MISC DEFINITIONS

Question 1

what is the capital needs approach

Answer 1

most widely used approach based on creation of a budget of expenses that will be incurred by adding up all current and potential expenses and subtracting total amount of existing assets from that sum

Question 2

single needs approach

Answer 2

determines the necessary coverage based on expenses, income replacement and immediate obligations. contrasts with human-life approach focusing on specific financial needs rather than potential earnings.

Question 3

multiple of earnings life insurance approach

Answer 3

the simplest method for estimating your clients life insurance needs is the multiple of income approach, replacing the primary breadwinner’s salary for a predetermined number of years.

Question 4

automatic reinsurance (obligatory reinsurance)

Answer 4

insurance companies automatically shift some portion of their policies guarantees onto the reinsurer. when multiple insurance companies purchase policies to limit their total loss

Question 5

what is net single premium

Answer 5

lump sum payment made by the policyholder in exchange for a guaranteed death benefit.

Question 6

what is an elimination period of an individual disability policy?

Answer 6

a wait period after the person becomes disabled before the insurance policy begins paying benefits

Question 7

what is a non forfeiture insurance clause

Answer 7

the policy owner will receive partial or full benefits or a refund of premium if the policy lapses due to non payment.

Question 8

what is a surrender value on an insurance policy

Answer 8

guaranteed cash value shown on your policy plus the value of any dividends accumulated in the policy

Question 9

what is level death benefit (option A)

Answer 9

the sum is a fix amount that doesn’t change over time. pays only the death benefit and no cash value.

Question 10

what is Combined death benefit (option B)

Answer 10

combines the death benefit plus the policy’s accrued cash value - both of these will be paid.

Question 11

what is endowment insurance

Answer 11

type of policy that combines death benefit with a long-term savings plan - offers a guaranteed lump sum payout at the conclusion of the policy term as long as premiums are paid

Question 12

what is the free look insurance provision

Answer 12

consumer protection feature that allows policyholders to cancel their insurance policy within a specified timeframe for a full refund, the buyer can cancel the policy within a specified number of days after active

Question 13

what are insurance exclusion riders

Answer 13

riders add extra coverage to plans

Question 14

What is a hazard

Answer 14

a condition or situation that creates or increases a chance of loss

Question 15

physical hazard

Answer 15

poor health, overweight, blind etc

Question 16

moral hazard

Answer 16

dishonesty, drugs alcohol etc

Question 17

morale hazard

Answer 17

careless attitude

Question 18

what is a loss

Answer 18

the unintentional decrease in the value of an asset due to a peril

Question 19

what is a peril

Answer 19

an immediate specific event which causes loss

Question 20

what is risk

Answer 20

the potential for loss

Question 21

what is speculative risk

Answer 21

risk that presents both the change for loss or gain ex: gambling

Question 22

pure risk

Answer 22

is the only insurable risk and present a potential for loss only ex: injury illness death

Question 23

• loss must be due to change

Answer 23

causeless, outside the insured’s control.

Question 24

• loss must be definite and measurable

Answer 24

time, place, amount, and when payable

Question 25

• loss must be predictable

Answer 25

statistically able to estimate the average frequency and reasonable

Question 26

• loss exposure to be insured must be large

Answer 26

ideally, common enough that the insurer can pool many homogenous, or similar exposure units (law of large numbers)

Question 27

• homogenous exposure units

Answer 27

are similar objects of insurance that are exposed to the same group of perils. for example, insuring a large number of homes in the same geographical area against hail damage

Question 28

adverse selection

Answer 28

insurers must minimize adverse selection which is defined as the tendency for poorer than average risk to seek out insurance.

Question 29

risk management

Answer 29

is the process of analyzing exposures that create risk and designing programs to handle them.

Question 30

treatment of risk

Answer 30

how people deal with risk

Question 31

avoidance

Answer 31

avoid the risk all together

Question 32

reduction

Answer 32

take precautions, minimizing severity of a potential loss

Question 33

retention (self insure)

Answer 33

accepting a risk and confronting it if it occurs.

Question 34

risk pooling (loss sharing)

Answer 34

when a large grou pof people spread a risk for a small certain cost.

Question 35

reinsurance

Answer 35

insurers deal with catastrophic loss through reinsurance which is defined as a contractual arrangement that transfers exposure from one insurer to another insurer

Question 36

principle of indemnity

Answer 36

involves making an insured whole by restoring them to the same condition as before a loss