Personal Risk Management

Question 1

What 3 branches are there of personal risk?

Answer 1

1) Life (death, there are various insurance plans)
2) Health (
3) Material / immaterial goods (property, liability, unemployment insurance)

Question 2

What are some personal risk management tools?

Answer 2

1) Risk Control:
a) risk avoidance
b) loss reduction

2) Risk Financing:
a) retention
b) risk transfer

Question 3

What is the Fisher Life Cycle?

Answer 3

• Model suggests individuals want to smooth consumption over a lifetime (implying an intertemporal risk management perspective).
• Insurance coverage prevents major income shock

Question 4

What are some sources of retirement income?

Answer 4

1) Social Security
2) Employer-sponsored sources of income (defined benefits and contribution plans)
3) Private Savings
4) Life insurance

Question 5

What are some types of Life Insurance?

Answer 5

Term Insurance: provides death protection

• temporary
• typically low initially & stays the same for the duration of the term
• no cash value or savings element
• temporary protection needed
• no savings component; the premium increases over time

Cash Value Policies: a person buys death insurance and is saving money with an insurer

• permanent for the whole life of the individual
• accumulates savings over time
• coverage for life
• more expensive in initial years, saving interest rates are low

Question 6

What are some details to a term-life insurance?

Answer 6

Pays the face amount if the insured dies within a stated time.

• Most are guaranteed renewable without evidence of insurability
• Convertible, without evidence of insurability
• Can be used when amount of money being used is limited; NOT SUITABLE FOR LIFETIME PROTECTION
• *Yearly Renewable Method: available, pure premium, determined by the death rate of each attained age

Question 7

What are some details of Whole Life insurance?

Answer 7

1) Ordinary Life Insurance
- straight life insurance, continuous during a lifetime
2) Limited-payment Life Insurance
- premiums are only payable for a certain number of years
3) Variable Life Insurance: fixed-premium policy; funds are held in a reserve and death benefits / payouts vary according to the investment experience
4) Universal Life Insurance: flexible premium policy that provides lifetime support
* *Level Premium Method: legal reserve is required