Insurance licensing exams are, to a large extent, vocabulary exams. The scenarios change but the terms do not, and a candidate who knows the definitions precisely can reason through unfamiliar questions. This glossary covers the terms that appear most often across Life, Health, and Property and Casualty exams.
Core contract principles
- Indemnity - restoring the insured to their pre-loss financial position, no better
- Insurable interest - the financial stake required for a policy to be valid; when it must exist differs between life and property insurance
- Utmost good faith - both parties deal honestly and disclose material facts
- Adhesion - the contract is drafted by one party, so ambiguity is construed against the insurer
- Aleatory - the exchange of value is unequal and depends on chance
- Unilateral - only the insurer makes a legally enforceable promise
- Conditional - coverage depends on conditions being met, such as premium payment
Expect at least one question that names a characteristic and asks you to identify it, or gives a scenario and asks which principle applies.
Underwriting and risk
- Risk - uncertainty of loss; pure risk is insurable, speculative risk is not
- Hazard - something that increases the chance of loss; physical, moral, and morale hazards are distinguished on exams
- Peril - the cause of loss, such as fire or theft
- Adverse selection - the tendency of higher-risk applicants to seek insurance
- Law of large numbers - the statistical basis that makes premiums predictable
- Representation, warranty, concealment, and fraud - the four ways an application can go wrong, in ascending order of seriousness
Policy structure
- Declarations - who, what, how much, and for how long
- Insuring agreement - the promise to pay
- Conditions - the duties of each party
- Exclusions - what is not covered
- Endorsement or rider - an amendment that adds, removes, or modifies coverage
Life insurance terms
- Face amount - the death benefit stated in the policy
- Cash value - the savings component in permanent policies
- Nonforfeiture options - what the owner receives if the policy lapses or is surrendered
- Dividend options - how participating policy dividends may be used
- Settlement options - how the death benefit is paid to the beneficiary
- Incontestability - after a stated period, usually two years, the insurer cannot contest the policy
- Grace period - time after a missed premium during which coverage continues
- Reinstatement - restoring a lapsed policy under stated conditions
- Per stirpes and per capita - how proceeds pass when a beneficiary predeceases the insured
- MEC - a modified endowment contract, a life policy that fails the seven-pay test and loses certain tax advantages
Health insurance terms
- Elimination period - the waiting period before disability benefits begin
- Coinsurance - the percentage split of covered costs between insurer and insured
- Copayment - a flat amount paid per service
- Deductible - the amount paid before benefits apply
- Out-of-pocket maximum - the cap on the insured's annual cost sharing
- Own occupation and any occupation - the two definitions of disability
- Preexisting condition - a condition treated before coverage began, subject to regulation
- HMO, PPO, POS, EPO - managed care models differing on networks and referrals
Property and casualty terms
- Actual cash value - replacement cost minus depreciation
- Replacement cost - the cost to replace without deduction for depreciation
- Coinsurance clause - in property insurance, a penalty for underinsuring relative to a stated percentage
- Subrogation - the insurer's right to recover from the responsible party after paying a claim
- Negligence - failure to exercise reasonable care; the basis of most liability claims
- Liability limits - split limits and combined single limit
- Occurrence versus claims-made - the two liability coverage triggers
- Salvage - the insurer's right to damaged property it has paid for
- Binder - temporary evidence of coverage before the policy is issued
How to study vocabulary efficiently
Definitions memorized in isolation fade. Terms learned through questions stick, because you encounter them the way the exam presents them.
- Read a term and state the definition in your own words before checking
- Practice the term inside a question rather than on a flashcard alone
- Group terms that are commonly confused and study them as pairs
- Revisit the whole list weekly rather than once intensively
Put these terms to work with a free practice exam, or study offline using the free questions and answers PDFs.