What is adverse selection?
People who are more likely to submit insurance claims are seeking insurance more often than preferred risks.
What are the three types of risk rating classifications in life insurance?
Standard
Substandard
Preferred
What two elements are necessary for a life insurance contract to have a legal purpose?
Insurable interest and consent
How is the information obtained for an investigative consumer report?
Through interviews with the applicant's associates, friends and neighbors
What is policy replacement?
A new policy is issued while an existing policy is terminated or reissued with a reduction in cash value
What are the four elements of an insurance contract?
Agreement (offer and acceptance), consideration, competent parties, and legal purpose
What type of report provides information about the applicant's hobbies, habits and financial status?
inspection report
During which stage in the insurance process do insurers evaluate information that identifies adverse selection risks?
Underwriting
When would a misrepresentation be considered material?
When it may alter the underwriting decision
If an applicant for a life insurance policy and the potential insured are two different people, what would be the underwriter's main concern?
The existence of insurable interest between the applicant and the insured
Health contracts are prepared by insurers and must be accepted by the insured on an 'as is' basis. This describes what aspect of a health insurance contract?
contract of adhesion
What are the three main instances when insurable interest exists in life insurance?
Insuring your own life, the life of a family member, or the life of a business partners or someone who has a financial obligation to the policyowner
If an insurer needs to obtain information about the applicant from investigators, what is the insurer required to do?
Provide the applicant a Disclosure Authorization Notice
What report is used to assess risk associated with a health insurance applicant's lifestyle and character?
Investigative consumer report
What is a warranty in an insurance contract?
An absolutely true statement upon which the validity of the insurance contract is based.
What is the main responsibility of a company's underwriting unit?
Risk selection
Health insurance contracts are unilateral. What does that mean?
only one party makes a legally enforceable promise
When does an insurance policy go into effect?
When the policy is delivered and the premium is paid
When must the policy summary for a life insurance policy be delivered to the policy owner?
At the time of policy delivery
Insurance is a contract that protects the insured from what?
loss
What document describes the specific information about a policy?
Policy summary
What is the name of the process that insurance companies use to determine whether or not an applicant is insurable?
Underwriting
What do individuals use to transfer their risk of loss to a larger group?
insurance
Who is a field underwriter?
Agent/Producer
What is the purpose of the agent's report during the application process?
The agent's report discusses the agent's personal observations about the proposed insured that may help in the underwriting process
At what point does coverage begin when an agent issues a conditional receipt for a life insurance policy?
Either on the date of the application or the date of the medical exam (whichever occurs last)
Who must have insurable interest in the insured?
Policyowner
What is insurance underwriting?
The process of risk selection and classification
What are the two phases of an annuity?
Accumulation and annuitization (or pay-in and pay-out)
Regarding annuity payments, what is the difference between the annuitant and the beneficiary of an annuity?
The annuitant receives payments from the annuity during the annuitization period; the beneficiary receives benefits after the annuitant's death
Why are policy loans not available on term insurance?
There is no cash value to borrow against
What does the term "level" refer to in level term insurance?
Face amount
What type of annuity is suitable for someone who wants to select the benefit option that will pay the largest amount only for as long as the annuitant lives?
Straight life
An individual has a contract that will provide him with a certain amount of income for the rest of his life. However, this is not a life insurance policy. What type of contract does this person have?
Annuity
What type of life insurance policy provides permanent protection?
whole life
How long will a life annuity with a 15-year period certain pay?
For the life of the annuitant unless he/she dies within the first 15 years of the annuitization period; then the payments will last for 15 years
Under Option B in a universal life policy, what happens to the death benefit?
Under Option B, the death benefit increases each year by the amount of the cash value increases
What is the main reason for purchasing an annuity?
To provide income that the annuitant cannot outlive
During partial withdrawal from a universal life policy, which portion will be taxed?
Interest earned on the withdrawn cash value
What type of life insurance policy is Life Paid-up at age 65?
Limited-pay whole life
A policy states that it will pay a specified face amount if the insured dies during the 20 year premium-paying period and nothing if death occurs after the 20 year period. What type of policy is this?
20-year level term
What happens to the cash value when a whole life insurance policy matures?
Cash value is paid to the policyowner
What is the purpose of establishing the target premium for a universal life policy?
To prevent the policy from lapsing
What elements of an adjustable life policy can be changed by the policyowners?
The amount and payment period of the premium, the face amount, and the period for protection
An annuity purchased with multiple payments that begin income payments after one year from the moment of purchase is known as what type of annuity?
Flexible premium deferred annuity
Who receives income payments from an annuity?
Annuitant
Mortality tables are used by insurance companies to predict what?
Life expectancy and the death rates for specific groups of individuals
What universal life option has a gradually increasing cash value and a level death benefit?
Option A
What are the death benefit options in universal life policies?
Option A - level death benefit, and Option B - increasing death benefit
What type of premium is charged on a straight life policy?
A level premium for the life of the insured
Who is entitled to the cash values in a life insurance policy?
Policyowner
What type of whole life insurance policy generates immediate cash value?
Single premium whole life
What type of life insurance is best suited to cover a mortgage?
Decreasing term
When would a 20-pay whole life policy endow?
When the insured reaches age 100
What type of license(s) is/are required to sell variable annuities?
A life insurance license and a securities license.
How is the premium determined in a joint life insurance policy?
The premium is based on the average age of the insureds
Under a 20-pay whole life policy, in order for the policy to pay the death benefit to a beneficiary, the premiums must be paid for what time period?
For 20 years or until the insured's death, whichever occurs first.
What type of annuity requires an agent to have a securities license?
Variable annuity
In variable universal life insurance, to what policy component does the term "variable" refer?
Cash value and death benefit
In annually renewable term policies, what is the annual premium based upon?
The insured's attained age
What annuity settlement option provides income payments to the annuitant for the duration of his or her life, and also guarantees payment for a specified number of years?
Life income with period certain
What type of life insurance policy offers pure death protection?
term
What type of annuity can be purchased with a single premium?
Immediate annuity
What is the difference between a single premium and a flexible premium payment options in a deferred annuity?
The number of payments that purchase the annuity
When does an adjustable life policy accumulate cash value?
When the premiums paid are more than the cost of the policy
In flexible premium payment annuities, the term flexible refers to what?
Amount of premium
What are the two classifications of annuities according to the time when annuity payments begin?
Immediate and deferred
If the annuitant dies before the annuitization period starts, what will the beneficiary receive?
Either the amount paid into the annuity or the cash value, whichever is greater
A whole life policy that requires that the policyowner only pays premiums for a specified number of years is known as what kind of policy?
Limited-pay whole life
The death protection component of a universal life policy is expressed as what type of coverage?
annually renewable term
What type of life insurance offers an applicant a cash value element?
Permanent insurance (usually, whole life)
With a single premium deferred annuity, when will the annuity payments become available?
No sooner than 1 year after the annuity purchase
Can a business or a corporation be an annuitant?
No, an annuitant must always be a natural person
In what type of life insurance policies can the policyowner skip premium payments without the policy lapsing?
Universal Life
What type of whole life insurance policies only requires a payment of premium at its inception, and in addition to providing insurance protection for the life of the insured, endows at the insured's age 100?
Single premium whole life
What is the name for a life insurance policy rider that provides coverage on the insured's family members?
Other-insured rider
What is the advantage of reinstating a life insurance policy as opposed to applying for a new one?
Policy premium in a reinstated policy will be set according to the insured's original age.
With the reduction of premium dividend option, how is the dividend used?
The dividend is applied to the next year's premium (it reduces the next year's premium).
What are the dividend options in life insurance policies?
Cash, reduced premium, accumulation at interest, paid-up additions, paid-up option, one-year term, and acceleration of endowment
What dividend option is automatically selected by the company if not chosen by the policyowner?
Paid-up additions
What dividend option can increase the death benefit of the existing life policy?
Paid-up additions
In the fixed-period settlement option, how will the number of installments for the death benefit proceeds determine the amount of the installments?
The longer the period selected, the smaller each installment will be
What provision in a life insurance policy extends coverage beyond the premium due date?
Grace period
What term is used to describe methods of payments of the death benefit to the beneficiary upon the insured's death?
Settlement options
Which of the two types of policy assignments requires transfer of all ownership rights in the policy to a third party?
Absolute assignment
What nonforfeiture option provides coverage for the longest period of time?
Reduced paid-up
What are the three nonforfeiture options in life insurance policies?
Cash surrender, reduced paid-up, and extended term
What required provision protects against unintentional policy lapse?
grace period
What is the purpose of settlement options in life insurance policies?
To determine how the death benefit will be paid to the beneficiary
What type of assignment is used to secure the payment of a debt with an existing life insurance policy?
collateral assignment
What beneficiary designation has first claim to the death proceeds of a life insurance policy?
Primary beneficiary
What settlement options are available in life insurance policies?
Lump-sum/cash, fixed period, fixed amount, life income, interest only
What are policy dividends?
Return of unused premiums
With the interest only settlement option, what happens to the policy's death benefit?
Policy proceeds are retained by the insurance company; only the interest is paid to the beneficiary
When will a contingent beneficiary receive death benefit from a life insurance policy?
When the primary beneficiary dies before the insured
What life insurance policy provision states that both the policy and a copy of the application form the contract between the policyowner and the insurer?
Entire Contract
What type of beneficiary is next in line after the primary beneficiary?
contingent beneficiary
To meet the requirement of the entire contract policy provision, an insurance policy must contain what?
A copy of the original insurance application
What nonforfeiture option is automatically selected by the company if not chosen by the policyowner?
Extended term
What life policy rider allows the company to forgo collecting the premium if the insured becomes disabled?
Waiver of Premium
What type of beneficiary can be changed at any point by the policyowner?
Revocable
What does the term double indemnity mean?
The insurer will pay a benefit of twice the face amount
Under what nonforfeiture option does the company pay the policy's surrender value and have no further obligations to the policyowner?
Cash surrender
What happens to a policy's cash value under an extended term nonforfeiture option?
The cash value is converted to the same face amount as in the whole life policy
What are the most common exclusions in life insurance policies?
War and military service, hazardous occupation, and aviation
What life insurance policy provision prevents an insurer from disputing or denying a claim due to misstatements on the application after a certain period of time?
Incontestability
What provision allows the policyowner to reactivate a lapsed life insurance policy within a specified period of time with proof of insurability?
Reinstatement