Ch 9- Reducing Financial Risks with Insurance

Question 1

What is insurance?

Answer 1

a person paying a fee to an insurance company in return for a promise to be compensated if a particular financial loss occurs.

Question 2

What are the benefits of insurance?

Answer 2

⇒ Provides financial security

⇒ Savings can be enhanced

Question 3

What are the types of insurance on assets and liabilities?

Answer 3

⇒ House insurance
⇒ Mortgage protection insurance
⇒ Motor insurance

Question 4

What is house insurance?

Answer 4

Insurance that covers both the buildings and its contents in the event of a wide range of risks including fire, burglary and accidental damage

Question 5

What is mortgage protection insurance?

Answer 5

Insurance that is required by all lenders before they will approve a mortgage to buy a house

Question 6

What is motor insurance?

Answer 6

Insurance that covers drivers in the event of an accident.

Question 7

What is the legal minimum insurance that all drivers must have? What does it cover?

Answer 7

Third party, fire and theft insurance covers the driver of any car you crash into, and your car if it is damaged by fire or stolen

Question 8

What is a no-claims bonus?

Answer 8

a discount offered on premiums to customers who haven’t made any insurance claims during the previous year, or number of years

Question 9

What are the types of insurance on health and life?

Answer 9

⇒ Health insurance
⇒ Personal accident
⇒ Life Assurance

Question 10

What does health insurance cover?

Answer 10

the cost of private healthcare in the event of illness

Question 11

What does personal accident insurance provide?

Answer 11

compensation if you have a serious accident.

Question 12

What does Life assurance provide?

Answer 12

cover for something that will happen i.e. death

Question 13

What are the two main types of life assurance?

Answer 13

⇒ Whole life assurance policies
⇒ Endowment life assurance policies

Question 14

What do whole life assurance policies require?

Answer 14

the insured person to pay an annual premium for the rest of his/her life

Question 15

What is endowment life assurance policies?

Answer 15

They pay out compensation when you reach a certain age, e.g. 60, or if you die before you reach that age, whichever comes first

Question 16

What are the steps of taking out insurance?

Answer 16

1. Contact an insurance company directly or else go through an insurance broker or agent
2. Fill in a proposal form
3. Risk is assessed and a premium is calculated
4. Policy is issued

Question 17

What is an insurance broker?

Answer 17

someone who works independently of insurance companies to help consumers to identify their insurable risks and give unbiased advice on the best insurance policy to buy and from which firm

Question 18

What is an insurance agent?

Answer 18

people that work for one insurance company and only sell that companies policy’s

Question 19

What is a proposal form?

Answer 19

an application form completed by the person applying for insurance cover.

Question 20

What factors influence the size of premium?

Answer 20

⇒Level of risk involved
⇒Value of the item being insured
⇒Profit targets set by the insurance company

Question 21

What are loadings?

Answer 21

extra charges added to motor premiums to take account of the different characteristics of the applicant
e.g. age of the driver

Question 22

What is an insurance policy?

Answer 22

It sets out the full contract including the items covered, the value of the compensation available and the conditions attached.

Question 23

What are the rules of insurance?
What happens if these rules are broken?

Answer 23

⇒Principle of Contribution
⇒Principle of Subrogation
⇒Principle of indemnity
⇒Average clause rule
⇒Utmost Good Faith
⇒Insurable interest

if breached, the company may not pay the compensation.

Question 24

Explain principle of indemnity

Answer 24

You can not make a profit from an insurance claim. Insurance companies will only compensate for the actual financial loss suffered

Question 25

What does the average clause rule state?

Answer 25

that because you are only insured for a fraction of what the item is worth, you only receive the same fraction of any compensation paid.

Question 26

What is over-insurance?

Answer 26

It is when you insure an item for more than it is actually worth

Question 27

What is under-insurance?

Answer 27

when you insure an item for less than it is actually worth.

Question 28

How can an insurance company settle a claim?

Answer 28

⇒Pay cash compensation to the insured
⇒Replace the asset
⇒Repair where a partial loss or damage occurs to an asset

Question 29

What is the principle of subrogation?

Answer 29

Insurance companies can sue whoever caused the loss

Question 30

What is the principle of contribution?

Answer 30

Insurance companies will share the burden, if a risk is insured by two or more companies

Question 31

What is insurable interest?

Answer 31

People can only insure something where they benefit from having the item and it would cost them money to replace it if it was robbed or stolen.
e.g. house

Question 32

What is Utmost Good Faith?

Answer 32

The person who wants to take out the policy must give truthful information and disclose all relevant facts