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CFP Insurance Flashcards

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1
Q

What is Risk?

A

The variation in possible outcomes of an event based on chance. Also, it is the uncertainty concerning a possible loss.

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2
Q

What is degree of risk?

A

A measure of the accuracy with which the outcome of an event based on chance can be predicted.

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3
Q

What is pure risk?

A

Refers to possibilities that can result in only loss or no change. A factory’s exposure to loss by fire is an example of a pure risk. A factory either burns or it does not burn. There is no gain potential from this possibility. Insurance deals only with pure risks.

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4
Q

What is an insurable risk?

A

An undesired, unplanned reduction of economic value arising from chance. For example, loss or damage to property or life due to fires, tornadoes, heart attacks, and criminal acts. It is also a risk that meets the criteria for efficient insurance.

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5
Q

To be considered efficient insurance, what must be true?

A
  1. The premium must be reasonable. The insurer must be able to charge a high enough premium to cover claims and the expenses of being in the insurance business.
  2. The risk must be financially measurable.
  3. The loss must be accidental and not predictable.
  4. The risk is not subject to a catastrophic loss. The risk cannot be so large that the insurer is unable to pay for the loss.
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6
Q

What are the five common risk management techniques in financial planning?

A
  1. Risk Avoidance
  2. Risk Reduction
  3. Risk Transfer
  4. Risk Retention
  5. Risk Diversification
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7
Q

The insured’s possibility of loss is called their _____________.

A

Exposure to loss. If the insured purchases an insurance policy, they transfer the exposure to loss to the insurer.

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8
Q

What is the proximate cause of a loss?

A

The first peril in a chain of events resulting in a loss. Without proximate cause, the loss would not have occurred.

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9
Q

What must a firm do to self-insure?

A
  1. Law of large numbers: The firm should be big enough to combine sufficiently large numbers of exposure units so as to make a loss predicable.
  2. Financial Reliability: The firm should be able to accumulate funds to meet losses that may occur. Also, the firm needs to cover losses if they occur more frequently than predicted.
  3. Geographic distribution: Dispersion of risk in the event of a catastrophe.
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10
Q

Indirect Loss

A

A loss of revenue that cannot be measured and the impacts that can be more difficult to see.

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11
Q

Occupational Safety and Health Act of 1970 (OSHA)

A

This federal law is designed to promote a safe working environment for employees.

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12
Q

The Consumer Products Safety Act of 1972

A

Requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.

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13
Q

Liability losses arise from three sources.

A
  1. Negligent injuries caused by an organization,
  2. The cost of a legal defense, and
  3. The cost of loss prevention arising from potential legal liability.
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14
Q

Risk management follows a six-step process. The steps are:

A
  1. Establishing objectives,
  2. Identifying loss exposure,
  3. Measuring loss exposure,
  4. Developing a plan,
  5. Implementing the plan, and
  6. Regularly reviewing the plan.
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15
Q

Breach of Contract

A

Involves a failure, without a legal excuse, to perform contractual duties.

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16
Q

Joint and Several Liability

A

May be called a “deep pockets” approach to recovery. Since 1986 more than two-thirds of the states have passed laws to modify the doctrine of joint and several liability, replacing it with several liability or a system for apportionment of damages based on the degree of fault.

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17
Q

Punitive Damages

A

Awards made to plaintiffs not as compensation for injuries suffered, but as a means of punishing defendants for outrageously offensive acts, which are always included in gross income.

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18
Q

Contributory Negligence

A

It means that because both parties are at fault, neither will be allowed recovery from the other.

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19
Q

Comparative Negligence

A

Allows plaintiffs some recovery despite contributing to their own injuries.

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20
Q

Last Clear Chance

A

When the plaintiff establishes that the defendant had a clear chance to avoid the accident despite the plaintiff’s negligence.

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21
Q

Tort

A

Is a private or civil wrong or injury, other than breach of contract, for which the court will provide a remedy in the form of an action for damages.

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22
Q

Three categories of tort liability:

A
  1. Intentional torts: Defendant’s actions are calculated to cause injury to another.
  2. Negligent torts: Defendant unintentionally acts or fails to act in a prudent manner.
  3. Strict liability torts: Damages result from dangerous activities.
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23
Q

In insurance, what is a “binder”?

A

A temporary contract in property insurance, and is often used before the issuance of the formal insurance policy. The binder must meet all the requirements for a legal contract. It is distinguished by its temporary nature (often 30 days or less).

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24
Q

Valid Elements of a Contract (4)

A
  1. Offer and acceptance
  2. Consideration
  3. Capacity
  4. Legal purpose
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25
Q

As one of the elements of a valid contract, what is Offer and Acceptance?

A

The proposal to make an exchange is called the offer. The offer must be reasonably definite and communicated clearly.

If the second person agrees to the exchange, this is called acceptance. The acceptance must be unconditional, unequivocal, and communicated clearly.

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26
Q

As one of the elements of a valid contract, what is Consideration?

A

What each party gives to the other. Consideration may take a tangible form, such as money, or it may take the form of a promise to do or not to do a particular activity. There must be an exchange of consideration to have a valid contract.

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27
Q

What is a Unilateral Contract?

A

Insurance contracts are unilateral in that only the insurer makes a binding promise. The insured can cancel the policy at any time without recourse, while the insurer is limited to specific situations (such as failure of the insured to pay premiums) when it may cancel a policy. The insured does not promise to pay the premiums and cannot be sued for failure to do so. Insureds cannot collect for losses if they do not pay premiums, because timely payment of the premium is a condition of the contract.

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28
Q

What is a Bilateral Contract?

A

Contracts in which both parties make enforceable promises. Insurance is not considered a ________ contract.

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29
Q

As one of the elements of a valid contract, what is Capacity?

A

A person’s legal ability to enter a contract (must not be a minor). Some states allow older minors (often at age 15) to enter binding agreements for insurance purposes. A minor can void a contract before reaching 18. Insurance companies also must be licensed, and an unauthorized insurer is subject to fines and penalties.

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30
Q

As one of the elements of a valid contract, what is Legal Purpose?

A

A valid contract must have an end or intention permitted by law. An owner of a contract must have an insurable/legal interest (legally recognizable economic relationship) in the insured.

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31
Q

Indemnity

A

_____________ means the insured should be restored to the same (not be enriched or impoverished) financial position occupied before the insured’s loss. Insurers enforce this principle through the insurable interest requirement, actual cash value settlements, and the operation of subrogation clauses.

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32
Q

Three Exceptions to Indemnity

A
  1. Life Insurance - The Value of Human Life Cannot Be Measured
  2. Replacement-Cost Insurance - Insurer Promises to Pay Full Cost Without Deduction for Depreciation
  3. Valued Insurance Policies - Covers Total Loss, Payment May Be More or Less Than Stated Amount
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33
Q

Actual Cash Value (ACV)

A

= Replacement Cost - Depreciation

34
Q

Insurance Services Office (ISO)

A

An industry organization that provides standards that help to keep policies consistent among insurers. Has six forms that provide coverage based on the type of home and the insured’s interest in the structure (dwelling) and its contents (personal property). Divided into property and liability.

35
Q

What are the HO Sections?

A

> > > Section One (Property) «<
Coverage A: Dwelling
Coverage B: Other Structures (~limited to 10% of A)
Coverage C: Personal Property (~limited to 50% of A)
Coverage D: Loss of Use (~limited to 20% of A)
Section Two (Liability) «<
Coverage E: Personal Liability
Coverage F: Medical Payments to others

36
Q

HO-2 Eight Exclusions

A
  1. Ordinance or Law
  2. Earth Movement
  3. Water Damage
  4. Power Failure
  5. Neglect
  6. War
  7. Nuclear Hazard
  8. Intentional Loss
37
Q

What are the four types of ‘uninsured motorist’?

A
  1. Drivers with coverage provided by insolvent insurers.
  2. Hit-and-run drivers.
  3. Drivers with less insurance than the minimum required by state law.
  4. Drivers without insurance.
38
Q

Compulsory Insurance Laws (States Included)

A

In Arkansas, Indiana, Massachusetts, New York, Louisiana, and North Carolina drivers must show evidence of their purchasing at least the minimum required amount of insurance before the state issues automobile license plates.

39
Q

Unsatisfied Judgment Funds

A

Some states use revenue collected from license plate sales or from insurance premium taxes to make payments to injured victims of uninsured motorists.

40
Q

Financial Responsibility Laws

A

Require drivers to furnish evidence (purchase of liability insurance, a surety bond or a deposit of assets) of financial responsibility to retain their driver’s license or their auto’s registration.

Drivers must establish their financial responsibility after they have been involved in an automobile accident or after they have been arrested for a serious traffic violation.

41
Q

Which homeowners insurance type of policy provides coverage for 16 named perils?

A

Broad form coverage (also includes basic coverage)

42
Q

In a HO-3 policy coverage for personal property is typically at what percentage of the Coverage A amount?

A

50%

43
Q

Which provision in a homeowners insurance policy sets forth the coverage provided by the insurance contract and states the insurer’s obligation to provide coverage as stated in the policy?

A

Insuring agreement

44
Q

What is the definition of Collision for PAPs?

A

Collision means collision (violent striking) of an automobile with another object (a car, a tree, or even standing water). The word “object” is quite broad. Only applies when automobile is being operated.

45
Q

Risk managers may purchase liability insurance to protect their firms from what three types of losses?

A
  1. Direct Liability Losses
  2. Vicarious Liability Losses
  3. Contractual Liability Losses
46
Q

What is a Comprehensive General Liability (CGL) Policy?

A

Developed in 1940 by the Insurance Services Office (ISO). Combined different types of business coverage in one policy. Largely replaced in 1986 by ISO by a new type of commercial general liability policy, also called the CGL.

47
Q

The updated (1986) CGL policies have two formats:

A
  1. Occurrence-based
  2. Claims-made
48
Q

What is the Occurrence-based format for 1986 CGL policies?

A

Requires the carrier providing the insurance at the time the injury was sustained to pay the claim, even if the claim is made 25 years after the policy expired.

49
Q

What is the claims-made format for 1986 CGL policies?

A

Obligates the insurer to pay only for claims first made against the insured during the policy period and arising from incidents occurring after the date stated on the policy.

50
Q

Most commercial umbrella policies include coverage for:

A

Personal injury liability, property damage liability and advertising liability. Some examples of personal injury liability include coverage for bodily injury, mental injury and anguish, sickness, disease, disability, and also libel, slander and defamation of character.

51
Q

What is Medicare?

A

Medicare is health insurance for those 65 or older, under 65 with certain disabilities, and any age with End-Stage Renal Disease. Costs vary based on the chosen plan, coverage, and services utilized.

52
Q

What does the original Medicare plan provide?

A

Part A (Hospital Insurance) and optional coverage for Part B (Medical Insurance), Part D (Prescription Drug coverage), and Medigap (Medicare Supplement Insurance) Policy.

53
Q

What does the original Medicare plan cost?

A

Most people are eligible for Part A coverage without having to pay a monthly premium if they or a spouse paid enough Medicare taxes while working. If someone does not qualify for premium-free Part A they may be able to buy it, but they may have to enroll in Part B and pay a premium for it too.

54
Q

What is Medicare Part A?

A

It covers inpatient care in hospitals, including critical access hospitals and skilled nursing facilities, excluding custodial or long-term care. It may also cover hospice care and home health care under certain conditions.

55
Q

What is Medicare Part B?

A

Covers doctors’ services, outpatient care, and medical services unmet by Part A. Helps pay for medically necessary and some preventive services. Most pay the standard monthly premium. As of 01/01/07 the premium is based on MAGI once income exceeds a certain amount.

56
Q

What is Medicare Part C?

A

Alternative Medicare plan that combines Part A & Part B. Most plans cover prescription drugs. If not, then purchasing Part D may be possible.

57
Q

What is Medicare Part D?

A

Medicare Prescription Drug Coverage that is available via private companies that work with Medicare. Enrollees can switch plans from 11/15 - 12/31 each year. Typically, a separate premium is paid. Penalties for those eligible who enroll late. Copayment or Coinsurance and maybe an annual deductible applies. Only some pharmacies participate.

58
Q

What is the Medicare Part A premium?

A

Part A: $0 if paid into ≥10 years, or $278 or $505 /mo depending on spouse/your years of work.

59
Q

What does Medicare Part A inpatient hospital care cost?

A

✔ $1,632 deductible for each benefit period
✔ Days 1-60: $0 after you pay your Part A deductible.
✔ Days 61-90: $408 copayment each day.
✔ Days 91-150: $816 copayment each day while using your 60 lifetime reserve days
✔ After day 150: You pay all costs.

60
Q

What is the standard Part B premium? What is Part B’s deductible and coinsurance?

A

Premium is $174.70 /mo (or higher depending on your income). Deductible = $240. Coinsurance is 80/20 after deductible is met.

61
Q

What is the Medicare Part C premium? What is the Medicare Part D premium?

A

Varies by plan! & Varies by plan!

62
Q

What is Medicare Supplement Insurance?

A

AKA ~ Medigap Insurance, is designed to supplement benefits provided under Medicare. This coverage typically pays for such things as the various Medicare deductibles, additional expenses when Medicare coverage ends, and the difference, if any, between the “reasonable payment” provided by Medicare for a physician’s services and the amount actually charged by the physician.

63
Q

How many Medigap (Medicare Supplement Insurance) plans are there? Which two were the most popular & comprehensive?

A

A, B, C, D, F, G, K, L, M, and N. Beginning in January 2020, the two most comprehensive and popular plan types, C and F, became unavailable to newly eligible individuals.

64
Q

What is Total Disability?

A

Means, that for the first 2 years, due to injury or illness:
1. You are unable to perform the duties of your occupation.
2. You are under the care and attendance of a physician.

65
Q

Disability contracts typically define disability in one of three ways:

A
  1. Own occupation definition (“own occ.”)
  2. Modified own occupation, with a time limit (e.g. 2 years) on “own occ” protection.
  3. Any gainful occupation definition, which is commonly, if somewhat inaccurately, called “any occ.”
66
Q

Survivorship Whole Life or Universal Life

A

The policy insures two lives and pays the death benefit only at the second death, so the survivor needs to plan on still paying premiums.

67
Q

Endowment Life Insurance

A

Policies payable only in the event of death are purchased chiefly for the benefit of others. On the other hand, endowment policies, although affording protection to others against the death of the insured during the fixed term, pay to the insured if he or she survives the endowment period to maturity. Not sold in the US any longer.

68
Q

Single Life Premium

A

Earnings accumulate tax-free until the policy is cashed in, or the policy owner can borrow cash up to the cost basis. New tax rules passed in 1988 eliminated the tax advantages of these policies.

69
Q

Modified Endowment Contracts (MECs)

A

Life insurance policies with a high amount of cash value buildup. In 1988 Congress passed TAMRA to close loopholes. The new rules said:

If a policy’s premiums equal or exceeds a 7-pay premium, the policy is a MEC. The 7-pay premium is the aggregate amount of premiums required to be paid during the first 7 years of the policy on a level-annual premium basis.

A MEC = Any funds withdrawn are subject to “last-in, first-out” taxation so investment income is withdrawn first +
a 10% penalty applies to withdrawals or loans before age 59 ½.

70
Q

Dividends on participating life insurance policies may be:

A
  • taken in cash.
  • used to pay a portion of the next premium.
  • left to accumulate interest.
  • used to purchase single-premium, paid-up insurance.
  • used to purchase one-year term insurance.
71
Q

The McCarran-Ferguson Act

A

Expressed the intent of Congress to allow the states to continue to regulate and tax the business of insurance. It found such continued state regulation to be in the public interest. Sec 2 and 3 of the law declare, however, if state law does not provide consumers with the type of protection found in the Sherman Act, the Clayton Act, and the Federal Trade Commission Act, then federal laws will be applied.

72
Q

Gramm-Leach-Bliley Act of 1999 (GLB)

A

Passed in November 1999 to provide a framework for regulating all financial services providers, including insurance companies. This law leaves insurance regulation primarily where it has historically been: in the hands of state insurance commissioners.

73
Q

The forces underlying the passage of Gramm-Leach-Bliley Act of 1999 (GLB) included the following:

A
  1. Consumer needs
  2. Banks wanting to expand the scope of the financial services they could offer
  3. International competition
  4. Technology
74
Q

The Gramm-Leach-Bliley Act also established the concept of functional regulation of subsidiaries of financial holding companies and established the _______________ as the umbrella supervisor.

A

Federal Reserve

75
Q

Insurance Regulatory Information System (IRIS)

A

System used by states to monitor insurance companies, to detect solvency problems, if any.

76
Q

What is NAIC’s risk-based capital (RBC) requirement?

A

The States do not allow insurance companies, especially life insurance companies, to take major risks as far as investments are concerned, so as not to jeopardize, the interest of the insureds.

77
Q

What is the NAIC?

A

Formed in 1871, The National Association of Insurance Commissioners (NAIC) is a private, nonprofit association of the state insurance commissioners that provides some uniformity to state insurance regulation. Although it has no legal power to enforce regulation, it has significant influence, and its Model Laws are frequently adopted by the states.

78
Q

The NAIC supports state regulatory efforts in a number of ways…

A

✔ Maintains an extensive insurance database and computer network linking all insurance departments
✔ Analyzes and informs regulators about the financial condition of insurers
✔ Coordinates examinations and regulatory actions with respect to troubled companies
✔ Establishes and certifies states’ compliance with minimum financial regulation standards
✔ Provides financial, reinsurance, actuarial, legal, computer and economic expertise to insurance departments
✔ Values securities held by insurers
✔ Analyzes and lists non-admitted alien insurers
✔ Develops uniform statutory financial statements and accounting rules for insurers
✔ Conducts educational and training programs for insurance department staff
✔ Develops model laws and coordinates regulatory policy on significant insurance issues
✔ Conducts research and provides information on insurance and its regulation to state and federal officials and the general public.

79
Q

An insurer needs ______________ that is in excess of assets over liabilities, as a cushion against poor underwriting results (more losses than predicted) and poor investment results (lower earnings than projected).

A

Surplus

80
Q

State regulation requires insurers to categorize their assets as admitted assets or non-admitted assets. What is the difference between the two categories?

A

Admitted assets = negotiable securities and real estate holdings. Non-Admitted Assets = Supplies, Equipment, Office Furniture, etc.

CFP BIF (4 decks)

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