Risk Flashcards
What are the different types of risk management strategies and when are they used
1) Risk Avoidance: High Severity/High Frequency - skydiving, bungee jump
2) Risk Transfer: High Severity/Low Frequency - life,disability,home insurance
3) Risk Reduction: High Frequency/Low Severity - preventative:seat belts
4) Risk Retention: Low Frequency/Low Severity - self insure, deductibles
What factors must be in place for a qualified accelerated death benefit
The insured must be terminally ill.
The reduction of the remaining face value of coverage is limited.
The cash value of the remaining death benefit may not be reduced.
What are requirements for tax treatment of viatical settlements
- Terminally ill individuals may use all proceeds tax free
- Chronically ill individuals may use to cover medical expenses for long term care tax free but any other non medical use will be taxed as ordinary income at tax rate
How many life insurance policies must be purchased under a partnership cross purchase plan
With a cross-purchase plan, the number of policies needed is equal to:
n x (n - 1), where n equals the number of partners or shareholders.
When annuitizing a life insurance contract, how do you determine the amount that is not-taxable for current period
Use the exclusion ratio to determine the portion of each annuity payment that represents a return of basis (tax-free amount).
Exclusion Ratio:
(Basis in Contract ÷ Expected Total Payments - annuity payment * periods of payment) x Annuity Payment Amount = Return of Basis.
eg: Rosalita had paid $150,000 of premium payments into the contract. The expected annual annuity payment is $22,500 for 16 years.
($150,000 ÷ [$22,500 x 16]) x $22,500
($150,000 ÷ $360,000) x $22,500 = $9,375 (tax-free return of basis)
If the insured forgets to pay the premium or decides to end the contract, the grace period provides _______ to pay the premium without forfeiting any contractual rights and no questions asked.
31 days
“If the insured forgets to pay the premium or decides to end the contract, the grace period provides 31 days to pay the premium without forfeiting any contractual rights and no questions asked”
What are the key features of credit life insurance
Credit life insurance is often sold in conjunction with a major purchase.
It typically is much more expensive than traditional term life insurance.
The premium does not increase each year and
The benefit decreases each year to coincide with the outstanding loan balance.
In legal terminology, what do you call ownership rights evidenced by something tangible or intangible?
In legal terminology, ownership rights evidenced by something tangible or intangible is called chose.
There are two types of choses:
Choses in possession
Choses in action
What are the different types and features of life insurance
Term - Fixed term limit for fixed dollar amount. No investment or saving vehicle
Whole -
Variable -
Universal - Combines the low-cost nature of term and the cash value features of whole life insurance. This new hybrid product was to be more flexible than its predecessors with features that allowed the insured to determine whether it would function more like term or more like a whole life policy.
What are the (6) different types of risk
Pure risk - the chance of a loss or no loss occurring. (Ex: your house is hit by a tornado and damaged or it is not). This is the only insurable
Speculative risk - the chance of loss, no loss, or a profit. (Ex: a speculative investment)
Static risk - the chance of a loss brought about by acts of nature or malicious acts by another that results in a financial loss to the insured; generally predictable (Ex: a flood) - Objective Risk
Dynamic risk - the core of risk resides in the change in the environment caused by the changing human condition -
Subjective Risk = based on individual’s perception of risk and measures the variation of an actual loss from expected loss
Name the terms for each definition below:
A) The right of a party to collect from third parties who are responsible for having caused the loss.
B) The right of the insured to be made whole after a loss occurs.
C) The right of the insured to bring tort action against the tortfeasor.
D) The stake or interest in a matter, person, property, or other business concern that might be damaged if the peril insured against occurs.
Option “A” is vicarious liability.
Option”B” is principle of indemnity
Option “C” is the right to bring suit.
Option “D” is an insurable interest.
Define the following:
The incontestable clause.
The entire contract clause.
The suicide clause.
The common disaster clause.
Incontestable clause - The provision in an insurance policy that prevents the insurance company from challenging payment on a policy once the policy has been in force for a given period of time
Entire contract clause states that the policy and the application attached make up the insurance agreement.
A suicide clause places limitations on benefits in the event of suicide by an insured.
The common disaster clause provides for policy disposition in the event of a common death of the insured and primary beneficiary.
