Questions and Answers
What is the term that refers to spreading the result of financial loss among many persons so the cost to any one person is small?
Insurance
What is exchanged for a certain cost when a person pays money into a fund based on their age, which will pay their family a specified amount upon their death?
Uncertainty about living long enough to provide for the family's financial security
Why do many pay for the actual losses of a few under the principle of life insurance?
It is impossible to know in advance which few among the many will sustain losses.
How does life insurance affect the financial loss resulting from an individual's death?
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What is a legal agreement between two or more parties promising a certain performance in exchange for valuable consideration?
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Why are life and health insurance policies considered unilateral contracts?
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In a valid insurance contract, what represents the insurance company's consideration?
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What are the characteristics of a legally enforceable contract?
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Who could generally be a party to a valid contract?
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Which type of contract is valid if formed for a legal purpose?
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In an insurance transaction, who makes the offer and who accepts?
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What best describes the thing of value exchanged for the performance promised in a contract?
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What is the term for the voluntary giving up of a known right or privilege?
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What does it mean when an insurance contract is referred to as aleatory?
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What is a contract that is not completed immediately called?
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Who is the recipient of Life Insurance proceeds?
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What must XYZ Insurance Company rely on to predict mortality among its insureds?
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What statement best represents the reliability of predictions about mortality at a specific age in the insured population?
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For predicting mortality, insurance companies typically ignore those over which age?
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What statements support the definition of insurance?
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What best describes the primary function of life insurance?
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What are typically included in a deceased's final expenses?
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What are the primary goals of life insurance?
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What are components of so-called death taxes?
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What is considered a living benefit of life insurance?
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Study Notes
Insurance Basics
- Insurance spreads financial loss among a large group, minimizing individual costs.
- Life insurance secures family financial support by exchanging uncertainty about longevity for a predictable cost.
Life Insurance Principles
- The principle of life insurance relies on many contributing to cover the losses of few, as it's unpredictable who will incur losses.
- Life insurance makes individual death costs manageable by distributing them among all policyholders.
Contracts in Insurance
- A contract is a legal agreement where performance is promised in exchange for valuable consideration.
- Life and health insurance policies are classified as unilateral contracts since only the insurance company must perform obligations.
Characteristics of Valid Contracts
- Key elements for legally enforceable contracts include competent parties, legal purpose, offer and acceptance, and consideration.
- Competent adults can act as parties in valid contracts; contracts must have a legal purpose to be considered valid.
Offer and Acceptance in Insurance
- In the insurance context, the potential insured submits an application (offer) and premium; the insurance company accepts by issuing a policy.
Consideration and Waivers
- Consideration refers to the value exchanged for contract performance.
- A waiver is the voluntary surrender of a known right or privilege.
Types of Contracts
- Aleatory contracts involve unequal values exchanged between parties.
- An executory contract is one that remains uncompleted at the time of formation.
Life Insurance Beneficiary
- The beneficiary is the individual who receives life insurance proceeds upon the insured's death.
Mortality Predictions
- Insurance relies on statistical probabilities of mortality within a large population, calculating average deaths by age.
- Reliable mortality predictions increase with larger recorded populations and deaths.
- Insurance companies statistically disregard individuals over the age of 100 in mortality calculations.
Defining Insurance
- Insurance is designed to spread financial loss across many, ensuring costs for each individual are low and predictable, regardless of loss circumstances.
Life Insurance Functions and Goals
- The primary function of life insurance is to create an estate for beneficiaries.
- Final expenses for the deceased typically include funeral costs, credit card debts, and family member obligations.
- Key life insurance goals involve covering burial costs, future living expenses for survivors, and educational expenses for children.
Taxes Related to Death
- Death-related taxes may involve income tax, estate tax, and inheritance tax.
Living Benefits of Life Insurance
- Living benefits may consist of loan values, retirement income, cash withdrawals, and dividends.
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Test your knowledge of health and life insurance concepts through these flashcards from the Commonwealth Schools of Insurance. Learn key terms and definitions to prepare for your examination effectively.