CO Life Insurance Chapter 1 Flashcards
Adverse Selection
insuring of risks that are more prone to losses than the average risk
Agent / Producer
a legal representative of an insurance company; the classification of producer usually includes agents and brokers ; agents are the agents of the insurer
Applicant (or proposed insured)
a person applying for insurance
Beneficiary
a person who receives the benefits of an insurance policy
Death Benefit
the amount paid upon the death of the insured in a life insurance policy
Fraud
intentional misrepresentation or deceit with the intent to induce a person to part with something of value
Insurance Policy
a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events
Insured
person covered by the insurance policy; may or may not be the policy owner
Insurer (principal)
the company who issues an insurance policy
Lapse
policy termination due to nonpayment of premium
Life insurance
coverage on human lives
Policyowner
the person entitled to exercise the rights and privileges in the policy
stock company
owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses
nonparticipating policies (stock company)
policyowners do not share in profits or losses ; does not pay dividends to policyowners but taxable dividends are paid to stockholders
Dividends
a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)
Mutual companies
owned by policyowners and issue participating policies
Participating policy (mutual company)
policyowners are entitled to dividends, which are a return of excess premiums and are nontaxable, though not guaranteed.
Domicile of Insurer
location of incorporation - domestic, foreign, alien
Domestic insurer
operating in the state they are incorporated in
foreign insurer
the insurer is operating in a state other than the one they are incorporated in
alien insurer
the insurer is incorporated outside the United States
Contract
an agreement between two or more parties enforceable by law.
Elements of a Legal Contract
- Agreement (offer or acceptance) 2.Consideration 3. Competent Parties 4. Legal purpose
Offer and Acceptance
The applicant makes the OFFER when submitting the application and ACCEPTANCE takes place when an insurer’s underwriter approves the application and issues a policy.
Consideration
Binding force; something of value that each party gives to the other ; for the insured - payment of premium and the rep’s made in the app. for the insurer - the promise to pay in the event of loss.
Insurer’s consideration
the promise to pay for losses
Insured’s consideration
payment of premiums and statements on the application
competent parties
must be capable of entering into a contract in the eyes of the law.
contract of adhesion
prepared by insurer and accepted or rejected by the insured with no negotiations. i.e. insurance contracts are offered on a take-it or leave-it basis by insurer
aleatory contract
there is an exchange of unequal amounts or values i.e. the premium paid by the insured is small in relation to the amount that will be paid by insurer in the event of loss.
unilateral contract
only one party is legally bound to do anything. the insured - no legal binding promises. the insurer - legally bound to pay losses covered by a policy in force
conditional contract
certain conditions must be met by the policyowner and the company in order for the contract to be executed AND before each party fulfills its obligations. i.e. the insured must pay premium and provide proof of loss in order for the insurer to cover claim
representations
statements made by the applicant on the insurance application that are believed to be true, but are not guaranteed to be true. i.e. insured’s statements on the application
warranty
an absolutely true statement upon which the validity of the insurance policy depends
misrepresentation
untrue statements on the application
material misrepresentation
a statement that would alter the underwriting decision of the insurance company
fraud
if material misrepresentations are intentional
Components of Application
- General Information and 2. Medical Information
Nonmedical Application
Typically small amount of insurance where the agent (me) and proposed insured will complete the medical information.
field underwriter
the company’s frontline i.e. the agent (me) ; responsible for soliciting the potential insured, completing application, collection premiums, and delivering the policy
agent’s report
provides the agent’s personal observations concerning the proposed insured
premium receipt
issued whenever agent (me) collects premiums
conditional receipt
most common type of premium receipt ; used only when the applicant submits a prepaid application ; says coverage will be effective either on date of application or date of medical exam (whichever occurs last) AS LONG AS the applicant is a standard risk and policy is issued exactly as applied.
standard risk
an applicant or insured who is considered to have an average probability of a loss based on health, vocation, and lifestyle
rider
any supplemental agreement attached to and made a part of the policy indicating the policy expansion by additional coverage, or a waiver of a coverage or condition.
replacement
a practice of terminating an existing policy or letting it lapse, and obtaining a new one.
underwriting
the risk selection process
underwriter’s responsibilities
selecting only those risks that are considered insurable and meet the insurer’s underwriting standards
purpose of underwriting
to protect the insurer against adverse selection
adverse selection
risks which are more likely to suffer a loss ; the tendency of risks with higher probability of loss to purchase and maintain insurance more often than the risks who present lower probability.
insurable interest
a financial interest in the life of another person; a possibility of losing something of value if the insured should die. In life insurance, insurable interest must exist at the time of policy application or policy issue ; insuring one’s own life, family member, or a business partner
consumer report
includes written and/or oral information regarding a consumer’s credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources.
investigative consumer reports
similar to consumer reports with primary difference being the information is obtained through an investigation and interviews with associates, friends, and neighbors of the consumer. These CANNOT be made unless the consumer is advised in writing about the report within 3 days.
prohibited information in consumer reports under $150,000 in policy
- bankruptcies over 10 years old 2. civil suits, records of arrest or convictions of crimes, or any other negative information over 7 years old.
Negative information (as defined by the Fair Credit Reporting Act)
information regarding a customer’s delinquencies, late payments, insolvency, or any other form of default.
MIB
Medical Information Bureau
Medical Information Bureau (MIB)
a nonprofit trade organization and membership corporation owned by member insurance companies. It receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals.
rating classification
risk rating
preferred risks
individuals who meet certain requirements and qualify for lower premiums than the standard risk i.e. superior physical condition, lifestyle, and habits
standard risks
persons who are entitled to insurance protection without extra rating or special restrictions ; representative of the majority of people at their age and with similar lifestyles ; average risk
Substandard (high exposure) risks
an applicant or insured who has a higher than normal probability of loss, and who may be subject o an increased premium.
declined risks
applicants who are rejected for a variety of reasons
STOLI
stranger-originated life insurance
IOLI
Investor-originated Life insurnance
Stranger-originated life insurance (STOLI)
life insurance arrangement in which a person with no relationship to the insured (a “stranger”) purchases a life policy on the insured’s life without the intent of selling the policy to an investor and profiting financially when the insured dies.
Investor-owned life insurance
a third-party investor who has no insurable interest in the insured initiates a transaction designed to transfer the policy ownership rights to someone with no insurable interest in the insured and who hopes to make a profit upon the death of the insured.
indemnity
security or protection against a loss or other financial burden.
