumulated in permanent life insurance

Question 5

Estate

Answer 5

A person’s net worth

Question 6

Illustrations

Answer 6

Presentation or depiction of nonguaranteed elements of a life insurance policy

Question 7

Life Insurance

Answer 7

Coverage on human lives

Question 8

Liquidation

Answer 8

Selling assets in order to raise capital

Question 9

Lump Sum

Answer 9

Payment of the entire benefit in one sum

Question 10

Minor

Answer 10

A person under legal age

Question 11

Solvency

Answer 11

Ability to meet financial obligations (e.g. an insurance company maintains enough assets to pay claims)

Question 12

What does a policyowner do in regards to the purchase of life insurance?

Answer 12

Pays premium to insurance company

Question 13

What does an insurance company do in regards to the purchase of life insurance?

Answer 13

• Issues policy to policyowner

- Pays benefit to the beneficiary

Question 14

Beneficiary

Answer 14

Receives benefit upon the insured’s death

Question 15

Insurable Interest

Answer 15

The possibility of the policyowner losing money or something of value in the event of loss

• must exist between the policyowner snd the insured at the time of application
• however, if the policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists

Question 16

A valid insurable interest may exist between the policyowner and the insured when the policy is insurance any of the following:

Answer 16

• Policyowner’s own life
• The life of a family member (a spouse or a close blood relative); or
• The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as debtor to a creditor)

Question 17

Is insurable interest required of beneficiaries?

Answer 17

No

• Since the beneficiary’s well being is dependent upon the insured, and the beneficiary’s life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased.

Question 18

Insurable interest must exist at the time of…

Answer 18

Application

Question 19

The policyowner must have insirable interest in the life of…

Answer 19

The insured