Insurance license exam

Which kind of risk can normally be insured?

Pure risk, where the only outcomes are loss or no loss Insurance covers pure risk: something bad might happen, or nothing happens at all. There’s no chance of making a profit from it, so insurance can put you back where you were without making you better off.

A homeowner keeps oily rags piled next to the furnace. In insurance terms, the rags are:

A hazard A hazard is something that makes a loss more likely or worse. The rags don’t cause the loss themselves. They make a fire, which is the peril, more likely. This one is a physical hazard.

How does the law of large numbers help an insurance company?

The bigger the group of similar risks, the more accurately it can predict losses When an insurer covers many similar risks, the actual number of losses gets closer to the expected number. That makes losses easier to predict and premiums easier to set fairly.

For life insurance, when must insurable interest exist?

At the start, when the policy is applied for and issued In life insurance, insurable interest has to exist when the policy begins. It doesn’t have to still exist when the insured dies. Property insurance is different: there, it must exist at the time of the loss.

The insurer writes the policy, and the buyer can only accept it or turn it down. Because of this, unclear wording is usually read in the insured’s favor. What feature of insurance contracts is this?

Contract of adhesion An insurance policy is a contract of adhesion: one side writes it and the other side has to take it as it is. Since the insured had no say in the wording, courts usually settle any unclear wording in the insured’s favor.

In an insurance contract, what is the applicant’s consideration?

The premium and the statements made in the application Consideration is what each side gives in exchange. The applicant gives the premium and the statements in the application. The insurer gives its promise to pay covered losses.

Which type of life insurance covers you for a set period and builds no cash value?

Term life Term life is pure protection for a set number of years, like 10 or 20. If you die during the term, it pays. If the term ends, the coverage stops, and there’s no cash value to take back.

Which policy lets the owner change how much premium they pay and adjust the death benefit, within limits?

Universal life Universal life is known for flexibility. The owner can pay more or less premium, within limits, and can raise or lower the death benefit. Raising it usually needs proof of insurability.

Decreasing term life insurance is often bought to cover:

A mortgage balance that shrinks over time With decreasing term, the death benefit goes down over the term while the premium usually stays level. That matches a debt that gets smaller, like a mortgage, so it’s a common fit.

A policyowner misses a premium. For an individual life policy, how long does the grace period usually keep the policy in force?

About a month (30 or 31 days) Individual life policies usually give a grace period of one month, or 30 or 31 days. If the insured dies during that time, the policy pays, minus the unpaid premium.

After a life policy has been in force for a set time, usually 2 years, the insurer can no longer void it because of misstatements on the application. Which provision is this?

The incontestable clause The incontestable clause gives the insurer a limited time, usually 2 years, to challenge the policy over statements in the application. After that, it can’t void the policy for those misstatements.

In a typical HMO, who coordinates your care and refers you to specialists?

A primary care physician, often called the gatekeeper HMOs usually have each member choose a primary care physician. That doctor handles routine care and decides when you need a specialist, which is why the role is called the gatekeeper.

In a disability income policy, what is the waiting time between the start of a disability and the start of benefits called?

Elimination period The elimination period works like a deductible measured in time. Benefits start only after you’ve been disabled for that long, such as 30 or 90 days. A longer elimination period usually means a lower premium.

A major medical plan has a $1,000 deductible and 80/20 coinsurance. Covered bills come to $6,000. Ignoring any out-of-pocket maximum, how much does the insured pay?

$2,000 The insured pays the first $1,000. That leaves $5,000, and the insured pays 20% of it, which is $1,000. So the total is $1,000 + $1,000 = $2,000. The plan pays the other $4,000.

How is actual cash value (ACV) usually worked out?

Replacement cost minus depreciation Actual cash value is the cost to replace the item today, minus depreciation for age and wear. It pays what the item was worth, not the price of a brand-new one.

A building is worth $200,000 and its policy has an 80% coinsurance clause. The owner insures it for only $120,000. A covered fire causes $40,000 of damage. Ignoring the deductible, how much will the insurer pay?

$30,000 The owner needed 80% of $200,000, which is $160,000. They carried $120,000, which is three-quarters of what was required. So the insurer pays three-quarters of the $40,000 loss: $30,000.

A policy covers direct physical loss from any cause that isn’t specifically excluded. What basis is it written on?

Open perils (special form) Open perils, also called special form, covers everything except what the policy excludes. Named perils is the opposite: it covers only the causes of loss it lists.

To prove that someone was negligent, what must be shown?

A legal duty, a breach of that duty, and damage caused by the breach Negligence needs a legal duty of care, a failure to meet it, and actual harm that the failure caused. Proximate cause is the link between the breach and the damage. An accident alone isn’t enough.

An auto policy shows liability limits of 100/300/50, in thousands of dollars. What does the 50 mean?

$50,000 for property damage per accident Split limits are written as bodily injury per person, bodily injury per accident, then property damage per accident. So 100/300/50 means $100,000, $300,000 and $50,000 for property damage.

An insurer pays its insured for a car crash caused by another driver, then goes after that driver to get its money back. What is this called?

Subrogation Subrogation means the insurer steps into the insured’s shoes after paying a claim. It takes over the insured’s right to recover from the person at fault. This stops the insured from being paid twice for the same loss.