Florida Life & Health Insurance Exam — All Questions

For a life insurance policy to be valid, when must the policyowner have an insurable interest in the insured?

• a.At the time of the insured's death
• b.At the time the policy is applied for and issued✓
• c.Continuously for the entire life of the policy
• d.Only if the beneficiary is not a family member

In life insurance, insurable interest must exist at the inception of the contract (when the policy is applied for), not at the time of loss. This differs from property insurance, where insurable interest must exist at the time of the loss. Requiring it continuously is incorrect: for example, a business may keep key-person coverage even after buying the policy, and a divorced spouse's policy can remain valid. Making it depend on the beneficiary's relationship confuses insurable interest (a relationship between owner and insured) with the separate question of who receives the proceeds.

The principle that allows insurers to predict losses more accurately as the number of similar exposure units increases is known as:

• a.Adverse selection
• b.The principle of indemnity
• c.The law of large numbers✓
• d.Subrogation

The law of large numbers states that as the number of similar, independent exposure units grows, the actual loss experience will more closely approach the predicted (expected) experience, letting the insurer set accurate rates. Adverse selection is the tendency of higher-risk applicants to seek coverage more than lower-risk ones. Indemnity is the concept of restoring an insured to their pre-loss financial condition (and does not apply to life insurance, which is a valued contract). Subrogation is an insurer's right to recover a paid claim from a responsible third party.

An insurance policy is considered a 'contract of adhesion.' What does this mean?

• a.The contract is prepared by the insurer and the applicant must accept it as written or reject it✓
• b.Both parties negotiate every term of the contract equally
• c.The values exchanged by the two parties are always equal
• d.The contract can be canceled by either party at any time without cause

A contract of adhesion is drafted by one party (the insurer) and offered to the other (the applicant) on a take-it-or-leave-it basis, with no negotiation of terms. Because of this, courts interpret any ambiguity in favor of the insured. It is not a negotiated bargain, so the second option is wrong. The third option describes a commutative contract; insurance is actually aleatory, meaning the dollar amounts exchanged are unequal and depend on chance. The fourth option confuses adhesion with cancellation rights, which are governed by separate policy provisions and state law.