Insurance Exam Prep Section 3 0 Life, Accident, And Health Insurance B 110 Questions And Answers
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3.0 Life, Accident, and Health Insurance Basics:
Insurable Interest:
Insurable Interest:
This exists when a person would suffer a financial or emotional loss if the insured person died or experienced a covered event. The law only requires this when the policy is first issued. It doesn't have to continue forever.
- Insurance is meant to protect against a loss—not allow someone to profit from another person's death.
- Without the ____ requirement, anyone could buy life insurance on a stranger and financially benefit if that stranger died. The law prevents this. It basically just makes sure you can't profit off a strangers death, it has to be someone who means something to you (or who affects you/would cause a loss).
If someone's death doesn't cause YOU to suffer a financial loss, you cannot legally buy a life insurance policy on them, you have NO ____.
- Insurance is meant to protect against a loss—not allow someone to profit from another person's death.
- Without the ____ requirement, anyone could buy life insurance on a stranger and financially benefit if that stranger died. The law prevents this. It basically just makes sure you can't profit off a strangers death, it has to be someone who means something to you (or who affects you/would cause a loss).
If someone's death doesn't cause YOU to suffer a financial loss, you cannot legally buy a life insurance policy on them, you have NO ____.
Who Usually Has Insurable Interest?
1) Yourself (Example: You buy a $500,000 life insurance policy on yourself.)
2) Spouses (Why? If one spouse dies, the other often loses income, financial support, or household services.)
3) Parents and Children (Parents generally have an ____ in their minor children. Children may also have an ____ in their parents if they depend on them financially.)
4) Business Partners (Business partners often have an ____ in each other. Example: Two people own a business together. If one dies, the surviving partner could suffer a major financial loss. They may each purchase life insurance on the other.)
5) Creditors (A lender may have an ____ in a borrower—but generally only up to the amount of the debt.
Example: A bank lends someone $300,000. The bank may have an ____ because the borrower's death could affect repayment of the loan.)
2) Spouses (Why? If one spouse dies, the other often loses income, financial support, or household services.)
3) Parents and Children (Parents generally have an ____ in their minor children. Children may also have an ____ in their parents if they depend on them financially.)
4) Business Partners (Business partners often have an ____ in each other. Example: Two people own a business together. If one dies, the surviving partner could suffer a major financial loss. They may each purchase life insurance on the other.)
5) Creditors (A lender may have an ____ in a borrower—but generally only up to the amount of the debt.
Example: A bank lends someone $300,000. The bank may have an ____ because the borrower's death could affect repayment of the loan.)
Insurable interest example:
WITH ____:
Sarah wants to buy a life insurance policy on her husband.
If he dies:
she loses his income,
she may struggle to pay bills,
she suffers financially.
She has an ____, so she can legally buy the policy.
WITHOUT:
Mike sees a wealthy celebrity on television.
He thinks:
"If that person dies, I'd like to receive $2 million."
Mike cannot buy life insurance on that celebrity.
He has no ____
Sarah wants to buy a life insurance policy on her husband.
If he dies:
she loses his income,
she may struggle to pay bills,
she suffers financially.
She has an ____, so she can legally buy the policy.
WITHOUT:
Mike sees a wealthy celebrity on television.
He thinks:
"If that person dies, I'd like to receive $2 million."
Mike cannot buy life insurance on that celebrity.
He has no ____
Personal Uses of Life Insurance
These are the common personal reasons people purchase life insurance.
The Pearson outline lists five major personal uses:
These are the common personal reasons people purchase life insurance.
The Pearson outline lists five major personal uses:
1. Survivor Protection
2. Estate Creation
3. Liquidity
4. Estate Conservation
5. Asset Protection
2. Estate Creation
3. Liquidity
4. Estate Conservation
5. Asset Protection
Survivor Protection:
means providing financial support to the people who depend on the insured after the insured dies.
- For most families, life insurance exists for one main reason:
If the person earning income dies, their family still needs money to live. Life insurance replaces some of that lost income. Death benefit can help survivors pay for:
mortgage or rent, groceries, childcare, etc.
- For most families, life insurance exists for one main reason:
If the person earning income dies, their family still needs money to live. Life insurance replaces some of that lost income. Death benefit can help survivors pay for:
mortgage or rent, groceries, childcare, etc.
Survivor Protection Example:
David earns $90,000 per year.
His wife stays home with their two children.
If David dies unexpectedly, the family's income disappears.
His life insurance pays a death benefit that helps his family continue paying their bills.
This is ____.
His wife stays home with their two children.
If David dies unexpectedly, the family's income disappears.
His life insurance pays a death benefit that helps his family continue paying their bills.
This is ____.
Estate Creation:
means using life insurance to immediately create an estate (a sum of money) for your beneficiaries.
- Many people don't have hundreds of thousands of dollars saved, but they can buy life insurance with a much smaller premium. If they die, the beneficiaries receive the much larger death benefit. Life insurance creates ____ that otherwise might not have existed.
- Many people don't have hundreds of thousands of dollars saved, but they can buy life insurance with a much smaller premium. If they die, the beneficiaries receive the much larger death benefit. Life insurance creates ____ that otherwise might not have existed.
Estate Creation Example:
Emma has only $30,000 in savings.
She owns a $500,000 life insurance policy.
She dies unexpectedly.
Her beneficiaries receive $500,000.
Life insurance has ____ much larger than what Emma had accumulated herself.
Exam Tip ⭐
____ is one of the biggest reasons people buy life insurance.
She owns a $500,000 life insurance policy.
She dies unexpectedly.
Her beneficiaries receive $500,000.
Life insurance has ____ much larger than what Emma had accumulated herself.
Exam Tip ⭐
____ is one of the biggest reasons people buy life insurance.
Liquidity
Means having cash that is readily available to pay expenses.
Many assets are valuable but cannot be turned into cash quickly.
Examples include:
a house, land, a business, valuable collectibles.
- It is easy to get cash from things like your wallet, your checking account, stocks (you can usually sell them quickly), but way harder to pull cash out from assets like a house, land, etc.
Those are valuable, but you can't usually sell them overnight. It may take weeks or months to find a buyer.
So they are not very ____.
Life insurance provides cash immediately after death, helping beneficiaries pay expenses without having to quickly sell those assets:
Many assets are valuable but cannot be turned into cash quickly.
Examples include:
a house, land, a business, valuable collectibles.
- It is easy to get cash from things like your wallet, your checking account, stocks (you can usually sell them quickly), but way harder to pull cash out from assets like a house, land, etc.
Those are valuable, but you can't usually sell them overnight. It may take weeks or months to find a buyer.
So they are not very ____.
Life insurance provides cash immediately after death, helping beneficiaries pay expenses without having to quickly sell those assets:
Liquidity Example:
Life insurance provides cash immediately after death, helping beneficiaries pay expenses without having to quickly sell those assets:
Life insurance provides cash immediately after death, helping beneficiaries pay expenses without having to quickly sell those assets:
Robert owns:
a $900,000 farm,
very little cash.
When he dies, his family needs money immediately for:
funeral costs,
bills,
legal expenses.
Instead of selling the farm quickly, they receive the life insurance proceeds.
The policy provides ____.
Easy way to remember for the exam
Ask yourself:
"Do I have money I can spend TODAY?"
If yes → You have liquidity.
If no → Your money is tied up in assets.
Life insurance helps create liquidity because it provides immediate cash after the insured dies
a $900,000 farm,
very little cash.
When he dies, his family needs money immediately for:
funeral costs,
bills,
legal expenses.
Instead of selling the farm quickly, they receive the life insurance proceeds.
The policy provides ____.
Easy way to remember for the exam
Ask yourself:
"Do I have money I can spend TODAY?"
If yes → You have liquidity.
If no → Your money is tied up in assets.
Life insurance helps create liquidity because it provides immediate cash after the insured dies