Part 3 - Life Insurance Due Care

Question 1

Five traditional elements of financial analysis

Answer 1

1) Capital and surplus adequacy
2) Leverage
3) Asset quality and diversification
4) Liquidity
5) Operational performance

Question 2

Credit default swaps

Answer 2

Financial instruments bought by investors to protect against defaults on bonds

Question 3

Disciplined current scale (DCS)

Answer 3

Schedule of current nonguaranteed values shown in a basic illustration for which each set of implicit assumptions is based on the insurer’s actual recent current, determinable, and credible experience

Question 4

Lapse-supported policy

Answer 4

One in which later policy values rely on gains from policy lapses and surrenders to support those values

Question 5

Spendthrift trust clause

Answer 5

Provision within a trust or life insurance settlement option stating that the beneficiary has no power to assign, transfer, or otherwise encumber installment payments to which he or she is entitled

Question 6

Fraudulent transfer/conveyance

Answer 6

Under the Uniform Fraudulent Transfer Act, payment made with the actual intent to hinder, delay, or defraud a creditor

Question 7

Contra proferentum doctrine

Answer 7

Legal doctrine emanating from the notion that insurance policies are contracts of adhesion, and, therefore, any ambiguities in contract language are construed strictly in favor of the party not drafting the contract (i.e. policyowner and/or insured). Corollary is that a contract will be construed precisely as written, in the absence of any ambiguity.

Question 8

Reasonable expectations doctrine

Answer 8

Viewed by many legal authorities as an extension of the contra proferentum doctrine, requires that the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance be honored even if policy provisions negated those expectations

Question 9

Warranty

Answer 9

Attestation that statement is absolutely and literally true

Question 10

Estoppel

Answer 10

Principal that prevents an individual from denying or asserting any position contrary to that established by the individual’s own conduct or by previous legal determinations

Question 11

Interpleader

Answer 11

Payment of disputed insurance policy proceeds to a court for it to decide the rightful recipient

Question 12

Repudiation

Answer 12

Express act of voiding a contract

Question 13

Aleatory

Answer 13

Characteristic of insurance contracts providing the outcomes are governed by chance and that one party may realize more than the other

Question 14

Commutative

Answer 14

Characteristic of contracts involving an approximately equal exchange of value between contracting parties

Question 15

Valued policy

Answer 15

(Also called stated value basis)

Stated policy benefit payable without regard to the actual economic loss suffered

Question 16

Adhesion

Answer 16

“Take it or leave it”

Characteristic of personal insurance contracts providing that their terms and provisions are fixed by one party (the insurer) and, with minor exceptions, must be accepted or rejected word for word by the other party (the prospective policy owner)

Question 17

Expectancy interest

Answer 17

With revocable life insurance beneficiaries, an expectation of receiving policy death proceeds but with no current vested interest or rights prior to claim maturity

Question 18

11 Generally required life insurance contract provisions

Answer 18

1) Entire contract clause
2) Incontestable clause
3) Grace period
4) Reinstatement
5) Nonforfeiture provision
6) Policy loans
7) Annual dividends
8) Misstatement of age
9) Settlement options
10) Deferral of loan and cash value payments
11) Policy owner’s right to return the policy for a refund