Insurance: Chapter 2

Question 1

What opportunities provide ways to manage personal risk?

Answer 1

1. Death
2. Disability
3. Poor Health
4. Unemployment
5. Superannuation (risk of outliving individuals or couples money)

Question 2

What 3 properties are examples in which risks and costs can be managed?

Answer 2

1. Real
2. Personal
3. Auto

Question 3

What actions create liability?

Answer 3

1. Negligence
2. Intentional Torts
3. Strict Liability

Question 4

What is a Tort?

Answer 4

A wrongful act other than a breach of contract for which a civil action may be brought against the tortfeasor.

*A tort is generally regarded as a crime.

Question 5

What is an intentional tort?

Answer 5

A deliberately performed act such as assault, battery, libel, slander or false arrest

Question 6

What is an unintentional tort?

Answer 6

Negligence or carelessness

Question 7

What is an attractive nuance and an example of it?

Answer 7

A situation in which a high degree of care is imposed on the land occupied for certain conditions on the land.

Ex: A pool that isn’t screened or fenced or a vacant lot where children play

Question 8

What is negligence per se with an example of it?

Answer 8

A situation where the standard of care is set by a statute.

Ex: A school zone or crosswalks

Question 9

What is strict liability with an example of it?

Answer 9

(Product liability) Generally limited to manufactures and distributors of products found to be defective.

Ex: Pharmacueticals that cause illness or death, cars found to have defects

Question 10

What is absolute liability and an example?

Answer 10

An extra hazardous condition that results in losses to others.

Ex: Keeping of wild animals, workers’ compensation and blasting

Question 11

What is vicarious liability or respondeat superior with an example?

Answer 11

When one person is held liable for the negligent behavior of another person.

Ex: Branch manager at BD responsible for supervising other, same as manager at insurance agency

Question 12

What is the assumption of risk?

Answer 12

One party recognizes and understands the danger in an activity yet voluntarily chooses to encounter it, another party cannot be held responsible for the injury.

Ex: Skiing, stock car racing

Question 13

What is contributory negligence?

Answer 13

Any negligence on the part of the injured party, although slight, defeats the claim.

Ex: Jaywalking or Drunk Driving

Question 14

What is comparative negligence?

Answer 14

Any degree of negligence on the part of the injured party, this does not defeat the claim, but is used in some manner to mitigate damages payable by the other party. Damages are adjusted proportionally

Ex: Injured party is found 20% negligent, the other party is found 80% negligent.

Question 15

What does the term last clear chance mean?

Answer 15

Any contributory negligence of the injured party will not bar recovery of damages if the other party (immediately prior to the accident) had a last clear chance to prevent the accident but failed to do so.

Ex: Road rage

Question 16

What is the capital utilization method in determining life insurance needs?

Answer 16

Uses annuitization to fund future income needed but leaves no money at the end of the anticipated distribution period.

Question 17

What is the capital retention or capital preservation method in determining life insurance needs?

Answer 17

Presumes that only interest is distributed and the original capital is still left at the end of the income period.

Question 18

Tom makes $120k, his wife will receive $20k in SS, if he dies and their investments earn 7%, what amount of money will provide an equivalent income without invading capital? Provide the steps

Answer 18

((120-20)/.07)+100*= 1,528,571

• this 100 is for the first year because the day he dies she will need income for the rest of the year

Question 19

John wants his wife to have $36k in income that will increase with inflation (4%). He can realize a net investment return of 7%, how much insurance should he purchase?

Answer 19

(36k/(.07-.04)) + 36k*= 1,236,000

• this 36k is for the first year because the day he dies she will need income for the rest of the year

Question 20

How much will disability carriers typically issue to a person for their earned income?

Answer 20

50-60%. This may be improved by adding group disability coverage after individual policy has been issued.

Question 21

Long term care insurance is generally purchased and calculate as what?

Answer 21

Per Diem. Costs vary but the typical amount is $200 to $400+ per day.

Question 22

What is the most common type of employee benefit?

Answer 22

Medical insurance. Most new plans are PPO or HMO, while older plans-imposed deductibles and coinsurances.

Question 23

What are the types of property loss exposure facing families that would require them to purchase property insurance?

Answer 23

Real or personal. Insurance should be used for risks with high severity and low frequency, while retention should be used for low severity and low frequency.

Question 24

What is liability risk?

Answer 24

Makes individuals responsible for certain losses they cause by injuring others or damaging property of others.

Clients should have adequate liability protection which typically includes personal umbrella liability policy.

Question 25

Are there different durations which you would need insurance coverage?

Answer 25

Yes. Disability you would only need until you retire, life insurance may be needed for an entire lifetime or possibly until children have completed college. Health insurance you are eligible to receive medicare at age 65.

Question 26

What is a participating policy?

Answer 26

Pays an annual dividend to the policyholder. They charge a larger premium (willful overcharge) and if the extra premium is not needed it is returned as a dividend generally tax free.

Dividends are generally based on higher-than-expected investment return and/or lower-than-expected mortality and expenses

Question 27

What should a financial planner do when choosing an insurance company?

Answer 27

Select a company that holds one of the 3 highest rating from at least three of the rating services.

A.M. Best A++ to F (provides detailed historical
data on insurance carriers)
Standard and Poors AAA to CCC
Moody’s Aaa to C
Weiss A+ to F

Question 28

What is underwriting?

Answer 28

The process of selecting and classifying exposures.

Question 29

What is the insurer seeking as an applicant for underwriting?

Answer 29

The insurer seeks to accept only applicants who (on average) will have actual loss experience comparable to the expected loss experience that is built into the company’s premium rates.

Question 30

What two activities must the underwriter complete?

Answer 30

1. Cover a large number of individual insureds so that the law of large numbers works
2. Obtain homogeneity of insureds so that there is a reasonable equity between the better and poorer individual insureds

Question 31

What 5 sources of information does the underwriter use?

Answer 31

1. An application for insurance
2. Information from the agent or broker
3. Investigations
4. Information bureaus
5. Physical examinations or inspections

Question 32

What is the sequence of events during the loss adjustment process?

Answer 32

1. Notice of loss: Notice by the insured to the insurance company that a loss has occurred.
2. Investigation: The adjuster must first determine that there was a loss and then whether the loss is covered under the policy
3. Proof of Loss: Insured files a signed proof of loss (must be in writing)
4. Payment or denial of claim

Question 33

What is an adjuster?

Answer 33

Someone who investigates losses