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60 Cards in this Set

  • Front
  • Back
party making application, offering himself/herself or another person to be insured by contract
- doc that provides info for underwriting
- becomes part of the contract
Attained Age
age at any point in time
Effective Date
date when coverage begins
form changing the provisions and attached to a policy
Face Amount (Limit of Liability)
death or maturity benefit payable
ability to meet requirements
Issue Age
age at policy issue date
termination of policy because of an unpaid premium at the end of the grace period
process of evaluating risk
Risk Management
process of analyzing exposures that create risk and designing programs to minimize the possibility of loss
contract used to indemnify against loss, damage, liability
Insurable Events
any event past or present that can cause loss or damage to someone with insurable interest
1. Risk
2. Speculative Risk
3. Pure Risk
1. Chance of loss exists
2. chance of loss or gain
3. Only loss. No gain.
Loss Exposure
Extent of being affected by a peril
Cause of possible loss
1. Hazard
2. Physical
3. Moral
4. Morale
1. increases probability of loss from a peril
2. tangible
3. dishonesty/fraud
4. indifference/recklessness
Over Insurance
- More insurance than the insured has to lose
- Excess not paid
- Not applied to life insurance
Methods of Handling Risk
1. Risk Reduction
2. Risk Avoidance
3. Risk Retention (Self-Ins)
4. Risk Transfer
5. Risk Sharing
Ideal Insurable Risk Requisites
1. large number of like units
2. definite cause, time, place, amount
3. accidental
4. cause financial hardship
5. excludes catastrophic perils (war, nuclear hazards, illegal operations)
Principle of Indeminity
insured is restored to the same financial condition prior to loss (not profit or lose from transaction)
Law of Large Numbers
the larger the number of exposures, the more closely the losses reported will equal the probability of loss
Reinsurance (Risk Sharing)
- transfer or share risk
- involves insurer originating the application (ceding company) and companies who share the risk (reinsurance insurers); strictly between two companies
- two types
Automatic Agreements
- one type of reinsurance
- ceding company must transfer the insurance in excess of the retention level immediately and automatically upon receipt of the premium
Facultative Agreements
- one type of reinsurance
- allows both parties to exchange advise about the underwriting of each case
- time consuming
- higher premium
Adverse Selection
- insuring those who are more prone to losses than the average (standard) risk
- higher participation rate
- above average (preferred) risk
Hold Harmless Agreement
- contract removing liability of one party from a second party
- used mostly in health replacements
- measure of Risk Avoidance
Insurable Interest
1. possibility of an economic loss due to sickness or death
2. can't purchase w/o consent of the insured (w/exception of minors)
3. Insurable Interest must exist at the time of application (not necessarily at the time of loss)
4. Insurable Interest on one's own life is unlimited
5. Love and affection exists
Buy-Sell Agreement
- continuation of business after the death of an owner through a contract that stipulates that the deceased estate must sell back to the entity at a predetermined price
- Funded by any type of life insurance
Cash Value
- money accumulated in a Permanent policy that the owner may borrow as a policy loan or receive if the policy is surrendered before maturity
- surrender charges
- paid to policy owner
- may be a source of supplemental income
Nonpar (nonparticipating policies)
no dividends to policy owners
Par (participating policies)
annual dividends to policy owners
Policy Owners
- one with ownership rights
- owners and insured usually the same
- changes must be made by the owner in writing with signature
Personal Uses of Life Insurance
1. Survivor Protection ($ for dependents)
2. Estate Creation
3. Estate Conservation
4. Cash Accumulation
5. Liquidity (funds upon death to pay final expenses)
6. Viatical Settlements (policies purchased from a terminally ill insured)

- reduces risk by transfer
Determining Amount of Personal Life Insurance
1. Human Life Value
2. Needs Analysis
Human Life Value
Measure of future earnings in the event of premature death based on:

- after-tax annual salary
- annual expenses
- value of all personal assets
- number of years expected to work
- age of all family members
- value of individual dollar as it depreciates over time
- present salaries of all wage earners in the home
Needs Analysis
Measures coverage by assuming that the death is immediate and:

- all financial needs caused by immediate death, including age of each dependent
- Subtract assets available to fund financial needs after death
- Determine which needs should continue (mortgage) and which needs should stop (retirement)
- Emergency Reserve Fund
Income Objectives to determine amount of life insurance needed
1. Capital Liquidation
2. Capital Retention/Conservation (investment earnings)
Advantages of Buy/Sell Agreements
1. Legally enforceable
2. Value is predetermined
3. Immediate/automatic method of transferring deceased interest
Disadvantages of NOT having a Buy/Sell Agreement
1. No income for surviving family members
2. Surviving business owners may suffer loss of income
3. Asset reduction due to forced liquidation
4. Delay in estate transfer due to #3
5. Shares of ownership transfer to relatives instead of remaining owners
Types of Buy/Sell Agreements
1. Cross Purchase Plan
2. Entity Plan
Cross Purchase Plan
parties purchase life insurance on each other or the employer
Entity Plan
Business is the owner and beneficiary for each contract participant, but not insured
Key Person (Key Employee)
Life Insurance purchased to offset expenses of the death of a valued employee for

- decreased cash flow
- recruiting costs
- training costs
- replacement costs

No employee retirement and does not replace group insurance

- written for the benefit of the employer who is the owner, premium payor, and usually the beneficiary
- if the owner is not the beneficiary then premiums can be deducted as a business expense
Deferred Compensation
- incentive plan
- employer promises to pay key employees certain amount of money at a future date (usually retirement)
- taxes deferred until employee gets the funds
- employer is the owner and beneficiary
- if the employee dies, than the benefits go to the employer who will pay the employee's heirs
- if the employee retires, then the policy can be surrendered for a payout
Split-Dollar Plans
- not tax deferred
- upon employee's termination, the policy can be purchased from the employer at an agreed price
- premium payments split between employer and employee
- death occurs, benefits are split between heirs and employer
- time period must pass before employee is entitled to any of the cash value
Executive Bonus Plans
- corporate cross purchase buy-sell agreement
- premiums are bonused by the corporation to each shareholder
- treated as compensation not dividends
- rider typically included to forbid surrenders, withdrawals, or any actions unless endorsed by the corporation
Minimum Deposit Plans
- policy loans used to pay premiums on the cash value
- each year's interest is to be paid in cash in order to receive any advantage to being deductible under a policy owned by a business
Third Party Ownership
- policy owned by one person that insures the life of another person
- policy owner, insured, and insurer
Classes of LI Policies
1. Group
2. Individual
3. Ordinary Life Insurance
4. Industrial (Home Service)
5. Permanent
6. Term
7. Participating
8. Non Participating
9. Fixed
10. Flexible
11. Variable
Group Policies
- owned by an employer
- 40% of all US LI and 85% of group is employer-employee
- can only be changed within the Master Policy
- no cash value
Individual Policies
- full individual ownership
- build equity (cash) value
- may furnish income in the form of an annuity
- build or preserve an estate
- may provide living benefit to the terminally ill
Industrial (Home Service)
- debit life insurance
- .03% of all LI in the US
- small policies ($250-$1000)
- aka: Monthly Debit Ordinary Policy (MDO)
- agent collects premiums for the insurer
Permanent Policies
- remains level in amount and premium
- no renewability required
- protects to 100 or until surrendered or canceled
- higher premiums
- form a living benefit
Term Policies
- lowest premium for the biggest benefit
- covers a short time period
- does not build equity
- covers mortgages and short term obligations
Participating Policies
- dividends paid as they are declared
Nonparticipating Policies
- all futures guaranteed
- stock company receives the profits and dividends
Fixed Policies
- fixed coverage, benefits, and premiums
- may need riders to cover inflation
Flexible Policies
- Universal and Variable Universal Life
- more options in terms of premiums, investments, and benefits
Variable Policies
- uses separate accounts for cash value accumulation like mutual funds
- need a securities license to sell this policy