Chapter 10 & 11 | Insurance

Question 1

Risk

Answer 1

the possibility of occurrence of an adverse event, in this case, an unexpected cash outflow

Question 2

Risk Assumption

Answer 2

Bear the risk of loss yourself

Question 3

Risk Avoidance

Answer 3

Avoid participating in activities that carry a risk of loss

Question 4

Risk Transfer

Answer 4

Transfer potential loss onto another party

Question 5

Risk Prevention

Answer 5

Prevent unnecessary or foreseeable risk

Question 6

Risk Control

Answer 6

Lessen the likelihood of a loss occurring, like driving within the speed limit, wearing a seat belt

Question 7

Insurance vs Speculation

Answer 7

Insurance: Defense - trying to get back to pre-loss level - only protecting downside
Speculation: Offense - trying to increase earnings

Question 8

Principle of Indemnity

Answer 8

The insured is entitled to payment from the insurance company only if a loss has been suffered. The amount of payment should not be greater than the economic value of the loss

Question 9

Insurable Interest

Answer 9

You can only insure property in which you have an interest

Question 10

Actual cash value

Answer 10

You can collect, at most, the depreciated value of your property unless you have replacement cost coverage

Question 11

Subrogation

Answer 11

You give your right to collect damages from the person who harmed you to the insurance company once the company has paid you

Question 12

Other Insurance

Answer 12

If multiple companies insure the property, the companies together will not pay you more than your economic loss

Question 13

Co-insurance provisions

Answer 13

You must buy insurance in an amount equal to at least a certain percentage of the replacement value of the property. Otherwise the insurance company will not fully repay you for your loss (you will become the co-insured and bear part of the loss)

Question 14

Underwriting

Answer 14

The process by which an insurance company decides whom to insure and the rate to charge that person

Question 15

Property insurance: the two main types of exposure we face

Answer 15

liability and property loss

Question 16

Auto Insurance: Liability

Answer 16

Required in most states
Pays injury and property damages to others when you are responsible for the loss.
Covers costs of settling or defending claims for damages.

Question 17

Auto Insurance: Uninsured

Answer 17

Pays when other driver has no insurance or in the case of a hit-and-run

Question 18

Auto Insurance: Collision

Answer 18

Pays the actual cash value of the damage (loss), minus any deductibles.
Pays no matter who is at fault.
Usually required for financed cars.

Question 19

Auto Insurance: Comprehensive

Answer 19

Protects against loss to insured auto caused by any peril other than by collision, i.e. fire, theft, falling objects, etc.

Question 20

Auto Insurance: Rules of Thumb

Answer 20

1. Start with minimum coverage limits when you have little money to spare.
2. Increase coverage in relation to income
3. To hold premiums at a min, take driver’s ed, defensive driving, be a good student, have airbags/security system, raise deductibles, and raise liability limits

Question 21

What does 15/20/15 mean?

Answer 21

15k bodily injury per person
20k bodily injury per accident
15k property damage per accident

Question 22

Homeowner’s Insurance

Answer 22

Covered
1. Homeowner
2. Residents of the household
3. Personal property worldwide
Not Covered
1. Floods
2. Earthquakes
3. Acts of war

Question 23

HO4, 5, 6

Answer 23

HO 5 - Homeowner’s
HO 4 - Renter’s
HO 6 - Condo Owner’s

Question 24

Health Insurance: Types of plans

Answer 24

Traditional Indemnity Plans: you pick healthcare provider
Managed Care Plans: Monthly premium payments directly to healthcare providers and receive services from a designated group of doctors and hospitals

Question 25

Health Insurance: Indemnity PPOs

Answer 25

Preferred Provider Organizations
Policyholders typically choose their doctors and hospitals, pay for their services, and then get reimbursed by the insurance company

Question 26

Health Insurance: HMOs

Answer 26

Health Maintenance Organizations

Offer comprehensive services that are usually contained within one facility

Question 27

Health Insurance: IPAs

Answer 27

Individual Practice Associations

Physicians operate out of their own offices and community hospitals

Question 28

HI: Plan characteristics

Answer 28

1. Physicians make more money off of hypochondriac behavior but it slows down the system making it harder for truly sick people to get care. Also expensive for insurance companies.
2. Both moral hazard and demand inducement are quantitatively important.
3. Coinsurance does not adequately incentivize the physicians

Question 29

Insurance plans to avoid

Answer 29

Accident policies - only cover certain types of accidents
Hospital income policies - avg hospital stay is only 4 days
Travel insurance - insurance coverage for foreign trips
Cancer insurance - many problems with this coverage

Question 30

Disability Insurance

Answer 30

Provides families with weekly or monthly income to replace income lost when the insured is unable to work due to an illness or injury.
Cost is dependent on provision of the plan

Question 31

Viatical Insurance

Answer 31

Involves buying out a LI policy of an afflicted person at pennies to a dollar and becoming the beneficiary
You continue to service the policy (patient’s care is paid for) until the policyholder passes and then cash it out

Question 32

Mortgage Insurance

Answer 32

Covers the mortgage lender against loss caused by a borrower’s default. The less the borrower puts down, the higher the premium

Question 33

Borrowing from life insurance

Answer 33

When you take out a loan against the cash value of the policy.
No need to repay the loan. No payment schedule.
Insurance company forwards the money with cash value buildup held as collateral, hence interest

Question 34

Convertibility

Answer 34

Allows insured to convert to whole life policy without evidence of insurability

Question 35

Living benefits clause

Answer 35

Allows the insured to receive a portion of benefits prior to death

Question 36

Deductible

Answer 36

The initial amount which is not covered and is determined on a calendar-year or per-incident basis

Question 37

COBRA

Answer 37

Continuation of Group Coverage: At your expense, you can continue your previous employer’s coverage for up to 18 months after leaving

Question 38

Co-insurance

Answer 38

HI - Participation: Company pays only a portion of the medical expenses after the deductible. Plan may include a stop-loss provision to cap your out-of-pocket expenses.
PI: You must buy insurance in an amount equal to at least a certain percentage of the replacement value of your property. Otherwise, the insured company will not fully repay you for your loss

Question 39

Grace Period

Answer 39

Permits the policyholder to retain full coverage for a short period of time after missing a due date for a premium payment

Question 40

Cancellation

Answer 40

HI: Obtain a policy that cannot be canceled unless premiums are not paid

Question 41

LI: Term Insurance

Answer 41

1. Benefit paid if insured dies during the policy period. No savings component. Economical way for young families to purchase large amount of life insurance.
2. Types -
   Straight term: Coverage same, premiums increase.
   Decreasing term: Premiums same,
   Coverage decreases
3. Features - Renewability: allows insured to renew policy without evidence of insurability
   Convertibility: Allows insured to convert to Whole Life policy without evidence of insurability

Question 42

Whole Life

Answer 42

1. Provides death protection + a savings feature called cash value. If policy is canceled prior to death, insured has the right to the cash value (Nonforfeiture right)
2. Types -
   Continuous premium: level premiums paid until death or cancellation.
   Limited payment: level premiums are paid for a specified number of years; insurance remains in force until death.
   Single premium - lifetime coverage is purchased with a single premium.
3. Advantages:
   Provides a savings vehicle.
   Cash value can be borrowed against.
   Premiums remain constant.
   Cash value accumulates tax free until redeemed.
4. Disadvantages:
   Less death protection than term.
   Lower returns on savings.
   Loans must be repaid with interest.
   Tax penalties may be assessed on cash values withdrawn early.
   If you have a loan outstanding when you die, that amount is subtracted from the face value of your policy

Question 43

Universal Life Insurance

Answer 43

Provides death protection + a savings feature.
Premiums are “unbundled” into two separate accounts.
Savings grow at the current interest rate.
Provides flexibility in premiums paid and death benefit.

Question 44

Other types of life insurance

Answer 44

Variable and variable universal life
Insurance on multiple lives
Group life insurance

Question 45

The Gramm-Leach-Bliley Legislation

Answer 45

Law enacted in 1999, dismantling the depression-era walls between insurers and banks.
The Gramm-Leach-Bliley Act requires financial institutions – companies that offer consumers financial products or services like loans, financial or investment advice, or insurance – to explain their information-sharing practices to their customers and to safeguard sensitive data

Question 46

The fair housing act makes it illegal to do what?

Answer 46

The law makes it illegal to discriminate in the sale, lease, or rental of housing, or to make housing unavailable-because of race, color, religion, sex, handicap, familial status, or national origin