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IL Life and Health Insurance > Insurance Contracts > Flashcards

Insurance Contracts Flashcards

1
Q

Risk

A

Uncertainty regarding the likelihood or severity of an event

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2
Q

Speculative Risk

A

Negative, Neutral, or Positive outcome; not compatible w/insurance

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3
Q

Pure Risk

A

Negative or Neutral outcome, no Positive; compatible w/insurance

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4
Q

Loss

A

Expense or decrease in value

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5
Q

Accident

A

Loss that occurs at either an unpredictable time or in an unpredictable amount

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6
Q

Are intentional acts with unintentional outcomes still accidents?

A

Yes

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7
Q

Insurance only compensates for…

A

Losses that are accidents

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8
Q

Peril

A

Cause of a loss

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9
Q

Peril: Life Insurance

A

Death and/or accidental death

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10
Q

Peril: Health Insurance

A

Accident and sickness

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11
Q

Accidents start with…

A

Injury

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12
Q

Sicknesses are…

A

Illnesses

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13
Q

Accident-only Insurance does not cover…

A

Loss caused by illness

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14
Q

Hazard

A

Increases likelihood or scope of loss; increases person’s exposure to loss

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15
Q

Physical Hazard

A

Environmental, physical, or biological factor that increases likelihood or severity of loss

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16
Q

Moral Hazard

A

Condition that increases temptation to cause loss on purpose

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17
Q

Insurers reduce moral hazards by…

A

Principle of indemnity and insurable interest

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18
Q

Principle of Indemnity

A

Make people “whole” again after a loss, not better or worse

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19
Q

Principe of Indemnity is seen in health by…

A

only paying for costs actually incurred

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20
Q

Valued Policy

A

Insurer and policyholder agree on value in advance of a loss

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21
Q

In a valued policy, the stated amount is paid…

A

Regardless of the loss’ actual size

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22
Q

A valued policy is used to insure…

A

Against losses that are hard to calculate

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23
Q

Does a valued policy follow the principle of indemnity?

A

Maybe

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24
Q

Insurable Interest

A

To insure a person/thing, you have an obvious desire to avoid a loss

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25
Q

Morale Hazard

A

Risk of being lazy and not worrying about the cost of losses; usually unintentional

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26
Q

Morale Hazards are reduced by…

A

Requiring consumer to pay for a portion of otherwise insured losses (“cost sharing”)

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27
Q

Deductible

A

Amount of an otherwise insured loss that must be paid by the consumer before the insurer will provide benefits

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28
Q

Bigger deductible =

A

Lower cost

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29
Q

Deductibles reduce…

A

Morale hazard and small claims

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30
Q

In major medical insurance, deductibles are usually enforced…

A

Annually

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31
Q

First-Dollar Coverage

A

No deductible

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32
Q

Risk Transfer/Shift

A

Transferring consequences of a potential loss from one party to another

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33
Q

Law of Large Numbers

A

More data an insurer has about a risk, easier it is to make predictions about losses

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34
Q

Inadequate data can make a risk…

A

Uninsurable

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35
Q

Mortality Tables

A

Estimate how many people will die at a given age

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36
Q

Morbidity Tables

A

Estimate how many people will be ill at a given age

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37
Q

Pooling of Risk

A

Risk spread across a larger group to minimize impact

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38
Q

Pooling of risk allows insurers to…

A

Diversify their portfolio of risks

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39
Q

Rate Class

A

Risk within this same pool

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40
Q

Adverse Selection

A

Occurs when insurance is purchased disproportionately by high-risk consumers

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41
Q

Adverse selection makes insurance…

A

Unaffordable or unavailable

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42
Q

Adverse selection is typically managed by…

A

Carefully evaluating/charging each insurance application based on risk and/or limiting coverage for pre-existing health conditions

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43
Q

Uninsurable Risk

A

Loss too predictable and not accidental; probability of loss too high; size of loss catastrophic to insurer; insurers lack data to understand risk and pool it with others; speculative and could result in gain

44
Q

Insurance

A

Contractual arrangement involving risk transfer and the pooling of risk

45
Q

Parties of an Insurance Contract

A

Insurer and Policyholder/owner

46
Q

The Insurer

A

Issues insurance policy; accepts risk; receives “premium” as payment; controls policy with policyholder/owner

47
Q

The Policyholder/Owner

A

Receives insurance policy; transfers risk; responsible for paying premium; controls policy with insurer

48
Q

The policyholder/owner is typically…

A

The same person covered by the insurance

49
Q

Elements of a Valid Contract

A

Legal Purpose; Competent Parties; Offer and Acceptance; Consideration

50
Q

Legal Purpose

A

Contract cannot force someone to break the law

51
Q

Void

A

Automatically invalid

52
Q

Competent Parties

A

Must be an adult of sound mind

53
Q

Offer and Acceptance

A

One party makes an offer and the other party has the opportunity to accept or reject

54
Q

In insurance, the consumer typically makes the offer in the form of…

A

An application and premium

55
Q

Invitation to make an offer

A

Application without premium

56
Q

Counteroffer

A

Insurer refuses to insure someone at the original price but offers to do so for more premiums or with extra exclusions

57
Q

Consideration

A

Exchange of one thing of value for another

58
Q

In insurance, a premium is given in return for…

A

Agreeing to receive a transferred risk

59
Q

Consideration Clause

A

Explains what’s being exchanged for in the contract

60
Q

Consideration Clause: Consumer gives…

A

Application and Premium

61
Q

Consideration Clause: Insurer gives…

A

The promise to pay

62
Q

Consideration is contingent on…

A

An accurate and complete application

63
Q

Unilateral Contract

A

Only one of the parties makes a legally enforceable promise and can be ordered to fulfill its duties by a court

64
Q

Bilateral Contract

A

Both parties make a legally enforceable promise and can be ordered to fulfill their duties by a court

65
Q

Aleatory Contract

A

Contract that involves matters of chance

66
Q

Aleatory contract allows consideration to be…

A

Unequal between two parties

67
Q

Aleatory contract: Buyer can benefit more than insurer (and vice versa) depending on…

A

If/when a loss occurs

68
Q

Conditional Contract

A

Besides payment of premium, several rules need to be obeyed and several things need to happen before insurer must act

69
Q

Personal Contract

A

Contract between insurer and policyholder

70
Q

Does a personal contract allow transfer?

A

Only with insurer’s consent

71
Q

Policy Period

A

Contractual duration of coverage

72
Q

Policy Period: In major medical insurance…

A

Often for one year

73
Q

Policy Period: In life insurance…

A

Might be one year, a few years, or a lifetime

74
Q

Contract of Adhesion

A

Generally written by just one of the parties

75
Q

Contract of Adhesion: Ambiguous language should be interpreted to favor…

A

The non-writing party

76
Q

Reasonable Expectation

A

Policyholders should be compensated for losses based on what can be reasonably be determined by the policy language and what the insurer has disclosed

77
Q

Utmost Good Faith

A

For the sake of efficiency, insurer and consumer must rely on each other’s honesty

78
Q

Warranty (1)

A

A promise/statement that must be absolutely true at all times in order to keep a contract in force

79
Q

Warranty (2)

A

A promise to do or not do something during all the contract

80
Q

Representation

A

Statement of fact at a particular time based on the person’s own knowledge

81
Q

Misrepresentation can result in…

A

Voidable contract if it relates to a “material fact” and was intentional

82
Q

Material Fact

A

Information that, if known, would influence decision regarding whether to enter into a contract

83
Q

Misrepresentation

A

Providing false information

84
Q

Concealment

A

Failing to disclose information

85
Q

Rescission

A

Contract is treated as if it never existed; puts insurer and policyholder back in the same position they were prior to contract

86
Q

Cancelation

A

Contract is valid but is ended prior to intended expiration date

87
Q

With a cancelation, each party keeps…

A

Premiums and benefits already earned/owed

88
Q

Non-Renewal

A

Contract ends on intended expiration date but cannot be extended, even for more money

89
Q

Insuring Clause

A

Insurer’s basic promise to pay benefits

90
Q

Free-Look Periods

A

Gives buyers a limited time to review their coverage and get their money back for any reason

91
Q

Free-Look Period time frame

A

10 days from date policy is delivered (not issued)

92
Q

Lapse

A

Cancelation by insurer for nonpayment

93
Q

Assignment

A

Rights of policyholder are transferred to another party who isn’t part of the contract

94
Q

Assignment: In health insurance, involves…

A

Payment of benefits directly to health care providers

95
Q

Assignment often requires…

A

Insurer’s consent

96
Q

Subrogation

A

Insurer takes certain rights of the policyholder for itself

97
Q

Subrogation typically allows insurance company to…

A

Sue or collect money from third parties who caused a loss

98
Q

Subrogation allows for insurance companies to…

A

Reimburse one another

99
Q

Subrogation prevents the policyholder from…

A

Collecting insurance money and suing for the same loss

100
Q

Riders

A

Amend the insurer’s standard policy

101
Q

Riders often add additional benefits in exchange for…

A

Additional premiums

102
Q

Impairment Riders

A

Can reduce premium by excluding certain conditions or activities for that specific person

103
Q

Impairment riders are typically used to insure people with…

A

Pre-existing conditions, high-risk hobbies, etc.

104
Q

Certificates of Insurance

A

Proof of insurance provided to a third party

105
Q

Certificates of insurance are NOT…

A

A contract

106
Q

Changes to a certificate of insurance are invalid unless…

A

It is reflected in policy, too

IL Life and Health Insurance (29 decks)

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