Life & Health Insurance License Exam

Life insurance is a contract between a policy owner and an insurance company in which the insurer agrees to pay a designated beneficiary a sum of money (the death benefit) upon the death of the insured person in exchange for premium payments. The primary purpose is to provide financial protection to surviving dependents after the insured's death.

Life insurance operates on the principle of risk pooling. Many individuals pay premiums into a common fund, and claims are paid from this fund when insureds die. Mortality tables, which predict death rates at various ages, are used to calculate premiums. The law of large numbers allows insurers to predict losses with reasonable accuracy when insuring large groups.

Insurable interest must exist at the time of application for life insurance. A person has insurable interest in:

Their own life (unlimited)

The life of a spouse

The life of a child or dependent

The life of a business partner or key employee

The life of a debtor (limited to the amount of debt)

Without insurable interest, a life insurance contract is void from inception and constitutes a wagering contract, which is illegal.

The policy owner and insured can be the same person (first-party policy) or different persons (third-party policy).

Term life insurance provides temporary protection for a specified period (the term). It pays a death benefit only if the insured dies during the term. If the insured survives the term, coverage expires with no payment. Term insurance has no cash value accumulation and provides pure death protection at the lowest initial premium cost.

Death benefit remains constant throughout the term

Common terms: 10, 15, 20, 25, or 30 years

Premiums may be level for the entire term or increase annually

Most popular form of term insurance

Provides coverage for one year at a time

Renewable each year without evidence of insurability

Premiums increase each year as the insured ages

Maximum renewal age typically 70 or 80

Death benefit decreases over the policy term

Premiums remain level throughout

Often used for mortgage protection (decreases match mortgage balance decline)

No cash value

Death benefit increases over time

May increase by a fixed amount or percentage annually

Used to offset inflation

Higher premiums than level term

Returns all premiums paid if the insured survives the term

Significantly higher premiums than standard term

Combines term protection with a savings element

Allows the policy owner to renew coverage at the end of the term without proving insurability

Premiums increase at renewal based on attained age

Renewable until a maximum age (often 70-80)

Valuable provision protecting future insurability

Allows conversion to a permanent policy without evidence of insurability

Conversion may be limited to a certain period or until a certain age

Premiums for the new policy based on attained age at conversion

Some policies offer original age conversion (requires paying the premium difference plus interest)

Offers lower renewal premiums if the insured can provide evidence of continued insurability

Higher premiums apply if the insured cannot demonstrate good health at renewal

Lowest initial premium cost

Maximum death benefit per premium dollar

Simple and easy to understand

Ideal for temporary needs

No cash value accumulation

Coverage expires at end of term

Premiums increase with age upon renewal

May become unaffordable at older ages

Income replacement during working years

Mortgage or debt protection

Coverage during child-rearing years

Business needs with a defined duration

Supplementing permanent insurance