Pre-Licensing Life Insurance (PCIL) Exam Prep 2025-2026 Guide, Exams of Credit and Risk Management

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Pre-Licensing Life Insurance (PCIL) Exam Prep 2025-2026 Guide

Questions Assessment Insurance - ANSWER-A contract that transfers the risk of financial loss from an individual or business to an insurer. In return, the insurer agrees to cover the individual or business for certain losses they occur. “Transfer of risk” Risk - ANSWER-"Uncertainty" about whether a loss will occur. Losses that are certain to occur do not involve risk. Ex: life insurance. death will happen to everyone, but the timing is uncertain How many types of risk are there?- ANSWER2 types of risk What are the 2 types of risk? - ANSWER-1. Speculative risk (NOT insurable) has a possibility of loss or gain Ex: insurance companies will not insure investment/gambling losses because someone could win or lose moncy 2. Pure risk (insurable) ONLY involve the possibility of loss and can be covered by insurance Ex: chance of being in a car accident Loss - ANSWER-A reduction in the value of an asset Loss calculation - ANSWER-Value before loss - Value after loss = Total amount of loss Death benefit - ANSWER Payout to the beneficiary Exposure - ANSWER-The item exposed to loss that is insured measured in units Ex: Unit for life insurance exposure is $1000 of death benefit and premium rates apply per unit of exposure Peril- ANSWER-Cause of loss. For life inurance, peril = death Ex: accidents, sickness, death Hazard - ANSWER-Anything that increases the chance that a loss will occur. Hazards do not cause loss but make loss more likely pes of Hazard are there? - ANSWER-3 Types What are the 3 Types of Hazard? - ANSWER-Physical Hazard- tangible evidence Ex: existing heart condition because there are medical documents proving it Moral Hazard- arise from an individual’s character Ex: dishonesty because it increases the chance a person may life/fake a loss Morale Hazard: a state of mind or careless attitude Ex: an unconscious change in a person’s actions or behaviors, not a deliberate intent. Leaving car doors unlocked Acronym for Methods of Handling Risk- ANSWER-S.T.ARR. Affordable- the premium for transferring the risk should be affordable for the average consumer Non-catastrophic- insurance cannot insure events that cause widespread losses to large numbers of insureds at the same time such as war Homogeneous- the individual risks that the insurer covers must be similar in regard to the factors that affect the change of loss Accidental- if the loss is too certain to oceur, there is no risk and no accident Measurable- it must be possible to estimate the loss at a dollar amount for example: medical bills Adverse Sel olher insureds jon- ANSWER-When a high-risk individual uses more of their insurance than Reinsurance - ANSWEF-Insurancc for insurers ta reduce the the total amount of loss il is able for in catastrophic losses in certain geographical areas The company needing to reduce its risk is called the ceding insurer and the company assuming new risk is called the reinsurer Ex: hurricane damage 2 ways reinsurance works - ANSWER-1. Falculative reinsurance- the reinsurer considers each risk before allowing the transfer to be made from the ceding company 2. Trealy reinsurance- Lhe reinsurer accpets all risk of a cerlain type from another insurance company Stock Insurer (Stockholders/Stockawners) - ANS WEF-A business formed as a public or private corporation and owned by its stockholders or shareholders. Profits of the corporation may go to its shareholders as dividends. NON-PARTICIPANT ANSWER-Does NOT have stockholders. Owned by policyholders. Policy owners participate in operating results of the company. Excess Mutual Insurers (Policyowners/Policyholders) premium payments can be relumed to policy holders on a nontaxable dividend Fraternal Benefit Societies (Benc lit af Members) - ANSWER-Lile or health insurance companies formed to provide insurance for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government. Reciprocal Insurers (Subscribers) - ANS WER-Unincorporated groups of people that provi insurance for one another through individual agreements. Run by an attorney-in-fact Risk Retention Groups: RRG (Liability Insurance for Policyholders} - ANSWER-An insurer formed for the sole purpose of providing liability insurance to its policyholders. Owned by the insureds/members. Policyholders must be apart. of the same business Ex: car dealers RRG Lloyd's Associations (Activity /hobby/sporls)- ANSWEF-Not insurance companies. Provide a hub of exchange for member underwriters who transact the business of insurance. Not provided by insurance companies Selfinsurers (Retention) - ANSWEF-Retaining rather than transferring risk to an insurance company. Businesses may scl aside savings Lo cover losses How many types of Agency Systems (types of agents) are there? - ANSWER-4 Types of Agency Systems What are the 4 Types of Agency Systems (types of agents}? - ANSWER1. Independent Agents- sales made by agents/producers who represent more than one company 2. Exclusive/Captive Agents- sell for only one company 3. General Agent/ Managing General Agent- recruits other agents in a certain area who actually sell the insurance to the customer 4, Direct Writing- the company sells the insurance through salaried employees of the company Direct Response Marketing - ANSWERThere is no producer/agent. Policies are directly sold to the public by the insurer through advertisements Agency - ANSWER-A relationship in which one person is anthorized Lo represent and act Lor another person or for a corporation. Insurance agent acts on behall of the principal Gnsnrance company) What is the principal referred to as? - ANSWER-The insurance company in which the agent works for How many types of Agent Authority are there? (what the agent is required to do/how to act) - ANSWER-3 Types of Agent Authority 3 Types of Agent Authority (what the agent is required to do/how to act)- ANSWER-1. Express Authority- what the agent's contract says with the company Ex: ifa policy is to be written for $100,000, the agent must not write a policy for $195,000 2. Implied Authority- not written but the actions agents normally do to sell insurance Ex: create business cards 3. Apparent Authority- actions the agent does that a reasonable person would assume as authority based on agent’s actions and statements Ex: schedule meetings, arrange presentations Fiduciary - ANSWER-A person in a position of financial trust Responsibilities of a fiduciary - ANS WER-Promptly send premiums to the insurer -Knowledge of products Comply with laws and regulations No commingling Acronym for Elements of a Legal Contract - ANSWER-C.L.O.AC. What does CLOAC stand for? - ANSWER-C- Consideration- MONEY! Each party to the coniracl must give something valuable La each other. Ex: the advisor provides their consideration in the form that they will cover losses and the insured provides their application Personal (characteristics of insurance contracts) - ANSWER-Property-casualty insurance policies (home and auto} are personal contracts but health and life are not because home and auto cannot be assigned to anyone else other than who the car/home belongs to Conditional (characteristics of insurance contracts) - ANSWEF-Insured must pay the premium and file a claim if a loss ac Indemnity (characteristics of insurance contracts) - ANSWER-The contract is intended to restore the insured to the financial state they were in prior to the loss. No more and no less Representation (characteristics of insurance contracts) - ANSWER-A statement believed to be ruc Misrepresentalion (charac of insurance contracts) - ANSWEF-Information that is nol. true, but does not affect the insurance company’s decision Ex: insured accidentally putting a wrong number in their address Material Misrepresontation (characlerislics af insurance contracts) - ANSWEF-Inlormalion given that is not true but DOES affect the insurer’s decision Ex: withholding a DUI record Warranty (characteristics of insurance contracts) - ANSWER-A promise made by insurance company. Insured can sue if warranty is broken. Insured can lose coverage if they break warranty )- ANSWEF Intentional failure to disclose Concealment (characteristics of insurance contract: known facts. Coverage could be voided Fraud (characteristics of insurance contracts) - ANSWER Intentional act designed to deceive another party. Ex: someone making a false claim to get money Fraud and False Statements - ANSWER-- Fine and/or imprisonment (10-15 years) - Embezzlement included Waiver - ANSWER-An intentional, knowing relinquishment of a legal right. Estoppel- ANSWER-A legal obstruction to denying a fact or restoring a right that has been previously waived. Underwriting - ANSWER-The process of evaluating a risk to determine if it is acceptable based on established insurance company guidelines. The agent is commonly referred to as field underwriter Completing lhe Application - ANSWER-The agent must complete the insured’s application thoroughly in order for the insured’s benefits to kick in Confidentiality - ANSWER-Highly personal information that the agent must inform the applicant will not be shared. Accuracy - ANSWER-Producers must get every ANSWER correct on the application for the benefit of both the producer and insured. Changes in the Application - ANSWER-Any changes being made must be initialed by the applicant The Application - ANSWEF-The application used to purchase life insurance asks for basic information: 1. General Information Name, address, DOB, gender, SS #, marital status, income, etc. 2. Health Information -Height, weight, drug usage, international travel, medical history, high-risk hobbies, etc. 3. Producer's Report (applicant does not view this) Attending Physican’s Statements (APS)- ANSWER-The underwriter may ask the proposed insured’s doctor for a medical briefing and history Medical Examinations and Testing - ANSWER-The insurer may pay for medical exams when the death benefit applied for is below a certain level AIDS Considerations - ANSWER-AIDS tests may be paid for by the insurer with the applicant’s consent HIPAA Disclosures - ANSWEF-The Health Insurance Portability and Accountability Act protect the applicant’s health privacy. All disclosure of insured's health information must remain Medial Information Bureau - ANSWER-A non prolil. insurance wade association |hal. maintains underwriting information on applicants. The types of information the MIB holds is medical history, hazardous Jobs or activities, or poor driving records. Consumer Reports - ANSWER-Used to determine a consumer's eligibility for credit report, insurance, or employment. Underwriters use an applicant's credit report to determine if they are reliable when paying monthly bills like their premium. Applicant must be informed. Investigative Consumer Report (Inspection Report) - ANSWER-When an insurer reaches out to an applicant's friend, neighbor or colleague to retrieve further information on an applicant with the applicant's consent. What aro the 4 Classifications of Risk? - ANSWER-1. Standard risk -Average health and normal life expectancy. Standard rates of insurance 2. Preferred risk -Excellent health, below average level of risk, clean medical history. May be insured at a discounted or preferred rate 3. Substandard risk -Below av: © life expec risk jobs, poor health, risky habits. Usually charged for a higher rate of a person who is older or less coverage 4. Declined -Applicant is not insurable at any price Personal (Agent) Delivery - ANSWER-Agent will usually deliver a receipt of policy to the insured either via mail or in person USA Patriot Act - ANSWER Designed to prevent and de like money laundering terrorist acts. Report suspicious act: Employee Retirement Income Security Act (ERISA) - ANSWER-Enacted to protect the interests of participants in employee benefit plans and their beneficiaries. Deals mostly with pensions Third Party Ownership - ANSWER-Refers to the situation where the owner of a life insurance policy is someone other than the insured. Insurable Interest - ANSWER-To have a policy issued on someone else's life, the applicant must be at risk of suffering a significant loss if the insured were to die. The loss may be economic or cmolional When must insurable interest. cxis.?- ANSWER-Insurable interest. only needs Lo exist al. the Lime of application. Ex: Ifa business buys a policy on the life of the VP of the company, pays premiums, then the VP. the business is still the beneficiary Survivor Protection- ANSWER-Providing funds for surviving spouses and dependents. Survivors are children, spouses Mortgage Payoff- ANSWER-A mortgage life insurance policy will pay off mortgage debt if insured dies Estate Creation - ANSWER-An individual's estate is the assets they leave behind. Life insurance can ercale an estate so that ifthe insured dics young, they have already accumulated assets Estate Conservation - ANSWER-Life insurance may be used to pay state inheritance taxes and federal estate taxes so that it is not necessary to sell off assets from the estate to pay these costs Liquidity - ANSWEF-Refers to how easy an estate can be turned to cash without loss of values. Ex: liquid assets are bank or savings accounts, life insurance proceeds Ex: illiquid assets are gold, farm land, real estate Cash Accumulation - ANSWER-Permanent life insurance policies have a cash value component that grows over time. The life insurance cash value is called living benefits. Personal Uses of Life Insurance - ANSWER--survivor protection -mortgage payoff -estate creation -estate conservation -liquidity -cash accumulation Human Life Value - ANSWER-According to the principle of human life value, the purpose of life insurance is to replace an individual's economic value with this calculation: the amount of individual’s income x the number of years until retirement The Needs Approach - ANSWER-Looks at a family’s needs in the future when the insured dies by looking at the survivors cash needs and income needs Buy-Sell Funding (Business Continuation Plani- ANSWER-Provide for the sale of a business at the death or disability of the owner 2 types of buy-sell funding - ANSWER. Entity Plan -The purchaser of a deceased person’s business is the business entity itself 2. Cross-purchase Plan -Surviving owners purchase the deceased owner's interest in the business Key Person Coverage - ANSWER-A particular employee who is key to success at a business would have the business as their beneficiary in order to cover for the loss of income when the key person dies as well as the cost of training a replacement employee Executive Bonus Plan - ANSWEF-Instead of receiving a bonus in cash, a business can pay the premium of an cmployee’s life insurance policy Deferred Compensation Plan - ANSWERThe employer agro amount of income beginning al. relirement than paying now. This slo pay an omployec a stated an benclit the employec because the money is not taxable until they receive it. When the emplo 2s the money at e re retirement they could potentially be taxed less 6 Business Uses of Life Insurance - ANSWER-1. Buy sell funding 2. Cross purchase 3. Entity purchase 4, Key person 6. Deferred compensation Group Life Insurance - ANSWER--A single contract that covers an entire group. Normally costs less than an individual policy with similar benefits. -Employer determines amount of insurance Individual Insurance - ANS WER--Cost based upon individual insured -Individual policy -Policyowner chooses amount of insurance Term Insurance - ANSWER--Death benefit only -Increasing premiums -Temporary coverage, expires at end of term Cannot be renewed (extended) after certain age Permanent Insurance - ANSWER--Living and death benefits -Level premiums -Lifetime coverage, no expiration -Protection continues through advanced ages Participating Insurance - ANSWER--May pay dividends to policyowner -Somewhat higher premium -Can be issued by mutual or stock insurers