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Business > FIN 3305 Exam 3 > Flashcards

FIN 3305 Exam 3 Flashcards

1
Q

Definition of Risk

A

Uncertainty regarding the possibility of a loss

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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.

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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.

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4
Q

Executor Funds

A

Burial expenses, estate settlement costs, etc.

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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
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6
Q

Are males or females more likely to die a premature death?

A

Males

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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
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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

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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.
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10
Q

Whole Life Insurance

A

Permanent life insurance with guaranteed premiums, cash value, death benefit, and paid-up coverage

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11
Q

Universal Life Insurance

A

Flexible premium, permanent life insurance plan

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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.
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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
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14
Q

What are the two different types of term coverage associated with term life insurance?

A

“Level Term” or “Decreasing Term”

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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

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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)

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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
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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
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19
Q

What are the 3 kinds of whole life premiums?

A
  1. Straight Life or Ordinary Life
  2. Limited-Pay Life
  3. Single-Premium Life
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20
Q

Straight Life or Ordinary Life Premiums

A

Insured pays premiums (usually annually) indefinitely

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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

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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

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23
Q

What happens if an insured terminates their whole-life policy before death?

A

They receive the cash value

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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

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25
Q

What type of life insurance coverage is favored by clients with low risk tolerance?

A

Whole life insurance

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26
Q

Which type of life insurance is the easiest to present and explain?

A

Whole life insurance is relatively easy to present and explain because of guaranteed elements

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27
Q

Give more details on Universal Life Insurance

A
  • 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
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28
Q

Are whole life insurance policies or universal life insurance policies more expensive?

A

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

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29
Q

Is Universal Life insurance considered permanent?

A

Universal life insurance is considered permanent because there is a premium at which the insured can keep the policy in force for life

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30
Q

What is the traditional use of universal life insurance?

A

Traditional use of universal life insurance often includes an investment component making use of the flexible premium feature and cash value of the policy

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31
Q

What are the 2 universal life death benefit options?

A
  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
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32
Q

No Lapse Guarantee Universal Life Insurance

A

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.

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33
Q

Indexed Universal Life Insurance

A
  • 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
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34
Q

Variable Universal Life Insurance

A
  • 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
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35
Q

Life Insurance Riders:
Waiver of Premium

A

This rider provides that premiums due after the insured goes on total disability will be waived for a period of time

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36
Q

Life Insurance Riders
Disability Income

A

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

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37
Q

Life Insurance Riders
Accidental Death Benefit

A

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

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38
Q

Life Insurance Riders
Guaranteed Insurability Option

A

Gives policy owner the right to buy additional amounts of insurance every 3 years, without new proof of insurability; Protects against becoming uninsurable

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39
Q

Life Insurance Riders
Accelerated Death Benefits

A

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

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40
Q

Life Insurance Riders
Catastrophic Illness Coverage

A

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

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41
Q

Are life insurance proceeds paid to a beneficiary taxable? What about build up of cash value in a permanent policy?

A
  • 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
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42
Q

Health Insurance Structure
PPO (preferred provider organization)

A
  • Network of providers, no primary care physician referral for specialist
  • Out-of-network treatment reimbursable at a lower rate
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43
Q

Health Insurance Structure
POS (point of service)

A
  • Primary Care physician is gatekeeper, controls access to in-network specialists
  • Some coverage for out-of-network care, but insured pays more
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44
Q

Health Insurance Structure
HMO (health maintenance organization)

A
  • 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
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45
Q

Deductible

A

The amount of money you must pay out-of-pocket before insurance coverage begins

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46
Q

Co-Insurance

A

The percentage of allowed charges for covered services that you-re required to pay. The co-insurance applies after the deductible is met

47
Q

Co-Pay

A

The insured pays a flat amount for a certain benefit (typically not subject to the deductible)

48
Q

Out-of-Pocket Maximum

A

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
Q

Why is Cost Sharing in Health Insurance important to consider?

A

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
Q

Effects of Cost Containment

A

If you stay in the network, you will pay less than if you receive care from an out-of-network physician or institution

51
Q

Describe the premise of the problem with cost shielding in healthcare, and then describe how consumer driven healthcare is a viable solution.

A

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
Q

Dental Insurance

A
  • 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
Q

Is Vision insurance coverage separate from health insurance?

A

Yes, vision insurance is separate. It tends to cover annual visits and standard care, with low limits for costly procedures

54
Q

Sources of Health Insurance

A
  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
Q

Medicare

A

Government health insurance for elderly and disabled people

56
Q

Medicaid

A

Government health insurance for low-income people

57
Q

Tricare

A

Government health insurance for military

58
Q

Medicare Part A Coverage

A

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
Q

Medicare Part B Coverage

A

Part B: Supplementary Medical
- Physician Services
- Physical Therapy and Occupational Therapy
- X-rays and lab work
- Medical equipment
…….. + many others

60
Q

Medicare Part D Coverage

A

Part D: Prescription Drugs
- Available from private companies for additional premium
- Federal law standardizes plans

61
Q

Medigap Insurance

A
  • 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
Q

Longevity

A
  • 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
Q

Retirement Plans
1. Qualified Plan

A

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
Q

Retirement Plans
2. Defined Benefit Plan

A

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
Q

Retirement Plans
3. Defined Contribution Plan

A

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
Q

Comparison of Defined Benefit and Defined Contribution Plans

A
67
Q

Two Types of Defined Benefit Plans

A
  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
Q

Employers and Pension Risk

A

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
Q

What are some specific types of Defined Contribution Plans?

A

401(k) Plan
Other types:
- Money purchase pension
- Profit-sharing plan (allocated in proportion to salary)
- Employee Stock Ownership Plan (ESOP)

70
Q

401(k) Plans

A
  • 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
Q

Fixed Annuity

A

Payments are guaranteed and fixed in amount

72
Q

Variable Annuity

A

Payments vary based on equity prices

73
Q

How long are benefits payable?
Annuity Certain

A
  • 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
Q

How long are benefits payable?
Straight Life Annuity

A
  • Pays during the lifetime of the annuitant
  • Larger payments for annuitants who start payments late in life
  • No continued payments once annuitant dies
75
Q

How long are benefits payable?
Period-Certain Guarantees

A

Version of straight-life annuity, which also specifies a guaranteed time period that is paid even if the annuitant dies early

76
Q

How long are benefits payable?
Refund Guarantees

A

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
Q

How long are benefits payable?
Temporary Life Annuity

A

Pays benefits until the expiration of a specified period of years or until the annuitant dies, whichever comes first

78
Q

How long are benefits payable?
Joint and Survivor Annuity

A

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
Q

What are the major risk exposures that automobile insurance protects against?

A
  • Legal liability
  • Personal injury
  • Property damage to the vehicle
  • Theft of vehicle
80
Q

Auto Insuring Agreement - Part A: Liability

A

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
Q

What is unique Liability Limits on auto insurance?

A

Liability coverage usually has “split limits” for bodily injury (individual and aggregate) and property damage. They are usually described like this:

82
Q

Auto Insurance Liability Coverage - Who is insured and when?

A

“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
Q

What does “your covered auto” mean?

A
  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
Q

Auto insurance Liability Exclusions

A
  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
Q

No-fault Auto Laws

A

State laws enacted to reduced the impact of auto accidents on tort costs and the court system

86
Q

No-fault Auto Laws
Pure no-fault

A

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
Q

No-fault Auto Laws
Modified No-fault

A

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
Q

No-fault Auto Laws
Add-on Plan

A

Injured parties can collect from their own insurance but also can still sue the responsible party

89
Q

No-fault Auto Laws
Choice no-fault

A

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
Q

Auto Insurance Medical Payments Coverage

A
  • 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
Q

Uninsured and Underinsured Motorists Coverage

A
  • 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
Q

Physical Damage Coverage

A
  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
Q

What are the primary rating factors for auto insurance?

A
  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
Q

Telematics or Usage-Based Insurance
Safe-Driving Programs

A

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
Q

Telematics or Usage-Based Insurance
Mileage Programs

A

Insurance charge based on actual miles driven

Allstate’s Milewise, Nationwide’s SmartMiles

96
Q

Telematics Mechanisms

A
  • Mobile Apps
  • Diagnostic port plug-in devices
  • Bluetooth beacons
  • OnStar
97
Q

Homeowners Pure Risks
Dwelling

A
  • Complete Destruction
  • Damage to dwelling
    -Damage to vital component
98
Q

Homeowners Pure Risks
Other structures

A
  • Destruction or damage to ancillary structures
99
Q

Homeowners Pure Risks
Personal Property

A
  • Destruction or damage
  • Loss or theft
  • Owned or used anywhere
  • Subject to aggregate and specific $ limits
100
Q

Homeowners Pure Risks
Loss of Use of the Premises

A
  • Additional living expenses for a substitute
101
Q

Homeowners Pure Risks
Additional Coverages

A
  • Remove Debris
  • Remove items from damaged house to protect
  • Cost of repair to prevent further damage
  • Damage to landscaping
102
Q

Homeowners Pure Risks
Personal Liability

A
  • 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
Q

Homeowners Pure Risks
Medical Payments to Others

A
  • 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
Q

Named Perils Coverage (Form HO-2)

A

We cover losses caused by ………. (names perils)

105
Q

Open Perils Coverage (Form HO-3)

A

We insure against any direct physical loss EXEPT losses cause by …….. (excluded)

106
Q

Is named perils coverage or open perils coverage broader?

A

Open perils coverage

107
Q

What perils are typically covered under homeowners insurance ?

A
108
Q

What perils are typically excluded (not covered) under homeowners insurance?

A
109
Q

What are the ways in which risk is left to responsibility of insured with homeowners insurance?

A
  • 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
Q

Risk Management Strategies for the Homeowner

A
111
Q

Homeowners Insurance Coverage E

A

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
Q

Homeowners Insurance Coverage F

A

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
Q

Exclusions to Coverage E (personal liability) and Coverage F (medical payments)

A

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