FP1 LIFE INSURANCE 1

Question 1

_ _ _ _ is the condition that creates or increases the chance of occurrence or the severity of loss when it does occur.

Answer 1

Hazard

Question 2

_ _ _ is the cause of the loss.

Answer 2

Peril is the cause of the loss.

Question 3

Give two examples of hazards?

Answer 3

[1] Driving a car with bald tires
[2] Storing combustibles in a home

Question 4

Each risk should be evaluated for:
[List 2]

Answer 4

Each risk should be evaluated for:
[1] Severity of loss
[2] Frequency of occurrence

Question 5

A loss is unsupportable if _ _ _

Answer 5

If it does seriously affect an individual’s standard of living or financial assets.​

Question 6

**SEVERITY AND FREQUENCY OF RISK

Risk severity is the dollar cost of a loss. Risk frequency is the probability of a loss occurring.**

Answer 6

**SEVERITY AND FREQUENCY OF RISK

Risk severity is the dollar cost of a loss.**

Risk frequency is the probability of a loss occurring.

Question 7

**SEVERITY AND FREQUENCY OF RISK

Low-frequency, high-severity risks have a low likelihood of occurrence, but could cause severe losses should they occur. For example, a young client never works again due to a total disability caused by a newly developed heart condition.**

Answer 7

**SEVERITY AND FREQUENCY OF RISK

Low-frequency, high-severity risks have a low likelihood of occurrence, but could cause severe losses should they occur. For example, a young client never works again due to a total disability caused by a newly developed heart condition.**

Question 8

Low-frequency, high-severity risks are best managed through insurance, because people are generally unable to absorb the potential loss personally. Even though the loss is likely to occur infrequently, the severity of such a loss is so significant that a single catastrophe could wipe out a client’s assets.

Answer 8

Low-frequency, high-severity risks are best managed through insurance, because people are generally unable to absorb the potential loss personally. Even though the loss is likely to occur infrequently, the severity of such a loss is so significant that a single catastrophe could wipe out a client’s assets.

Question 9

What is Loss Avoidance? Give an example of a loss avoidance strategy?

Answer 9

**LOSS AVOIDANCE
Not exposing one’s self to a particular risk

EXAMPLE
The loss of capital due to a stock market crash can be avoided by investing in guaranteed term deposits rather than in equities.**

Question 10

What is Loss Prevention? Give an example of loss prevention?

Answer 10

**LOSS PREVENTION:
Aims at reducing the frequency of loss while continuing to engage in the activity.

EXAMPLE:
The risk of loss due to a fire at a factory can be prevented if flammable materials are stored away from an open flame.**

Question 11

What is meant by risk transfer?

Answer 11

RISK TRANSFER
Shifting the cost of the potential loss arising from the risk to a third party.

Question 12

_ _ _ is the cause of the loss.

Answer 12

Peril is the cause of the loss.

Question 13

Give 2 risk transfer techniques?

Answer 13

[1] Insurance
[2] Non - Insurance

Question 14

Explain risk transfer through insurance?

Answer 14

**Insurance reduces risk through pooling.

It is effected by means of a policy contract that transfers the financial consequences
of pure risk to the insurer, in return for the premiums paid.**

Question 15

Explain risk transfer through non-insurance means?

Answer 15

**Unwanted risks can be transferred by contracts.

One example is to transfer the risk of a defective refrigerator by purchasing a service contract that makes the retailer responsible for all repairs after the warranty expires.**

Another example is to transfer risk by incorporation of a business. By incorporating, the liability of the owners is limited and the risk of having insufficient assets to pay business debts is shifted to the creditors.

Question 16

What is risk loss financing?

Answer 16

Risk (loss) financing relates to the cost of losses that may be incurred and cannot be avoided or prevented. The cost of losses can be managed through a technique called risk retention, which can be either active or passive.

Question 17

**COMPLETE THE SENTENCE

With risk retention, individuals or companies retain all or part of a risk by [LIST 2]**

Answer 17

**With risk retention, individuals or companies retain all or part of a risk by:

[1] accepting the cost of the risk if it should happen or**

[2] planning to fund the costs in advance.

Question 18

Describe Active Risk Retention? Give and example?

Answer 18

The client is aware of the risk and deliberately plans to retain all of part of it.

EXAMPLE
A car owner with an older, low-value vehicle retains the risk of loss by choosing not to insure it against collision damage.

Question 19

Describe Passive Risk Retention?

Answer 19

Unknowingly retaining risks because of ignorance, indifference or carelessness.

EXAMPLE
Not realizing that his boat is not covered under his homeowner’s policy, a man fails to insure it against loss.

Question 20

**[NOTES]
Each risk should be evaluated for potential severity of loss and frequency of loss. If a risk is unsupportable, the risk will affect the standard of living or financial assets.

Low-frequency, high-severity risks could cause severe losses should they occur and are best managed through insurance.**

Answer 20

**[NOTES]
Each risk should be evaluated for potential severity of loss and frequency of loss. If a risk is unsupportable, the risk will affect the standard of living or financial assets.

Low-frequency, high-severity risks could cause severe losses should they occur and are best managed through insurance.**

Question 21

What is personal risk?

Answer 21

Personal risk directly affects a client. It includes possibilities such as losing or facing a reduction of earned income or incurring extra expenses.

Question 22

List the three major types of personal risks?

Answer 22

[1] Premature Death
[2] Aging and retirement
[3] Health

Question 23

What are the costs associated with premature death?

Answer 23

Costs associated with premature death include:

[1] Loss of earned income of the deceased person.
[2] Expenses incurred including:
[2a] Funeral expenses
[2b] Costs associated with the last illness - Estate settlement costs and taxes
[3] Emotional and social costs including:
[3a] Grief counselling for survivors
[3b] Guidance for children

Question 24

A loss is supportable if _ _ _

Answer 24

If it does not affect an individual’s standard of living or financial assets.

Question 25

What are the phases a family may go through after a death?

Answer 25

[1] Readjustment
[2] Dependency
[3] Survivor Life Needs

Question 26

Detail the dependency phase after loss?

Answer 26

**This phase is defined by the age of the youngest child.

The surviving spouse will need enough income to provide for the children until age 18 or older, if attending school.**

Question 27

Detail the survivor life income needs?

Answer 27

**The period after the youngest child reaches age 18 is critical.

The survivor may have been out of the workforce for many years and may find re-entering the work force difficult.

It may be necessary to plan for life-long income for the survivor, including support prior to and during retirement.**

Question 28

Some of the other needs that should be taken into consideration when looking at the impact of a premature death are:
[LIST 3]

Answer 28

[1] Outstanding mortgage obligations and other debts
[2] Future education funding requirements for children
[3] Emergency fund for survivors

Question 29

What can be done to cope better with the risks associated with aging?

Answer 29

The following should be taken into consideration when putting together a retirement plan:

[1] Make an allowance for the reduced income and increased expenses that come with aging.

[2] Build extra saving components into the pre-retirement portion of the client’s plan to compensate for any shortfalls.

[3] Recommend additional disability and life insurance be purchased to protect the long-term interest of the client and the family in the event of interrupted income due to premature death or disability.

Question 30

Detail the readjustment phase after loss/death?

Answer 30

**A normal readjustment period to recover from emotional shock is one to two years.

The family may need additional financial support while adjusting to a change in lifestyle.**

Question 31

What are the financial risks associated with disability?

Answer 31

[1] Decrease in cash inflows and increase in cash outflows
[2] Increase in medical expenses
[3] Loss of income and wealth erosion

Question 32

What are the two types of loss associated with property ownership?

Answer 32

[1] Direct Loss
[2] Indirect Loss

Question 33

Describe direct loss and give an example?

Answer 33

Loss resulting from the physical damage, destruction or theft of a property.

EXAMPLE
Jane owns a rental condominium at a ski resort. If the building
is damaged by a major fire, the physical damage to the property is a direct loss.

Question 34

Describe indirect loss and give an example?

Answer 34

Loss resulting from the consequence of the physical damage, destruction or theft of a property.

EXAMPLE
With Jane’s condominium fire, the loss of her rental income, while the building is being rebuilt, is an indirect loss.

Question 35

Indirect loss is also known as _ _ _

Answer 35

Consequential Loss

Question 36

With businesses, indirect losses are called _ _ _ .

Answer 36

With businesses, indirect losses are called “business interruption losses.”

Question 37

The main loss exposures associated with home ownership are:
[LIST 4]

Answer 37

The main loss exposures associated with home ownership are:

[1] Loss of residence or secondary residence
[2] Loss of contents
[3] Loss of associated structures
[4] Personal liability associated with injury to individuals on the premises

Question 38

How is the value of a lost or destroyed item determined? [LIST 2]

Answer 38

[1] Depreciated Value
[2] Replacement Value

Question 40

Define replacement value?

Answer 40

**The indemnity is based on the lost or destroyed articles being replaced with comparable new items.

There is no deduction for the depreciation in value caused by use of the originals.

Replacement value coverage requires a higher premium but can save the policy owner thousands of dollars at time of claim.**

Question 41

List & describe two other factors that should be considered when insuring property?

Answer 41

[1] Increase in the cost of living: If the property was made uninhabitable by the resulting damage, additional costs may be incurred. Costs will have to cover the period until the property is returned to a habitable condition.

[2] Inflation: In periods of high inflation, there is a risk that the replacement cost of assets may exceed levels of the current risk protection. If there is an inflation guard in place, the amount of insurance coverage automatically increases to reflect the changes in price.

Question 43

Define depreciated value?

Answer 43

**The indemnity is based on the value of the replacement or repair of the articles in the condition they were in when they were lost or damaged.

This is the standard policy.**