Chapter 10 & 11 | Insurance Flashcards
Risk
the possibility of occurrence of an adverse event, in this case, an unexpected cash outflow
Risk Assumption
Bear the risk of loss yourself
Risk Avoidance
Avoid participating in activities that carry a risk of loss
Risk Transfer
Transfer potential loss onto another party
Risk Prevention
Prevent unnecessary or foreseeable risk
Risk Control
Lessen the likelihood of a loss occurring, like driving within the speed limit, wearing a seat belt
Insurance vs Speculation
Insurance: Defense - trying to get back to pre-loss level - only protecting downside
Speculation: Offense - trying to increase earnings
Principle of Indemnity
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
Insurable Interest
You can only insure property in which you have an interest
Actual cash value
You can collect, at most, the depreciated value of your property unless you have replacement cost coverage
Subrogation
You give your right to collect damages from the person who harmed you to the insurance company once the company has paid you
Other Insurance
If multiple companies insure the property, the companies together will not pay you more than your economic loss
Co-insurance provisions
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)
Underwriting
The process by which an insurance company decides whom to insure and the rate to charge that person
Property insurance: the two main types of exposure we face
liability and property loss
Auto Insurance: Liability
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.
Auto Insurance: Uninsured
Pays when other driver has no insurance or in the case of a hit-and-run
Auto Insurance: Collision
Pays the actual cash value of the damage (loss), minus any deductibles.
Pays no matter who is at fault.
Usually required for financed cars.
Auto Insurance: Comprehensive
Protects against loss to insured auto caused by any peril other than by collision, i.e. fire, theft, falling objects, etc.
Auto Insurance: Rules of Thumb
- Start with minimum coverage limits when you have little money to spare.
- Increase coverage in relation to income
- 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
What does 15/20/15 mean?
15k bodily injury per person
20k bodily injury per accident
15k property damage per accident
Homeowner’s Insurance
Covered 1. Homeowner 2. Residents of the household 3. Personal property worldwide Not Covered 1. Floods 2. Earthquakes 3. Acts of war
HO4, 5, 6
HO 5 - Homeowner’s
HO 4 - Renter’s
HO 6 - Condo Owner’s
Health Insurance: Types of plans
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
Health Insurance: Indemnity PPOs
Preferred Provider Organizations
Policyholders typically choose their doctors and hospitals, pay for their services, and then get reimbursed by the insurance company
Health Insurance: HMOs
Health Maintenance Organizations
Offer comprehensive services that are usually contained within one facility
Health Insurance: IPAs
Individual Practice Associations
Physicians operate out of their own offices and community hospitals
HI: Plan characteristics
- 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.
- Both moral hazard and demand inducement are quantitatively important.
- Coinsurance does not adequately incentivize the physicians
Insurance plans to avoid
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
Disability Insurance
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
Viatical Insurance
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
Mortgage Insurance
Covers the mortgage lender against loss caused by a borrower’s default. The less the borrower puts down, the higher the premium
Borrowing from life insurance
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
Convertibility
Allows insured to convert to whole life policy without evidence of insurability
Living benefits clause
Allows the insured to receive a portion of benefits prior to death
Deductible
The initial amount which is not covered and is determined on a calendar-year or per-incident basis
COBRA
Continuation of Group Coverage: At your expense, you can continue your previous employer’s coverage for up to 18 months after leaving
Co-insurance
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
Grace Period
Permits the policyholder to retain full coverage for a short period of time after missing a due date for a premium payment
Cancellation
HI: Obtain a policy that cannot be canceled unless premiums are not paid
LI: Term Insurance
- Benefit paid if insured dies during the policy period. No savings component. Economical way for young families to purchase large amount of life insurance.
- Types -
Straight term: Coverage same, premiums increase.
Decreasing term: Premiums same,
Coverage decreases - Features - Renewability: allows insured to renew policy without evidence of insurability
Convertibility: Allows insured to convert to Whole Life policy without evidence of insurability
Whole Life
- 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)
- 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. - Advantages:
Provides a savings vehicle.
Cash value can be borrowed against.
Premiums remain constant.
Cash value accumulates tax free until redeemed. - 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
Universal Life Insurance
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.
Other types of life insurance
Variable and variable universal life
Insurance on multiple lives
Group life insurance
The Gramm-Leach-Bliley Legislation
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
The fair housing act makes it illegal to do what?
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
