Chapter 1: Basic Principles Of Life And Health Insurance

The primary reason for buying life insurance is to provide death benefits. Life insurance offers financial protection to the policyholder's beneficiaries in the event of their death. This ensures that their loved ones are taken care of financially and can cover expenses such as funeral costs, outstanding debts, and ongoing living expenses. Life insurance provides peace of mind and a sense of security, knowing that loved ones will be financially supported after the policyholder's passing.

The Fair Credit and Reporting Act (FCRA) is a federal law that aims to protect consumers by providing guidelines for credit reporting and distribution. It ensures that credit reporting agencies maintain accurate and fair information about individuals' credit histories and allows consumers to dispute any errors on their credit reports. The FCRA also regulates how consumer credit information is shared and distributed, ensuring that it is done in a responsible and secure manner. By doing so, the FCRA helps to protect consumers from unfair practices and promotes transparency in the credit reporting industry.

Under the Fair Credit Reporting Act, the maximum penalty that may be imposed on Ken for obtaining Consumer Information Reports under false pretenses is $5,000.

A rating from a rating service company, such as A.M. Best, is not considered advertising because it is an evaluation or assessment of an entity's financial strength or creditworthiness. It does not promote or market a product or service, but rather provides an objective opinion or rating. Advertising typically involves the promotion or communication of goods, services, or ideas to a target audience with the aim of influencing their behavior or perception.

A life insurance company transfers some of its risk to another insurer, known as a reinsurer. Reinsurers specialize in assuming risks from primary insurers, like life insurance companies, in exchange for a premium. This allows the primary insurer to reduce its exposure to large losses and maintain financial stability. The reinsurer takes on a portion of the risk and pays out claims when necessary. Therefore, the correct answer is "Reinsurer."

Liquidity refers to an insurer's ability to make unpredictable payouts to policyowners. It is the measure of how easily an insurer can convert its assets into cash to meet its obligations. A high level of liquidity indicates that the insurer has enough readily available funds to pay out claims and other policyholder obligations, even in unforeseen circumstances. Therefore, liquidity is the correct answer in this case.

A mutual insurer is owned by its policyowners, meaning that the policyholders are also the owners of the company. They have the right to vote on company matters and may receive dividends or premium reductions based on the company's performance. This type of insurer operates for the benefit of its policyholders rather than shareholders, as in the case of a stock insurer. Domestic, in-house, or any other terms do not accurately describe an insurer that is owned by its policyowners.

The primary purpose of a rating service company such as A. Best is to determine the financial strength of an insurance company. These companies assess the financial stability and creditworthiness of insurers, providing ratings that help consumers and other stakeholders make informed decisions. By evaluating factors such as the insurer's capitalization, claims-paying ability, and overall financial health, rating service companies like A. Best offer valuable insights into the financial strength and stability of insurance companies, assisting individuals and businesses in selecting reliable and secure insurance providers.

A self-funded plan refers to a type of insurance plan where the employer pays for the insurance benefits using funds derived from their current resources. In this plan, the employer takes on the financial risk and responsibility for providing healthcare coverage to their employees, rather than relying on an insurance company. This allows the employer to have more control over the plan design and potentially save costs if the claims are lower than expected.

The Do Not Call Registry offers exemptions for calls placed from charities, political organizations, and surveys. However, it does not offer exemptions for insurance sales calls. This means that individuals who have registered their phone numbers on the Do Not Call Registry can still receive calls from insurance sales representatives, unless they specifically request to be added to the company's internal do not call list.

A participating life insurance policy is issued by a mutual insurer and provides a return of divisible surplus. This means that policyholders who hold participating policies are entitled to receive a portion of the profits made by the insurance company. The divisible surplus is distributed among the policyholders in the form of dividends or other benefits. This type of policy allows the policyholders to share in the financial success of the insurance company, making it a popular choice for those looking for potential additional returns on their investment.

A Fraternal Benefit Society has each of the following characteristics: incorporated, without capital stock, and exists for the benefit of its members. However, it does not exist for profit. Fraternal Benefit Societies are nonprofit organizations that provide benefits to their members, such as insurance or other financial assistance. They are not focused on generating profit, but rather on serving the needs of their members.

A nonparticipating company is sometimes called a stock insurer because it is owned by shareholders who hold stock in the company. These shareholders have the right to receive dividends and have voting rights in the company's operations and decisions. Unlike a mutual insurer, where policyholders are also owners and share in the company's profits, a stock insurer operates for the benefit of its shareholders. Reinsurers, on the other hand, provide insurance to other insurance companies, and alien insurers are foreign insurance companies operating in a different country.

Dividends from a mutual insurer are not subject to taxation because they are considered to be a return of premium. This means that the dividends are viewed as a refund or repayment of a portion of the premiums paid by the policyholder. Since the premiums were already taxed when they were initially paid, the dividends are not taxed again to avoid double taxation.

State insurance departments regulate an insurer's claim settlement practices. These departments oversee and enforce insurance laws and regulations within their respective states. They ensure that insurers comply with fair claim settlement practices, including timely and fair payment of claims. State insurance departments also handle consumer complaints and investigate any potential violations by insurers. By regulating claim settlement practices, state insurance departments aim to protect policyholders and ensure that insurers fulfill their obligations to policyholders in a fair and transparent manner.