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Legal & Regulatory Aspects of FP > Chapter 32 - Insurance > Flashcards

Chapter 32 - Insurance Flashcards

1
Q

Who/What is a Person? (Insurance)

A

An individual, corporation, partnership, or any other legal entity.

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2
Q

What is Insurance?

A

A contract in which one person, in return for a fee, agrees to guarantee another against loss caused by a specific type of danger.

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3
Q

Who is the Insurer?

A

The person who issues the insurance policy and serves as guarantor

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4
Q

What is the Insured?

A

The person whose loss is the subject of the insurance policy.

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5
Q

Who is the Owner? (Insurance)

A

The person who enters into the insurance contract and pays the premiums.

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6
Q

What is a Premium?

A

The consideration that the owner pays under the policy.

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7
Q

Who is a Beneficiary? (Insurance)

A

The person who receives the proceeds from the insurance policy.

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8
Q

What requirements must an insurance policy meet?

A

All common law requirements for a contract:
-Offer
-Acceptance
-Consideration
The owner must have legal capacity, that is, he must be an adult of sound mind

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9
Q

What invalidates an insurance policy? 3

A

Fraud
Duress
Undue Influence

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10
Q

How does the purchaser of an insurance policy make an offer?

A

By delivering an application and a premium to the insurer.

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11
Q

How can an insurance company accept an offer?

A

They can accept by:
Oral notice
Written Notice
Delivery of the Policy

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12
Q

What is a Binder? What does it indicate?

A

A short document acknowledging receipt of the application and premium.
It indicates that a policy is temporarily in effect but does not constitute final acceptance.

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13
Q

What is insurable interest’s role in life insurance claims?

A

An insurance contract is not valid unless the owner has an insurable interest in the subject matter of the policy.

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14
Q

What is Insurable Interest?

A

Means that someone would suffer a loss if the insured event occurs.

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15
Q

What is Life Insurance?

A

Provides for payments to a beneficiary upon the death of the insured.

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16
Q

What are the four rules on insurable interest? 4, terms only

A

Definition
Amount of Loss
Life Insurance
Work Relationship.

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17
Q

What is the definition rule on insurable interest?

A

A person has an insurable interest if she would be harmed by the danger that she has insured against.

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18
Q

What is the amount of loss rule on insurable interest?

A

The insurable interest can be no greater than the actual amount of the loss suffered.

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19
Q

What is the life insurance rule on insurable interest?

A

A person always has an insurable interest in his own life and the life of his spouse of fiancee.
Parents and minor children also have an insurable interest in each other
Creditors have a legitimate interest in someone who owes them money.
For some states, the standard is that you have an insurable interest in someone if the person is worth more to you alive than dead.

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20
Q

What is the work relationships rule on insurable interest?

A

.Business partners, employers and employees have an insurable interest in each other if they would suffer some financial harm from the death of the insured.

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21
Q

What is Key Person Life Insurance?

A

A policy a company can buy on their officers to compensate if they were to die.

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22
Q

In regards to insurance, what does it mean if something is material?

A

Important to the insurer’s decision to issue a policy or set a premium amount.

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23
Q

What is a material misrepresentation?

A

Means that the misstatement of omission would affect the insurer’s decision to issue the policy or set the premium amount.

Insurers have the right to void a policy if, during the application process, the insured makes a material misstatement or conceals a material fact.

A lie can void a policy even if it does not relate to the actual loss.

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24
Q

Insurance policies often contain a covenant of good faith and fair dealing. If it is not in the policy, how can an insurance company still be held to follow it?

A

Even if the policy itself does not explicitly include such a provision, an increasing number of courts imply this covenant.

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25
Q

Under what circumstances can an insurance company violate the covenant of good faith and fair dealing? What is its liability if it is breached?

A

1) Fraudulently inducing someone to buy a policy
2)Unreasonable refusing to pay a valid claim
3)Refusing to accept a reasonable settlement offer that has been made to an insured.
When an insurance company violates this, they are liable for both compensatory and punitive damages.

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26
Q

What are the six major types of insurance?

A
  • Property
  • Life
  • Health
  • Disability
  • Liability
  • Automobile
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27
Q

What is Property Insurance?

A

AKA - Casualty Insurance - Covers physical damage to real estate, personal property, or inventory from causes such as fire, smoke, lightning, wind, riot, vandalism, or theft.

28
Q

What is the purpose of life insurance?

A

To replace at least some of the insured’s income so that their family will not be financially devastated.

29
Q

What are four basic types of life insurance?

A

Term
Whole
Variable
Annuities

30
Q

What is Term Insurance? How does it work?

A

The simplest, cheapest life insurance option. It is purchased for a specific period. It the insured died during the policy, the insurance company pays the policy amount to the individual. If the owner stops paying premiums, the policy terminates, and the beneficiary receives nothing.

31
Q

When is Term Insurance the best choice?

A

When a person simply wants to protect his family by replacing income if he dies young.

32
Q

What is Whole Life? How does it work?

A

AKA - Straight Life - Insurance designed to cover the insured for his entire life. A portion of the premiums pays the insurance, and the remainder goes into savings. This savings portion is called the cash value of the policy. The cash value accrues without being taxed until the policy is cashed in. The owner can borrow against the cash value. If the owner cancels the policy, the company will pay her the policy’s cash value.

33
Q

How does a premium work on a Whole Life policy?

A

The insurance company typically sets a premium to stay constant over the life of the policy.

34
Q

What is the advantage of a whole life policy?

A

It forces people to save money.

35
Q

What are some disadvantages of a whole life policy? 4

A
  • The interest returns from the savings portion of whole life insurance have traditionally been mediocre.
  • A significant portion of the premium for the first year goes to pay overhead and commissions.
  • Unless the customer holds the policy for about 20 years, it will typically generate little cash value
  • Whole life insurance provides the same amount of insurance through the insured’s life. (Whether that is ultimately appropriate or not)
36
Q

What is Universal Life? How does it work?

A

A flexible combination of whole life and term. The owner can adjust the premiums over the life of the policy and also adjust the allocation of the premiums between insurance and savings.

37
Q

What is an Annuity?

A

Annuities are the reverse of life insurance- they make payments until death.

38
Q

How does a basic annuity work?

A

The owner makes a lump sum payment to an insurance company in return for a fixed annual income for the rest of her life.

39
Q

What is a Deferred Annuity Contract?

A

Where the owner makes a lump-sum payment bur receives no income until some later date. From that date forward, he will receive benefits for the rest of his life.

40
Q

How are traditional health insurance plans structured? What are the benefits and drawbacks?

A

They are pay for service. The insurer pays virtually any treatment that any doctor order.
The benefit is that under this system is that policyholders have the largest possible choice of doctor and treatment
The disadvantage is that doctors and patients have an incentive to overspend on health care because the insurance company picks up the tab.

41
Q

What is an alternative to the pay for service plans? How do they work?

A

Managed Care Plans. They limit choices. In some plans the patient has a primary care physician who must approve all visits to specialists. In Health Maintenance Organizations (HMOs) the patient can be treated only by doctors in the organization unless there is some extraordinary need for an outside specialist.

42
Q

What is Disability Insurance?

A

Replaces the insured’s income if he becomes unable to work because of illness or injury.

43
Q

What is Liability Insurance?

A

Reimburses the insured for any liability she incurs by accidentally harming someone else.

44
Q

What does liability insurance not insure against?

A

Intentional torts

45
Q

Personal liability insurance covers tort claims from who?

A
  • Those injured on property owned by the insured
  • Those injured by the insured away from his home or business
  • Those whose property is damaged by the insured.
46
Q

What types of claims does business liability insurance protect against?

A
  • Professional malpractice on the part of an accountant, architect, doctor, engineer, or lawyer
  • Product liability for injuries caused by the company’s products
  • Employment practices liability insurance to protect employers against claims of sexual harassment, discrimination, and wrongful termination on the part of an employee.
47
Q

What are the four basic kinds of auto insurance?

A
  • Collision
  • Comprehensive
  • Liability
  • Uninsured motorist
48
Q

What is collision auto insurance?

A

Covers the cost of repairing or replacing a car that is damaged in an accident

49
Q

What is comprehensive auto insurance?

A

Covers fire, theft, and vandalism - but not collision

50
Q

What is liability auto insurance?

A

Covers harm the owner causes to other people or their property - their body, car, or stone wall. Most states require drivers to carry liability insurance.

51
Q

What is uninsured motorist auto insurance?

A

Covers the owner and anyone else in the car who is injured by an uninsured motorist.

52
Q

What can you do to reduce your insurance costs? 5

A 
Do not insure against every risk
Do not buy "special occasion" insurance
Select as high a deductible as you can afford
Shop for the best price
Shop for quality
53
Q 
Which of the following insurance policies continue for a stated period of time with the premiums increasing with the age of the insured?
Answer
	1. 	
Double indemnity.
	2. 	
Annuity contract.
	3. 	
Term insurance.
A

3

54
Q 
A policy that makes payments to the owner monthly for her entire life is called:
Answer
	1. 	
disability insurance
	2. 	
whole life insurance
	3. 	
universal life insurance
	4. 	
an annuity
A

4

55
Q 
Insurance experts recommend that workers carry disability insurance to replace \_\_\_\_\_\_ of their income.
Answer
	1. 	
between 75% and 95%
	2. 	
100%
	3. 	
50%
	4. 	
between 60% and 75%
A

4

56
Q

Liability policies, such as personal liability, professional malpractice, or business liability insurance, do not protect the insured against:
Answer
1.
There own intentional torts.
2.
a negligent act or omission by the property owner.
3.
someone injured by the insured away from home or business.
4.
a personal injury on the insured’s property, such as the mail carrier who slips and falls on the owner’s sidewalk.

A

1

57
Q

An insurance policy must meet which of the following?
Answer
1.
Common law requirements for contracts.
2.
State statutory requirements for tort law.
3.
Federal statutory requirements for tort law.
4.
Common law requirements for tort law.

A

1

58
Q

Abraham has just purchased his first car. His bank, First State Bank, loaned him the money to buy the car and has required him to purchase insurance to protect the car as the collateral for the loan. Which basic types of coverage should Abraham buy to satisfy the bank requirement and to protect himself from the risks of operating an automobile?
Answer
1.
Collision and comprehensive coverage only.
2.
Collision, uninsured motorist, comprehensive, and liability coverage.
3.
Collision coverage only.
4.
Collision, uninsured motorist, and comprehensive coverage.

A

2

59
Q 
Health insurance plans that specify that the patient can be treated only by doctors in the organization are called:
Answer
	1. 	
Health Maintenance Organizations
	2. 	
Health Management Options
	3. 	
Point Source Plans
	4. 	
Pay for Service Plans
A

1

60
Q

Liability insurance would cover:
Answer
1.
intentional poisoning committed on your property
2.
an injury to a guest on your property caused by a tree limb falling on them
3.
damage done by a drunk driver
4.
injuries sustained in a fight on your property

A

2

61
Q 
Which of the following is NOT a type of coverage in automobile insurance?
Answer
	1. 	
Uninsured motorist
	2. 	
Collision
	3. 	
Comparative
	4. 	
Liability
A

3

62
Q 
Under which of the following does the insured have a right to borrow against his policy.
Answer
	1. 	
Disability Insurance
	2. 	
Whole life policy.
	3. 	
Term life policy.
	4. 	
Annuity contract.
A

2

63
Q

Pamela applies for a life insurance policy with Forever Young Insurance Company. When completing the application form about past surgeries, Pamela forgot about a past outpatient surgery when she had an infected hang-nail removed and her toe treated. One year after issuing the policy, Pamela died suddenly from a brain aneurysm. Forever Young denies payment under the policy based on misrepresentation. If Pamela’s sister, Paula, sues Forever Young, she will:
Answer
1.
win, because once an application has been accepted, an insurer may not use a misrepresentation on the application to avoid liability.
2.
lose, because Pamela’s application contained a misrepresentation of material fact.
3.
win, because Pamela’s misrepresentation was not a material fact and did not increase Forever Young’s risk in insuring Pamela’s life.
4.
lose, because an insurer can always use any misrepresentation on an application to avoid paying.

A

3

64
Q 
Which of the following is generally covered under casualty insurance?
Answer
	1. 	
Employee theft or embezzlement.
	2. 	
Disability.
	3. 	
Transportation insurance.
	4. 	
Vandalism.
A

4

65
Q 
Sarah has car insurance. While driving her automobile, Sarah negligently ran a red light and hit Vi's car. Which type of coverage will pay for the damage done to Vi's car?
Answer
	1. 	
Uninsured motorist insurance.
	2. 	
Liability insurance.
	3. 	
Comprehensive insurance.
	4. 	
Collision insurance.
A

2

66
Q 
Darcy buys a life insurance policy on her own life, under which she pays the annual premiums. The insurance is issued for a specific period, but is renewable for similar periods. Darcy is covered only as long as she makes the payments. There is no cash value portion to the policy. Darcy probably owns:
Answer
	1. 	
term life insurance.
	2. 	
key-person life insurance.
	3. 	
an annuity.
	4. 	
whole life insurance.
A

1

67
Q

Insurance obtained by a limited partnership on the life of the general partner would be:
Answer
1.
key-person insurance, because the general partner is a key person, contributing a great deal to making the business successful.
2.
double indemnity insurance, because both the limited partnership and the general partner are insured.
3.
whole life or straight life insurance which builds a cash value.
4.
a co-insurance policy because both the limited partnership and the general partner are insured.

A

1

Legal & Regulatory Aspects of FP (26 decks)

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