2 Other Insurance Flashcards
Ways to Address Risk
2.120
- Avoidance
- Reduction
- Transfer
- Retention
Insurable Loss
Loss that arises from chance.
Non-chance losses are deprecation expenses.
Adverse Selection
(in Insurance)
Refers to how individuals with higher risk factors are more likely to purchase insurance policies
Asymmetric Information
(in Insurance)
Refers to how one party in an insurance transaction (usually the policyholder) has significantly more information about their risk level than the insurance company
Law of Large #s
(in Insurance)
More events means more likely you’ll get the expected outcome
Proximate Cause
(in Insurance)
First peril in a chain of events
Peril = Cause of the loss
Cross-purchase agreement
2.164
- Good for?
- How many agmts?
- Tax consequences?
Owners buy life insurance policies on each other and agree to buy and sell their respective business interest upon death (or disability or retirement).
- Good for fewer owners
- n(n-1) agmts needed
- Benefits go tax-free to other owners
- Basis increased by death benefit/purchase amount :)
A type of “Buy-Sell” agreement.
Younger owners may have to pay more.
Stock Redemption Buy-Sell Plan
another name for an Entity Purchase Agmt for a corporation
Entity Purchase Agreement
2.168
- Nickname?
- Good for?
- How many agmts?
- Tax consequences?
Business buys life insurance policies on the owners to buy up their interest upon their deaths.
- Good for more owners
- n agmts needed
- Benefits go tax-free to business
- Basis does not increase AT ALL for survivors :(… not even the amount of deceased’s original basis
A type of “Buy-Sell” agreement.
The company pays for, owns, & is the beneficiary of the policies.
Wait & See Agreement
- How it works
- Pros & cons
2.172
Wait & See BOB…
Who purchases deceased partner’s stock?
1. Biz has first option
2. Owners (surviving partners) have 2nd option (if biz waived option #1 or purchased < 1/2)
3. Biz MUST purchase it back
Pros: Flexible
Cons: (complicated & expensive)
A type of “Buy-Sell” agreement.
Could be structured with cross-purchase agmt, entity purchase agmt, or both.
Coinsurance Clause in
Homeowners Insurance
FOR DWELLING, POLICY PAYS…
If insured ≥ 80% replacement, lesser of:
- Actual cost to repair
- Stated coverage limit
If insure < 80% replacement, greater of:
- “Actual cash value” of damage (replacement – depreciation)
- Proportion of loss = proportion of insurance maintained vs 80% of replacement cost
Coverage = (Did Have ÷ Should Have) x Loss Amount – Deductible
Remember that the policy will never pay more than the stated policy limit
Collision vs Comprehensive Coverage to Auto
What part?
These cover damage to YOUR car:
- Collision: Covers collisions with cars or inanimate objects (more in your control)
- Comprehensive: Covers other physical damage like theft, vandalism, flood, fire, falling objects, & animal strikes (less in your control)
Part D
PAP = Personal Automobile Policies
What do 3 numbers in split limit in PAP mean?
What part?
PAP = Personal Automobile Policies
- max bodily injury expenses for 1 person
- max bodily injury expenses per accident
- max property damage expenses
Part A
e.g., $250K/$750K/$100K or $100K/$300K/$100K (mine)
why part of auto insurance coverage pays for damage to someone else’s vehicle in a collision?
Property damage liability coverage (this is the Z in X/Y/Z)
