Life, Health, Property & Casualty Insurance Test Prep

A “free-look” provision allows a policyholder to purchase a life insurance policy with the option to continue to shop around and change policies if a better policy is found. These policies typically provide a ten to thirty day review period following the actual delivery of the policy. During the review period, the insured can do more research into other policies to determine if the insured wants to stick with the current policy or return it and get a full premium refund. The free look review period starts once the policyholder receives actual physical delivery and the premium is paid. Also, before the free look period can begin, a delivery receipt is issued, dated, and signed by the insured and witnessed by the agent. As long as the premium is paid and the policy is delivered, coverage is in effect.

Adjustable life policies are more flexible compared to other types of policies. In fact, the flexibility it provides is the main reason why adjustable life insurance policies exist. Adjustable life policies allow changes to the main features of the policy, such as the premiums paid and the face value. An ordinary policy is used as a foundation to build upon, and then the features can be adjusted to the needs of the insured. The insured can seek a certain premium payment schedule and amount. In addition, changes can be made to the period of protection and face amount. By using an adjustable policy, the insured gets more flexibility, while the insurer can charge a higher premium versus a whole or term life policy.

Stranger originated life insurance (“STOLI”) is a policy where the beneficiary does not know the insured before the policy is purchased and does not have an insurable interest in the insured. They are not illegal under federal law, but state insurance laws may restrict STOLI policies. STOLI is primarily purchased as an investment for the benefit of the beneficiary, rather than to provide protection to the insured and those close to the insured. STOLI’s are subject to abuse by unscrupulous individuals seeking to take advantage of the elderly.

A viatical settlement is the process whereby a policyholder sells a policy for less than the amount of the death benefit to a private individual. While the insured receives less than the death benefit amount, the insured receives more than the amount of its cash surrender value, so it can be an attractive option when the policyholder is chronically or terminally ill, since it enables the insured to obtain a lump sum settlement payment to live out the remainder of the insured’s life without worrying about finances. The purchaser of the policy becomes the new policyholder and as long as the purchaser continues to make the required premium payments, the purchaser will receive the entire death benefit once the insured dies.

An actuary is a mathematician who calculates the likelihood that certain events will occur and prices the policy of insurance based on the likelihood that the events will happen.

A spouse term insurance rider allows an insured with a whole life policy to obtain term coverage for a spouse. The term policy usually pays a small death benefit. It could also include an option to convert the term policy without having to prove insurability at certain ages reached by the spouse, as defined in the insurance agreement (e.g., 50, 60, 65). Another available feature is that if the insured dies while the premium-paying period is still in effect, the spouse’s coverage will become term coverage, without requiring any further premium.

With a term life insurance policy, the premium is fixed and the policy is for a limited term. Term life riders provide term coverage for a fixed period (e.g. 10, 15, or 20 years), in addition to the permanent whole coverage in the main policy. When the life rider is made part of a permanent life policy, the insured is permitted to convert the term life insurance coverage into permanent life insurance at some later date. By having a portion of the coverage as term, the insured saves money on the premiums at the beginning of the policy term. Notably, if a conversion is performed, an additional underwriting process and medical exam are not required.

Ordinary life insurance may also be referred to as whole life insurance or straight life insurance. Ordinary life insurance is a life insurance policy that is guaranteed to remain in full force for the lifetime of the insured, as long as the premiums are paid, or until the policy maturity date. A life insurance policy is a contract between the insured and insurer that requires the insurer to pay the death benefit of the policy to the policy’s beneficiaries when the insured dies, assuming that the contractual terms are met. Because whole life policies are guaranteed to remain in force as long as the required premiums are paid, the premiums are typically much higher than those of term policies. Whole life premiums are fixed, based on the age of issue, and usually do not increase with age. The insured party normally pays premiums until death, except for limited pay policies which may be paid-up in 10 years, 20 years, or at age 65. Whole life insurance belongs to the cash value category of life insurance, which also includes universal life, variable life, and endowment policies.

A child who is a dependent, unmarried child of a worker that is deceased, disabled or retired can obtain Social Security benefits once that child turns 18 years old and becomes disabled before the age of 22.

Medicaid is a federal-state partnership government program available in all states. It provides free or low-cost health care to people who meet the requirements. The federal and state governments share the funding. The level of benefits is determined by each state, and coverage and costs vary by state, but Medicaid programs have to adhere to federal guidelines. Depending on the specific program, payments can be made directly to the medical provider or a third-party administrator or insurance companies could manage the Medicaid program. Under the PPACA states had the option to expand coverage to additional persons in accord with federal guidelines.

A certificate of insurance (COI) is issued by an insurance company to provide proof that insurance coverage is in effect. The document also provides the coverage provisions, including the type of policy, the coverage terms, effective date of coverage and any limitations or exclusions. The COI could be used to provide proof that a certain type of medical procedure is covered.

An independent medical examination (IME) may be requested by an insurer to verify claims of an insured’s personal doctor. The IME doctor has not treated the insured before the IME. It is a second opinion.

A point of service plan (POS) combines characteristics of a health maintenance organization (HMO) and the preferred provider organization (PPO). In a Point-of-Service plan, members who obtain health services from plan providers are typically reimbursed 90-100% of the cost versus a non-plan provider where reimbursement is approximately 70%. The difference in the cost and reimbursement amount is paid by the insured. A POS is a type of managed care that offers less medical expense, but in exchange for limited choice of providers.

The main job function of underwriters, especially for accident or disability policies, is to evaluate and analyze the risk and exposures of applicants. Underwriters review several factors, including an applicant’s medical history, to determine the applicant’s risk level. The underwriter next determines the level of coverage to offer the applicant, and then rates the policy. The premium rate is then determined. Lastly, the policy is issued, which typically involves sending all plan documents, including the certificate of insurance (COI), to the selling agent. The agent then provides the documents to the applicant.

Coverage D provides coverage for loss of use. The insured receives a payout if the insured dwelling is rendered uninhabitable as the result of a covered loss. The two possible methods of reimbursement are: 1) additional living expense, which allows the insured to maintain their standard of living if the insured loses use of the residence dwelling; and 2) Fair rental value, which covers lost rental payments if the dwelling is rented to another person.

Coverage B is other structures coverage that insures other buildings that are separate from the main dwelling, but located on the same property (e.g. a detached residential garage). Exemptions from Coverage B are business use structures and properties that are rented to people, when the renter is not a tenant of the main dwelling.

Coverage A insures the main dwelling and:
-any structures attached to it
-any fixtures or materials on the same premises as the dwelling that are necessary to maintain the dwelling

Coverage C is personal property coverage. It covers the personal property when an event occurs. If off-premises coverage is provided, the property does not need to be located at the insured premises to obtain coverage. If the insured is moving to a new principal residence, full coverage for the property is provided for up to 30 days. Additionally, full coverage is available when the insured residence is uninhabitable or is under repair or construction and the covered property is stored at the insured’s temporary residence. It does not cover property of a boarder/roomer or the insured’s property located within an apartment rented out by the insured or property being stored away from the insured residence. It also does not cover animals or fish, motorized vehicles, aircraft, water/steam or credit cards.

An HO6 is an insurance policy for condominium owners and is similar to a renter’s insurance policy. For assessments against a condo owner due to a building loss, maximum coverage provided to a H06 policyholder is typically $1,000 (e.g., a building’s roof is destroyed, which results in an assessment against all unit owners, since the condominium does not have enough money in the common charge account to cover the loss). An HO6 insurance policy only covers the condominium’s interior, including property, walls, ceilings, floors and property from the same perils covered in HO2 home insurance policies. The exterior of the condominium building is typically covered through a policy purchased by the Homeowners association or management company community manager. An HO6 policy may also provide coverage for reimbursement for additional living expenses. Additionally, HO6 policies provide personal liability protection, in the event a person is injured on the insured property and the insured is liable for the injury. The personal liability coverage pays for the cost of an attorney, court costs, medical expenses and any money awarded to the injured party.

H01 is the Basic Homeowner Policy, which covers the home’s structure and the property inside. It also covers structures located on the property due to damage caused by:

Windstorm/hail
Fire/lightning
Vandalism/criminal mischief
Vehicles/aircraft
Explosions/riots
Glass breakage
Smoke
Volcanic eruption
Personal liability

Damage from flooding and earthquakes is excluded from coverage in HO1 policies. Coverage is provided on a replacement cost basis, so the insured receives the cost of rebuilding or repairing damage to the dwelling with materials of similar quality.

HO2 Homeowners policies provides more coverage than an HO1 policy. It is also called a broad form policy. In addition to the eleven events covered under a basic policy, HO2 policies also cover:

Falling debris/objects
Freezing
Collapses due to the weight of ice, snow or sleet
Accidental discharge or overflow of water or steam
Sudden and accidental destruction, burning, cracking or burning
Accidental damage caused by surges of electrical current

HO2 policies are available with replacement cost or actual cash value coverage. Be aware that an HO2 policy does not cover water damage caused by a water backup and foundation or slow leaks. It also does not cover open perils, including earthquakes or floods. However, they may provide mechanical breakdown coverage with respect to heat and air conditioning systems or water heaters, but not for kitchen or laundry appliances, computers, televisions, sound equipment or systems.

An HO3 policy is one of the most comprehensive Homeowners policies available. It covers the dwelling’s structure from all perils unless specifically excluded. It does not cover the contents inside. The contents can be covered with a named perils policy. Some typical exceptions to HO3 dwelling coverage include:

Laws/ordinances
Earth movement
Water damage
Power failure
Animals owned by insured
Neglect
War/nuclear hazards
Intentionally caused loss
Government action
Collapse of structure
Theft of property from an under construction dwelling
Vandalism/Malicious mischief if the property is vacant for over 60 days
Mold/fungus/rot
Wear and tear or deterioration
Mechanical breakdown
Smog, rust, corrosion
Smoke caused by agricultural smudging or industrial operations
Discharge, dispersal, seepage of pollutants
Settling/shrinking/bulging/expansion
Birds/vermin/rodents/insects

If something happens to your home and it isn’t listed as an exclusion, then it is probably covered by your insurance policy. Some HO3 insurance plans have a named perils policy, which means it specifically lists what is covered. Regardless of the type of coverage, HO3 insurance typically does not include floods and earthquakes in its perils coverage, according to the NAIC.

An HO4 policy is also called the contents broad form. It is the tenant’s or renter’s form that provides named peril protection for the personal property of tenants. The coverage is meant for residents who rent and do not own a property, including single-family homes, apartment units/condominiums and mobile homes. The HO4 policy provides coverage similar to an HO-2 policy, though it covers personal property only and not any structures.

HO5 – Premier Homeowner Policy
This type of coverage includes everything that is included in an HO3 policy, but its applied to the structure and the property within your home, including your furniture, clothes, and appliances. Although an HO5 policy is the most comprehensive available, it does not include coverage for earthquakes or floods. HO5 insurance policies are available to homes that were either built within the last 30 years or renovated within 40 years, and they typically cover any damages at replacement cost.

An HO8 policy covers special risks, such as unique properties and older properties whose market values are much lower than the replacement costs. It provides peril coverage to dwellings and personal property and may provide extended coverage for certain perils. It may also cover vandalism and criminal mischief. Payouts are made on an actual cash value basis.

A coinsurance provision requires the policyholder to maintain a specific amount of insurance in order to obtain full payment for a loss. This has a different meaning than coinsurance for health insurance.

A hired auto is an automobile that is borrowed, leased or hired by the insured from a non-family member or certain other individuals. Vehicles that do not constitute a hired auto are automobiles borrowed, leased or rented from a family member, business partner or employee.

Countersigning refers to the insurance agent’s authentication of an insurance contract. An agent is required to review and sign new insurance policies. Subrogation is the insurance principle referring to an insurer stepping into the shoes of the insured to recover money or damages paid out to or on behalf of the insured from another party

A dwelling policy does not cover a mobile home situated on a temporary foundation (e.g. cinder blocks). It covers mobile homes that are on permanent foundations. Dwelling insurance is a personal lines policy that covers property only. It is meant for people who rent out a property, want to insure a vacation home or are not eligible for other types of coverage, such as someone who is too much of a risk for a Homeowners policy. A dwelling policy also covers:

-Dwellings with four families or less
-Apartments with five people or less
-Vacant dwellings
-Personal property located in covered dwellings

Employee dishonesty coverage protects a business against an employee’s theft of money, property or securities.

A class is a group of businesses who have similar exposures, so they get grouped together for rating purposes. Classification is the creation of general categories of businesses for rating purposes.

Supplementary costs are the insured’s costs that are covered by liability insurance, aside from costs paid for any injuries or damages (those are covered under the primary coverage). Supplementary costs are paid to the insured in addition to the policy’s liability limits. Examples of supplemental costs are:

-Costs for a legal defense (e.g., an attorney)
-First aid provided during and immediately after an accident
-Claim investigation costs
-Premium payments for bonds, such as bail bonds or bond required in the event of an appeal from a court decision
-Lost earnings as the result of missed work related to the claim (e.g., lost time from work due to appearing in court)
-Pre and post judgment interest, in the event that it is not a standard damage as defined in the policy

An indirect loss (a/k/a consequential loss) is a financial loss sustained due to a direct loss (e.g. car rental cost if the insured’s vehicle is out of service due to an accident).

An aleatory contract is a contract where an uncertain event determines the parties’ rights and obligations. In an aleatory contract, the exchange of value between the two parties may not be equal. Insurance contracts are aleatory contracts, since a payout only occurs if an uncertain event occurs. The insured does not receive a payout if the event does not occur, so the insured may never receive anything in exchange for their premium payments. On the other hand, when the event does occur, the payout by the insurance company may be more than the amount received in premiums.

A countersignature is the signature of a licensed agent on an insurance policy that is required to validate the policy.

The maximum total coverage amount available for Coverages A, B, and C is the general aggregate limit, however, it does not include damages related to the products-completed operations hazard. Products-completed operations covers liability caused by a defective product or due to the business’ operations. The products-completed operations aggregate limit is the maximum amount Coverage A pays out for damages related to the products-completed operations hazard.

For commercial general liability insurance, Coverage A covers bodily injury and property damage liability. It provides reimbursement of the insured’s expenses, such as legal defense costs, and for damages resulting from any findings of liability for bodily injury or property damage caused by an event, such as an accident, by the insured.

Coverage B covers an insured for personal injury and advertising injury liability (e.g., defamation). It covers the insured’s expenses, such as legal defense costs, as well as damages if the insured is found liable for libel (written defamation) or slander (verbal defamation). Advertising injury includes oral or written statements that libel or slander a person or an organization or their products or services. Also covered are copyright or trademark infringement, oral and written statements infringing upon a person’s right to privacy and advertising someone else’s misappropriated ideas or business methods.

Coverage C covers medical payments resulting from bodily injury, regardless of who was at fault, for an injury occurring on or next to the insured’s premises or is related to the insured’s business activities.

The insuring agreement states the insurance company will make payment if a covered loss occurs, subject to any conditions or exclusions contained in the policy.

This declarations page states the policy owner’s name and also who is responsible for making premium payments and entitled to the return of any premiums for a cancelled policy.

Exclusions exclude coverage for losses resulting from certain events.

Compensatory (a/k/a/ Actual) damages reimburse a party for a loss sustained in order to make the party whole, such as paying for a party’s automobile damage sustained in an accident with a negligent party.

The conditions section of an insurance policy explains the rights and obligations of the insured and the insurance company.

Risk is the likelihood or chance of injury, damage or loss to a person or thing. A peril is the specific event that causes a loss (e.g., weather-related disaster, fire, accident, theft).

Hazards are things that increase the chance of loss. The tree types of hazards are:
-Physical hazard – Relates to the actual use or occupancy of property (e.g. Improper electrical wiring)
-Moral hazard – Concerns someone’s chance of engaging in dishonest, immoral or illegal conduct (e.g. A person burns their own property in an attempt to claim a loss and obtain money from an insurance company)
-Morale hazard – Involves losses caused by someone’s negligent or careless conduct

The notice of claim provision in an insurance policy requires the insured to inform the insurance company about any claim that the insured seeks to file. It is the first step in filing a claim and is often accomplished by telephone or an online claims submission. It is an important aspect of a policy, since failure to provide timely notice could result in delays or the complete denial of a claim.

An insured must provide the insurance company with a proof of loss statement in order for a claims investigation to commence. The investigation is required to determine if the insurance company will approve or deny a claim.

There are various types of damages that a party found liable may be required to pay:

Punitive damages are intended to punish improper conduct. For example, when an oil company recklessly causes a spill, punitive damages could be awarded to punish the company and to deter future similar conduct.

Compensatory (a/k/a/ Actual) damages reimburse a party for a loss sustained in order to make the party whole, such as paying for a party’s automobile damage sustained in an accident with a negligent party. Other types of compensatory damages include:

1) Special damages are compensatory in nature, since they cover the injured party’s expenses, such as medical bills.

2) General damages compensate an injured party for non-economic expenses. For example, a party may recover damages due to pain and suffering resulting from an accident.