Insurance is a contract (policy) by which one party (insurer/company) agrees to pay another party (insured/policyholder) for losses in exchange for a premium. Insurance transfers risk from the individual to a large group (risk pooling).
| Characteristic | Meaning |
|---|---|
| Aleatory | Unequal exchange — one party may receive much more or less than paid (based on chance/loss) |
| Unilateral | Only the insurer makes a legally enforceable promise; insured can cancel anytime |
| Adhesion | Written by insurer; insured "takes it or leaves it" — ambiguities interpreted in favor of insured |
| Conditional | Insurer must pay only if conditions are met (premiums paid, claim filed, etc.) |
| Personal | Policy is between insurer and specific insured; cannot be transferred without insurer consent |
Insurable interest must exist at the time of application for life insurance (and at the time of loss for property/casualty). Insurable interest = financial stake in the continued life or health of the insured. Examples: self, spouse, children, business partners, key employees.
The foundation of insurance: the larger the group of similar risks pooled together, the more accurately the insurer can predict losses. Actuaries use mortality tables to price life insurance based on this principle.
Q: An insurance contract is described as "aleatory." This means:
The PA Insurance Commissioner oversees insurance regulation in Pennsylvania. Responsibilities: licensing producers/insurers, examining companies, handling consumer complaints, approving rates and policy forms.
An insurance producer in PA must: pass the state exam, submit a license application, undergo background check, complete required pre-licensing education (40 hours for life/health), and pay licensing fees.
Licensed producers must complete 24 hours of CE every 2 years. Of the 24 hours: 3 hours must be ethics. Variable product licensees need additional coursework. CE must be completed before the biennial renewal deadline.
Grounds for denial, suspension, or revocation in PA: material misrepresentation on application, willful misrepresentation to insureds, twisting (inducing lapse of existing policy to sell new one), churning, commingling of funds, felony conviction. The Commissioner may also impose civil penalties up to $5,000 per violation.
Q: A PA insurance producer tells a client that their existing life policy is in danger of lapsing (which is false) in order to get them to buy a new policy. This is:
Pure death protection for a specified period. No cash value accumulation. Premiums are lowest initially but increase at renewal. Types: level term (fixed premium and death benefit), decreasing term (death benefit declines), renewable term (can renew without new medical exam), convertible term (can convert to permanent without medical exam).
| Type | Premiums | Death Benefit | Cash Value | Key Feature |
|---|---|---|---|---|
| Whole Life | Fixed, level | Fixed, level | Guaranteed growth at fixed rate | Endows at age 100 (face = cash value) |
| Universal Life | Flexible | Flexible (A or B) | Varies with interest rates (credited rate) | Unbundled — can see cost of insurance |
| Variable Life | Fixed | Varies (min guaranteed) | Varies with subaccount performance | IS a security; requires Series 6/7 |
| Variable Universal Life (VUL) | Flexible | Flexible | Varies with subaccounts | Most flexible; IS a security |
| Indexed Universal Life | Flexible | Flexible | Tied to market index (with floor/cap) | Participation rate limits upside; floor prevents loss |
Option A (Level Death Benefit): total death benefit stays level; as cash value grows, net amount at risk decreases. Option B (Increasing Death Benefit): death benefit = face amount + cash value; total benefit grows, but premium is higher to maintain coverage.
Q: A client purchases a $250,000 variable universal life policy. Which of the following is required to sell this product?
| Provision | Description |
|---|---|
| Free Look | 10–30 days to review and return for full refund |
| Grace Period | 30 days (31 days) after missed premium — policy stays in force |
| Reinstatement | Restore lapsed policy within 3 years — must pay back premiums + interest; insurability evidence required (except for premiums) |
| Incontestability | After 2 years, insurer cannot contest policy based on misrepresentation (except fraud) |
| Entire Contract | Policy + application = entire contract; no oral agreements bind insurer |
| Misstatement of Age | If insured misstated age, death benefit adjusted to what premium would have bought at correct age (no rescission) |
When a permanent policy lapses (after cash value has built up), the insured has nonforfeiture options to preserve value:
| Option | What Happens |
|---|---|
| Cash Surrender Value | Receive the cash value — policy ends |
| Reduced Paid-Up Insurance | Smaller permanent death benefit; no more premiums due |
| Extended Term Insurance | Same death benefit, shorter term; uses cash value to buy term |
Mutual (participating) policies may pay dividends (return of excess premium — NOT taxable). Dividend options:
| Rider | What It Does |
|---|---|
| Waiver of Premium | Insurer pays premiums if insured becomes totally disabled |
| Accidental Death Benefit (ADB) | "Double indemnity" — pays 2x face if death is accidental |
| Guaranteed Insurability Option (GIO) | Can buy additional coverage at specified ages without new medical exam |
| Cost of Living (COL) | Death benefit increases with inflation automatically |
| Long-Term Care (LTC) Rider | Accelerates death benefit to pay for long-term care |
| Payor Benefit | Waives premiums if the PAYOR (not insured) dies or becomes disabled (juvenile life) |
Q: A policyholder misses a premium payment. Under the grace period provision, the policy will remain in force for:
Primary beneficiary: receives proceeds at insured's death. Contingent beneficiary: receives proceeds if primary predeceases the insured. Revocable beneficiary: can be changed by policyholder without consent. Irrevocable beneficiary: CANNOT be changed without that beneficiary's written consent.
| Option | Description |
|---|---|
| Lump sum | Single payment; default option |
| Interest only | Insurer holds principal and pays interest; beneficiary can access principal later |
| Fixed period | Payments made over a specified period (e.g., 20 years) |
| Fixed amount | Specified amount paid until funds exhausted |
| Life income | Monthly payments for life (like an annuity) |
Death benefit: generally income-tax-free to beneficiaries. Cash value growth: tax-deferred inside the policy. Policy loans: not taxable (treated as debt, not income) unless policy lapses or is surrendered. Surrender: gain (proceeds − basis) taxable as ordinary income. Modified Endowment Contract (MEC): if over-funded per IRS rules, loses tax advantages.
Q: A beneficiary receives $500,000 in life insurance proceeds. How are these proceeds taxed?
An annuity is a contract that provides periodic income payments, typically for retirement. The ACCUMULATION phase is when money grows; the ANNUITY (payout) phase is when payments are made. Annuities offer tax-deferred growth.
| Type | Investment Risk | Returns | Security? |
|---|---|---|---|
| Fixed | Insurer | Guaranteed minimum rate | No |
| Variable | Owner | Based on subaccounts (like mutual funds) | YES |
| Indexed (Fixed Indexed) | Shared | Tied to index (S&P 500) with floor and cap | No (typically) |
| Immediate | Insurer (if fixed) | Payments begin within 30 days of purchase | No (if fixed) |
| Deferred | Varies | Payments begin at future date | Depends |
| Option | Monthly Payment | Beneficiary Gets | Risk |
|---|---|---|---|
| Life only (pure life) | HIGHEST | Nothing | Die early → lose all |
| Life + period certain (e.g., 10-yr) | Lower | Remaining guaranteed payments | Reduced |
| Joint & survivor | Lower | Continues to survivor (at same or reduced %) | Low |
| Period certain only | Fixed | Remaining payments | Outlive the period |
| Life with refund | Lower | Refund if premiums not fully returned at death | Low |
Growth inside annuities is tax-deferred. At payout: GAINS are taxed as ordinary income (LIFO — last in, first out); basis is returned tax-free (exclusion ratio). Withdrawals before 59½: 10% penalty on gains. Unlike life insurance, annuity death benefit is NOT income-tax-free (gains are taxable to beneficiary).
Q: A 65-year-old retiree has no dependents and wants to maximize her monthly income from her $300,000 annuity. Which payout option is MOST suitable?
Group insurance covers multiple individuals under a single master policy. The master policy is issued to the group (employer, union, association). Individual members receive certificates of coverage (not individual policies).
Usually term insurance. Coverage typically = 1–2× annual salary. Premium based on group characteristics (age, sex, occupation). No individual medical exam for eligible employees. Conversion right: upon leaving, can convert to individual whole life WITHOUT a medical exam (within 31 days).
Non-contributory: employer pays 100% of premiums → 100% of eligible employees must be covered (100% participation). Contributory: employees pay part of premium → 75% of eligible employees must participate (to prevent adverse selection).
Q: An employee leaves her job and wants to continue her group life insurance coverage. Under the conversion privilege, she:
AD&D pays a benefit for: accidental death (principal sum = face amount) OR accidental dismemberment/loss of sight (capital sum = fraction of face). Common "schedule of losses": both hands/feet/eyes = 100%, one hand/foot/eye = 50%.
| Use | Description |
|---|---|
| Key Person Insurance | Company insures key employee; company is owner AND beneficiary. Protects company from financial loss if key employee dies. |
| Buy-Sell Agreement | Funded by life insurance; allows surviving partners/shareholders to buy out deceased owner's interest. Entity plan or cross-purchase plan. |
| Executive Bonus (162 Plan) | Employer pays premium as bonus to executive; executive owns policy. Premium is deductible by employer; taxable income to executive. |
| Split-Dollar Life | Employer and employee share premium costs and policy benefits per agreement. |
| Group Carve-Out | Replaces group term for executives with individual permanent policy for tax advantages. |
Health insurance covers medical expenses due to illness or injury. Key concepts: deductible (amount paid out-of-pocket before insurance pays), copayment (fixed amount per visit/prescription), coinsurance (percentage split after deductible), out-of-pocket maximum (cap on total patient spending).
Q: A company purchases life insurance on its CEO to protect against financial loss if the CEO dies. The company pays the premiums and is the beneficiary. This is called:
| Plan Type | Primary Care Physician (PCP)? | Referrals Required? | Out-of-Network? | Cost |
|---|---|---|---|---|
| HMO (Health Maintenance Organization) | Yes — "gatekeeper" | Yes | No (except emergency) | Lowest premiums |
| PPO (Preferred Provider Organization) | No | No | Yes (higher cost) | Higher premiums |
| POS (Point of Service) | Yes (if in-network) | Yes (if in-network) | Yes (with referral and higher cost) | Middle ground |
| EPO (Exclusive Provider Organization) | No | No | No | Lower; network limited |
| HDHP + HSA | No | No | Varies | Low premium; high deductible |
COBRA: Consolidated Omnibus Budget Reconciliation Act. Allows employees who lose group coverage (job loss, reduced hours, divorce) to CONTINUE group health coverage for 18–36 months. Employee pays 100% of premium + 2% admin fee. Applies to employers with 20+ employees.
Q: A patient with an HMO plan wants to see a specialist. Which of the following is required?
| Coverage | What It Covers |
|---|---|
| Basic Hospital | Room, board, hospital services; defined daily benefit |
| Basic Surgical | Surgeon's fees based on a schedule (fee schedule) |
| Basic Medical | Non-surgical physician visits (in hospital) |
| Major Medical | Broad coverage for catastrophic expenses; high limits; deductible + coinsurance |
| Comprehensive Major Medical | Combines basic + major medical into one policy (most common today) |
Deductible: amount insured pays before insurance kicks in (e.g., $1,000/year). Coinsurance: percentage split after deductible (e.g., 80/20 — insurer pays 80%, insured pays 20%). Out-of-pocket maximum: after this amount, insurer pays 100%.
When a person has TWO health policies, COB prevents overpayment (collecting more than 100% of expenses). Primary policy pays first; secondary pays the remainder up to 100%. Determining primary payer: employment is primary to dependent coverage; birthday rule for children of divorced parents.
Q: A patient has a $2,000 deductible and 80/20 coinsurance. She incurs $12,000 in medical expenses. What does she pay out of pocket?
Health Insurance Portability and Accountability Act: protects health insurance coverage when changing/losing jobs; limits pre-existing condition exclusions in group plans; establishes medical privacy rules (PHI — Protected Health Information cannot be shared without consent).
HSAs are tax-advantaged accounts for medical expenses. Must have a HDHP (High Deductible Health Plan) to contribute. Contributions: tax-deductible. Growth: tax-deferred. Withdrawals for qualified medical expenses: tax-free. "Triple tax advantage." Unused funds ROLL OVER year to year — no "use it or lose it."
Q: A person has an HSA. At year-end, they have $800 in unused funds. What happens?
Disability income insurance replaces a portion of earned income when an insured cannot work due to illness or injury. Typically replaces 60–80% of income (designed so it's not as lucrative as working). Benefits are tax-free if the insured paid premiums; taxable if employer paid premiums.
| Definition | Description | Best For |
|---|---|---|
| Own Occupation ("own occ") | Cannot perform duties of YOUR specific occupation | Professionals (doctors, lawyers) — most favorable to insured |
| Any Occupation ("any occ") | Cannot perform ANY occupation for which reasonably suited by education/experience | Lower premium; harder to collect |
| Modified Own Occ | Own occ for first 2 years; any occ thereafter | Middle ground; common in policies |
The elimination period is the waiting period before benefits begin (like a deductible measured in time, not dollars). Common: 30, 60, 90, or 180 days. Longer elimination period = lower premium. Benefits don't begin until the elimination period expires.
How long benefits are paid: short-term (1–2 years), long-term (5 years, to age 65, or to age 67). Longer benefit period = higher premium. Most important for long-term income protection: benefits to age 65.
| Provision | Description |
|---|---|
| Residual disability | Pays partial benefit if partially disabled (can work but at reduced capacity) |
| Presumptive disability | Automatically considered totally disabled upon loss of sight, hearing, speech, or two limbs — no elimination period |
| Recurrent disability | Relapse within 6 months of recovery = same claim (no new elimination period) |
| Non-cancelable | Insurer cannot cancel, increase premiums, or reduce benefits as long as premiums paid |
| Guaranteed renewable | Cannot cancel; CAN increase premiums for an entire class |
Q: A surgeon purchases a disability income policy with an "own occupation" definition. She suffers a hand injury and cannot perform surgery but can still practice medicine as a general practitioner. Will she receive disability benefits?
Federal health insurance for: persons age 65+, disabled persons (after 24 months of disability benefits), persons with ESRD (end-stage renal disease) or ALS.
| Part | Name | Covers | Funded By |
|---|---|---|---|
| A | Hospital Insurance | Inpatient hospital, skilled nursing facility (SNF), hospice, some home health | FICA taxes (usually no premium if 40+ work quarters) |
| B | Medical Insurance | Outpatient, doctor visits, preventive care, durable medical equipment | Monthly premium + general tax revenue |
| C | Medicare Advantage | All of A + B (and often D) through private plans (HMO, PPO) | Premium varies by plan |
| D | Prescription Drug | Prescription medications through private plan | Monthly premium; stand-alone or Part C |
Medicare does NOT cover: long-term custodial care, dental, vision, hearing aids, most prescription drugs (without Part D), cosmetic surgery, private-duty nursing. Medigap (Medicare Supplement) fills many of these gaps.
Joint federal-state program for low-income individuals. Income and asset tests apply. Covers: comprehensive medical services, long-term care (nursing homes) — a critical distinction from Medicare. Must spend down assets to qualify (asset limits vary by state). No age requirement (any age if eligible).
LTC insurance pays for care when the insured cannot perform 2 of 6 Activities of Daily Living (ADLs): bathing, continence, dressing, eating, toileting, transferring. OR has severe cognitive impairment (Alzheimer's).
Q: Which government program pays for long-term nursing home care for individuals who have depleted their assets?
| Provision | Description |
|---|---|
| Entire Contract | Policy + application = complete contract |
| Time Limit on Certain Defenses | After 3 years (2 years for some), insurer cannot contest based on pre-existing conditions (if not excluded) |
| Grace Period | 7 days (weekly premium), 10 days (monthly premium), 31 days (all other modes) |
| Reinstatement | Insurer has 45 days to accept/reject; if no action in 45 days — automatically reinstated |
| Notice of Claim | Claimant must notify insurer within 20 days of loss (or as soon as reasonably possible) |
| Claim Forms | Insurer must provide claim forms within 15 days of notice of claim |
| Proof of Loss | Must submit within 90 days (or 1 year if not reasonably possible) |
| Legal Action | Cannot sue insurer within 60 days of proof of loss; must sue within 3 years |
| Type | Insurer's Right to Cancel | Insurer's Right to Raise Rates |
|---|---|---|
| Cancelable | Can cancel anytime with notice | Yes |
| Optionally renewable | Can refuse renewal at anniversary date | Yes |
| Conditionally renewable | Cannot cancel based on health; can for other reasons | Yes |
| Guaranteed renewable | Cannot cancel as long as premiums paid | Yes (for class) |
| Non-cancelable (non-can) | Cannot cancel as long as premiums paid | NO — premium locked in |
Q: A health insurance policy states the insurer cannot cancel as long as premiums are paid, but reserves the right to increase premiums for all policies in the same class. This is:
The Insurance Commissioner enforces the PA Insurance Department Code. Powers include: licensing, examination of insurers, rate approval, market conduct examinations, and consumer complaint resolution. The Commissioner can revoke licenses, issue cease and desist orders, and impose fines.
| Rule | PA Requirement |
|---|---|
| Life insurance free look | 10 days (30 days for Medicare supplement) |
| Annuity free look | 10 days (30 days for persons 60+ or Medicare supplement) |
| CE requirement | 24 hours per 2-year cycle; 3 hours must be ethics |
| License renewal | Biennial (every 2 years) |
| Licensing exam | Administered by Pearson VUE; 75-150 questions depending on license |
| PA insurance guarantee fund | Protects policyholders if insurer becomes insolvent; life/health: up to $300,000 in death benefits |
Prohibited: misrepresentation, false advertising, defamation (of other insurers), unfair discrimination (charging different rates for same risk class without actuarial basis), rebating (giving anything of value as inducement to purchase — including sharing commissions with insured), twisting, churning.
Q: A producer offers to pay the first month's premium as an inducement for a new client to purchase a life insurance policy. This is: