Completing the Application, Underwriting, and Delivering the Policy 8% Flashcards
What is Insurance?
transfer of risk of loss from an individual or business entity to an insurance company (which in turn, spreads costs of loss to many individuals)
What would happen if there was no insurance mechanism?
cost of loss would have to be borne solely by the individual who suffered the loss
What does the term ‘insurance transactions’ include?
(by mail or other means)
1) Solicitation
2) Negotiations
3) Sale (effectuation of a contract of insurance)
4) Advising an individual concerning coverage or claims
What does the process of issuing a life insurance policy begin with?
Solicitation
What does solicitation of insurance mean?
attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing
What does solicitation of insurance include?
1) providing info about available products
2) describing policy benefits
3) making recommendations about a specific type of policy
4) trying to secure a contract between the applicant and the insurance company
Advertising must be what?
accurate and not misrepresent the facts
Advertising rules apply to what?
insurance advertisements intended for:
1) presentation
2) distribution
3) dissemination
4) or other advertising used when used or made either directly or indirectly by or on behalf of the insurance company
Who is responsible for establishing and maintaining a system of control over the content, form, and method of dissemination of all advertising of its policies?
Insurance Company
Who is responsible for all it’s advertisements, regardless of who wrote, created, presented, or distributed policies being advertised?
Insurer
Specific Insurance code regulations for advertisements of life insurance policies in this state (Nevada) include, but are not limited to?
1) may not make any unfair or incomplete comparisons with other policies
2) must use language that can be understood by general public
3) Must identify the actual insurer before using trade names, insurance designation, or names of parent
4) No combination of words or symbols similar to hose of state or federal government agencies may be used if they could imply that the solicitation is connected with a government agency
5) May not contain false statements regarding claims payment, imply that claim settlements will be liberal or generous or special treatment will be provided beyond policy terms
6) Testimonials must be genuine, accurately reproduced and represent the author’s current opinion. If the person is compensated, the testimonials must include “Paid Endorsement”
What does the term Illustration mean?
a presentation or depiction that includes non-guaranteed elements of a life insurance policy over a period of years
What are the General Rules of an Illustration of a life insurance policy (the basic info on the illustration)?
1) Name of insurer
2) Name & Business address of producer or insurer’s authorized representative
3) Name, age, & sex of proposed insured, except when a composite illustration is permitted under this regulation
4) Underwriting or rating classification upon which the illustration is based
5) Generic name of policy, the company product name (if different) and form number
6) Initial Death benefit
7) Dividend option and election or application of non-guaranteed elements
8) Illustration date
9) A prominent label stating “Life Insurance Illustration”
A life insurance illustration must do the following?
1) Distinguish between guaranteed and projected amounts
2) Clearly state that an illustration is not a part of the contract
3) Identify those values that are not guaranteed as such
An agent may only use what illustrations of the insurer if what?
if it has been approved and may not change it in any way
What are the prohibited practices of an Illustration if used in sale of a life insurance policy?
1) Represent the policy as anything other than a life insurance policy
2) Describe non-guaranteed elements in a manner that could be misleading
3) Use an illustration that depicts policy’s performances as being more favorable than it really is
4) Provide an incomplete illustration
5) Claim that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless it is fact
6) Use the term “vanish” or “vanishing premium” or a similar term that implies the policy becomes paid up
7) Use an illustration that is not self-supporting
If an interest rate used to determine the illustrated non-guaranteed elements is shown, it may not what?
may not be greater than the earned interest rate underlying the disciplined current scale
What are the two traditional methods of comparing costs?
1) Interest-adjusted net cost
2) Comparative interest rate
What helps consumers make educated decisions on purchasing life insurance?
industry developed specific methods and indexes that measure and compare the actual policy costs
Where are the comparisons of policy costs usually included?
in Policy Illustrations
What comparing cost method considers the ‘time value of money’ by applying an interest adjustment to yearly premiums and dividend?
Interest Adjusted Net Cost method
What is time value of money?
investment return on the insurance premium had it been invested elsewhere
What does the Interest Adjusted Net Cost method do?
each year premiums and dividends are figured, interest is taken into consideration
What are the two versions of the Interest Adjusted Net Cost method?
1) surrender cost index
2) net payment cost index
What is the Comparative Interest Rate (CIR) method?
the rate of return that must be earned on a hypothetical “side fund” in a buy-term-invest-the-difference plan, so that the value of the side fund will equal the illustrated cash surrender value of the higher-premium policy at a designated point in time
What happens when the CIR is higher?
the less expensive the higher-premium policy (e.g. whole life) relative to the alternative plan (e.g. term plus side fund)
What is a Contract?
agreement between two or more parties enforceable by law
Because of the unique aspects of insurance transactions, what happened to the general law of contracts?
had to be modified to fit the needs of insurance
In order for insurance contracts to be legally binding, they must have what 4 essential elements?
1) Agreement - offer and acceptance
2) Consideration
3) Competent Parties
4) Legal Purpose
What happens with an Offer in insurance?
there must be a definite offer by one party, and the other party must accept this offer in it’s exact terms
In Insurance, who usually makes the Offer?
Applicant when submitting the application
What happens in Acceptance in insurance?
it takes place when an insurer’s underwriter approves the application and issues a policy
What is a Consideration?
something of value that each party gives to the other
What is the binding force in any contract?
Consideration
What is the Consideration part on both the insured and the insurer?
Insured- the payment of premium and the representations (statements) made in the application
Insurer- promise to pay in the event of loss (pay for losses)
What is the general rule under the Competent Parties section of a contract?
the parties to a contract must be capable of entering into a contract in the eyes of the law
What is required for both parties under Competent Parties?
both parties must be:
1) of legal age
2) mentally competent to understand the contract
3) Not under the influence of any drugs or alcohol
The purpose of a contract must be what?
Legal and not against public policy
To ensure legal purpose of a Life insurance policy, it must have what?
must have both insurable interest and consent
What happens if a contract does not have a legal purpose?
it’s considered void, and cannot be enforced by any party
What is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured)?
A Contract of Adhesion
How are Insurance contracts drawn up? think about contract of adhesion
insurance contracts are offered on a take-it-or-leave-it basis by an insurer, and there are no negotiations and the insured has little to say
*** any ambiguities in the contract are settled in favor of the insured
Insurance contracts are aleatory, which means what?
means there is an exchange of unequal amounts or values
What is aleatory for the insurer?
Premiums paid by the insured are small in relation to the amount that will be paid by the insurer in the event of a loss
What is a Unilateral Contract?
only one parties to the contract is legally bound to do anything
What is stated in a unilateral contract for both parties?
Insured- makes no legally binding promises
Insurer- legally bound to pay losses covered by a policy in force
What is a Conditional Contract?
requires that certain conditions must be met by the policy owner and the company in order for the contract to be executed, and before each party fulfills its obligations
What is a Warranty?
an absolutely true statement upon which the validity of the insurance policy depends
What can happen when there is a breach of warranty?
could be grounds for voiding the policy or return of premiums
Which is generally not considered warranties because of the strict definitions?
statements made by the applicants for life and health policies, except in cases of fraud
What is a Representation?
statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true
For insurance purposes, representations are what?
are the answers the insured gives to the questions on the insurance applications
Untrue statements on the applications are considered what and could void the contract?
Misrepresentation
What is a material misrepresentation?
a statement, that if discovered, would alter the underwriting decision of the insurance company
When are material misrepresentations considered fraud?
when they are intentional
What is the starting point and basic source of info used by the insurance company in the risk selection process?
The Application
Although apps may not be uniform and can vary from one insurer to another, what are the basic components they all have that are the same?
Part 1 - General Information
Part 2- Medical Information
What does Part 1 - General Information of the app include?
General questions about the applicant like name, age, address, birth date, gender, income, marital status, and occupation
What could Part 1 - General Info also inquire about?
existing policies and if the proposed insurance will replace them
Part 1 - General Info on the app identifies what?
The type of policy applied for and the amount of coverage, and usually contains info concerning the beneficiary
What does Part 2 - Medical Info of the app include?
info on the prospective insured’s medical background, present health, any medical visits in recent years, medical status of living relatives, and cause of death of deceased relatives
If the amount of insurance is relatively small, the agent and proposed insured will complete all of the medical info and that would be considered what?
Nonmedical application
For larger amounts of insurance, what would the insurer require in Part 2 - Medical info?
the insurer will usually require some sort of medical examination by a professional
