Overview
This lecture covers essential vocabulary and concepts for the life insurance exam, including types of policies, key terminology, policy provisions, riders, underwriting, annuities, Social Security, and retirement plans.
Insurance Company Structure & Regulation
- The Actuarial Department calculates policy rates, reserves, and dividends.
- Alien insurers are based in another country but operate in the US.
- Foreign insurers are based in one state, operate in another.
- Domestic insurers are based and operate in the same state.
- Admitted (authorized) insurers have a state certificate of authority to sell insurance.
- Claims Department processes, investigates, and pays claims.
Types of Insurers and Roles
- Broker: Represents clients, searches for best policy across companies.
- Agent: Represents insurer, sells policies directly.
- Captive insurer: Owned by a parent company to insure its own risks.
- Fraternal Benefit Society: Nonprofit, offers insurance only to members.
- Industrial insurer: Sells small policies, collects premiums weekly.
- Lloyd’s of London: Marketplace for underwriting rare risks.
Key Policy Terms & Provisions
- Insurance: Pooling resources to share risk and cover losses.
- Insured: Person/entity covered by the policy.
- Insurer: The insurance company.
- Policy: Written agreement providing compensation for covered losses.
- Legal Purpose: Policy must have a lawful objective.
- Insurable Interest: Must benefit from the insured’s continued life.
- Contract of Adhesion: Take-it-or-leave-it policy terms.
- Aleatory Contract: Unequal exchange of value, payout depends on chance.
- Unilateral Contract: Only insurer is legally bound to fulfill contract.
- Conditional Contract: Insurer pays benefits if policy terms are met.
Underwriting & Application
- Application: Document with applicant’s information for coverage assessment.
- Attending Physician’s Statement (APS): Doctor's report when health clarification needed.
- Consumer/Inspection/Credit Reports: Used to assess risk and financial responsibility.
- Declined risk: Applicant is too risky, denied coverage.
- Preferred, Standard, Substandard Risks: Categories based on health and lifestyle.
Types of Life Insurance Policies
- Term Life: Temporary, low-cost, no cash value, pays only if insured dies during term.
- Level Term: Fixed premiums and death benefit.
- Decreasing Term: Death benefit declines over time, premiums level.
- Convertible Term: Can change to permanent without proof of insurability.
- Renewable Term: Can renew without new proof of insurability.
- Whole Life: Permanent, level premium, builds cash value.
- Limited Pay Whole Life: Premiums paid for set years but coverage lasts lifetime.
- Modified/Graded Premium: Premiums start low, increase later.
- Joint/Survivor Policy: Covers two lives, pays at first or last death.
- Family/Children’s Riders: Add coverage for family members.
- Variable/Universal/Indexed: Cash value and benefits can vary or are linked to investments.
Policy Riders and Provisions
- Accidental Death Benefit: Extra payout for accidental death.
- Accelerated Benefits: Access part of death benefit if terminally ill.
- Waiver of Premium: Premiums waived if owner becomes disabled.
- Return of Premium: Refunds premiums if insured outlives term (higher cost).
- Guaranteed Insurability: Add coverage later without proof of insurability.
- Grace Period: Time after payment due to pay without lapse.
- Free Look: Period to cancel for a refund after receiving policy.
- Incontestable Clause: After 2 years, insurer cannot dispute policy (even if fraud).
Nonforfeiture and Dividend Options
- Nonforfeiture: On surrender, choose cash value, extended term, or reduced paid-up policy.
- Dividend Options: Cash, accumulate interest, paid-up additions, premium reduction, one-year term.
Beneficiaries & Settlement Options
- Primary/Contingent/Tertiary: First, second, third in line for benefit.
- Revocable/Irrevocable: Owner can (or cannot) change beneficiary.
- Per Capita/Per Stirpes: Distribution methods for multiple beneficiaries.
- Settlement: Lump sum, fixed period, fixed amount, life income, interest only.
Annuities
- Fixed Annuity: Pays guaranteed income, fixed or deferred.
- Variable Annuity: Investments fluctuate; payout varies.
- Immediate/Deferred: Start payments immediately or later.
- Accumulation Units: For variable annuities before payout.
- Exclusion Ratio: Determines non-taxable portion of annuity payout.
Social Security & Retirement Plans
- Social Security: Provides old age, survivors, and disability insurance (OASDI).
- Fully insured: 40 credits (quarters), eligible for all benefits.
- 401(k), 403(b), SEP, IRA: Tax-advantaged retirement savings, with specific rules for contributions and withdrawals.
Key Terms & Definitions
- Actuarial Department — Calculates rates and reserves for policies.
- Admitted Insurer — Licensed and authorized to sell in a state.
- Alien/Foreign/Domestic Insurer — Company based in another country, state, or same state.
- Beneficiary — Receives policy proceeds on insured’s death.
- Dividend — Surplus earnings shared with policyholders (mutual companies).
- Endowment policy — Pays at death or after a specified period.
- Grace Period — Extra time to pay premium after due date.
- Insurable Interest — Financial or emotional stake justifying coverage.
- Nonforfeiture Option — Choices for using policy cash value if canceled.
- Rider — Additional policy feature or amendment.
- Underwriter — Assesses risk and decides on coverage/price.
Action Items / Next Steps
- Review key terms and definitions from your study guide.
- Memorize contract types and main policy features.
- Practice risk classifications and policy options.
- Study beneficiary designations and settlement choices.
- Prepare for additional chapters on group and health insurance policies.