FIN 3305 Exam 3 Flashcards
1
Q
Definition of Risk
A
Uncertainty regarding the possibility of a loss
2
Q
What is the risk in mortality risk?
A
The risk that an individual die earlier than expected. Can lead to a loss of income, or other consequences that come as a result of death.
3
Q
What is life insurance protecting against?
A
Life insurance protects against the financial uncertainty and risks associated with untimely death. Such as: executor funds, income needs of financially dependent survivors, and business related exposures.
4
Q
Executor Funds
A
Burial expenses, estate settlement costs, etc.
5
Q
Business-Related Exposures protected by life insurance
A
- Loss of income due to incomplete work or loss of customer relationships
- Replacement of key employee
- Funds to buy ownership interest from heirs of owner
6
Q
Are males or females more likely to die a premature death?
A
Males
7
Q
What is a Mortality Table? Why are using large population sizes important? What do mortality tables measure?
A
- Table of calculations showing expected number of deaths of persons by age by a certain point
- Use of large populations increases confidence in calculation (law of large numbers)
- Mortality tables measure the frequency of the risk
8
Q
How do you calculate the severity of mortality risk? (amount of insurable need)
A
Needs:
- Executor funds
- Income needs of financially-dependent survivors
- Business-related exposures
Human Life Value:
- Replace income in present value terms
- Consider expected salary increases
- Subtract living expenses and taxes
9
Q
Level Premium Plan
A
- Pay a greater premium during earlier years of life, compared to a yearly renewable term policy
- The excess cash paid in those early period and its investment earnings are available to help pay claims as they occur.
- The accumulation of funds, combined with a decreasing amount of true insurance protection makes it possible for the premium to remain level, even though the probability of death rises as the insured gets older.
10
Q
Whole Life Insurance
A
Permanent life insurance with guaranteed premiums, cash value, death benefit, and paid-up coverage
11
Q
Universal Life Insurance
A
Flexible premium, permanent life insurance plan
12
Q
Term Life Insurance
A
- Life insurance that is in effect for a limited time, which builds no. cash value
- Has a premium that ultimately increases with age or a face amount that reduces with age.
13
Q
Give a more detailed description of Term Life Insurance
A
- Insurance protection for a set number of years at which time it terminates with no value
- Usually renewable at end of term, but with premium increase
- Often convertible to a permanent policy for a limited time after issue
- Common forms are 10, 15, or 30 year term and term to age 65
14
Q
What are the two different types of term coverage associated with term life insurance?
A
“Level Term” or “Decreasing Term”
15
Q
Describe “Level Term” Coverage
A
“Level term” as a constant face amount
(ex. $1,000,000 to beneficiary if the insured dies during the policy period
16
Q
Describe “Decreasing Term” Coverage
A
“Decreasing term” has a face amount that decreases over time
(can be useful for policies intended for a specific purpose, like paying off a mortgage)
17
Q
When is term life insurance coverage the least expensive? What is term life insurance used for?
A
- Least expensive coverage at younger ages
- Often used for temporary insurance needs (term of debt, until children are grown)
- Can also be used as a supplement to other permanent coverage
18
Q
Give a more detailed description of Whole Life insurance
A
- A permanent insurance policy intended to provide insurance protection for one’s entire life
- Features a guaranteed death benefit
- Features level premiums for the premium payment period
- Features guaranteed cash values
19
Q
What are the 3 kinds of whole life premiums?
A
- Straight Life or Ordinary Life
- Limited-Pay Life
- Single-Premium Life
20
Q
Straight Life or Ordinary Life Premiums
A
Insured pays premiums (usually annually) indefinitely
21
Q
Limited-Pay Life Premiums
A
Insured pays premiums for a specified period of time (ex. 20 years), and is not required to pay after that. Coverage remains in place for the rest of the insured’s life
22
Q
Single-Premium Life
A
Insured pays one lump sum at the onset of the contact and is not required to pay more. Coverage remains in place for the rest of the insured’s life
23
Q
What happens if an insured terminates their whole-life policy before death?
A
They receive the cash value
24
Q
Which types of life insurance typically has the highest premiums?
A
Whole life insurance typically has the highest premium of all types of insurance because of guaranteed benefits
25
What type of life insurance coverage is favored by clients with low risk tolerance?
Whole life insurance
26
Which type of life insurance is the easiest to present and explain?
Whole life insurance is relatively easy to present and explain because of guaranteed elements
27
Give more details on Universal Life Insurance
- A permanent life insurance policy that allows flexible premium payments and may have an adjustable death benefit
- Elements of the policy are unbundled and disclosed separately to owner
- Typically include current interest and cost of insurance rates
28
Are whole life insurance policies or universal life insurance policies more expensive?
Usually Universal Life insurance policies are less expensive than whole life per $1000 of insurance coverage because cash value and face amount are not guaranteed
29
Is Universal Life insurance considered permanent?
Universal life insurance is considered permanent because there is a premium at which the insured can keep the policy in force for life
30
What is the traditional use of universal life insurance?
Traditional use of universal life insurance often includes an investment component making use of the flexible premium feature and cash value of the policy
31
What are the 2 universal life death benefit options?
1. Type A
- Death benefit is a specified amount that remains the same while the policy is in force
- This amount is what will be paid upon death - cash values is part of this flat amount
- As cash value builds up, the "mortality charge" component of premium decreases
2. Type B
- Death benefit fluctuates
- Payment upon death is the policy's cash value, plus a fixed amount of "death protection"
- Small payment early, since cash values are small; Larger payment later as cash values increase
32
No Lapse Guarantee Universal Life Insurance
Type of universal life insurance policy that ensures the policy remains in force for the insured's lifetime (or a specified period) regardless of the cash value, as long as the required premiums are paid on time.
33
Indexed Universal Life Insurance
- Interest rate credited to cash value in the policy is set to an interest index or equity index (ex. cash values might be credited with some percentage of the return of the S&P 500)
- Generally, paired with a low guaranteed rate that would prevent loss of cash value
34
Variable Universal Life Insurance
- Insured is allowed to choose to tie cash values to performance of selected investments such as mutual funds
- Many variations, but, in general, insured assumes some risk of market performance
35
Life Insurance Riders:
Waiver of Premium
This rider provides that premiums due after the insured goes on total disability will be waived for a period of time
36
Life Insurance Riders
Disability Income
Provides a typical income benefit for as long as total disability continues. Disability payments are usually made for the balance of the insured's life as long as total disability continues
37
Life Insurance Riders
Accidental Death Benefit
*Sometimes called double indemnity*
Provides that DOUBLE the face amount of the policy will be paid if the insured's death is caused by accident (death caused by accidental bodily injury)
*Named Peril Insurance*
38
Life Insurance Riders
Guaranteed Insurability Option
Gives policy owner the right to buy additional amounts of insurance every 3 years, without new proof of insurability; Protects against becoming uninsurable
39
Life Insurance Riders
Accelerated Death Benefits
Triggered by either the occurrence of a catastrophic illness or the diagnosis of a terminal illness; Results in payment of a portion of a life insurance policy's face amount prior to death
40
Life Insurance Riders
Catastrophic Illness Coverage
When a catastrophic illness rider is added to a life insurance policy, a portion of the face value is payable upon diagnosis of specified illness
41
Are life insurance proceeds paid to a beneficiary taxable? What about build up of cash value in a permanent policy?
- Life insurance proceeds paid to a beneficiary are generally not taxable as income
- Build up of cash value in a permanent policy is not taxable as income
42
Health Insurance Structure
PPO (preferred provider organization)
- Network of providers, no primary care physician referral for specialist
- Out-of-network treatment reimbursable at a lower rate
43
Health Insurance Structure
POS (point of service)
- Primary Care physician is gatekeeper, controls access to in-network specialists
- Some coverage for out-of-network care, but insured pays more
44
Health Insurance Structure
HMO (health maintenance organization)
- Primary Care physician is gatekeeper
- IPA (individual practice association) - Doctors have contracts with HMO, but maintain private practice
- Staff Model - HMO employs doctors and owns hospitals and medical facilities
- Generally, no reimbursement if seek treatment outside of HMO
45
Deductible
The amount of money you must pay out-of-pocket before insurance coverage begins
46
Co-Insurance
The percentage of allowed charges for covered services that you-re required to pay. The co-insurance applies after the deductible is met
47
Co-Pay
The insured pays a flat amount for a certain benefit (typically not subject to the deductible)
48
Out-of-Pocket Maximum
The amount of money you pay for deductibles and coinsurance charges within a given year before the insurance company starts paying for all covered expenses
49
Why is Cost Sharing in Health Insurance important to consider?
All of the item associated with cost sharing (deducible, coinsurance, copay, out-of-pocket maximum) allow the insured to share in costs and affect the premium amount. The higher these amounts are for the insured, the lower the premium cost.
50
Effects of Cost Containment
If you stay in the network, you will pay less than if you receive care from an out-of-network physician or institution
51
Describe the premise of the problem with cost shielding in healthcare, and then describe how consumer driven healthcare is a viable solution.
Premise:
- Cost-Shielding - Consumers are unaware of the actual cost of medical treatment and care
- Cost shielding leads to excess demand
- Potentially can lead to morale hazard (carelessness or lack of concern about hazards)
Solutions:
- Health savings accounts - allow pre-tax contributions and tax-deferred (or tax-free) earning to pay for medical expenses
- High deductible health plans can also make consumers more aware of cots
- Pricing and quality transparency
52
Dental Insurance
- Separate from health insurance
- Covers preventative care (cleanings, xrays, etc.) usually without cost staring
- Also covers fillings, crowns, dentures, orthodontics (subject to deductible and coinsurance)
- Relatively low limits of coverage (~$2,500)
53
Is Vision insurance coverage separate from health insurance?
Yes, vision insurance is separate. It tends to cover annual visits and standard care, with low limits for costly procedures
54
Sources of Health Insurance
1. Insurance companies
2. HMO's
3. Blue Cross and Blue Shield (started as non-profits, now mostly health insurance)
4. Employer self-insurance
5. Government programs (medicare, medicaid, tricare)
55
Medicare
Government health insurance for elderly and disabled people
56
Medicaid
Government health insurance for low-income people
57
Tricare
Government health insurance for military
58
Medicare Part A Coverage
Part A: Hospital Insurance
- Inpatient hospital care (max 90 days, includes deducible and copay)
- Skilled nursing home care (max 100 days, first 20 days fully covered, then daily deductible)
- Home health services (fully covered)
- Hospice care (210 days max)
59
Medicare Part B Coverage
Part B: Supplementary Medical
- Physician Services
- Physical Therapy and Occupational Therapy
- X-rays and lab work
- Medical equipment
........ + many others
60
Medicare Part D Coverage
Part D: Prescription Drugs
- Available from private companies for additional premium
- Federal law standardizes plans
61
Medigap Insurance
- Private insurance to "fill in the gaps" left by deductibles, coinsurance, and coverage limitations in medicare
- 10 different plan types; Small but important differences between them
62
Longevity
- The capability to survive beyond the average age of death, usually expressed as a probability
- The measurement takes into account that a person has already survived to a certain age
63
Retirement Plans
1. Qualified Plan
Meets certain rules set out in tax code and labor law. Result is company deducts contributions to plan immediately, but employee does not have to claim current income
64
Retirement Plans
2. Defined Benefit Plan
Employee is promised a benefit upon retirement according to a formula, usually based on length of service and average compensation. (ex. 2.5% of average compensation for each year of service)
65
Retirement Plans
3. Defined Contribution Plan
Employer agrees to make certain contributions to a plan (often employer agrees to match employee contribution)c and establishing an individual account for employee in the plan to hold contributions and earning on the account. Employee's benefit at retirement depends on balance in the account at retirement date.
66
Comparison of Defined Benefit and Defined Contribution Plans
67
Two Types of Defined Benefit Plans
1. Traditional Defined Benefit Pension Plan
- Requires annual actuarial calculation of funding
- Complex
- Expensive for older employees
- Difficult for employees to calculate current benefit amount
2. Cash Balance Plan
- A defined benefit plan that looks like a defined contribution plan
- Employer guarantees a specific contribution amount and an annual investment return
- Creates hypothetical individual account
- Benefit represented by balance in the account
68
Employers and Pension Risk
Avoidance is the trend
Since 1990's a growing trend to eliminate defined benefit pension plans and transition to defined contribution plans (avoid expense, transfer investment risk to employees, better fit for more mobile workforce and more transparent to employees)
69
What are some specific types of Defined Contribution Plans?
**401(k) Plan**
Other types:
- Money purchase pension
- Profit-sharing plan (allocated in proportion to salary)
- Employee Stock Ownership Plan (ESOP)
70
401(k) Plans
- Employee contributes to plan, employer may match all or part of employee contribution
- Employee chooses investment allocations (employer provides options)
- Contributions and investment earnings are tax deferred until distribution
(In Roth 401k Plan, contributions are made with after-tax dollars, until age 59.5, when they become tax free)
71
Fixed Annuity
Payments are guaranteed and fixed in amount
72
Variable Annuity
Payments vary based on equity prices
73
How long are benefits payable?
Annuity Certain
- Payable for a specified period of time
- If annuitant dies, payments continue to heirs until the time expires
- No survivorship benefit, only interest + principal
74
How long are benefits payable?
Straight Life Annuity
- Pays during the lifetime of the annuitant
- Larger payments for annuitants who start payments late in life
- No continued payments once annuitant dies
75
How long are benefits payable?
Period-Certain Guarantees
Version of straight-life annuity, which also specifies a guaranteed time period that is paid even if the annuitant dies early
76
How long are benefits payable?
Refund Guarantees
Version of a straight-life annuity, which also specifies that once the annuitant dies, benefits continue until the total payments equal the original purchase price
77
How long are benefits payable?
Temporary Life Annuity
Pays benefits until the expiration of a specified period of years or until the annuitant dies, whichever comes first
78
How long are benefits payable?
Joint and Survivor Annuity
Multiple annuitants (usually 2) on the contract, pays as long as one annuitant is alive
- May provide constant payments or change when one annuitant dies
- Joint Benefit: Payment when both annuitants are alive
- Survivor Benefit: Payment when only one annuitant is alive, usually expressed as a % of the joint benefit
79
What are the major risk exposures that automobile insurance protects against?
- Legal liability
- Personal injury
- Property damage to the vehicle
- Theft of vehicle
80
Auto Insuring Agreement - Part A: Liability
We will pay damages for "bodily injury" or "property damage" for which any "insured" becomes legally responsible because of an auto accident. In addition to our limit of liability, we will pay all defense costs we incur.
- This is the only coverage required by state law
- This is exclusively 3rd party coverage - It will only pay other people, not the insured
- There is no deductible for claims under Part A
81
What is unique Liability Limits on auto insurance?
Liability coverage usually has "split limits" for bodily injury (individual and aggregate) and property damage. They are usually described like this:
82
Auto Insurance Liability Coverage - Who is insured and when?
"We will pay damages for bodily injury or property damage for which any *covered person* becomes legally responsible because of an auto accident"
"Covered person" as used in this part means:
1. You or any family member for the ownership, maintenance, or use of any private passenger type auto, sport utility vehicle, pickup or van or trailer.
2. Any person using your covered auto
3. For your covered auto, any person or organization but only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this part
4. For any auto or trailer, other than your covered auto, any person or organization but only with respect to legal responsibility for acts or omissions of you or any family member for whom coverage is afforded under this part.
83
What does "your covered auto" mean?
1. Any vehicle shown in the declarations
2. A newly acquired auto (must add to policy within 14 days
3. Any trailer you own
4. Any auto or trailer you do not own while used as a temporary substitute vehicle, while your auto is out of use
84
Auto insurance Liability Exclusions
1. Intentional Loss
2. Damage to property owned or being transported by an insured
3. Damage to property rented, used, or in the insured's care
4. Liability caused by use as a public conveyance (Uber, Lyft)
5. Bodily injury to an employee of the insured
6. Vehicles used in an auto business
7. Using a vehicle without reasonable belief the person is entitled to do so
8. Commercial vehicles used in any other business
9. Vehicles with less than 4 wheels
10. Vehicle furnished for the named insured's regular use
11. Racing vehicles
12. Vehicles covered under special nuclear energy contracts
85
No-fault Auto Laws
State laws enacted to reduced the impact of auto accidents on tort costs and the court system
86
No-fault Auto Laws
Pure no-fault
Right to sue is eliminated - no person is held liable for an accident, each person's auto insurance pays for their own loss (no states have a "pure" no fault law)
87
No-fault Auto Laws
Modified No-fault
Right to sue is not eliminated but is restricted - can only sue if damages are greater than a specified dollar threshold or a verbal threshold has been crossed (ex. "fatal" or "serious" injury)
88
No-fault Auto Laws
Add-on Plan
Injured parties can collect from their own insurance but also can still sue the responsible party
89
No-fault Auto Laws
Choice no-fault
Insurance applicants choose whether they want no-fault (for a lower premium) or want to retain the ability to sue (for a higher premium)
90
Auto Insurance Medical Payments Coverage
- Optional
- Limits are generally low (ex. $1,000 - $2,500)
- Payments regardless of fault
- Payments not coordinated with other medical expense insurance (could collect twice)
91
Uninsured and Underinsured Motorists Coverage
- Coverage if liable party has no or insufficient coverage
- Coverage for all damages that otherwise would have been paid (medical expenses, lost income, pain and suffering)
- Required by law in most states
92
Physical Damage Coverage
1. Collision (covers damage from collisions and rollovers)
2. Other-than-collision (comprehensive)
- Covers damages from falling objects, explosions, glass breakage, earthquake, windstorms, hail, contact with an animal
Deductibles generally used for both
93
What are the primary rating factors for auto insurance?
1. Driver Characteristics
- Age, gender, marital status
- Use of the auto, number of autos
- Credit score, other factors
2. Driving Records
3. Model of Auto
4. Territory: congestion, weather, crime
94
Telematics or Usage-Based Insurance
Safe-Driving Programs
These programs usually track a combination of the following:
- Mileage, time of day, cornering, braking, speeding, phone usage, acceleration
Progressive's Snapshot, Geico's DriveEasy, State Farm's Drive Safe & Save
95
Telematics or Usage-Based Insurance
Mileage Programs
Insurance charge based on actual miles driven
Allstate's Milewise, Nationwide's SmartMiles
96
Telematics Mechanisms
- Mobile Apps
- Diagnostic port plug-in devices
- Bluetooth beacons
- OnStar
97
Homeowners Pure Risks
Dwelling
- Complete Destruction
- Damage to dwelling
-Damage to vital component
98
Homeowners Pure Risks
Other structures
- Destruction or damage to ancillary structures
99
Homeowners Pure Risks
Personal Property
- Destruction or damage
- Loss or theft
- Owned or used anywhere
- Subject to aggregate and specific $ limits
100
Homeowners Pure Risks
Loss of Use of the Premises
- Additional living expenses for a substitute
101
Homeowners Pure Risks
Additional Coverages
- Remove Debris
- Remove items from damaged house to protect
- Cost of repair to prevent further damage
- Damage to landscaping
102
Homeowners Pure Risks
Personal Liability
- For damages for a claim against insured because of bodily injury or property damage
- Not limited to premises
- Exclusions for business use claims and use of other-insured items like autos, aircraft, boats
103
Homeowners Pure Risks
Medical Payments to Others
- For medical care for a guest on the premises
- Medical care caused by insured or insured's animal
- Not for insured or family living at residence
104
Named Perils Coverage (Form HO-2)
We cover losses caused by .......... (names perils)
105
Open Perils Coverage (Form HO-3)
We insure against any direct physical loss EXEPT losses cause by ........ (excluded)
106
Is named perils coverage or open perils coverage broader?
Open perils coverage
107
What perils are typically covered under homeowners insurance ?
108
What perils are typically excluded (not covered) under homeowners insurance?
109
What are the ways in which risk is left to responsibility of insured with homeowners insurance?
- Deductible amounts
- Excluded risks
- Limits of liabilities (overall policy limits & special limits by type of property)
- Listing property not covered
- Listing losses not covered
110
Risk Management Strategies for the Homeowner
111
Homeowners Insurance Coverage E
Coverage E: Personal Liability
Two Premises provided by Insurer
1. To pay damages for which the insured is legally liable
2. to provide a defense, at the insurer's expense, against lawsuits
*Coverage is on an OPEN PERILS basis*
- Damages must be either bodily injury or property damage
- Includes cost of defense
- Subject to policy limit
- Not limited to events occurring on the premises
112
Homeowners Insurance Coverage F
Coverage F: Medical Payments
Medical expenses will be paid if incurred within 3 years of an accident and arising out of 1 of 5 possible situations:
1. That of a person on the insured location with the permission of an insured
2. That of a person off the insured location if the bodily injury arises out of a condition on the insured location
3. One caused by the activities of an insured
4. One caused by a residence employee in the course of employment by the insured
5. One caused by an animal owned by or in the care of an insured
- Expenses incurred by regular residents of the residence premises, except for residence employees, are not covered.
*The insured, spouse, and children living at the residence, and others living there, are excluded so that this policy does not become a health insurance policy
Subject to a relatively low policy limit
113
Exclusions to Coverage E (personal liability) and Coverage F (medical payments)
