Questions and Answers
What is the primary difference between term life insurance and permanent life insurance?
Which type of life insurance has a cash value that can be invested?
What is the purpose of a Waiver of Premium Rider?
What is the primary function of an endorsement in a life insurance policy?
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What is the purpose of a Suicide Clause in a life insurance policy?
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What is the role of the policy owner in a life insurance policy?
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What is the purpose of an Incontestability Clause in a life insurance policy?
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What is the primary difference between a rider and an endorsement in a life insurance policy?
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What does the principle of utmost good faith require from the parties involved in an insurance contract?
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Under which principle must the insured demonstrate a financial interest in the subject matter of the insurance?
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What is the primary purpose of the principle of indemnity?
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What does the principle of proximate cause determine in an insurance policy?
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What role does the principle of subrogation allow the insurer to undertake?
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What does the principle of contribution ensure when multiple insurers cover the same loss?
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What is required from the insured by the principle of mitigation of loss?
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Which principle dictates that the insurer's liability is confined to the losses directly tied to an insured event?
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Study Notes
Life Insurance Policies
Types of Life Insurance Policies
- Term Life Insurance: Provides coverage for a specified period (e.g., 10, 20, or 30 years). Pays a death benefit if the policyholder dies during the term.
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Permanent Life Insurance: Lifelong coverage with a cash value component that grows over time. Examples include:
- Whole Life Insurance: Fixed premiums, fixed death benefit, and a guaranteed cash value.
- Universal Life Insurance: Flexible premiums, adjustable death benefit, and a cash value that can be invested.
- Variable Life Insurance: Cash value invested in a separate account, with potential for growth or loss.
Policy Riders and Endorsements
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Riders: Additional features or benefits added to a policy, such as:
- Accidental Death Benefit Rider: Pays an additional death benefit if the policyholder dies due to an accident.
- Waiver of Premium Rider: Waives premium payments if the policyholder becomes disabled.
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Endorsements: Changes to the policy, such as:
- Assignment: Transfers ownership of the policy to another person or entity.
- Change of Beneficiary: Updates the beneficiary designation.
Policy Provisions
- Suicide Clause: Excludes payment of death benefits if the policyholder dies by suicide within a specified time period (e.g., 1-2 years).
- Incontestability Clause: The insurer cannot contest the policy's validity after a specified time period (e.g., 2 years) unless the policyholder provides false information.
- Graveyard Clause: A provision that allows the insurer to deny claims if the policyholder dies within a specified time period (e.g., 1-2 years) due to a pre-existing condition.
Policy Ownership and Beneficiaries
- Policy Owner: The person or entity that owns the policy and has control over it.
- Beneficiary: The person or entity that receives the death benefit if the policyholder dies.
- Contingent Beneficiary: The secondary beneficiary who receives the death benefit if the primary beneficiary is deceased or unable to collect.
Policy Termination
- Lapse: The policy terminates due to non-payment of premiums.
- Surrender: The policyholder voluntarily terminates the policy and receives the cash value.
- Expiration: The policy terminates at the end of the specified term.
Life Insurance Policies
Types of Life Insurance Policies
- Term Life Insurance: Provides coverage for a specified period (e.g., 10, 20, or 30 years) and pays a death benefit if the policyholder dies during the term.
-
Permanent Life Insurance: Offers lifelong coverage with a cash value component that grows over time, with three sub-types:
- Whole Life Insurance: Features fixed premiums, fixed death benefit, and a guaranteed cash value.
- Universal Life Insurance: Has flexible premiums, adjustable death benefit, and a cash value that can be invested.
- Variable Life Insurance: Invests the cash value in a separate account, with potential for growth or loss.
Policy Riders and Endorsements
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Riders: Add features or benefits to a policy, including:
- Accidental Death Benefit Rider: Pays an additional death benefit if the policyholder dies due to an accident.
- Waiver of Premium Rider: Waives premium payments if the policyholder becomes disabled.
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Endorsements: Make changes to the policy, such as:
- Assignment: Transfers ownership of the policy to another person or entity.
- Change of Beneficiary: Updates the beneficiary designation.
Policy Provisions
- Suicide Clause: Excludes payment of death benefits if the policyholder dies by suicide within a specified time period (e.g., 1-2 years).
- Incontestability Clause: Prevents the insurer from contesting the policy's validity after a specified time period (e.g., 2 years), unless the policyholder provides false information.
- Graveyard Clause: Allows the insurer to deny claims if the policyholder dies within a specified time period (e.g., 1-2 years) due to a pre-existing condition.
Policy Ownership and Beneficiaries
- Policy Owner: The person or entity that owns the policy and has control over it.
- Beneficiary: The person or entity that receives the death benefit if the policyholder dies.
- Contingent Beneficiary: The secondary beneficiary who receives the death benefit if the primary beneficiary is deceased or unable to collect.
Policy Termination
- Lapse: The policy terminates due to non-payment of premiums.
- Surrender: The policyholder voluntarily terminates the policy and receives the cash value.
- Expiration: The policy terminates at the end of the specified term.
Principles of Insurance
Utmost Good Faith
- Insurer and insured must disclose all material facts accurately and honestly
- Insured must provide complete and accurate information about the risk
- Insurer must provide clear and transparent policy terms
Insurable Interest
- Insured must have a financial interest in the subject matter of the insurance
- Insured must stand to lose financially if the event insured against occurs
- Examples: business owners insuring their business, homeowners insuring their property
Indemnity
- Insurer will compensate the insured for losses up to the amount of the policy limit
- Goal is to restore the insured to their original financial position before the loss
- Insurer does not aim to make a profit for the insured, but rather to compensate for losses
Proximate Cause
- Insurer is only liable for losses that are directly caused by the event insured against
- Insurer is not liable for losses that are indirectly caused by other factors
- Example: if a hurricane causes a flood, and the flood causes mold growth, the insurer is only liable for the losses caused by the flood, not the mold growth
Subrogation
- Insurer can pursue a third party responsible for the loss to recover the amount paid to the insured
- Insurer steps into the shoes of the insured to seek compensation from the third party
- Example: if a driver causes an accident, and the insurer pays the claim, the insurer can then pursue the driver for reimbursement
Contribution
- When multiple insurers are liable for the same loss, each insurer will contribute a proportionate share of the loss
- This principle ensures that the insured is not over-compensated and that each insurer is only liable for their share of the loss
- Example: if two insurers each cover 50% of a loss, they will each contribute 50% of the claim amount
Mitigation of Loss
- Insured must take reasonable steps to minimize the loss or damage
- Insurer is only liable for losses that could not be avoided or minimized by the insured
- Examples: installing security cameras to prevent theft, taking steps to prevent water damage
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Description
Learn about different types of life insurance policies, including term life insurance, permanent life insurance, whole life insurance, and universal life insurance.
