Chapter Exam - Legal Concepts

Question 1

At what point does an informal agreement become a binding contract?

Answer 1

When consideration is provided by one of the parties to the contract

Question 2

Taking receipt of premiums and holding them for the insurance company is an example of:
1) Commingling
2)theft
3)Fiduciary responsibility
4)Misappropriation

Answer 2

Fiduciary responsibility

Question 3

A life insurance policy would be considered a wagering contract WITHOUT:

Answer 3

insurable interest

Question 4

Which of the following consists of an offer, acceptance, and consideration?

Answer 4

contract

Question 5

In an insurance contract, the insurer is the only party who makes a legally enforceable promise. What kind of contract is this?

Answer 5

Unilateral

Question 6

A policy of adhesion can only be modified by whom?

Answer 6

The insurance company

Question 7

A contract where one party either accepts or rejects the terms of a contract written by another party is called a contract of

Answer 7

adhesion

Question 8

What is the consideration given by an insurer in the Consideration clause of a life policy?

Answer 8

Promise to pay a death benefit to a named beneficiary

Question 9

The Consideration clause of an insurance contract includes:

Answer 9

the schedule and amount of premium payments

Question 10

Stranger Originated Life Insurance (STOLI) has been found to be in violation of which of the following contractual elements?

Answer 10

Legal Purpose (Insurable Interest)

Question 11

Which of these is considered a statement that is assured to be true in every respect?
1)Estoppel
2)Warranty
3)Guarantee

Answer 11

Warranty

Question 12

Insurance policies are considered aleatory contracts because

Answer 12

performance is conditioned upon a future occurrence

Question 13

When must insurable interest be present in order for a life insurance policy to be valid?

Answer 13

when the application is made

Question 14

Insurance contracts are known as ____ because certain future conditions or acts must occur before any claims can be paid.

Answer 14

conditional

Question 15

Statements made on an insurance application that are believed to be true to the best of the applicant’s knowledge are called:

Answer 15

representations

Question 16

Which of the following consists of an offer, acceptance, and consideration?
1)Warranty
2)Estoppel
3)Contract
4)Representation

Answer 16

3)Contract

Question 17

E and F are business partners. Each takes out a $500,000 life insurance policy on the other, naming himself as primary beneficiary. E and F eventually terminate their business, and four months later E dies. Although E was married with three children at the time of death, the primary beneficiary is still F. However, an insurable interest no longer exists. Where will the proceeds from E’s life insurance policy be directed to?

Answer 17

The correct answer is “F”. In this situation, the proceeds from E’s life insurance policy will go to F. Insurable interest only needs to exist at the time of application.

Question 18

Insurance policies are offered on a “take it or leave it” basis, which make them:

Answer 18

The correct answer is “Contracts of Adhesion”. Because insurance policies are offered on a “take it or leave it” basis, they are referred to as Contracts of Adhesion.

Question 19

If a contract of adhesion contains complicated language, to whom would the interpretation be in favor of?

Answer 19

The correct answer is “Insured”. In a contract of adhesion, any confusing language would be interpreted in the favor of the insured.

Question 20

Which of these arrangements allows one to bypass insurable interest laws?
1)Concealment
2)Indemnity contract
3)Contract of adhesion
4)Investor-Originated Life Insurance

Answer 20

The correct answer is “Investor-Originated Life Insurance”. Investor-originated life insurance (or IOLI), sometimes called stranger-originated life insurance (or STOLI) is used to circumvent state insurable interest statutes. This is done when an investor (or stranger) persuades an individual to take out life insurance specifically for the purpose of selling the policy to the investor. The investor compensates the insured and makes the premiums, then collects the death benefit when the insured dies.

Question 21

The part of a life insurance policy guaranteed to be true is called a(n):

Answer 21

Warranty

Question 22

When third-party ownership is involved, applicants who also happen to be the stated primary beneficiary are required to have:

Answer 22

insurable interest in the proposed insured

Question 23

When must insurable interest exist for a life insurance contract to be valid?

Answer 23

The correct answer is “Inception of the contract”. Insurable interest must only exist at the inception of the contract.

Question 24

In regards to representations or warranties, which of these statements is TRUE?

1)Warranties are statements considered to be true to the best of the applicant’s belief
2)If material to the risk, false representations will void a policy
3)Representations are statements guaranteed to be true in every respect
4)If material to the risk, false representations will NOT void a policy

Answer 24

If material to the risk, false representations will void a policy

Question 25

A life insurance arrangement which circumvents insurable interest statutes is called:
1)a contract of adhesion
2)an indemnity contract
3)key person insurance
4)Investor-Originated Life Insurance

Answer 25

Investor-Originated Life Insurance

Question 26

Q purchases a $500,000 life insurance policy and pays $900 in premiums over the first six months. Q dies suddenly and the beneficiary is paid $500,000. This exchange of unequal values reflects which of the following insurance contract features?
1)Aleatory
2)Unilateral
3)Consideration
4)Adhesion

Answer 26

Aleatory

Question 27

Who makes the legally enforceable promises in a unilateral insurance policy?

Answer 27

Under a unilateral insurance policy, the insurance company makes the legally enforceable promises.