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CFP Exam Prep > Risk Management and Insurance Planning > Flashcards

Risk Management and Insurance Planning Flashcards

C.17 Principles of risk and insurance C.18 Analysis and evaluation of risk exposures C.19 Health insurance and health care cost management (individual and group) C.20 Disability income insurance (individual and group) C.21 Long-term care insurance and long-term case planning (individual and group) C.22 Qualified and Non-Qualified Annuities C.23 Life insurance (individual and group) C.24 Business owner insurance solutions C.25 Insurance needs analysis C.26 Insurance policy and company selection

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1
Q

Pure Risk

A
  • Insurance is only used to protect against “Pure Risks.”
  • Pure risks simply create either a financial loss or no loss.
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2
Q

Speculative Risk

A
  • With speculative risk, there is a chance of profit, loss, or no loss.
  • Speculative risk is generally undertaken by entrepreneurs.
  • Speculative risk is generally voluntary risk and not insurable.
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3
Q

Subjective Risk

A
  • Subjective risk differs based upon an individual’s perception of risk.
  • For example: Tom recently moved to Dunwoody, Georgia. His neighbors told him that the police department has a reputation for writing speeding tickets. As a result, Tom buys a radar detector because he perceives there to be a significant risk of getting a speeding ticket.
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4
Q

Objective Risk

A
  • Objective risk does not depend on an individual’s perception, but is measurable and quantifiable.
  • Objective risk measures the variation of an actual loss from expected loss.
  • For example: Statistics published for the number of speeding tickets written per drivers living in a city would confirm or disprove the subjective risk perceived by Tom in the previous example.
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5
Q

Law of Large Numbers

A
  • The law of large numbers specifies that when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases.
  • The more exposures, the more likely that the results will equal true results and thus will be predictive of future results.
  • The Law of Large Numbers helps to reduce objective risk
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6
Q

Perils

A
  • Perils are the actual cause of a loss.
  • For example: Fire, wind, tornado, earthquake, burglary, and collision.
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7
Q

Hazard

A
  • A hazard is a condition that increases the likelihood of a loss occurring.
  • There are three types of hazards: Moral, Morale, and Physical Hazard.
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8
Q

Moral Hazard

A
  • A moral hazard is a character flaw.
  • A character flaw would lead to a filing a false claim.
  • For example: A famous running back for Ohio State claimed his car was broken into and $10,000 worth of CDs were stolen. There certainly wasn’t $10,000 worth of CDs in his car and thus is an example of a moral hazard.
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9
Q

Morale Hazard

A
  • Morale hazard is the indifference created because a person is insured.
  • For example: Beth goes to the convenience store to get milk for her baby. Beth leaves the keys in her car and the car running while she goes into the store, not concerned that her car may get stolen because she has car insurance.
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10
Q

Physical Hazard

A
  • A physical hazard is a tangible condition that increases the probability of a peril occurring.
  • For example: Icy or wet roads, poor lighting, or defective equipment.
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11
Q

Adverse Selection

A
  • Adverse selection is the tendency of persons with higher-than-average risks to purchase or renew insurance policies.
  • Premiums are dependent upon a balance between favorable and unfavorable risks in the pool.
  • Adverse selection is managed through underwriting, denying insurance on the front end, and raising premiums on the back end.
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12
Q

Insurable Risks

A

CHAD

Catastrophic
Homogeneous exposure units
Measurable
Determinable

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13
Q

Principle of Indemnity

A
  • An insured is only entitled to compensation to the extent of the insured’s financial loss.
  • An insured cannot make a profit from an insurance contract.
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14
Q

Subrogation Clause

A
  • The insured cannot receive compensation from both the insurer and a third party for the same claim.
  • If the insured collects compensation from their insurance company, they lose the right to collect compensation from the third party.
  • The insurer “steps into the shoes” of the insured to recoup any restitution from the 3rd party or the 3rd party’s insurer.
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15
Q

Void Contract

A

A void contract was never valid and thus never came into existence. It is not an enforceable contract since it lacks one of the four elements of COALL.

  • For example, a contract to sell heroin in the United States is a void contract since it is established for an unlawful purpose.
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16
Q

Voidable Contract

A
  • A voidable contract is a valid contract that allows cancelation by one of the parties however the other party is bound by the agreement.
  • For example, if a minor enters into a contract to purchase a car the contract is valid but voidable by the minor (not a competent party). The car dealership, however, is bound by the contract
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17
Q

Concealment

A

When the insured is silent about a fact that is material to the risk.

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18
Q

Adhesion

A
  • An insurance policy is basically “take it or leave it.” There are no negotiations over terms and conditions.
  • As a result, any ambiguities in an insurance contract are found in favor of the insured.
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19
Q

Aleatory

A
  • The money exchanged may be unequal. In other words, there’s a small premium, but the insured may receive a large benefit.
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20
Q

Unilateral

A
  • Only one promise is made by the insurer which is to pay in the event of a loss.
  • The insured is not obligated to pay the premiums. If the premiums are not paid, then there’s no promise by the insurer
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21
Q

Conditional

A
  • The insured must abide by the terms and conditions of the insurance contract. If the terms and conditions are not followed, the insurer may not pay a claim
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22
Q

Estoppel

A

Takes place when a party is denied assertion of a right to which they are otherwise entitled. Consider an insured who causes a car accident. The insured’s insurance agent says, “Your auto insurance premiums won’t increase because of one accident.” The insurer could be “estopped” from raising premiums at the next opportunity because of the informal agreement between the insured and insurance agent.

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23
Q

Parol Evidence Rule

A

Once the contract is placed in written form all previous and prior understandings may not contradict the written contract. Essentially the parol evidence rule stipulates that the contract reflects the complete understanding of both parties.

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24
Q

Reformation

A

Contractual remedy in which the contract is revised to express the original intent of all parties.

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25
Q

Recission

A

Deems a contract void from inception

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26
Q

Express Authority

A
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27
Q

Implied Authority

A
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28
Q

Apparent Authority

A
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29
Q

Features of Insurance Contracts

A

Conditions - details the duties and right of the insured and insurer

Declarations - includes the name of the insured, description of the property, amount of coverage, amount of premium, term of the policy, start/end dates

Exclusions - what will not be covered

Riders/Endorsements - customized additions.

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30
Q

Insurance Industry Regulation

A

performed at the state level

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31
Q

Legislative Branch

A

Provides for licensing of agents and enacts laws and requirements for doing business in a particular stat

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32
Q

Judicial Branch

A
  • The judicial branch rules on constitutionality of laws passed by the legislative branch.
  • They also render decisions and interpretations regarding policy terms.
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33
Q

Executive or State Insurance Commissioner

A
  • Administers, interprets, and enforces insurance laws.
  • The State Insurance Commissioner does NOT make law!
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34
Q

Goals of State Insurance Regulation

A
  • Protect the insured.
  • Maintain and promote competition.
  • Maintain solvency of insurers.
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35
Q

Coinsurance

A
  • A homeowners policy requires the insured to cover at least a stated percentage of the property value.
  • If coverage meets or exceeds the coinsurance requirement (usually 80%), then the insurer pays the lesser of: face value of policy, replacement cost, or actual expenditures.
  • If coverage is less than the coinsurance requirement, then insurer pays the greater of actual cash value or the following formula:

(Face Value / Coinsurance) x Loss - Deductible

Coinsurance = 80% x Replacement Cost

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36
Q

3 Main Rating Agencies

A

AM Best’s
Moody’s
Standard and Poor’s

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37
Q

A.M. Best’s

A

Highest Rating: A++ to A/A-
Lowest Rating: C/C-to D

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38
Q

Moody’s

A

Highest Rating: Aaa to Aa1/Aa2
Lowest Rating: B1/B2/B3 to Caa

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39
Q

Standard and Poor’s

A

Highest Rating: AAA to BBB
Lowest Rating: BB and lower CC

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40
Q

NAIC

A
  • Provides a watch list of insurance companies based upon financial ratio analysis.
  • Ratios measure the financial health of insurance companies.
  • NAIC has no regulatory power over the insurance industry, but is involved in accrediting state insurance regulatory offices.
  • NAIC issues “model legislation” that state legislatures may or may not adopt.
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41
Q

Human Life Value Approach

A
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42
Q

Needs Approach

A
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43
Q

Term Insurance - Provisions

A
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44
Q

Dividend Options

A
45
Q

Fixed Amount - Annuity Payment

A
46
Q

Life Income - Annuity Payment

A
47
Q

Fixed Period - Annuity Payment

A
48
Q

Life Income w/ Period Certain - Annuity Payment

A
49
Q

Joint and Last Survivor Income - Annuity Payment

A
50
Q

Nonforfeiture Options

A
51
Q

Life Insurance Policy Provisions

A
52
Q

Absolute vs Collateral Assignment

A
53
Q

Taxation of Life Insurance

A
54
Q

Taxation of Dividends

A
55
Q

Taxation of LI Withdrawals

A
56
Q

Transfer of Policy for Value

A
57
Q

Taxation of Group Life Insurance

A
58
Q

Taxation of Viatical Settlements

A
59
Q

Taxation of Accelerated Benefits

A
60
Q

Taxation of Annuities

A
61
Q

ACA Employer Requirements

A
62
Q

HMO

A
63
Q

PPO

A
64
Q

HSA Facts

A
65
Q

COBRA Facts

A
66
Q

Medicaid

A
67
Q

Medicare Part A-B-C-D

A
68
Q

LTC Policy Coverage

A
69
Q

LTC Tax Benefits

A
70
Q

Definitions of Disability

A
71
Q

Disability Benefit/Elimination Period

A
72
Q

Taxation of Disability Benefits

A
73
Q

Cost of Living Rider (Disability)

A
74
Q

Residual Benefits (Disability)

A
75
Q

Integration with Social Security (Disability)

A
76
Q

3 basic forms of homeowners policies

A

Basic
Broad
Open

77
Q

Basic coverage protects the homeowner from losses associated with how many perils?

A

12

Fire
Vehicles (damage caused by vehicles)
Lightning
Smoke
Windstorm
Vandalism
Hail
Explosions
Riots
Theft
Aircraft
Volcanic Eruptions

78
Q

Describe the protection offered from Broad Coverage

A

Everything in basic coverage, plus six additional perils.

Falling objects

The weight of ice, snow, sleet

Accidental discharge or overflow of water or steam

Sudden and accidental cracking, burning, bulging of appliances

Freezing of plumbing, heating, air conditioning, fire sprinkler system or appliance

Sudden and accidental damage from artificially generated electrical currents.

79
Q

Describe Open perils

A

Will cover all perils, except whatever that policy specifically excludes.

80
Q

General exclusions of homeowners policies

A
  • Movement of the ground (earthquake, ground movement from volcanic eruption, mud/landslide, and sink hole)
  • Ordinance or law regulating the construction, repair or demolition of a building or structure
  • Damage from rising water (including floods; surface and tidal water; waves; water below the surface that exerts pressure on buildings, structures, and improvements; and water backing up through drains and sewers)
  • War
  • Nuclear Hazards
  • Power failure caused by an uninsured peril (such as spoilage due to the freezer thawing out)
  • Intentional acts
  • neglect
81
Q

Endorsements (Homeowners policies)

A

An endorsement is a supplement to an existing policy that provides additional coverage. Endorsements could include:

Sink hole collapse
Earthquake
Sewage back up
Refrigerated property coverage.

82
Q

Property Insurance Coverages

A

Coverage A - Abode (Home/Dwelling)
Coverage B - Barns and Buildings (Other Structures)
Coverage C - Contents (Personal Property)
Coverage D - Damage (Loss of use)
Coverage E - Exposure (Personal Liability)
Coverage F - First Aid (Medical payments to others)

83
Q

Homeowners Insurance Policies

A

HO-2 Broad Forms
HO-3 Special Form
HO-4 Renters Policy
HO-5 Comprehensive Policy
HO-6 Condominium Owners Form
HO-8 Modified Coverage Form

84
Q

Automobile Insurance Policies

A

Part A - At fault (Liability Coverage)
Part B - Band aid (Medical payments coverage)
Part C - Careless Cyclist (uninsured motorist coverage)
Part D - Dents/Damage to insureds vehicle
Part E - Evidence (duties after an accident or loss)
Part F - Fine print (general provisions)

85
Q

Types of torts

A

Intentional Interference: actions deliberately performed by a person that cause harm to another. (e.g. assault, battery, trespassing.)
* Slander (verbal) and libel (written) are usually covered under personal liability insurance.

Strict and absolute liability: occurs as a result of legislation in which one party is held legally liable regardless of who is responsible for the injury. (e.g. Workers compensation)

Negligence: harm caused by a person’s failure to exercise reasonable care/judgment.

86
Q

Res Ipsa Loquitur

A

Res ispa loquitur, the act speaks for itself, is a doctrine of the law of negligence that permits the use of reasonable evidence when a specific explanation of negligence is not available. For example, if a plane crashes, there is negligence. It does not have to be proven. There mere fact that a plane crashes implies negligence. Planes do not just fall out of the sky.

87
Q

Negligence Per Se

A

The act itself constitutes negligence, thereby relieving the burden to prove negligence (e.g., drunk driving).

88
Q

Burden of proof

A

Initially borne by the injured party. Standard of proof in most civil cases is the preponderance of the evidence (more than 50%).

89
Q

Types of damages

A
  • Special damages compensate for measurable losses (loss of limbs).
  • General damages compensate for intangible losses (pain and suffering).
  • Punitive damages are amounts assessed against the negligent party as punishment for the act
90
Q

Defense to Negligence - Assumption of Risk

A

Definition: The defense that the plaintiff knowingly and voluntarily assumed the inherent risks of a dangerous activity or situation.

Examples: A spectator at a baseball game assumes the risk of being hit by a foul ball; a participant in a bungee jumping activity assumes the risk of potential injury.

91
Q

Defense to Negligence - Negligence on the insured party

A

Contributory Negligence: In jurisdictions that follow this rule, if the plaintiff is found even slightly negligent, they may be barred from recovering any damages.

Comparative Negligence: In jurisdictions that follow this rule, the plaintiff’s compensation is reduced by the percentage of their own fault. There are two subtypes:

          - Pure Comparative Negligence: The plaintiff can 
            recover damages even if they are 99% at fault, but 
            their recovery is reduced by their degree of fault.

         - Modified Comparative Negligence: The plaintiff 
           can only recover damages if their fault is less than 
           a specified threshold (usually 50% or 51%).
92
Q

Defense to Negligence - Last clear chance

A

The “last clear chance” doctrine emphasizes that the defendant’s failure to avoid the harm, despite having a clear opportunity to do so, can override the plaintiff’s initial negligence.

93
Q

Important factors for liability insurance

A
  1. Earning Power
  2. Netwroth

Judgments from liability can result in the legal seizure of both your assets and future earnings, which liability insurance helps protect against by covering legal costs and damages.

94
Q

PLP/PLUP

A

Personal Liability Policy/Personal Liability Umbrella Policy

PLP is a lower level of protection typically included within HO, renters, or auto policies.

PLUP provides additional liability protection beyond the limits of HO, renters, or auto policies.

95
Q

PLUP Facts

A
  • Won’t be issued without meeting certain levels of coverage from both auto/home insurance
  • Usually provides $1 million or more in coverage.
  • It should be noted that umbrella policies do not cover all liabilities. Criminal acts and intentional acts are not covered. Slander and libel are the exceptions.

A client without an Umbrella policy, or with one too low to meet the underlying policy limits, is considered to have a deficiency in their plan that needs to be addressed.

96
Q

CPP - Commercial Package Policy

A

Typically includes property insurance, liability insurance, and other types of coverage tailored to the needs of the business.

Common components can include general liability, commercial property, business income, and equipment breakdown.

97
Q

BAP - Business Auto Policy

A

Includes liability coverage (for bodily injury and property damage), physical damage coverage (collision and comprehensive), and other options such as medical payments and uninsured/underinsured motorist coverage.

Can cover vehicles owned, leased, hired, or borrowed by the business.

98
Q

CLUP - Commercial Liability Umbrella Policy

A

Offers higher limits of liability coverage, typically starting at $1 million or more.

Can provide coverage for some claims that may not be covered by the underlying policies (subject to policy terms and conditions).

99
Q

FICA/SECA Tax

A

6.2% on wages up to the wage base of $168,600
1.45% on all wages

EE pays 7.65%, ER pays 7.65%

100
Q

Important Social Security Beneficiaries

A
  • A disabled insured worker under age 65.
  • A retired insured worker age 62 or older.
  • A spouse of a retired or disabled worker who is at least 62 OR is caring for a child under age 16 or disabled child.
  • A divorced spouse of a retired or disabled worker, if the ex-spouse is age 62 and was married to the worker for at least 10 years and did not remarry by age 60.
101
Q

Reduction in SS Benefits

A
  • Reduced by 5/9 of 1% for each month, for the first three years that a worker retires early.
  • Reduced by 5/12 of 1% for each month beyond three years that a worker retires early.

William’s full retirement age is 65, but he decides to take retirement benefits at age 62. How much will his benefit be reduced?

65 - 62 = 3 years or 36 months too early
36 x 5/9 = 20% reduction in benefits

102
Q

SS Income Hurdles

A

MFJ 1st Hurdle - $32,000
MFJ 2nd Hurdle - $44,000

Single 1st Hurdle - $25,000
Single 2nd Hurdle - $34,000

103
Q

SS Combined Income

A

AGI
Nontaxable Interest
Foreign Earned Income
1/2 of Retirement Benefit

104
Q

SS Disability Definition

A

There is severe physical or mental impairment for 5 months that is expected to prevent the worker from performing substantial work for at least one year or result in death. Benefits would begin in the 6th month following the 5 month waiting period.

How much of a benefit is paid depends on credits earned and the age of the worker when disabled.

105
Q

SS Disability Eligibility

A
  • If ages 21-24; a worker has earned 6 quarters in the last 12 quarters.
  • Between ages 24-30: a worker has earned 1⁄2 of quarters available since age 21 to disability.
  • Age 31 and greater; the worker is fully insured (40 quarters) and earned 20 quarters in the last 40 quarters.
106
Q

SS Survivorship Eligibility

A

Fully Insured (40 Qtrs/Credits)
or
Currently Insured - at least 6 credits in the last 13 quarters

107
Q

SS Survivor Benefit Payout

A
  • A child under age 18, under 19 if in high school (aka secondary school), or disabled prior to age 22, is entitled to survivorship benefits whether a worker is currently or fully insured.
  • A spouse with a child under age 16 is entitled to survivorship benefits for the care of the child, whether a worker is currently or fully insured.
  • There is no coverage for spouse of a currently insured worker.
  • There is spousal coverage, if worker was fully insured. Survivor benefits would start when the surviving spouse has reached age 60.
  • There is a one time lump sum payment of $255 to the beneficiary of a deceased covered worker.
108
Q

Medicare

A

Part A - Admission
Part B - Basic Medical Needs
Part C -
Part D - Drugs

109
Q
A

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