Insurance Principles Overview

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Questions and Answers

What principle underlies the concept of insurance?

Policyholders bear all the risks associated with insurance

Drawing a small amount from many to relieve few from financial distress (correct)

Collecting a large amount from a few individuals to help many

Risk is only borne by the insurance company without contribution

What defines a stock insurance company in Canada?

Operates for the benefit of its policy owners only

Issues share capital with two classes of directors (correct)

Returns profits exclusively to non-participating policyholders

Owned solely by policyholders with no shareholders

How are profits managed in a mutual insurance company?

Profits are returned to policy owners through dividends (correct)

Profits are distributed to external stakeholders

Profits are reinvested into the company exclusively

Profits are divided among shareholders

What characterizes the ownership structure of a mutual insurance company?

Owned by and for the benefit of its policy owners Signup and view all the answers

What role does science play in insurance companies?

It minimizes overall risk associated with insurance contracts Signup and view all the answers

What is the role of a trustee in relation to a minor as a beneficiary?

To assume control of the insurance proceeds for the minor Signup and view all the answers

What happens if the first-named beneficiary of a policy predeceases the insured?

The proceeds go to a contingent beneficiary Signup and view all the answers

What is the main responsibility of the policy owner in a life insurance contract?

To name a beneficiary and manage the policy Signup and view all the answers

Which statement accurately describes a void contract?

It is rendered invalid with no chance for correction Signup and view all the answers

Which term describes the transfer of ownership of a life insurance contract to another person?

Absolute assignment Signup and view all the answers

What constitutes the '10-day free look' period in insurance contracts?

A period in which policy owners can cancel the policy for a full refund Signup and view all the answers

What is the implication of an irrevocable beneficiary designation?

The policy owner's ability to alter the policy is restricted Signup and view all the answers

What happens to an insurance contract after the 2-year contestability period has expired?

It becomes incontestable Signup and view all the answers

In a joint life policy, when is the death benefit paid out?

Upon the last death within the group of insured individuals Signup and view all the answers

Which option is NOT a common settlement option for insurance policy proceeds?

Payment as a fixed interest bond Signup and view all the answers

Who must have an insurable interest in order for a life insurance contract to be valid?

The policy owner Signup and view all the answers

What is a characteristic of a revocable beneficiary designation?

The policy owner can change the beneficiary without prior consent Signup and view all the answers

What must occur for an insurance policy to become effective after it has been issued?

The first premium must be paid in full Signup and view all the answers

A policy owner that names a contingent owner allows what to happen?

The contingent owner assumes ownership if the current owner dies Signup and view all the answers

What is the implication of misstatement of age in an insurance policy application?

An age correction can be made for innocent misstatements Signup and view all the answers

Which type of joint life policy pays out upon the death of the first insured individual?

Joint-First-to-Die policy Signup and view all the answers

What is the primary benefit of the convertible feature in term insurance?

It provides an opportunity to convert to a permanent policy without evidence of insurability. Signup and view all the answers

At what point is it typically necessary to consider converting a term life insurance policy?

As the policy expiration date approaches and coverage is still needed. Signup and view all the answers

How do premiums for term life insurance generally change over time?

They are low in the early years and increase with each renewal. Signup and view all the answers

What is a characteristic feature of whole life insurance?

The face amount and premium remain fixed throughout the policy's life. Signup and view all the answers

What does the reserve on a whole life policy consist of?

Premiums paid to date plus interest earned less mortality and expenses. Signup and view all the answers

Which of the following factors might cause an individual to choose term insurance initially?

Need for low premiums for short-term financial needs. Signup and view all the answers

When is it common for term life insurance policies to expire?

Usually at ages 65, 70, 75, or 85. Signup and view all the answers

What is typically a disadvantage of term life insurance compared to whole life insurance?

Term insurance does not build any cash value over time. Signup and view all the answers

What describes yearly term rates in a mortality charge?

They are based on the likelihood of death occurring within the year. Signup and view all the answers

What is a characteristic of level term-to-100 rates?

They consider the increasing cost associated with aging. Signup and view all the answers

Which statement about cash surrender value is accurate?

It is calculated by subtracting outstanding policy loans and surrender charges from cash value. Signup and view all the answers

What is the most expensive death benefit option?

Indexed Death Benefit Signup and view all the answers

How are mortality and expense charges covered in a universal life policy?

They are withdrawn from the accumulating account. Signup and view all the answers

What defines a term-to-100 insurance policy?

It requires premiums until age 100 with potential continued coverage afterwards. Signup and view all the answers

What is a key reason that term-to-100 policies tend to have higher early premiums compared to temporary term policies?

They are guaranteed for a longer duration. Signup and view all the answers

What happens if a policy owner misses a premium payment in a term-to-100 policy?

A grace period applies, but no cash value can cover the payment. Signup and view all the answers

What is a feature of group life insurance provided by employers?

It often includes dependants and other health benefits. Signup and view all the answers

What characterizes the surrender charges in a universal life policy?

They typically start high and decrease as the policy ages. Signup and view all the answers

What is true about expense charges associated with a universal life policy?

They usually include monthly administration fees and possible transaction fees. Signup and view all the answers

How is the level face death benefit option described?

It offers a level amount of insurance while reducing mortality cost over time. Signup and view all the answers

What best differentiates indexed death benefits from other options?

They allow the face amount to increase based on a market index. Signup and view all the answers

Study Notes

Introduction to Insurance

Insurance is a system where a small amount collected from many can be used to alleviate the financial distress of a few
The core principle of insurance is based on predicting the chances of losses and using that to determine premiums
Life insurance allows individuals to transfer the risk of financial loss due to their death to an insurance carrier

Parties to the Life Insurance Contract

Insurer/Carrier:
- Stock company: Issued shares to shareholders and policyholders
- Mutual company: Owned and operated by its policyholders
Policy Owner:
- Holds the contract with the insurance carrier
- Has the right to name a beneficiary, deal with the policy, and access the cash value
- Ownership can be transferred through an absolute assignment
- Can appoint a successor owner if they die before the life insured
Life Insured:
- The individual whose life is insured under the policy
- Must have an "insurable interest" for the contract to be valid
Joint Life Policies:
- Cover multiple lives
- Joint-Last-to-Die: Pays a death benefit upon the last death within the group
- Joint-First-to-Die: Pays a death benefit upon the first death within the group

Beneficiary Designation

Revocable Beneficiary:
- Policy owner can change the designation without the beneficiary's consent
- No legal rights to proceeds until after the death of the life insured
Irrevocable Beneficiary:
- Policy owner requires their consent to alter the designation or surrender the policy
- Has legal rights to the proceeds while alive
Minor Beneficiaries:
- Cannot provide a valid discharge to the insurance company
- A trustee may be appointed to manage the proceeds on their behalf
Contingent Beneficiary:
- Receives the proceeds if the first-named beneficiary predeceases the life insured

Settlement Options

Most proceeds are paid as a lump sum, but other options exist:
- Full lump sum payment
- Money held on deposit
- Annuities paid in installments
If not pre-selected, the beneficiary chooses from available settlement options

Contract Formation

Void Contract: Invalid and cannot be corrected (e.g., fraudulent medical evidence)
Voidable Contract: Has a correctable flaw
Policy Delivery:
- Takes effect upon payment of the first premium
Rescission Right (10-day free look):
- Policy owner can cancel and receive a full refund within 10 days
Incontestability Period:
- After 2 years, the insurance company cannot contest the validity of the policy
Misstatement of Age:
- Special rules apply if the age stated on the application exceeds the carrier's limit
- Innocent mistakes can be corrected

Convertible Feature

Allows the policy owner to convert term insurance to a permanent insurance product without needing to prove insurability
Provides flexibility for individuals who may initially need only temporary coverage

Policy Expiration

Term life insurance has a maximum age limit after which the policy terminates
Policy owners need to consider converting to a permanent product if coverage is still needed
Common expiration ages are 65, 70, 75, and 85

Product Pricing and Premiums

Term insurance premiums are based on the carrier's mortality costs and expenses
Premiums are generally low in the early years and increase with each renewal
Policy owners can choose payment frequency (monthly, quarterly, semi-annually)

Whole Life Insurance Introduction

Traditional type of permanent insurance providing coverage for the life insured's lifetime
Face amount and premiums are fixed from the time of purchase

Whole Life Insurance Plan Design

Reserve:
- Accumulated value calculated by adding premiums, earned interest, and subtracting mortality and expense charges
Mortality Charges:
- Policy owner chooses the type (e.g., yearly term rates, level term-to-100 rates)
- Yearly term rates reflect the probability of death in the upcoming year
- Level term rates account for the increasing probability of death over time
Expense Charges:
- Include fees for administration, transactions, etc.
Investments:
- Universal life policies offer investment options like fixed-interest accounts, guaranteed term deposits, equity, and index options

Whole Life Insurance Cash Surrender Value

Represents the amount available to the policy owner if they surrender the policy
Calculated by subtracting outstanding policy loans and surrender charges from the cash value
Surrender charges are high early in the policy and decrease over time

Whole Life Insurance Death Benefit Options

Level Face: Fixed death benefit, premium decreases over time as the policy value increases (least expensive)
Level Face Plus Deposits: Pays the face amount plus the total amount of deposits (middle ground)
Level Face Plus Account Value: Pays the face amount plus the value held in the policy account (more expensive)
Indexed Death Benefit: Death benefit adjusted annually based on an index (most expensive)

Whole Life Insurance Non-Forfeiture Options

Alternatives provided if premium payments stop
Mortality and expense charges are covered annually for the policy to stay in force
Charges are withdrawn from the accumulating account for plans that build cash value

Whole Life Insurance Policy Loan and Illustration

Policy Loans: Available up to the cash surrender value
Illustrations: Show projected policy values, premiums, and death benefits

Term-To-100 Insurance Introduction

Type of permanent insurance that provides coverage until age 100
Coverage often continues beyond age 100 without further premiums
Premiums are usually level and guaranteed
Non-participating policy, meaning no dividends

Term-To-100 Insurance Product Design

Varies by carrier in terms of premium payment periods
Some plans require premiums until age 100, others have limited payment periods
While traditional plans don't offer cash value, some newer plans may have guaranteed value after a specific term.

Term-To-100 Insurance Premiums

Premiums are higher earlier in the policy compared to shorter term plans due to the level premium schedule
Usually less expensive than whole life insurance because of the lack of cash value build-up
No cash value means no automatic premium payments if one is missed

Term-To-100 Insurance Exempt and Non-Exempt

Since the primary purpose is insurance protection, the plan is exempt from income tax reporting

Group Life Insurance Introduction

Employer-provided benefit that is typically part of a broader employee compensation package
Can include life insurance, dependant life insurance, health and dental, and disability benefits
Helps employees secure coverage through their employer.

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Description

This quiz explores fundamental concepts of insurance, including the principles that govern the field, distinctions between stock and mutual insurance companies in Canada, and the impact of scientific methods on insurance management. Test your knowledge on the ownership structures and profit management practices unique to different types of insurance companies.