Book 2 Pages 1 - 101 Flashcards
a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool
Insurance
a condition where there is a possibility of an adverse deviation from the desired outcome
risk
The larger the number of members in the group, the ____ the probability that actual losses will equal expected losses
greater
the cause of a financial loss
Peril
examples of perils
The actual cause of a loss, such as fire, wind, tornado, earthquake burglary and collision and illness
a condition that increases the probability that a loss will occur
hazard Ex: moral, morale and physical hazard
physical characteristics of the person or property that increase the probability of a loss occurring
Physical Hazard is a tangible condition that increases the probability of a peril occurring, such as:Icy roads, poor lighting, defective equipment
Physical hazards are actions, behaviors, or conditions that cause or contribute to peril. Smoking is considered a physical hazard because it increases the chance of a fire occurring.
examples of physical hazards
Physical hazards are actions, behaviors, or conditions that cause or contribute to peril. Smoking is considered a physical hazard because it increases the chance of a fire occurring.
Ex: Icy roads, poor lighting, defective equipment
the chance of loss from dishonesty or when a person intentionally causes a loss or overstates a loss
Moral Hazard
the chance of a loss occurring due to ones indifference or a person lack of caring if a loss occurs because they know they have insurance
Morale Hazard
a stated amount of money the insured is required to pay on a loss before the insurer will make any payments
Deductible
an outline of the perils that are not covered under the policy
Exclusions
Exclusions example : Outlines specifically what will not be covered, such as: May exclude perils such as war and flood. May exclude losses such as a private hospital room when a semi-private room will do. May exclude specific items such as cash.
Examples of exclusions
earthquake, war, floods
describe written additions to an insurance policy
riders/endorsements
exposure to a risk that may cause financial loss
Financial risk
exposure to a risk that does not cause financial loss
Non-financial risk
losses that are caused by factors other than a change in the economy, i.e. risks that are always present
Static risks
Examples of static risks
Static risks are risks that involve losses brought about by acts of nature or by malicious and criminal acts by another person
Ex: natural disasters, death, flood, earthquake
True or False?
Static risks are not insurable
False, they are insurable
losses that are a result of the economy changing
Dynamic risks
Examples of Dynamic risks
Inflation, changes in business cycle
True or False?
Dynamic Risks are insurable
False, they are not
a risk that affects a large group of people
Fundamental risk
examples of fundamental risks
recession, earthquake
a risk that is individual in nature or affects a small number of people
Particular risk
a risk that involves only the chance of a loss or no chance of a loss
Pure risk
Are pure risks insurable?
Yes
loss of income or asset resulting from the loss of ability to earn income caused by disability, death, or sickness
Personal risk
direct or indirect loss to property itself from theft or destruction
Property risk
intentional or unintentional injury to property or others
Liability risk
failure to meet or follow through on an obligation
Risk from failure of others
risk that involves both the chance of loss or gain
Speculative risk
examples of speculative risk
gambling
Is speculative risk insurable?
No
True or False?
Risk management involves managing both insurable and non insurable risks?
True
In risk management, insurance should be justified on the basis of what kind of an analysis?
cost-benefit analysis
What are the 6 steps to risk management?
- Determine the objectives
- Identify the risks that the subject is exposed to
- Evaluate the risks as to the probability of occurrence and potential loss
- Determine alternatives for managing risk and select most appropriate for each risk
- Implement the most appropriate alternative
- Evaluate and review periodically
happens when a person refuses to accept risk by not engaging in an action that creates risk
risk avoidance
examples of risk avoidance
not driving a car or going on a plane
happens when a person chooses to retain the risk and takes no action to avoid the risk
Risk retention Ex: deductibles are a way of insurance companies forcing the insured to retain risk
examples of risk retention
self insurance, coinsurance, deductibles
happens when a person transfers the risk through an individual or insurance contract
risk transfer
happens when a person shares the risk with a group of others
Risk sharing
happens when risk is reduced through loss prevention methods or safety improvements
Risk reduction
What are some methods that can be used to decrease the insurance premiums?
increase the deductible increase the elimination period install an alarm system improve health and diet avoid tobacco choose a safer job reduce coverage term (years)
What characteristics must be present for a loss to occur?
- Large homogeneous exposure
- must be measurable and definite
- must be accidental
- can’t be catastrophic to society
the likelihood that parties with the greatest probability of loss are the ones most likely to purchase insurance
Adverse selection
mandatory insurance that seeks to protect individuals against large fundamental risks
Social insurance
What are some examples of social insurance?
Social security
Medicare
Workers comp
Medicaid
insurance that seeks to enhance public trust and is usually mandatory
Public insurance
What are some examples of public insurance?
federal deposit insurance corp (FDIC)
Pension benefit guarantee corp (PBGC)
securities investor protection corp (SIPC)
What insurance coverage should a client have during the asset accumulation phase?
health, disability, life, property and casualty
What insurance coverage should a client have during the conservation phase?
health, disability, life, property and casualty
may consider long term care
What insurance coverage should a client have during the gifting/distribution phase?
health, property and casualty, long term care, and life to lesser extent
an organization made up of the states’ insurance commissioners, whose purpose is to discuss industry problems that may require legislation or regulation
National Association of Insurance Commissioners (NAIC)
What are the 5 elements of an insurance contract?
- Offer and acceptance
- Consideration
- Legal Object
- Legal Capacity
- Legal Form
acts that are prosecuted by the state and are punishable by fine, imprisonment, or death
Criminal acts
Are criminal acts insurable?
generally no
an infringement on the rights of another; the wrongdoer creates a right in the damaged party to bring a civil action
Tort
What are examples of intentional torts?
battery, assault, libel, slander, false imprisonment, trespass, etc
an act or failure to act in a reasonably prudent manner, and such act or failure to act causes harm to another
unintentional tort
happens when one person becomes legally liable for the torts of another
Vicarious liability
examples of vicarious liability
an employer becomes liable due to an employees actions
the failure to act in a way that a reasonably prudent individual would have acted in a similar situation
Negligence
liability that may be imposed without proof of an individual’s negligence or bad intent
Strict (absolute) Liability
What are some examples of strict liability?
workers comp
product liability
extraordinarily dangerous activities (handling hazardous materials)
What are the two forms of injury that can result from a tort?
Bodily injury and property damage
type of injury that may lead to medical expense, loss of income, pain and suffering, mental anguish and loss of consortium
bodily injury
damages used to compensate for measurable losses
special damages
damages used to compensate for intangible losses (pain and suffering)
general damages
damages exceeding simple compensation and awarded to punish the defendant
punitive damages
True or False?
Property damage is usually measured by the actual monetary loss
True
a rule that states that damages assessed to a negligent party should not be reduced simply because the injured party has other sources of recovery available, such as insurance or employee benefits
Collateral Source Rule
a defense of negligence stating that the injured party fully understood and recognized the dangers involved in an activity and voluntarily chose to proceed
Assumption of Risk
examples of assumption of risk
a fan got hit by a baseball while sitting behind first base at a game
a defense of negligence stating that the injured party’s negligence also contributed to their injury
Contributory negligence
a defense of negligence where the amount of damages is adjusted to reflect the extent to which the injured party’s own negligence contributed to the injury
Comparative negligence
the actual authority that an insurance company gives representatives
Expressed authority
the authority that is reasonably necessary to carry out the agent’s duties
Implied authority
the authority that the agent is not expressly given by the principal but that an agent in a similar situation normally possesses
implied authority
when the insured is led to believe the agent has authority, either express or implied, where no such authority actually exists
Apparent authority
principle that states the insured may only recover from the insurance company the amount of financial loss they experienced
Indemnity
a relationship where the person applying for insurance will incur a loss from the destruction, damage, or death of the insured subject
insurable interest
When does an insurable interest for property have to exist? i.e. at the time of issuance or the time of the loss?
Both
When does an insurable interest have to exist for life insurance? i.e. at the time of issuance or the time of loss?
Time of issuance
Do life insurance policies follow the indemnity rule? Why or why not?
No because the recovery amount is the death benefit or face value of the policy not the actual value of the insured’s life
the amount that can be recovered under a contract that provides for the repairs or replacement needed
replacement cost
contracts that set an agreed upon value of the property at issuance and at the time of the loss the insurer must pay that value to the insured
Started value contracts
True or False?
Insurance contracts, other than life insurance, cannot be transferred to another person without the written consent of the insurance company
True
an oral or written statement that is false and intended to defraud, which induces a party to enter a contract
Misrepresentation
type of misrepresentation where the statement is false and material
misrepresentation of fact
type of misrepresentation where the statement is false, material, and fraudlent
Misrepresentation of opinion
failure to disclose material facts relative to the application for insurance
Concealment
the intentional relinquishment of a known right by the insured
waiver
prevents denying a fact that was previously admitted
Estoppel
An insurance contract is a _________ contract meaning that the insurer promises to perform, but the policy owner does not promise to pay the premiums
unilateral
an insurance contract is a _____ contract meaning that the insurer will make pay benefits, but only if the insured is paying premiums
conditional
an insurance contract is an _____ contract meaning that if no loss occurs the insurer will pay nothing, but if a loss does occur the insurer will pay more than the premiums received
aleatory
states that if an insurer pays the insured for a loss caused by a third party, the insured is required to assign his right to recover from the third party to the insurer
subrogation
insurance contracts are contracts of _____ meaning you can’t negotiate, it’s take it or leave it
adhesion
Who is said to be making the offer under an insurance contract when the application includes the first premium?
The applicant/future insured
when the policy owner assigns all or a portion of the death benefit to a creditor as security for a loan
Collateral assignment
how long is the period of time before the incontestable clause for a life insurance policy kicks in?
usually 2 years
What is the typical grace period under a life insurance policy to pay premiums?
30 or 31 days
What happens when the insured dies during the grace period?
The amount of premium due will be deducted from the death benefit
How long does a typical suicide clause in an insurance policy last?
Two years
True or False?
If suicide occurs within two years the beneficiary receives the premiums paid plus any interest accumulated
False, only premiums paid, interest does not get paid out
4 rules for a life insurance policy to be reinstated
- lapse can’t be longer than 3-5 years as stated in policy docs
- policy must not have been surrendered
- acceptable proof of insurability must be provided
- all premiums due from the time of the lapse must be paid
What is the maximum loan size under a life insurance policy?
an amount equal to the cash surrender value
What does the automatic premium loan provision do?
It pays the premium from the cash value of the policy if the premium is not paid by the due date
Rules involved with an accidental death benefit rider?
death must occur within 90 days of accident
cause of death must be related to accident
age limitation is usually imposed
excludes suicide, death from disease, and acts of war
a rider that permits the policyowner to purchase additional life insurance at specific intervals without providing evidence of insurability
guaranteed insurability rider
a rider that offers additional life insurance as inflation protection
cost of living rider
a clause that provides protection against the beneficiary’s alienation of the policy proceeds by denying the beneficiary the right to convey, alienate, or assign his interest in the policy proceeds
Spendthrift clause
clause that stipulates that settlement of the policy is withheld for a specified number of days (usually 30) after the death of the insured; furthermore any surviving beneficiary who dies within this period is considered to predecease the insured
Common disaster clause
How long can most term insurance policies be renewable without having to provide evidence of insurability?
until age 70
provision involved with term insurance policies that allow you to convert to a permanent insurance policy without evidence of insurability up to a specified age
Convertible
type of term insurance that has a level face amount and exponentially increasing annual premiums
annual renewable term
type of term insurance that has a level face amount and premiums that remain constant for the term then increase if the policy is renewed at the end of the term
Level term
type of term insurance that has exponentially increasing premiums and policy cannot be renewed beyond specified age
Term to age 65 or 70
type of term insurance that has level premiums and a decreasing face amount
Decreasing term
type of term insurance that is used to protect ones mortgage
decreasing term
type of term insurance used in buy-sell agreements, mortgage protection, paying off debt, and education expenses
first to die or joint term life
life insurance policies that pay the face value of the policy only if the insured survives the endowment period
Pure endowment policies
True or False?
Pure endowment policies are available in the US
False
type of life insurance policy that pays the face value of the policy only if the insured dies within the endowment period or pay the face value (usually in the form of an annuity) if the insured survives the endowment period
regular endowment contract
type of life insurance where premiums are level and are paid for life, the face amount also remains constant for life
whole ordinary life
type of life insurance where premiums are paid for a specific number of years but the death benefit remains constant for life
limited pay life
type of insurance policy where there premium is low in the first year then increases each year for early policy years then levels off after 5-1o years
Graded premium whole life
type of insurance policy where premiums are lower for the first 3-5 years then increase to a premium slightly more than what a whole life policy would cost at that age but less than what a level premium whole policy would be at that age
Modified life
type of insurance policy where premiums are fixed but the face amount may vary with no guarantee of cash value
Variable life
True or False?
A client should have higher risk tolerance if they want to use variable life
True
Does the death benefit of variable life have a minimum guaranteed?
Yes
a life insurance policy that is interest sensitive in which the insurer’s current investment experience under nonparticipating policies is credited to the cash values
Current assumption whole life (CAWL)
under (CAWL) favorable experience relative to assumptions may make the insured have a ____ premium
lower
unfavorable experience under a (CAWL) relative to assumptions may make the insured have a ______ premium
higher
life insurance that has a flexible premium, adjustable death benefit, and is an unbundled life insurance policy
Universal Life
universal life policy that has a level death benefit
Universal Life A or Option 1
universal life policy where the death benefit equals face amount of policy plus cash value (increasing DB)
Universal Life B or Option 2
true or false?
universal life B is more expensive than universal life A
True
an universal life policy with investment options for the cash value and no minimum guarantee rate of return or interest
Variable Universal Life
Are death benefits under VUL guaranteed?
No
are premiums greater for first to die or second to die policies?
first to die
second to die has cheaper premiums
life insurance that protects the lender or borrower from financial loss in the event the borrower dies before completing payment of debt
Credit Life
what does the death benefit under credit life usually equal?
the loan balance
True or False?
Credit life premiums are high relative to the amount of coverage provided
True
life insurance that has a known maximum cost and a minimum death benefit
whole life
life insurance that has a know maximum costs and minimum death benefit but allows for investment options
Variable Life (Whole)
a method of evaluating a person’s need for capital resources upon death
Programming for Life Insurance
Named vs. All-Risk (Comprehensive)
