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Finance 3300 > Chapter 10 > Flashcards

Chapter 10 Flashcards

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1
Q

What is insurance? (2)

A

Protection against possible financial loss; it gives you peace of mind

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2
Q

What is an insurance company?

A

risk-sharing firm that assumes financial responsibility for losses from an insured risk

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3
Q

You purchase a policy. The insurer assumes a risk for a free called

A

the premium, which the insured policyholder pays periodically

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4
Q

What is risk?

A

Uncertainty or lack of predictability as to loss that faces a person or property covered by insurance

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5
Q

What is peril?

A

The cause of a possible loss or risk, such as fire, windstorm, robbery, disease, or death

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6
Q

What is hazard?

A

Increases the likelihood of a loss through some peril (e.g., driving drunk, defective house wiring)

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7
Q

What is risk management?

A

Organized, planned strategy to protect your assets and family

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8
Q

What are the three types of pure risk?

A

personal risks; property risks; liability risks

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9
Q

Give four examples of personal risks.

A

death; health; LTC; disability

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10
Q

Give two examples of property risks.

A

auto; home

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11
Q

Give an example of liability risks.

A

negligence

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12
Q

(T/F) Nature and financial loss of pure risk cannot be predicted.

A

False, it can be predicted.

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13
Q

(T/F) You cannot insure every type of pure risk.

A

False, you can insure any pure risk.

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14
Q

What is pure risk?

A

a chance of loss, not gain, that is accidental or unintentional

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15
Q

What is speculative risk?

A

chance of loss or gain, such as starting a business or gambling

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16
Q

Is speculative risk insurable?

A

No, it is uninsurable

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17
Q

What is risk avoidance? Give an example.

A

eliminate risk by not participating (don’t sky dive)

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18
Q

What is risk reduction? Give an example.

A

take measures to reduce risk (wear a seat belt)

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19
Q

What is risk assumption? Give an example.

A

assume the risk because the financial loss is small (don’t insure the $1,500 farm truck)

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20
Q

What is risk shifting? Give an example.

A

transfer the risk to another party, like an insurer (accident and illness insurance)

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21
Q

What are the four risk management techniques?

A

risk avoidance; risk shifting; risk assumption; risk reduction

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22
Q

What is a deductible?

A

amount the insured pays before the insurance company pays

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23
Q

Higher deductibles have what effect on premiums?

A

the higher the deductible, the lower your premiums

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24
Q

What is the biggest factor in deciding coverage?

A

premiums

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25
Q

What are the four steps to developing a personal insurance program?

A

set insurance goals; develop a plan to reach your goals; put your plan into action; check your results

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26
Q

What are the two basic types of risk?

A

acts of God; acts of man

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27
Q

What are the two types of property and liability risk?

A

physical damage; loss of use

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28
Q

Define liability.

A

legal responsibility for cost of another person’s losses or injuries

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29
Q

Define negligence.

A

failure to take ordinary or reasonable care, such as failure to supervise children in a pool

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30
Q

What is strict liability?

A

you are held responsible for your own intentional or unintentional actions

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31
Q

What is vicarious liability?

A

you are held responsible for the actions of another person, such as your child breaking a neighbor’s window

32
Q

Define personal property floater.

A

“schedule” high value items, like wedding rings or musical instruments

33
Q

What is the medical payments coverage in the context of personal liability?

A

medical payments coverage for minor injuries to others caused by you, family members, or pets, occurring on your property or away from home

34
Q

How much is personal liability?

A

$1 million or more

35
Q

What is an umbrella policy? (2)

A

also called a personal catastrophe policy; supplements basic personal liability coverage

36
Q

What are endorsements?

A

add coverage to a standard policy, for things such as earthquake damage

37
Q

Do you pay extra for endorsements?

A

Yes, you pay an additional premium

38
Q

(T/F) Renter’s insurance is widespread and common among renters.

A

False, many renters do not have insurance.

39
Q

HO-1

A

Basic form

40
Q

HO-2

A

Broad form

41
Q

HO-1 and HO-2 are called

A

Named Perils policies (usually no longer offered)

42
Q

HO-3

A

Special form — all risk, except those excluded (war, flood, earthquake, nuclear)

43
Q

HO-4

A

Renter’s form

44
Q

What are the alternates for HO-4 in Texas?

A

HO-BT or HO-CT

45
Q

HO-5

A

Comprehensive form — replacement cost coverage of HO-3 form

46
Q

HO-6

A

condominium owner

47
Q

HO-7

A

country home — covers agricultural buildings and equipment

48
Q

Should you look for a policy with full coverage or a coinsurance clause? Why is a coinsurance clause bad?

A

look for a policy with full coverage, because with a coinsurance clause, you have to pay for part of a loss if underinsured

49
Q

What is the formula to calculate coinsurance payment?

A

(insurance coverage)/(coinsurance% * replacement cost) * loss

50
Q

What does ACV stand for?

A

actual cash value

51
Q

What is ACV?

A

replacement cost less depreciation

52
Q

What is replacement value?

A

cost to repair or replace the damaged or lost item, without considering depreciation (HO-5 comprehensive form)

53
Q

What are the two rules for replacement value?

A

may limit replacement cost to 400% of actual cash value of item; premium 10-20% more than ACV coverage

54
Q

What is financial responsibility law?

A

state legislation in nearly all states, which require automobile liability insurance laws

55
Q

What is the minimum split-limit for financial responsibility in texas?

A

30/60/25

56
Q

What do the financial responsibility laws do?

A

require drivers to prove their ability to cover the cost of damage or injury caused by them in an automobile accident

57
Q

What does bodily injury liability cover?

A

the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an accident for which you were responsible

58
Q

What does medical payments coverage cover?

A

the cost of health care for persons injured in your automobile, including yourself

59
Q

What is another name for medical payments coverage?

A

personal injury protection (PIP)

60
Q

What amount is typically covered in medical payments coverage?

A

small amount, usually $2,500 to $5,000

61
Q

What does uninsured/underinsured motorist’s protection pay for?

A

cost of injuries to you and your family if your vehicle is hit by a person without adequate insurance -or- hit and run

62
Q

Does uninsured/underinsured motorist’s protection pay for property damage?

A

no, you would need to add this to cover property

63
Q

What is no-fault insurance?

A

system intended to provide fast, smooth methods of paying for damages without taking the legal action frequently necessary to determine fault

64
Q

What does property damage liability cover?

A

covers damage to other person’s auto when you are at fault and also includes damage to such things as street signs and buildings

65
Q

What does collision coverage pay for?

A

pays for damage to your automobile when it is involved in an accident, regardless of who is at fault

66
Q

If you are not at fault for a collision, what happens?

A

your insurer will subrogate against the other driver’s property damage liability first for reimbursement

67
Q

Collision coverage is limited to

A

the retail value of your vehicle

68
Q

What does comprehensive (other than collision) physical damage coverage cover?

A

damage to your vehicle not caused by a collision, like vandalism or weather

69
Q

What does wage loss insurance do?

A

reimburses you for any salary or income lost due to injury in an automobile accident

70
Q

What does towing and emergency road service do?

A

pays for the breakdowns and mechanical assistance

71
Q

How much is recommended for bodily injury liability?

A

$100,000/$300,000

72
Q

How much is recommended for additional umbrella liability protection?

A

$1,000,000

73
Q

How much is recommended for property damage liability?

A

$100,000

74
Q

(T/F) Credit history can have an impact on automobile insurance premiums.

A

True

75
Q

What are some examples of factors that can lead to premium discounts? (3)

A

good driving record; non-smoker; having car security devices

Finance 3300 (15 decks)

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