Life Ch. 1 Flashcards
Elements of a Legal Contract
Agreement — offer and acceptance;
Consideration;
Competent parties; and
Legal purpose.
When does acceptance take place?
Acceptance takes place when an insurer’s underwriter approves the application and issues a policy.
What is consideration?
something of value that each party gives to the other.
What is the consideration part on the insured and the insurer?
The consideration on the part of the insured is the payment of premium and the representations made in the application. The consideration on the part of the insurer is the promise to pay in the event of loss
What must a policy have to be legal?
insurable interest and consent.
Contract of Adhesion
A contract of adhesion is prepared by one of the parties (insurer) and accepted or rejected by the other party (insured). Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. In other words, insurance contracts are offered on a take-it-or-leave-it basis by an insurer.
Aleatory Contract
Insurance contracts are aleatory, which means there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of loss.
Unilateral contract
In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.
Conditional contract
As the name implies, a conditional contract requires that 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. For example, the insured must pay the premium and provide proof of loss in order for the insurer to cover a claim.
Warranty
A warranty is an absolutely true statement upon which the validity of the insurance policy depends.
Representations
Representations are statements believed to be true to the best of one’s knowledge, but they are not guaranteed to be true.
Material representations
material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they are considered fraud.
Part 1 of application
Part 1 identifies the type of policy applied for and the amount of coverage, and usually contains information concerning the beneficiary.
Part 2 of the application
Part 2 - Medical Information of the application includes information on the prospective insured’s medical background, present health, any medical visits in recent years, medical status of living relatives, and causes of death of deceased relatives
Why would the agent complete the application?
If the agent feels that there could be some misrepresentation, he/she must inform the insurance company. Some insurers require that the applicant complete the application under the agent’s watchful eye, while other insurers require that the agent complete the application in order to help avoid mistakes and unanswered questions
What happens if a policy is handed in and there unanswered questions?
If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer to the question. The insurer will not have the right to deny coverage based on any information that the unanswered question might have contained.
Conditional receipt
The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last
Underwriting
the risk selection and classification process
What must there be in order to proceed or buy a life insurance policy
insurable interest must exist between the policyowner and the insured
Fair credit reporting act
established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. The law also protects consumers against the circulation of inaccurate or obsolete personal or financial information.
What kind of policy allows withdrawals or partial surrenders?
Universal life
Universal Life products allow the partial withdrawal, or surrender, of the policy cash value.
Required Signatures
Both the agent and the proposed insured (usually the applicant) must sign the application
What happens if an insurer receives an incomplete application
If the insurer receives an incomplete application, the insurer must return it to the applicant for completion. If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer to the question
Consumer reports
Consumer reports include 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
Investigative Consumer Reports are similar to consumer reports in that they also provide information on the consumer’s character, reputation, and habits.
Difference b/t consumer and investigative reports.
The primary difference is that the information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer. Unlike consumer reports, investigative reports cannot be made unless the consumer is advised in writing about the report within 3 days of the date the report was requested. The consumers must be advised that they have a right to request additional information concerning the report, and the insurer or reporting agency has 5 days to provide the consumer with the additional information.
Medical Information Bureau (MIB)
The MIB is a membership corporation owned by member insurance companies. It is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals
HIPAA
The Health Insurance Portability and Accountability Act (HIPAA) is a federal law that protects health information.
Disclosure statement
disclosure statement that provides basic information about the cost and coverage of the insurance being solicited.
help the applicants to make more informed and educated decisions about their choice of insurance.
Preferred risk
Preferred risks are those individuals who meet certain requirements and qualify for lower premiums than the standard risk. These applicants have a superior physical condition, lifestyle, and habits
Standard risks
Standard risks are persons who, according to a company’s underwriting standards, are entitled to insurance protection without extra rating or special restrictions
Substandard risk
Substandard (High Exposure) risk applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies are also referred to as “rated” because they could be issued with the premium rated-up, resulting in a higher premium.
Stranger-originated Life Insurance (STOLI)
is a life insurance arrangement in which a person with no relationship to the insured (a “stranger”) purchases a life policy on the insured’s life with the intent of selling the policy to an investor and profiting financially when the insured dies…
violate the principle of insurable interest,
initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in the life of the insured at the time of policy origination.
Investor-originated Life Insurance (IOLI)
another name for a STOLI, where 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 or annuitant.
