Transcript for:
Fundamentals of Insurance Concepts

hi welcome to this video on General Insurance Concepts my name is Chris and I will be your insurance exam guide so in this video we're going to cover the concepts that are important for you to know for your exam uh covering both life and health insurance Concepts so let's get started to begin let's start with talking about what insurance is and the main way it's defined that you need to know in your exam is insurance is a way to handle risk you'll hear us talk about the transfer of risk here in a moment but what to begin with is risk it's really just the potential for loss so in the case of life insurance you're covering the potential loss of life uh obviously with health insurance you're covering the potential reer loss of health or for sickness and also prevention of sickness um it is also in property the loss of property we're not going to be covering prop property as much here today in this video series we're going to be focused on life and health so let's look at the next idea or concept which is what are your options for handling risk here's the five ways in which you can handle risk avoid reduce retain transfer or share or pull your risks as it's called in insurance so let's break these down one by one one the first one is avoiding risk and sounds like a good idea right if we could avoid our risks in effect we wouldn't really need insurance but we all know that's not a realistic possibility life itself inherently has risks so the strategy of avoiding risks is a pretty limited strategy reducing risks is sensible right we all take precautions for example we're driving we try and drive at least in a reasonable way to try and avoid accidents um same thing when it comes to our our health or even our life itself everything that we can do to prevent illness uh or tragedy or death you know we uh we do that to the best of our ability so you could see any effort that you take to reduce risk is Manner of taking precautions is also a way of handling risks like avoiding it though reducing risk doesn't eliminate risk another way in which you can handle risk is to retain risk it's the term that's used in insurance or self-insure all that means is that you're going to take that risk in Life or in health on your own you're not going to utilize any other outside party to help you handle that risk so for example uh if I decide to go without health insurance then I'm self-insuring meaning that I'm prepared or have to be prepared to pay 100% of the cost for any Health Care Health incidents that happen so retaining risks uh again can be very costly for people and that's why insurance is a useful product it helps you know so that we don't have to retain all of the risks ourself so finally we get to the strategy that is the core or life flood of insurance and that's called transferring risk you need to know this on the test uh you will see Insurance referred to as the transfer of risk what does it mean to transfer well it means to turn over or you know give that risk over to an outside party in this case you know an insurance company company it is the safest option uh the insurance company in this case when you transfer the risk is going to cover you know at least a portion or even all of that risk um that you have in your life so again going back to like a health uh Insurance situation um we transfer that risk to the insurance company so that if I have some kind of catastrophic Health event um I don't go bankrupt right if I have a $100,000 operation I'm covered and I don't have to pay that $100,000 just on my own so you'll see in health insurance there's sort of a transfer of some of the risk and maybe retaining some of the risk so it is possible with insurance for a person to retain some of the risk uh but transferring those large costs or even the majority of it to the insurance company in terms of life insurance of course you know we're transfer ering that risk of loss of life uh really entirely over to the insurance company meaning that in the event of death then the insurance company pays um a set amount whatever was decided on in that policy so the risk associated with loss of life then is transferred to the insurance company and they're going to pay out to the beneficiaries or the people who are receiving the benefit of that policy another option for handling risk is called sharing that risk or pulling the risk so this often happens within a group or organization let's say for example that uh you run a small business and there are other people other small business owners a similar kind of risk and you pull together uh your resources and create a way of protecting each other from those risks in other words you put your own money uh together within a large group to create a pool of money that's available then for anyone in that group to utilize if some sort of incident occurs that they need the coverage for another example of this would be um there are some church organizations who offer to uh those church members to uh pull their money together to form a kind of policy to cover their health it's not exactly insurance it's a a a share of money that's put together and there are rules and regulations that are set up around that but it's not officially you know an insurance policy or an insurance company that's handling that risk so again you get the idea risk is about you know spreading that risk um handling risk is about spreading the risk Beyond just yourself so that you know you're not responsible for 100% of the costs yourself and that's the main takeaway here when you talk about handling risk you know how do we manage that in a way that's not going to leave us as an individual to end up um you know bankrupt okay the next concept we're going to address here are called hazards in insurance and Hazards another way of saying conditions where there's an increased chance of loss and of course you know it's important to start thinking in a sense from both the standpoint of us as regular consumers or individuals and also learn to think from the standpoint of insurance companies who are taking on risks so that's one way I'm going to have you of expand your thinking to include what's the perspective of insurance companies and these hazards are really you know considerations on the part of the insurance company that uh you know are going to make for conditions that make it more likely for a person to experience a a loss and so of course those are very important to insurance companies to manage so that they don't have to pay out too much on uh any one member of their policy so let's break these down and look at each one of them individually so the first one is physical hazards and that's pretty self-explanatory uh if you were going to sign up for a policy and let's say it's a health policy you have a chronic illness or you suffer from obesity blindness or maybe you're a smoker obviously those physical conditions are conditions which put you at a higher risk so again when we think from the standpoint of the insurance company that's not good right it means they have a much higher chance of having to pay out on claims for people who have these physical hazards so again keep in mind these hazards are really uh you know looked at from the standpoint of the insurance company's perspective let's go on and take a look at the next type of Hazard and that is called moral hazard so what's the risk here well uh obviously if somebody lies or conceals key information when they are filling out an application for insurance or they're engaged in ilicit Behavior like doing drugs and alcohol um and you know covering that doing things that are illegal so people who are lying or doing illegal things uh of course are a much bigger risk and concept here is called moral hazard so if you ever remember one thing remember uh moral hazard is like lying and uh doing bad things all right so no morals right uh it's it's kind of contained in that word now another very similar word but different meaning is morale so what's the difference between moral and morale we said moral is you know not having any morals lying and concealing things lack of morale means a person is careless or indifferent and why is that a consideration for the insurance company well somebody who's careless or indifferent is much more likely to engage in Reckless Behavior you know they're not really concerned about outcomes they're not really taking precautions they're just I don't know you know either thrill seeking or have a cwh May sort of attitude so that's a hazard for the insurance company that's taking on that risk I again if you think from the insurance company standpoint would you want to cover somebody who is uh planning on you know going up and cliff diving or you know doesn't care when they drive drives really fast all the time right you would uh pause before you'd want to cover such an individual so there you have it those are the three types of Hazards just keep in mind moral uh means you know morals and morale means lack of morale or carelessness Reckless or indifferent attitude next Concepts we're going to go to is loss Peril and risk so very straightforward here loss like everybody understands intuitively but from insurance standpoint you know it's a more fancy definition I guess I guess you could say is the unintentional decrease in value of an asset due to a Peril so it is a decrease in value so remember insurance is really about finances even life insurance we think you know of life insurance as covering somebody's life it does but it's doing so from an economic standpoint so insurance is always concerned about you know loss in economic value or decrease in value so what's a Peril because it says the decrease in value of an asset due to a Peril well Peril in Insurance terminology is the cause for the loss right so um I guess the easiest example here actually comes from property insurance we have hail storms that happen right or a storm that happens that's a Peril that could cause you to lose or have your house damaged right so that's um you know one easy way of describing the Peril and risk is always that potential for loss so perils are there and they create because the the reality of perils those create um the risks that we're covering through inance Insurance all right a really important distinction here in Insurance terminology is between speculative and pure risk so you see in the picture there uh a roulette wheel and that's speculation right and speculative risk is a situation where there's a possible loss or a gain and insurance is not going to cover speculative risk for that reason when you think about that it makes kind of sense right why would insurance company cover um some sort of gamble that a person is taking because they might lose and which case the insurance company has to cover it or they might gain but guess what the insurance company doesn't participate in that game so the easiest way to think about this stuff is again if you were an insurance company you know know would you write a policy for somebody to cover their gambling habit where every time they lost you had to pay them but every time they gained they got to keep the money that's not a very good deal right so insurance companies do not cover speculative risk so what do they cover well they cover what's called a pure risk and the definition of pure means that only loss can happen so that's the only kind of insurable risk is where loss is the only potential outcome so what are some examples of that well uh injury is one there's no way that you can really gain from an injury right it's a pure loss illness is another one we can't gain from the illness we can only lose we lose our health and the big one of course is death death is a pure loss right there's no gain for that person so these make um by by definition these become insurable risks because there's no possible chance of gain so the insurance company can decide you know what's going to be the cost of that loss and they can cover that potential loss you know based on analyz in each situation all right so I know there's a lot of Concepts and uh you know best thing to think of is you have to review these several times so don't worry if it feels like a lot uh it is it'll all begin to sink in you can watch this video multiple times let's talk about the elements of insurable risk so there are some key things for a risk to make it insurable again we're going going to break down each one of those so uh you know bear with me the loss has to be due to chance it has to be definite and measurable has to be predictable not catastrophic got to be large in number or common and randomly selected so some uh easy terms in there some maybe you know slightly confusing ones but we're going to go through each one and make sure we break them down they become clear so first off is that the loss has to be due to chance and that means that it was outside the control of an insured person so this is really important I guess you know one of the things that uh you could use as an example May it's not a very happy example but uh when it comes to life insurance uh the loss of your life has to be due to chance and you'll see actually Clauses in every life insurance policy that says you know almost everyone that says you know it's not going to cover suicide right suicide would be a way you know that's in the control of the insured person and so you know death has to be um due to chance so again when you think about all of these things think from the standpoint of the insurance company itself why why does it need to be by chance because uh if not they can't make good statistics for outcomes that they can cover right it becomes not uh profitable for insurance companies to cover risks that are planned or events that are planned they have to be happening by chance to make it uh work out statistically where it can still stay profitable for the insurance company loss also has to be definite and measurable same kind of thinking here uh insurers are only going to cover specifics you know specific events that happen a particular time in place and amount it's not can't be something that's like you know vague um it's got the loss has to be definite and measurable so an example here would be um you know maybe with a specific Health event uh you know if you had a heart attack or you know something some severe thing that happened some sort of loss that happened um it has to be very clear when and how that happened so that the insurance company can cover it it also has to be predictable insurers have to be able to use statistics to define the average what's called frequency or severity of that that loss so uh insurance companies are always analyzing statistics so you know it's these are mathematical kind of calculations if they couldn't do that they couldn't run a business an insurance company can't exist without being able to calculate statistically how many losses it's going to incur again think about it if you were setting up an insurance company and you had no idea you know how many losses that might occur and you're taking in people's money right premiums they pay for that policy and you have no idea you know how much you're going to have to spend out that's not a sustainable business model right so for insurance to work uh for the companies and then for us as the people who benefit from the insurance losses have to be predictable they have to be able to do an analysis maybe another you know example from property insurance standpoint would be um you know they're going to look at an area in which you live and determine how many risks how often for example hailstorms happen in your area how often do hurricanes happen in your area and they can look at that statistically right and make decisions about how and if they're going to cover those risks so predictable also the loss must be not catastrophic now I've just used example of like um hurricanes you know that sounds pretty catastrophic right so uh the insurance company has to have a way of dealing with catastrophe well again remember we're thinking from the insurance company perspective here what does catastrophe mean to an insurance company well it really means what if there's too many claims at once uh you know so using the hurricane example or flooding example right if you're writing if you're an insurance company that's covering people who are flooding in an area like where Katrina hit or covering for hurricanes in Florida um you're at risk for having to cover catastrophic amount of claims all at once so insurance companies have two options in that situation they can either decide not to cover at all so they can exclude coverage and you'll see that some times like with flood insurance or you know in a health insurance example um you know you might have a a policy or life insurance policy that won't cover people if they're you know diabetic for example so you know they're going to maybe exclude certain uh things that they cover that's one way way of not having too many losses at once the other option that they have and you need to take note of this one too is to use what's called reinsurance and reinsurance simply means the insurance company buying an insurance policy that sounds kind of different doesn't it reinsurance is an insurance company taking out a policy for itself to cover in the case that it has a situation like that again a good example is a hurricane um use some sort of huge event that's going to cause a lot of claims and literally could make that insurance company go bankrupt if they weren't covered so they buy their own policy from another insurance company that covers them so it's almost like two layers of coverage right so reinsurance is the insurance company transferring risk to another insurance company to protect them from catastrophic situations or situations where there's you know a huge amount of claims all at once okay the next element here is the loss has to be large in number or common and this is an important concept for you to know you will see this uh you know for sure uh on the exam there it is called the law of large numbers so make a know that the law of large numbers there have to be enough um things in common with the insured to make a big enough pool of what are called homogenous exposure units I know that's not language you see every day right it simply means people with similar risks here's an example um let's take a life insurance example when you look at any given age group let's say a 30-year-old male or a 30-year-old female you can uh look at statistic statistics right and see what's the chances of them you know uh for for them to lose their life and there are similar statistics and if you have enough of them that you're covering then that large number makes it possible for you to predict uh for those statistics to work out so let's uh take an example let's say I'm uh writing you know again I'm an insurance company I started an insurance company and I decide to cover um you know people for life insurance and what happens if I only signed up like 10 people I only have 10 people in my insurance plan that's not a very large number so I might have all the statistics for where they live and what age they are uh to predict you know how many people at that age are likely to die prematurely you know at age 30 but if I only have 10 people who knows right I might be get really unlucky and you know four of my 10 uh people who are members of my insurance company um die all within the same year now I've got a very high claim you know to pay out so statistically the way statistics work is unless I have a large number of people it's really hard to uh make those numbers work out in a way that I can predict and I can manage so here's what you need to take away the larger the group The more predictable losses will be and that's just a rule of Statistics you know if I have a thousand people in my plan or even 10,000 people in my plan across 10,000 people those statistics are going to end up working out pretty right on you know like a certain percentage of those people people will pass away a very small percentage right most people don't pass away at uh age 30 so once I have a large number then I can manage that risk it becomes an insurable risk so that is uh the law of large numbers important for you to know all right now the last element of insurable risk is that the Lost has to be randomly selected that sounds like a kind of confusing or strange way of uh describing you know a risk but or a loss U but it simply means that in order for things to work out again to be predictable for the insurance company they have to have a balanced number of good and poor risks let me give you an example from health insurance let's say um you know I sign up people for health insurance and uh all of the people that I sign up you know they're only people who are diabetic right or let's say you know uh nine out of 10 of them have diabetes that's not a balanced number of risks right those people are who have diabetes are at higher risk for needing health services and you know risk for other diseases and uh as an insurance company I'm I'm liable for that so if I have two many people with illness in my policy and I don't have balance it's not balanced out with healthy people then again my business is not sustainable best way to think about all of these concept these elements of insurable risk is from that perspective of the insurance company how can an insurance company stay in business they have to have a balance right there has to be some predictability and balance um in order for them to stay in business so uh that's the element of insurable risk is loss has to be randomly selected there's got to be this balance between good and poor risks speaking of managing risk there is a concept called adverse sele C you kind of think of this as the opposite of what we just talked about in terms of random selection adverse selection is this tendency of people to seek out um Insurance when they're in a high risk situation it's kind of natural when you think about it from the standpoint you know of us as consumers but when you think from the standpoint of an insurance company that's not a good thing for example when is a person most likely to want dental insurance or to seek out dental insurance well when their teeth start hurting so that makes sense for us right as consumers from the insurance company standpoint that's terrible right what if all of your customers that are coming to you are coming to because they need to have a covered an event covered you know a health event covered right away that could be very costly right let's say you know you're you have an insurance policy for dental insurance that costs I don't know you know $30 a month and so the person pays their premium of $30 to have this policy and they immediately go to the dentist in the first month to try and get a crown fill that's $1,000 right they paid $30 and they're going to need $1,000 of coverage right away right if you're an insurance company that would be pretty tough if all of your customers were doing that right so uh it's adverse for insurers to cover this so again think from the standpoint of the insurance company with respect to these terms it'll help you immensely adverse for the insurance company if people select Insurance when they're at highest risk for needing it risk management is simply what insurance companies do insurers do to analyze risks and design ways to handle them so they have to figure out how do we offer this policy without people coming in in that situation we'll talk more about that later in other videos about some of the strategies the plans you know how insurance companies actually do that risk management uh in further sessions and now we're ready to move on to insurance contracts so you know insurance contracts insurance is a business and these contracts are legal contracts so they have specific requir requirements to them and you're responsible for knowing those on your exam so there's got to be four elements uh in every insurance contract those are consideration legal purpose offer and acceptance and competent parties and you guessed it we're going to break it down cover each one of those individually so let's start with consideration so this term consideration means there's an exchange of value both parties meaning the insurer insurance company and the insured so that's us right consumers or clients people who are seeking Insurance both have to bring something to the table that's true in every contract that's not hard to remember the insurer promises to pay covered loss that's defined in the policy and the insured offers an application for a policy and premium payment so you're going to know this uh need to know this on the test you're going to remember that consideration is an exchange of value and remember what each party has to bring it's really simple the insurer promises to pay and the insured offers an application you know says I want the policy so that's part of their value and then they they make their premium payment uh as well for that policy so that's consideration next concept there legally is legal purpose so this is also kind of intuitive or common sense the insurance contract can't violate any laws so an example might be you can't write a policy to cover a drug dealing business right because the business itself is an illegal Enterprise so it might be you know a great contract a great concept but it's not legal also you can't write a life policy on a person without their consent that's also not legal for example I can't just go you know write a life policy on my father-in-law without him agreeing to it pretty obvious why right I might want why I might want to do that you know capitalize on somebody's um death you know that's not legal right and they so they have to give consent yes I will write a policy and uh you know they agree to it then it's fine not legal if they don't consent to it so insurance contracts have to have a legal purpose they have to be based on laws that can't break any laws all right let's cover number three here which is offer and acceptance and I think this is pretty intuitive too with any contract there's usually some sort of offer and then the other party has to accept so same same is true uh in Insurance let's use the example of a life insurance policy an applicant submits an application it usually includes their U you know first premium payment that's a way of showing yep I'm serious I really want this policy then the insurer reviews that application may go through a process of underwriting uh meaning that insurer is going to take a look at that person's uh individual risks and decide if they want to take on that policy so they can decide yes we're going to accept that person and accept their offer and then a policy is written or they might possibly make a counter offer and say you know yes we'll take you under these conditions we'll get more into the details of what that might look like in a life insurance contract later on for now just suffice keep in mind that uh there's an offer that's made the applicant makes the offer and the insurer reviews and then decides whether they're going to accept that offer fourth uh the insurance contract has to be made between competent parties again I think this is pretty self-evident or intuitive uh not hard to understand that anyone applying if you accept an application as an agent from a person you need to be sure that they're of legal age of course right you can't have a child submit um like a life insurance policy and then secondly you have to also U assure that they're of sound mind um this is particularly relevant let's say you're writing a life insurance policy or a senior citizen you know somebody maybe uh you I've written policies for people well into their 80s some of those folks are as sharp as a tech some of them you might feel like I'm not sure if they quite understand what I'm saying and uh anytime you're in that situation you know it's best to you know back away not make a contract don't make a contract with somebody if they appear not to be of sound mind or really understanding fully what you're talking about because of their you know mental capacity whatever that might be another situation that diminishes mental capacity if somebody's had a lot to drink or maybe they seem like they're on pain pills or or both and they're very fuzzy and not clear about what you're saying don't want to write an insurance contract uh in those S situations for obvious reasons right so we only want to write insurance contracts when people appear of sound mind they're competent and they know what they're doing all right now we've got all that covered let's move on to insurance contract features what are some of the features of contracts first off it's what's called a contract of adhesion so I know these are new unfamiliar terms that's why we're learning them but uh once you learn them you realize they're not they're not they're not too hard once we break it down adhesion simply means that it is the insurance company who is the only author of that contract so when it comes to insurance contract you don't sit down together with the insurer and write it up they write the contract you as the insured or the consumer has to stick to it that's how I remember it's called adhesion you know you have to stick to what's written by the insurance company and you get to either accept that or reject it you say yep I want to sign up for that policy as it is as it's written or not um keep in mind that if if there's anything unclear later on in the contract that you didn't understand usually if there is any kind of legal dispute and you feel like you've been unfairly treated courts tend to favor the insured in this situation for that very reason that uh the insurer or the insurance company was the one who wrote it so if they wrote something that was confusing to you it's not usually considered to be your fault if uh you know anyone who's reasonable could see up yeah that looks kind of confusing um then courts are going to rule in the favor of the insured in those situations if it ever comes to that so all you got to remember here contract of adhesion it's the insurance company who writes it the consumer has to stick to what the insurance company has written all right next concept here is insurance contracts are what are called an alator contract and I yeah think that's an unusual term we don't use that language in everyday life and the way to remember it is simply means it's an unequal exchange to cover the chance of loss the the best and easiest example here would be a life insurance policy let's say you make an offer for uh and Insurance life insurance policy the insurance company accepts that offer writes that policy now you're covered and it's a $100,000 death benefit and you've made your first premium payment which is $50 a month you paid that premium you're covered for that amount and as Fates would have it let's say you know uh a terrible event happens and uh you know that causes you to lose your life then then that payment $100,000 has to be paid to your beneficiaries alator means that was not an equal exchange right you've only paid $50 in that case and the insurance company is on the hook to pay a full $100,000 uh even though they've only received 50 that's a pretty unequal exchange but it's how it works that's the whole idea uh whole reason why people want insurance is that it is alator so that's all you got to remember here alator means it's unequal exchange insurance companies pay you know uh generally a lot more than what they receive from any one single person so alator you pay a little you get a lot and just to tie that back to what we said before how can an insurance company do that remember that law of large numbers they got $50 from you but what if they sold uh 10,000 policies then they have enough to cover that death benefit for that one person right so it all works out with large numbers that's how Insurance works all right the next feature of insurance contracts is that they are what's called unilateral and the easy way to remember this is uni means one and lateral means side it's onesided only the insurer is legal obligated to do anything um that sounds strange right but really as a insured person you are um if you want to keep a policy of course you have to keep paying the premium but you can decide to stop paying the premium and just lose that policy in other words you're not under any legal obligation to do anything uh nobody says by law you have to pay that premium if you don't uh you're not going to be able to keep the Poli policy but the insurance company can't sue you and say hey he didn't pay his premium they're just going to cancel the policy right so it's only the insurer only insurance company is legally obligated what are they legally obligated to do they have to pay you according to terms and conditions of that policy so that's unilateral it's one-sided it's only the insurer who has a legal obligation the next feature of an insurance contract is that it's conditional contract and that simply means that certain conditions have to be met for benefits to be paid um there's lots of different examples of this you can think of any one of the conditions you know for for example maybe you have a um a health policy a health policy says hey we only cover you if you go to this particular network of doctors if you go outside that Network you know we're not going to cover or pay for those uh Health Services outside of a network so that's one of the conditions of the contract um you know with life insurance policies there's other conditions uh that are going to be in any contract that have to be met in order for that obligation of payment uh to be fulfilled here's a concept that you also need to know uh indemnity contracts that simply the term Indemnity simply means restoring the insured after a loss or uh we like to say you know making somebody whole again so you see in the picture know broken cup that's fixed Indemnity contract restores you back to the original state you were in before an event happened whether that's you know physical event a health event a life event uh even property event uh so Indemnity contracts are not supposed to make you gain and health insurance is a good example of that you're let's say you know you have a health insurance policy and it covers you for um you know many ways for your for your health events illnesses or sicknesses that happen let's say um again you had something like um you know heart attack that landed you in the hospital well they're going to pay for that hospitalization but they're not going to give you additional money so let's say your hospitalization you know came to $20,000 now the policy says you know they will cover an limited amount or you know they'll cover uh $50,000 but if your bill is only $20,000 they're going to cover that $20,000 you're not going to get you know an additional amount beyond that so Indemnity means that you're not gaining you're being brought back to hold meaning where you were financially before that event happened now a value contract is um something you'll see in life insurance those are value contracts and that means that um it is going to pay a stated amount for a loss so when it comes to life insurance you know you'll decide together with you know as an with an agent you're going to be an agent you decide with your customer what sort of value are they going to put on a person's life now again remember when we say that we're not talking about the actual value of that life we're talking about the economic value of their life so if a loss were occur that loss of life how much money would be needed to cover expenses that are going to occur uh from that death from that loss of life so for example you would have funeral and burial expenses um maybe you also want to cover current Andor future expenses uh it's not uncommon for somebody to want to have coverage to replace their income for example or maybe pay for pay you know pay off the house or pay for their children's um you know future expenses for education for college so you know you can calculate the value and then determine what's called a face amount how much do I want uh stated value this person's life and then you write a policy accordingly another feature of insurance contracts is they are based on what's called utmost good faith that's just a fancy way of saying that um you know it's implied or assumed that everyone is being honest in their part of the contract in other words the insurer is being straightforward as possible you know they're trying to describe uh in good faith what they're covering and be ensured the person who's applying for coverage is being honest in stating you know what their condition is uh again whether it's life or health insurance they're being honest about what's the condition of their of their health uh what's their you know what's their condition their reality uh are there any risks that they're taking that the insurance company should know so utmost good faith means everybody's you know being honest and forthright as they enter into this contract now uh another feature is called warranties and these are statements made by an applicant that are guaranteed to be true so they're not they're not vague they're uh very explicit things usually they're um you know straightforward example of that would be you write down your actual name your date of birth these are things that there's there's uh there's no ambig it about right it's warranteed meaning it's guaranteed to be true another thing that's on a contract though are what are called representations now these are different than warranties because they're still believed to be true but they're not guaranteed necessarily so uh for example maybe uh you as an insurance agent ask somebody about their health and people um you know aren't necessarily lying or concealing and say oh yeah I'm in in good health and they're not thinking very deeply about maybe what they've experienced in the past two years three years uh so you know you might say to some yep I'm healthy you don't think back that actually a few years ago you did have a heart attack so maybe you're okay now but the insurance company probably wants to know uh about that you know because it still can affect your health now even though you're feeling pretty healthy so um another one this actually happened to me recently I had a client that said they didn't smoke because they Vape you know they're vaping they're like in their mind they're like no this isn't smoking it's it's vaping so they're representing you know representation they're representing themselves in in uh they're they're saying things that they believe to be true they're not lying but they're just not being uh thorough you necessarily you know so representations are statements that people make that they you know that they believe to be true but they're not uh warranteed not guaranteed now on the opposite s or the opposite side of the spectrum if somebody actually actively tries to hide something obviously that's not not good um on any contract right and the concept here is called concealment if you try and withhold or hide specific information U this is another thing that happened to me once I was sitting with a client I remember I just remember this so clearly sitting at their kitchen table and there's an astray look just like that just full of cigarettes they came to smoking questions uh so you know I had to ask do you smoke person looked right at me and says no and now they already told me they didn't live with anyone else so um that's you know pretty Brazen concealment you might even say you know that's moral hazard right they might have just out and out were just lying to me or you know who knows I don't know maybe maybe they have a neighbor that sits with them every day who does smoke that much and comes and visit so um you know but if somebody is actively concealing something you know for example they check no uh they tell you no to a diabetes question again there's all this diabetes equipment that's there you know if it's true that they are diabetic if it's true that they're smokers and they're withholding that information that's called concealment now fraud is you know concealment is a a kind of fraud right uh fraud has a little bit deeper meaning here though because um it means you're intentionally misrepresenting or concealing uh but there's this concept of material fact and you're determined to try and you know cheat the insurance company usually that's what that means it's usually the person you know insurance companies can't really uh generally aren't the ones committing fraud I'll say generally so uh mostly it's you know a person applying who's trying to misrepresent something on purpose now in quotes here you see material concealment of a material fact what does material mean it means relevant to the decision to enter the contract kind of you know you can sum it up from the standpoint again if you put your insurance company hatot on and you think you know if I'd known that I wouldn't insure you uh that means it's material right and smoking you know might be an example of that usually um really in in life insurance contracts what happens with um smoking is it it it's a you have to pay a higher premium right so it might not be a deal breaker but if the person's trying to you know um you know misrepresent that so they don't have to pay the higher premium uh you know that's obviously not something the insurance company wants to deal with but there can be other you know bigger things like uh you conceal the fact that you're actually a motorcycle racer and you know you're writing this life insurance policy and kind of representing yourself like no I just do this desk job um and the insurance company think you know if I'd known that you were motorcycle racer I wouldn't have written this $500,000 life policy uh on you you know so um material it means it has a big impact on the decision and fraud is when people intentionally misrepresent those material things those important things uh in the contract all right next one is reasonable expectations the insured is covered by a policy in a way that any reasonable person would expect so this is a way of sort of covering the fact that um you know you can't write down any everything in any contract and this is kind of protection for the insured again remember we talked about it's a unilateral contract meaning that the insurance company wrote it if there's something something that's not clear or confusing um and the insured says you know this is the way I understood how I was covered and it's reasonable then the law is going to kind of favor them and in that respect so uh this is reasonable expectation simply means that you know if any reasonable person would expect you know like a life insurance policy it's going to cover them in the case of death that's pretty reasonable right and maybe there's like some confusing exception in there the person didn't understand very well the Law's going to you know be in in their favor uh because it was reasonable for them expect to be covered for a natural death for example um so you know again from a contract standpoint reasonable expectations uh covers it sort of a protection for the insured all right here's a concept that again you need to know it's called fiduciary responsibility again talking about using you know big terminology for pretty simple Concepts it simply means being responsible with money as an agent uh you're going to handle money I most you know if you're doing life insurance for sure you're going to be handling money in those Insurance transactions you've got to do so in an honest responsible way uh you know one one example could think of here you know with fiduciary responsibility let's say um a applicant gives you that premium check and you lose the check you know it gets lost in your car falls out of your uh portfolio goes underneath your your seat and um you don't do anything about it or you forget about it it never gets the insurance company well you've obviously not kept up your fiduciary responsibility that the applicant gave you money you're a representative of the insurance company that you're working you know writing policies for so in that respect you know it's your your responsibility to make sure those transactions um go through right you're that's what agent means you're part of that um that process and you're part that's part of your responsibility so fiduciary responsibility simply means you know responsible with money waiver another important concept it means uh giving up a right you know you wave your right so uh here's an example the insurer has a right to collect medical information for example uh but they issue a policy without doing a medical exam so and some policies will do that so then they find out later that oh wait a minute you know you actually had cancer right but by signing you up or issuing the policy without the medical exam by doing that they've waved their right so they can't ask the insurer later to do an exam they can't say hey wait a minute we think you know you might have cancer I want you to do an exam now they can't they wave that they wave that right when they issued the policy based on the information they have so uh that's waiver now a stole uh I always think this you know just like a very German sort of word right a stubble so it literally means stop I think it is German actually you know it means literally stop and it legally stops one party of the contract from reclaiming a right that was waved so in the example that I said before you know if the insurance company um sued and said wait a minute you know I wanted to find out if this person had cancer and they wouldn't let me they would lose right because of a stop they are legally not able to uh reclaim a right that they've waved so you can't get that right back once you've once you waved it there are other kind of waivers we'll talk about in other sessions but for now you know waiver you're waving a white a stopple means you don't get to get have that right back if you've um already issued a policy all right here's another you know term that we don't use this language too much parole we usually talking about parole from you know the standpoint of jail terms but here the parole evidence rule actually parole here mean just means oral and the parole evidence rule prevents um oral or other evidence from being used that's outside a written contract so insurance contracts are written contracts um that can't come in later and be modified you know by uh somebody saying well I think this is what what that meant or providing oral evidence or maybe they hear a story about a person um that can't be brought in later to change the contract so the contract is written it is as it stands and that's what PE evidence rule means here again is another term that's uh not our usual you know use or English language so you got to kind of put it in your head or write it down learn each one of these terms just something that you're going to learn um and you know Insurance concepts are like that you just have to you know get them get them down once you get them down they'll stick and you'll be able to recognize them on the exam uh I promise that later on people don't talk too much or use this language too much subregion is something though that does come up it means to substitute and very simply put the insurer has has a right to pursue compensation from a third party that caused a loss uh and then substitute their loss with money from the third party what does that mean let's give uh an example of that um it's easiest to think about this in terms of property insurance like Auto you know car insurance uh let's say for example you have a car accident and the person not you the insured uh but the other driver was the person that's default so the insurance company has to You Know cover your losses but they have the right to go after that other person or even the other person's insurance company to recoup what they've paid right which makes sense uh it wasn't you know there was somebody else who was at fault so insurance company has a right to go after them legally to recoup uh some of those losses that they had to cover so that subg subate again means to substitute substitute you know your loss with somebody else's in this case last we're going to cover uh insurance agent Authority and that will be it for this video and there's a lot of threes and fours here three types of agent Authority first one is Express Authority so you as an agent for a company have a explicit written Authority that's you know part of your contract with whatever insurance companies you know you represent so uh for example almost every contract that you make with an insurance company gives you the right to collect premiums and applications and there'll be some kind of clause in that contract that's Express Express means a written down Authority it's clearly in black and white in your contract with your insurer number two is implied Authority again this refers ref to you your relationship with the insurer either you as an agent working with on behalf of the insurer and they give you an authority it's not written down in your contract with them uh but to you know fulfill certain duties as an agent uh obviously you're going to you know be able to write policies go and set appointments not every single one of those things is going to be lined out in your contract with the insurance company so it's going to be though an implied kind of authority that you have as an agent to yeah for example help somebody find a policy that works for them right so last one is parent Authority now this has more to do with um your client and you and it does have to do with your relationship with the insurance company as well but it's mostly about the customer's perception of your Authority now the insurance company gives you uh certain you know branded information branded material maybe you have you might have a pin you know you might have a a pen um you know your name on letterhead uh whatever you know the sort of you have material that's from that branded insurance company so is you know the apparent Authority is the customer's perception that you're uh part of that insurance company it's it's a good thing right it's nothing wrong with that but just understand a parent Authority means a customer's perception you have authority based on material that you have um that's that's branded and the fact you showed up you know at their door representing a company writing a policy for a company so um going back to sort of like that fiduciary responsibility they might have you know part of apparent Authority is you know I can give you this check and that's like giving the check to the insurance company so that's a parent Authority all right there we have it we've gotten through all of our general insurance Concepts might seem like a lot you know we spent an hour together and after you've reviewed and gone through those I'm confident you can get them you firmly planted in your mind so that you do great when you see these come up on your insurance insurance exam again I'm Chris your insurance exam guide thanks for spending time here today see you in the next video