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AZ Life & Health practice questions

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Question 1Arizona Insurance Law, Rules, and Regulations

Which entity is responsible for enforcing Arizona's insurance laws and licensing insurance producers?

  1. The Arizona Corporation Commission, which oversees utility rates
  2. The Department of Insurance and Financial Institutions Correct answer.
  3. The Attorney General, through the consumer protection division
  4. The Secretary of State, through the business services division

Explanation

Arizona's insurance laws are administered by the Department of Insurance and Financial Institutions (DIFI), which is headed by a Director appointed by the Governor. DIFI issues producer and insurer licenses and enforces Title 20 of the Arizona Revised Statutes.

Question 2Arizona Insurance Law, Rules, and Regulations

Which person may lawfully solicit and sell life insurance in Arizona?

  1. A producer licensed only in another state
  2. A person who passed the exam but has not applied for a license
  3. A licensed producer appointed by the insurer Correct answer.
  4. An unlicensed office employee who explains policy benefits

Explanation

Arizona requires anyone who solicits, negotiates, or sells insurance to hold a producer license from DIFI. To act on behalf of a specific insurer, the producer must also be appointed by that insurer.

Question 3Arizona Insurance Law, Rules, and Regulations

What is the continuing education requirement for an Arizona insurance producer?

  1. 12 hours every two years, including 2 hours of ethics
  2. 24 hours every two years, including 3 hours of ethics Correct answer.
  3. 16 hours every two years, with no ethics requirement
  4. 24 hours every year, including 3 hours of ethics

Explanation

Arizona producers must complete 24 credit hours of continuing education every two years. At least 3 of those hours must be devoted to ethics.

Question 4Arizona Insurance Law, Rules, and Regulations

An individual life insurance policy is delivered to a buyer in Arizona. How long does the owner have to review the policy and return it for a full premium refund?

  1. 10 days Correct answer.
  2. 15 days
  3. 30 days
  4. 20 days

Explanation

Arizona requires a free-look period of at least 10 days for individual life insurance policies delivered in the state. If the owner returns the policy within that period, the premium is refunded.

Question 5Arizona Insurance Law, Rules, and Regulations

What is the minimum grace period required in an Arizona individual life insurance policy?

  1. 7 days
  2. 10 days
  3. 30 days Correct answer.
  4. 20 days

Explanation

Arizona individual life policies must provide a grace period of at least 30 days for payment of premium. Coverage remains in force during the grace period.

Question 6Arizona Insurance Law, Rules, and Regulations

Under Arizona law, a life insurance policy must become incontestable after how long?

  1. One year from the date of application
  2. Three years from the date of issue
  3. Five years from the date of delivery
  4. Two years from the date of issue Correct answer.

Explanation

Arizona requires life policies to state that the policy is incontestable after it has been in force for two years from the date of issue. Nonpayment of premium is an exception to the incontestability clause.

Question 7Arizona Insurance Law, Rules, and Regulations

A producer tells a client she will receive a $200 gift card if she buys a policy today. This practice is:

  1. Prohibited, unless the policy is issued within 30 days
  2. Permitted, if the insurer approves the promotion in writing
  3. Permitted, because the gift comes from the producer's own funds
  4. Prohibited, because it is an unlawful inducement to buy insurance Correct answer.

Explanation

Offering anything of value that is not stated in the policy as an inducement to purchase is rebating, an unfair trade practice in Arizona. It does not matter whether the producer pays for the gift personally or the insurer approves it.

Question 8Arizona Insurance Law, Rules, and Regulations

A producer deposits client premium checks into his personal checking account and pays the insurer later. This conduct is:

  1. Acceptable, if the producer keeps a record of each payment
  2. Prohibited commingling of fiduciary funds Correct answer.
  3. Acceptable, if the client gives oral permission
  4. Acceptable, because the insurer was paid in full

Explanation

Premium funds collected from clients are held in a fiduciary capacity and must be kept separate from the producer's own money. Commingling is grounds for license discipline even if the insurer is eventually paid.

Question 9Arizona Insurance Law, Rules, and Regulations

Arizona may issue a temporary producer license to a designated person after the death or disability of a licensed producer. What is the maximum term of that temporary license?

  1. 30 days
  2. 90 days
  3. 180 days Correct answer.
  4. 60 days

Explanation

Arizona allows a temporary producer license for up to 180 days, typically so a surviving family member or designee can continue the business after a producer dies or becomes disabled.

Question 10Arizona Insurance Law, Rules, and Regulations

A producer licensed and in good standing in another state applies for an Arizona nonresident producer license. Arizona will generally:

  1. Limit the license to health insurance only
  2. Require the applicant to open an office in Arizona
  3. Require the applicant to pass the Arizona licensing exam
  4. Issue the license without an exam based on reciprocity Correct answer.

Explanation

Arizona grants nonresident producer licenses on a reciprocal basis to producers whose home state license is in good standing. The Arizona exam is not required for these applicants.

Question 11Arizona Insurance Law, Rules, and Regulations

A newly licensed producer begins submitting life applications for an insurer that has not appointed her. Which statement is correct?

  1. She may act if she assigns her commissions to the insurer
  2. She may not act for the insurer until the appointment is in effect Correct answer.
  3. She may continue for 30 days while the appointment is processed
  4. She may act if she discloses the missing appointment to clients

Explanation

A producer may act for an insurer only after the insurer has appointed the producer and the appointment is in effect. Submitting business before appointment is unlicensed activity.

Question 12Arizona Insurance Law, Rules, and Regulations

How long does an Arizona producer have to notify the Director of a change of address?

  1. 30 days Correct answer.
  2. 20 days
  3. 10 days
  4. 60 days

Explanation

Producers must keep their contact information current with DIFI and must report a change of address within 30 days.

Question 13Arizona Insurance Law, Rules, and Regulations

An insurer receives proof of loss on a life insurance claim and takes no action for 90 days. This conduct is best described as:

  1. Rebating
  2. Defamation
  3. Twisting
  4. An unfair claim settlement practice Correct answer.

Explanation

Arizona's unfair trade practice laws require insurers to acknowledge and act promptly on claims. Unreasonable delay without justification is an unfair claim settlement practice.

Question 14Arizona Insurance Law, Rules, and Regulations

A producer misstates the benefits of a client's existing policy to persuade her to drop it and buy a new one. This practice is:

  1. Twisting Correct answer.
  2. Boycotting
  3. Coercion
  4. Rebating

Explanation

Twisting is inducing a policyholder to lapse or surrender coverage by misrepresenting the terms or benefits of the existing policy. It is prohibited as an unfair trade practice in Arizona.

Question 15Arizona Insurance Law, Rules, and Regulations

An insurer's marketing memo falsely states that a competing insurer is financially unstable. This statement is:

  1. Twisting
  2. Rebating
  3. Unfair discrimination
  4. Defamation Correct answer.

Explanation

Defamation is making or circulating a false statement that is derogatory to the financial condition of an insurer. It is a prohibited unfair trade practice.

Question 16Arizona Insurance Law, Rules, and Regulations

Three insurers agree among themselves not to write coverage for a particular group of applicants. This practice is prohibited as:

  1. Twisting
  2. Unfair claim settlement
  3. Boycott, coercion, or intimidation Correct answer.
  4. Rebating

Explanation

Arizona prohibits boycotts, coercion, and intimidation that restrain or monopolize the insurance business. An agreement among insurers to refuse coverage to a class of applicants is a boycott.

Question 17Arizona Insurance Law, Rules, and Regulations

The Arizona Life and Disability Insurance Guaranty Fund is designed to:

  1. Provide coverage for uninsured Arizona residents
  2. Reimburse producers for unpaid commissions
  3. Guarantee that insurers will earn a profit
  4. Pay covered claims of policyholders of insolvent member insurers Correct answer.

Explanation

The guaranty fund protects policyholders by paying covered claims when a member insurer becomes insolvent. It is funded by assessments on member insurers rather than by the state.

Question 18Arizona Insurance Law, Rules, and Regulations

Before the Director of DIFI revokes a producer's license, the Director must:

  1. Publish the proposed action in a newspaper
  2. Obtain a court order from the Superior Court
  3. Give the producer notice and an opportunity for a hearing Correct answer.
  4. Obtain the agreement of the insurer that appointed the producer

Explanation

Due process requires that the Director give the producer notice of the charges and an opportunity for a hearing before suspending or revoking a license. The license may not be taken without that opportunity.

Question 19Arizona Insurance Law, Rules, and Regulations

A licensed producer shares part of her commission on a life sale with an unlicensed friend who referred the client. This arrangement is:

  1. Permitted, if the friend discloses the arrangement to the client
  2. Prohibited, because commissions may be shared only with licensed persons Correct answer.
  3. Permitted, because referrals are not insurance transactions
  4. Permitted, if the amount is less than $100

Explanation

Commissions for the sale of insurance may be paid only to a person licensed to transact that line of insurance. Splitting a commission with an unlicensed person is prohibited and subjects the producer to discipline.

Question 20Arizona Insurance Law, Rules, and Regulations

A producer replaces a client's existing life policy with a new one. Arizona requires the producer to:

  1. Wait 60 days before delivering the new policy
  2. Obtain written approval from the original insurer
  3. Refund the commission on the replaced policy
  4. Provide the required replacement notice to the applicant Correct answer.

Explanation

When a life policy is replaced, the producer must give the applicant a replacement notice so the buyer understands the consequences of dropping existing coverage. The replacing insurer also has related duties.

Question 21Arizona Insurance Law, Rules, and Regulations

In 2020, Arizona's insurance regulator became part of DIFI through:

  1. A federal mandate
  2. A merger of two state agencies Correct answer.
  3. An interstate compact
  4. A public referendum

Explanation

Arizona combined the Department of Insurance with the Department of Financial Institutions to form DIFI. The new agency regulates both insurance and financial services.

Question 22Arizona Insurance Law, Rules, and Regulations

Under Arizona's fraudulent insurance act, a person who knowingly presents a false statement in support of an insurance claim:

  1. Commits a violation only if the insurer suffers a loss
  2. Commits a fraudulent insurance act subject to criminal and civil penalties Correct answer.
  3. Commits a violation only if the amount exceeds $1,000
  4. Commits no violation if the claim is denied

Explanation

Knowingly providing false information in an insurance application or claim is a fraudulent insurance act. It can lead to criminal prosecution, restitution, and license discipline.

Question 23Arizona Insurance Law, Rules, and Regulations

A producer wants to place a life insurance policy with an insurer that holds no Arizona certificate of authority. Under Arizona law, this is:

  1. Permitted, if the client signs a waiver
  2. Permitted, if the producer is licensed as a surplus lines broker
  3. Not permitted, because life insurance must be placed with an authorized insurer Correct answer.
  4. Permitted, if the producer discloses the insurer's status

Explanation

An insurer must hold a certificate of authority from Arizona to transact insurance in the state, and life insurance must be placed with an authorized insurer. Surplus lines placement is limited to eligible lines and does not extend to life insurance.

Question 24Arizona Insurance Law, Rules, and Regulations

A producer holds both life and health licenses in Arizona. How many continuing education hours must she complete every two years?

  1. 36 hours
  2. 48 hours
  3. 24 hours Correct answer.
  4. 12 hours

Explanation

The continuing education requirement applies to the licensee, not separately to each line of authority. A producer holding both life and health licenses completes 24 hours every two years, including 3 hours of ethics.

Question 25Arizona Insurance Law, Rules, and Regulations

A person convicted of a felony involving dishonesty or breach of trust wants to work as an Arizona insurance producer. Under federal and state rules, the person may transact insurance only if:

  1. The insurer agrees to supervise the person
  2. The Director grants written consent Correct answer.
  3. The felony is more than five years old
  4. The person completes 40 hours of prelicensing education

Explanation

A person convicted of a felony involving dishonesty or breach of trust may not engage in the business of insurance without the written consent of the insurance regulator, often called a 1033 waiver. The Director's consent is the controlling requirement.

Question 26Arizona Insurance Law, Rules, and Regulations

Who appoints the Director of the Arizona Department of Insurance and Financial Institutions?

  1. The state's voters in a general election
  2. The State Senate by majority vote
  3. The Insurance Industry Advisory Council
  4. The Governor Correct answer.

Explanation

Arizona's insurance regulator is the Department of Insurance and Financial Institutions, headed by a Director who is a gubernatorial appointee. The Director is not chosen by the legislature, by popular election, or by industry groups. The Director administers Title 20 and adopts rules to carry out Arizona insurance law.

Question 27Arizona Insurance Law, Rules, and Regulations

Arizona's Medicaid program, which provides health coverage to eligible low-income residents, is known as:

  1. The Public Safety Personnel Retirement System
  2. AHCCCS Correct answer.
  3. The Arizona Basic Health Plan
  4. The State Compensation Fund

Explanation

AHCCCS, the Arizona Health Care Cost Containment System, is the state agency and program that administers Medicaid in Arizona, delivering acute and long-term care coverage to eligible residents. It operates as a managed care system rather than a fee-for-service state plan. The other listed entities are a workers' compensation carrier or unrelated public programs.

Question 28Arizona Insurance Law, Rules, and Regulations

What is the minimum age at which an individual may be issued a resident Arizona producer license?

  1. 17
  2. 18 Correct answer.
  3. 21
  4. 16

Explanation

Arizona requires a resident producer license applicant to be at least 18 years old, along with the other qualification requirements such as passing the licensing examination. There is no requirement that the applicant be 21. Age alone, however, does not qualify a person; the license must still be issued by the Director.

Question 29Arizona Insurance Law, Rules, and Regulations

Marco holds an Arizona producer license for life insurance only. He takes an application for a major medical policy. Marco's conduct is:

  1. Acceptable, provided the insurer appoints him before delivery
  2. Unlawful, because life and health are separate license lines Correct answer.
  3. Acceptable, if he notifies the Director within thirty days
  4. Acceptable, since health coverage is a type of life insurance

Explanation

Arizona issues producer licenses by line of authority, and life insurance and health (disability) insurance are distinct lines. A producer may solicit or take applications only for the lines the license covers. Appointment by an insurer does not expand the producer's line of authority.

Question 30Arizona Insurance Law, Rules, and Regulations

Two agents form a partnership to sell life and health insurance in Arizona. To operate lawfully, the partnership must:

  1. Register only with the Secretary of State as an insurance agency
  2. Rely on the individual licenses held by the partners
  3. Obtain a certificate of authority from the Director as a domestic insurer
  4. Be licensed as a business entity with a designated licensed producer Correct answer.

Explanation

Arizona requires an agency or other business entity that transacts insurance to hold its own business entity producer license and to designate a licensed individual producer who is responsible for the entity's compliance. The individual licenses of the owners do not license the entity itself. A producer license is different from the certificate of authority issued to insurers.

Question 31Arizona Insurance Law, Rules, and Regulations

An insurer terminates a producer's appointment for cause. Under Arizona law, the insurer must:

  1. Notify the Director of the termination and the reason for it Correct answer.
  2. Ask the Director to revoke the producer's license
  3. Publish notice of the termination in a newspaper of general circulation in the county
  4. Take no action, because the appointment ends automatically by operation of law when it is terminated

Explanation

Arizona requires an insurer that terminates a producer's appointment to report the termination and its cause to the Director, so that the producer's appointment history remains accurate. Termination of an appointment is a separate matter from the status of the producer's license, which only the Director may revoke or suspend. No publication requirement applies.

Question 32Arizona Insurance Law, Rules, and Regulations

An Arizona insurer charges two applicants who are the same age, sex, and health classification different premiums for identical coverage because of their national origin. This practice is:

  1. Permitted, if the difference is disclosed in the policy
  2. Permitted, since insurers set rates using actuarial judgment
  3. Prohibited as unfair discrimination Correct answer.
  4. Prohibited only if the Director has already issued a cease and desist order

Explanation

Arizona's unfair trade practice law prohibits unfair discrimination between individuals of the same class and equal expectation of life in rates, terms, benefits, or conditions of coverage. Charging different premiums based on national origin, rather than on permitted actuarial factors, is unlawful. A disclosure statement does not make an unlawfully discriminatory rate acceptable.

Question 33Arizona Insurance Law, Rules, and Regulations

An Arizona producer's license is suspended by another state's insurance regulator after an administrative proceeding. When must the producer notify the Arizona Director?

  1. Only if the suspension later becomes a revocation
  2. Within one year of the final order
  3. Within 30 days of the final disposition of the matter Correct answer.
  4. Only at the time of the producer's next license renewal

Explanation

Arizona producers must report administrative actions taken against their license by another jurisdiction to the Director within 30 days of the final disposition. The duty arises from the final order itself and does not wait for renewal or for escalation to revocation. The report keeps the national licensing record current and allows the Director to evaluate the producer's fitness.

Question 34Arizona Insurance Law, Rules, and Regulations

An Arizona claims representative reports a suspected fraudulent claim to state insurance fraud investigators in good faith. The representative is:

  1. Barred from testifying in any later criminal proceeding
  2. Required to post a bond before the report can be accepted
  3. Immune from civil liability for making the report Correct answer.
  4. Liable for defamation if the suspicion later proves unfounded

Explanation

Arizona's insurance fraud provisions encourage reporting by granting immunity from civil liability to persons who report suspected fraudulent insurance acts in good faith. Immunity depends on good faith, not on whether fraud is ultimately proven. Reporting does not disqualify a witness from later testifying, and no bond is required.

Question 35Arizona Insurance Law, Rules, and Regulations

A producer signs a client's name to a life insurance application without the client's authorization. Under Arizona law, this conduct:

  1. Is lawful once the client accepts the delivered policy
  2. Is a clerical error that the insurer's underwriter may correct
  3. Is regulated only by federal authorities
  4. Is grounds for license discipline and may also be a crime Correct answer.

Explanation

Signing another person's name without authorization is a dishonest practice that constitutes grounds for suspension, revocation, or other discipline of an Arizona producer license. The same act may also violate criminal forgery and insurance fraud statutes. Later acceptance of a policy does not erase the unauthorized signing.

Question 36Arizona Insurance Law, Rules, and Regulations

A producer collects the first premium from an applicant, but the insurer declines the application. The producer must:

  1. Return the full premium to the applicant promptly Correct answer.
  2. Apply the premium to a different policy without asking the applicant
  3. Send the premium to the insurer and leave any refund decision to the insurer
  4. Keep the premium as compensation for work performed

Explanation

Premium received by a producer is held in a fiduciary capacity for the insurer or the applicant, and no coverage resulted from the declined application. The producer therefore must return the full premium promptly rather than retain it or redirect it. Retaining the money would amount to misappropriation of funds held in trust.

Question 37Arizona Insurance Law, Rules, and Regulations

Arizona rules governing insurance advertising require an insurer to:

  1. Keep copies of its advertisements available for inspection by the Director Correct answer.
  2. Submit every advertisement to the Director for prior approval before use
  3. Use only advertising copy prepared by the Director's office
  4. List the name of every producer who sells the advertised product

Explanation

Arizona requires insurers to maintain a file of advertisements and to make that file available for examination by the Director, who reviews ads for misleading content. The state does not pre-approve each advertisement before publication, and it does not supply advertising copy. The requirement ensures a reviewable record exists.

Question 38Arizona Insurance Law, Rules, and Regulations

A licensed producer's unlicensed office assistant discusses coverage limits with callers, quotes premiums, and recommends a policy, with the producer reviewing the file afterward. Under Arizona law:

  1. The arrangement is acceptable because the producer reviews each file afterward
  2. The assistant is soliciting unlicensed, exposing the producer to discipline Correct answer.
  3. The arrangement is acceptable if the assistant is paid a salary instead of a commission
  4. The arrangement is acceptable because quoting a premium is not solicitation

Explanation

Only a licensed person may solicit insurance, and discussing coverage, quoting premiums, and recommending a policy are solicitation activities. After-the-fact review by the licensed producer does not cure the unlicensed activity, and the producer who permits it may be disciplined. How the assistant is compensated is irrelevant to the licensing requirement.

Question 39Arizona Insurance Law, Rules, and Regulations

A producer helps an investor who has no family or business relationship with a 75-year-old applicant obtain a life policy naming the investor as beneficiary, under a prearranged agreement to buy the policy later. This arrangement is:

  1. Acceptable, because the investor consents to the arrangement
  2. Acceptable, if the insurer's underwriter approves the application
  3. Prohibited, because no insurable interest existed at issuance Correct answer.
  4. Prohibited only if the policy is later resold to a third party

Explanation

A life insurance contract requires an insurable interest in the insured at the time the policy is issued. A stranger with no relationship to the insured who funds a policy under an agreement to acquire it is engaging in a prohibited stranger-originated life insurance transaction. Consent or underwriting approval does not supply the missing insurable interest.

Question 40Arizona Insurance Law, Rules, and Regulations

An Arizona-issued life policy contains a provision that gives the insurer more time to act than Arizona law permits. What is the effect of that provision?

  1. The policy is void and the insurer must return all premiums paid
  2. Arizona law controls, so the provision cannot be enforced Correct answer.
  3. The policy provision controls because the insurer filed the form
  4. The policy provision controls because insurance is a private contract

Explanation

Arizona insurance statutes set minimum standards, and a policy provision that conflicts with them is unenforceable to the extent of the conflict. Filing the form with the Director does not validate an unlawful provision. Only the conflicting clause fails, not the entire policy.

Question 41General Insurance Concepts

A homeowner buys a homeowners insurance policy to handle the financial consequences of a fire. Which risk management technique does this represent?

  1. Retaining the risk and paying losses out of pocket
  2. Reducing the frequency of losses through safety measures
  3. Transferring the risk to an insurer Correct answer.
  4. Avoiding the risk by never engaging in the activity

Explanation

Insurance is a risk-transfer device: the insured pays a premium and the insurer assumes the financial consequences of a defined loss. Avoidance eliminates the exposure, retention keeps it, and loss control merely reduces it, so none of those shifts the burden to another party.

Question 42General Insurance Concepts

In life insurance, when must insurable interest exist?

  1. At the time of the insured's death
  2. At both the time of application and the time of death
  3. At the time the policy is applied for Correct answer.
  4. At the time the beneficiary submits a claim

Explanation

For life insurance, insurable interest must be present when the policy is applied for, and it does not have to continue afterward. This requirement keeps the contract from being a wager on a stranger's life.

Question 43General Insurance Concepts

Which type of risk involves only the chance of loss, with no possibility of gain?

  1. Investment risk
  2. Speculative risk
  3. Business venture risk
  4. Pure risk Correct answer.

Explanation

Pure risk presents only the possibility of loss or no loss, and it is the type insurance is designed to handle. Speculative risk involves the chance of gain as well as loss and is generally not insurable.

Question 44General Insurance Concepts

The principle of indemnity means that an insurance payment should do which of the following?

  1. Require payment of the full face amount regardless of the loss
  2. Shift every loss to a government fund
  3. Allow the insured to profit from a loss
  4. Restore the insured to the pre-loss financial position Correct answer.

Explanation

Indemnity places the insured back in roughly the same financial position held before the loss, no better and no worse. Paying more than the actual loss would create a profit motive and encourage fraud.

Question 45General Insurance Concepts

What does the law of large numbers contribute to insurance?

  1. Losses are more predictable when fewer policies are written
  2. Premiums must always increase as an insurer grows larger
  3. Predictability of losses improves as similar units increase Correct answer.
  4. Each additional insured raises the insurer's risk by an equal amount

Explanation

As an insurer covers more similar exposure units, actual loss experience tends to approach the expected loss level. That greater predictability is what allows insurers to set reliable rates.

Question 46General Insurance Concepts

An applicant deliberately hides a health condition to obtain a lower premium. This behavior is an example of which concept?

  1. The mere possibility that a loss may occur
  2. Dishonesty or indifference toward loss that increases the chance of loss Correct answer.
  3. The cost of replacing damaged property
  4. A physical hazard such as icy roads

Explanation

Moral hazard refers to dishonesty or indifference on the part of the insured that increases the likelihood or size of a loss. It differs from physical hazard, which is a tangible condition that raises the chance of loss.

Question 47General Insurance Concepts

Which type of insurer is owned by its policyholders rather than by outside investors?

  1. A reciprocal exchange, which is owned by its attorney-in-fact
  2. A mutual insurer, which is owned by its policyholders Correct answer.
  3. A fraternal benefit society, which is owned by its lodge members
  4. A stock insurer, which is owned by its shareholders

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends from favorable results. A stock insurer, in contrast, is owned by shareholders and exists to generate profit for them.

Question 48General Insurance Concepts

Which statement about producer representation is correct?

  1. A managing general agent represents the applicant in negotiations
  2. A broker legally represents the applicant or buyer Correct answer.
  3. A broker legally represents the insurer in a sale
  4. A captive agent may place business with any insurer the client prefers

Explanation

A broker is licensed to represent the insurance buyer and may place coverage with more than one insurer. An agent represents the insurer and acts on the insurer's behalf when selling and servicing policies.

Question 49General Insurance Concepts

An insurance policy is written by the insurer and offered to the applicant on a take-it-or-leave-it basis. This makes the policy which kind of contract?

  1. A conditional contract
  2. A unilateral contract
  3. A contract of adhesion Correct answer.
  4. An aleatory contract

Explanation

A contract of adhesion is drafted by one party and presented to the other with little or no bargaining power over its terms. This is why ambiguous policy language is generally construed in favor of the insured.

Question 50General Insurance Concepts

Because what an insured pays in premium and what the insurer may pay in benefits can be very unequal, insurance is described as which type of contract?

  1. A unilateral contract, because the insured pays the entire premium at once
  2. A wagering contract, because payment depends on an uncertain event
  3. An aleatory contract, because performance depends on chance Correct answer.
  4. A conditional contract, because both parties must perform at the same time

Explanation

An aleatory contract involves an exchange of unequal amounts, since a small premium may result in a large claim payment. Whether the insurer pays anything depends on an uncertain future event.