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Life and HealthInsuranceLicense800 East 96th Street, Indianapolis, Indiana 46240

Life and Health Insurance License Exam CramPublisherCopyright 2005 by Que PublishingPaul BogerAll rights reserved. No part of this book shall be reproduced, stored ina retrieval system, or transmitted by any means, electronic, mechanical,photocopying, recording, or otherwise, without written permissionfrom the publisher. No patent liability is assumed with respect to theuse of the information contained herein. Although every precautionhas been taken in the preparation of this book, the publisher andauthor assume no responsibility for errors or omissions. Nor is any liability assumed for damages resulting from the use of the informationcontained herein.International Standard Book Number: 0-7897-3260-2Library of Congress Catalog Card Number: 2004112114Printed in the United States of AmericaExecutive EditorJeff RileyAcquisitions EditorCarol AckermanDevelopment EditorGus MiklosManaging EditorCharlotte ClappFifteenth Printing: June 2013Project EditorTrademarksAll terms mentioned in this book that are known to be trademarks orservice marks have been appropriately capitalized. Que Publishing cannot attest to the accuracy of this information. Use of a term in thisbook should not be regarded as affecting the validity of any trademarkor service mark.Warning and DisclaimerEvery effort has been made to make this book as complete and as accurate as possible, but no warranty or fitness is implied. The informationprovided is on an “as is” basis. The author(s) and the publisher shallhave neither liability nor responsibility to any person or entity withrespect to any loss or damages arising from the information containedin this book or from the use of the CD or programs accompanying it.Bulk SalesQue Publishing offers excellent discounts on this book when orderedin quantity for bulk purchases or special sales. For more information,please contactU.S. Corporate and Government or sales outside the U.S., please contactInternational [email protected] FinneyCopy EditorNancy AlbrightIndexersKen JohnsonMandie FrankProofreaderTracy DonhardtTechnical EditorTeresa ChapmanPublishing CoordinatorPamalee NelsonMultimedia DeveloperDan ScherfInterior DesignerGary AdairCover DesignerAnne Jones

Study Quicker, Score Higher The test is in 2 weeks –are you ready?You need a quick and efficient way to make sureyou have what it takes to pass.Where do you go?Exam Cram!Why?Que Certification Exam Cram titles have exactly what you needto pass your exam:Property and Casualty InsuranceExam CramBISYS Education Services0-7897-3264-5 34.99 US/ 49.99 CAN/ 24.99 Net UK Key terms and concepts highlighted at the start of eachchapter Notes, Tips, and Exam Alerts advise what to watch out for End-of-chapter sample Exam Questions with detailed discussions of all answers Two text-based practice tests with answer keys at the endof each book The tear-out Cram Sheet condenses the most importantitems and information into a two-page reminder A CD that includes BISYS Practice Tests for completeevaluation of your knowledge Our authors are recognized experts in the field. In mostcases, they are current or former instructors, trainers, orconsultants—they know exactly what you need to know!Que Certification: Your Complete Resource!www.examcram.com

About the Authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .About BISYSThe BISYS Group, Inc. (NYSE: BSG), headquartered in New York City, provides solutions that enable insurance companies, investment firms, and banksto expand their businesses and run their operations more profitably. BISYScurrently supports more than 22,000 domestic and international financialinstitutions and corporate clients through several business units.BISYS Education Services is the nation’s premier provider of licensing preparation, continuing education, and professional development courses for life,health, long-term care, annuity, and property-casualty insurance products aswell as investments. This unit complements its education services with acomprehensive compliance management solution that supports insuranceand investment firms and professionals with a sophisticated suite of servicesthat automate the entire licensing process.BISYS Insurance Services is the nation’s largest independent distributor of lifeinsurance and provider of support services required to sell traditional andvariable life and annuity products as well as long-term care and disabilityinsurance. This unit is also the nation’s second largest independent wholesaledistributor of commercial property/casualty insurance.BISYS Investment Services group provides administration and distributionservices for approximately 380 clients, representing more than 2,200 mutualfunds, hedge funds, private equity funds, and other alternative investmentproducts, with approximately 750 billion in assets under administration. Italso provides retirement services to more than 18,000 companies in partnership with 40 of the nation’s leading banks and investment management companies and offers analytical research and competitive information through itsFinancial Research Corporation (FRC) subsidiary.BISYS’ Information Services group supports approximately 1,450 banks,insurance companies, and corporations with industry-leading information

processing and imaging solutions, turnkey asset retention solutions, and specialized corporate banking solutions. Additional information is available atwww.bisys.com.Eric Alan Anderson is Director of Insurance Education for BISYSEducation Services, based in Indianapolis, Indiana. He has almost 25 years ofexperience creating training and test preparation materials for the financialservices industry. In addition to authoring 17 insurance training texts andediting 8 others, he has written newsletters and magazine articles and hasdeveloped materials for audio cassette/workbook, videotape, computer disk,and the Web. He has also taught basic English skills courses at the collegelevel and has made presentations to national conferences of insurance associations.Matt McClure is Editor of Life/Health Products for BISYS EducationServices. He maintains 42 titles on BISYS Education Services’ course list,including the Life/Health Concepts license preparation text and its supplementary review materials. Formerly a freelance writer and editor, his workhas appeared in numerous nationally published books and magazines. He isa licensed life and health insurance producer.Richard A. Morin, CIC, is a contract author based in Los Angeles,California. He has 35 years of experience writing and training on a broadrange of subjects for the financial services industry. For several years he wasan editor for a major insurance training publisher, and he has also worked asan insurance underwriter, a rating supervisor, and a licensed insurance andmutual fund sales representative.About the ReviewerTeresa Chapman has been in the insurance business since 1996, upon graduation from Ball State University in Muncie, IN. She started her career withState Farm Insurance Company as a Life and Health Underwriter. A seriesof moves with State Farm led to a variety of jobs; supervisor of Life andHealth Policy Changes, and Life and Health compliance officer, and culminated in her decision to be a State Farm insurance agent located in Carmel,IN. Teresa now lives in Noblesville, IN, with her husband Trent, a StateFarm auto claim representative, and their son, Christian.

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Contents at a Glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Introduction xxviiSelf-Assessment xxxvChapter 1Introduction to Insurance 1Chapter 2Insurance Regulation 23Chapter 3Insurance Law 55Chapter 4Underwriting Basics 73Chapter 5Group Insurance 91Chapter 6Selling Life Insurance 101Chapter 7Policy Issuance and Delivery 121Chapter 8Types of Insurance Policies 137Chapter 9Policy Provisions 177Chapter 10Policy Options 205Chapter 11Annuities 221Chapter 12Group Life Insurance 239Chapter 13Social Security and Tax Considerations 247Chapter 14Retirement Plans 265Chapter 15Health Insurance Basics 281Chapter 16Health Insurance Policy Underwriting, Issuance,and Delivery 309Chapter 17Health Insurance Policy Provisions 321Chapter 18Disability Income Insurance 345

Chapter 19Medical Expense Insurance 363Chapter 20Special Types of Medical Expense Policies 385Chapter 21Group Health Insurance 397Chapter 22Social Health Insurance 411Chapter 23Long-Term Care 433Chapter 24Health Insurance Taxation 451Chapter 25Practice Exam 1 461Chapter 26Answer Key 1 471Chapter 27Practice Exam 2 477Chapter 28Answer Key 2 487Appendix AWhat’s on the CD-ROM 493Appendix BNeed to Know More 497Glossary 501Index527

Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Introduction .xxviiSelf-Assessment .xxxvChapter 1Introduction to Insurance .1Risk2Perils and Hazards 3Managing Risk 3Law of Large Numbers 4Insurable Interest 5Insurable Risks 6Insurance Coverage Concepts 7Indemnity 7Limit Of Liability 8Deductibles 8Coinsurance 9Types of Insurance 9Types of Insurers 10Commercial Insurers 11Nonprofit (Service) Organizations 11Other Types of Private Insurers 12Self-Insurers 13The United States Government as an Insurer 13Domicile and Authorization 14Insurer’s Domicile (Domestic, Foreign, and Alien Insurers)Authorized Versus Unauthorized (Admitted VersusNonadmitted) 15Types of Distribution Systems 15Agency System 15Mass Marketing 16Internet Insurance Sales 1714

x. . Table. . . of. .Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Insurance Producers 17Categories of ProducersExam Prep Questions 19Exam Prep Answers 2217Chapter 2Insurance Regulation .23Federal Regulation 24Paul Versus Virginia 24South-Eastern Underwriters Decision 24McCarran-Ferguson Act 25Privacy Act Of 1974 25Fair Credit Reporting Act 27False or Fraudulent Statements 30Financial Services Modernization Act Of 1999 31Other Regulating Agencies 32State Insurance Regulation 32Commissioner’s Scope and Duties 32Regulating Insurance Companies 33Insurer Solvency 34Investments 34Taxation of Life Insurance Companies 34Company Ratings 35Examination of Insurers 35Guaranty Associations 36Marketing and Advertising Life and Health Insurance 36Producer Regulation 37Licensing Regulation 37License Required 37Exceptions To License Requirements 38Nonresident Producer Licensing 39Obtaining a License 40Application for Examination 40Issuance of License 40Temporary Agent Licenses 40Maintaining a License 41Change of Address 41Assumed Names 41Office and Records 41Continuation, Expiration, and Renewal of License 42Notice of Appointment 42Termination of Appointment 43License Denial, Nonrenewal, or Revocation 43

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table. . . of. Contents. . . . . . .Regulated Practices 44License for Controlled Business ProhibitedUnfair Trade Practices 45Unfair Claims Practices 47Self-Regulation 49The NAIC 49Exam Prep Questions 50Exam Prep Answers 5345Chapter 3Insurance Law .55Agency Law 56Agency Law Principles 56Formation of a Life and Health Insurance ContractContract Elements 60Parts of the Insurance Contract 62Legal Requirements 63Contract Construction 63Contract Characteristics 64Exam Prep Questions 68Exam Prep Answers 7160Chapter 4Underwriting Basics .73The Underwriting Process 74Selection Criteria 75Sources of Underwriting Information 75Field Underwriting 80Classification of Risks 81Standard Risks 81Preferred Risks 82Determination of Premiums (Rating Considerations)Mortality or Morbidity 83Interest 84Expenses 84Premium Mode 86Loss Ratios 86Insurance Fund Reserves 87Exam Prep Questions 88Exam Prep Answers 9083xi

xii. . Table. . . of. .Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chapter 5Group Insurance .91Types of Groups 92Group Premiums 93Group Underwriting Considerations 93Adverse Selection 94Probationary Period 94Eligibilit

End-of-chapter sample Exam Questions with detailed dis-cussions of all answers Two text-based practice tests with answer keys at the end of each book The tear-out Cram Sheet condenses the most important items and information into a two-page reminder A CD that includes BISYS Practice Tests for complete evaluation of your knowledge Our authors are recognized experts in the .