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Risk Management & Insurance Planning Flashcards

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1
Q

What are the three basic categories of losses from risk exposures?

A
  1. Property Losses–Direct and indirect
  2. Liability Exposures
  3. Personal Losses to Income and Wealth
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2
Q

What are the five different types of personal risk exposures?

A
  1. Death
  2. Disability
  3. Poor Health
  4. Unemployment
  5. Superannuation
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3
Q

What are the six steps involved in the risk management process?

A
  1. Establish Objectives
  2. Identify Loss Exposure
  3. Measure Loss Exposure
  4. develop Plan
  5. Implement Plan
  6. Regularly Review Plan
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4
Q

What is Human Life Value?

A

Human Life Value is based on the person’s earning ability. Human Life Value is the present value of income lost as a result of the person’s death.

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5
Q

What is a Needs Analysis Approach?

A

Rather than just replacing lost income, needs analysis looks at how the income was being used.

  1. Identify the needs that would arise or continue following death of the individual
  2. Total the resources that would be available
  3. Measure the difference between the needs and the resources available. The resulting shortfall is the insurance need
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6
Q

What are some typical liabilities to be paid at death?

A

Outstanding balances on credit cards, tax obligations, personal loans, and notes, auto loans

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7
Q

What are final expenses?

A

Final expenses are those incurred as a result o death. Probate, postmortem expenses and death-related federal and state taxes are all considered final expenses.

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8
Q

What is probate?

A

Probate is the process of filing, validating, and executing a will by a court. Such costs commonly range from 2 to 5 percent of the gross estate and can be higher.

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9
Q

What are cash objectives?

A

cash objectives require a single-sum cash amount to fulfill; they arise from the need or desire to pay outstanding liabilities such as auto and personal loans, credit card balances, payment of an outstanding mortgage loan balance and incurred income tax liabilities.

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10
Q

What are the five categories of cash needs at death?

A

The five categories of cash needs at death include final expenses, outstanding debt, housing, education, and emergency funds.

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11
Q

Describe the characteristics of the Capital Liquidation Approach

A

The capital liquidation approach assumes that both principal and interest are liquidated over the relevant time period to provide the desired income. This approach requires a smaller capital sum to provide a given income level.

  1. The future desired lifetime income could be funded through the purchase of a life annuity
  2. The capital liquidation method could provide for the complete liquidation of principal and interest between the present and the maximum age to which the income recipient is likely to live
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12
Q

Describe the characteristics of the Capital Retention Approach

A

The capital retention approach assumes that the desired income is provided from investment earnings on the principal, and no part of the desired income is from the capital. This approach is both more flexible and more conservative.

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13
Q

Why is the capital retention approach more flexible and conservative than the capital liquidation approach?

A

Having the principal available rather than being distributed means keeping more resources on hand for increasing inflation, unexpected medical costs or declining rates of return on investments.

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14
Q

What are the three categories of health insurance?

A

The three categories of health insurance include medical expense insurance, long term care insurance, and disability income insurance.

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15
Q

Identify individuals who are not covered by group or government health plans

A

> self-employed persons
students no longer covered by their parents’ insurance
persons under retirement age and not in the work force, such as early retirees and persons between jobs
those whose employers do not offer medical expense coverage
part-time, temporary, or contract workers not eligible for coverage through their employers
unemployed persons not eligible for government-sponsored health programs for the poor, and
children, spouses, and other dependents ineligible for coverage or too costly to cover under an employer-sponsored plan.

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16
Q

What are the essential elements of Long Term Care?

A

the need for medical, personal or social services
the need results from an accident, illness or frailty
services are provided by other persons, either paid or unpaid, at home or in a nursing home, and
services are to assist the individual in performing the essential activities of daily living (ADLs).

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17
Q

What are the three components of establishing the premium for a disability policy?

A

The elimination period, the benefit period, and the monthly indemnity amount.

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18
Q

What is the elimination Period?

A

The elimination period, or “waiting period” refers to the number of days at the start of a disability in which no benefits are paid. It is meant to exclude the inconsequential illnesses or injuries that disable the insured for only a few days and that is more economically met from personal funds. Periods typically range from 30 days to one year. Premiums are lower for policies with longer elimination periods.

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19
Q

What is the benefit period?

A

The benefit period is the longest period of time for which benefits are paid under the disability policy. The longer the benefit period, the higher the premium.

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20
Q

What are the six forms of the Homeowners Insurance Program? What can they not be used for?

A

HO-1: Basic 4
HO-2: Broad
HO-3: Special
HO-4: Content Broad (coverage for renters)
HO-6: Unit Owners (condominium-type coverage)
HO-8: Modified

The HO forms cannot be used to cover mobile homes or house trailers.

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21
Q

Describe Homeowners Coverage A

A

Coverage A covers the actual dwelling of the insured

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22
Q

Describe Homeowners Coverage B

A

Coverage B applies to other structures, such as an unattached garage or shed. It does not include structures attached to thee telling such as a garage, which is covered under Coverage A. Coverage B also includes materials and supplies located on or next to the residence premises.

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23
Q

Describe Homeowners Coverage C

A

Coverage C covers unscheduled personal property such as furniture, clothes, appliances, and other personal property.

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24
Q

Describe Homeowners Coverage D

A

Coverage D covers “loss of use,” which are extra expenses incurred if a covered loss prevents the insured from living in the home.

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25
Q

Describe Homeowners Coverage E

A

Coverage E covers comprehensive personal liability insurance under Section 2 of all HO forms

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26
Q

Describe Homeowners coverage F

A

Coverage F covers payment of medical expenses for others injured by the insured or on the insured’s property, under Section 2 of all HO forms

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27
Q

What are the three categories of liability coverage?

A

The three categories of liability coverage include business general liability, commercial general liability, and automotive liability

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28
Q

What is a contract?

A

A contract is a legally binding agreement creating rights and duties for those who are parties to it.

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29
Q

What is a voidable contract?

A

A voidable contract allows one party the option of breaking the agreement because of an act or omission of an act by the other party.

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30
Q

What is a void contract?

A

A void contract is a contract that a court will not enforce because from its very beginning it lacked one or more features of a valid contract. Likewise, if an incompetent person were to enter into an insurance contract, this contract would be considered, “void ab initio,” or void from the very beginning.

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31
Q

What is a binder?

A

A binder is a temporary contract in property insurance and is often used before the issuance of the formal insurance policy. The binder must meet all the requirements for a legal contract.

32
Q

What is the purpose of the binder?

A

The purpose of the binder is to provide coverage during the time it takes to process an application.

33
Q

What is a conditional Receipt?

A

A conditional receipt can provide temporary coverage, contingent on an applicant’s ability to present evidence of insurability.

34
Q

What are Unilateral Contracts?

A

In unilateral Contracts, only one party makes an enforceable promise. Insurance contracts are unilateral in that only the insurer makes a binding process. Contracts in which both parties make enforceable promises are called bilateral contracts.

35
Q

What is Subrogation?

A

Subrogation is the legal substitution of one person in another’s place. Subrogation is supported by the theory that if a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party.

36
Q

What does subrogation help prevent?

A

Subrogation helps prevent insureds from profiting on their insurance by collecting twice for the same loss.

37
Q

What are the four elements of a valid contract?

A

The four elements of a valid contract include 1) offer and acceptance, 2) consideration, 3) capacity, 4) legal purpose.

38
Q

How do we define offer and acceptance?

A

Offers must be reasonably definite and communicated clearly. Acceptance must be unconditional, unequivocal and communicated clearly.

39
Q

What is consideration?

A

Consideration is the value exchanged between the parties to the contract.

In an insurance contract, the consideration the insurer gives is a contingent promise to pay the insured. The insured gives money and a promise to follow the provisions of the contract.

40
Q

Not every person has the capacity to enter into a contract. A person cannot legally enter into a contract if the following apply:

A

The person is a minor, the person is legally incompetent, or the person is intoxicated.

41
Q

What does Indemnity mean?

A

Indemnity means the insured should be restored to the same financial position occupied before the insured’s loss.

42
Q

What are the three exceptions to the rule that insurance contracts are contracts of indemnity?

A

The three exceptions to the rule that insurance contracts are contracts of indemnity are life insurance, replacement-cost insurance, and valued insurance.

43
Q

What is a valued insurance policy?

A

A valued insurance policy pays the limit of liability whenever an insured total loss occurs. Damages may be more or less than the stated amount but the stated amount will always be paid.

44
Q

What is actual cash value and how is it derived?

A

Actual cash value means replacement cost at the time of loss, less depreciation.

It is derived by replacement cost - depreciation = actual cash value.

45
Q

What are the grounds for contracts to be discharged?

A

Contracts can be discharged on the grounds of the following conditions: Performance, condition precedent, condition subsequent, rescission, or reformation.

46
Q

What are the reasons business firms purchase life insurance?

A

Business firms purchase life insurance to provide benefits for employees, to protect the firm against the financial problems caused by the loss of a key person. , and to aid in transferring business ownership.

47
Q

What are the three forms of life insurance business firms typically use?

A

The forms of life insurance used by business firms are usually group life insurance, key employee life insurance, and split-dollar life insurance.

48
Q

How does Code Section 79 affect the taxability of group-term insurance contracts for employees?

A

If the employer’s group plan qualified under Code Section 79, the cost of the first $50,000 of insurance is tax-free to employees.

49
Q

What are the six significant elements of Key Employee life Insurance?

A

Identify: key persons must be identified
Measure: the financial loss of the person’s death is measured
Estimate: The effect on profits while a replacement is hired
Permission: Key person must give permission to purchase
Purchase: Business purchases life insurance for the value measured
Premiums: Premiums are paid by the business.

50
Q

How do Split-Dollar Life Insurance plans work?

A

Split-dollar life insurance allows a business to reward and retain valuable personnel. The employer receives an amount equal to the savings value at the employee’s death. The employee’s beneficiary receives an amount equal to the face value less the savings value.

51
Q

What is a split-dollar rollout?

A

Rollout essentially means terminating the split-dollar arrangement by having the covered employee pay off the corporation, that is, terminate the corporation’s policy rights. This can be achieved through a simple buyout, a deductible compensation plan, or a gradual buyout over time.

52
Q

How are the benefits of split-dollar plans taxed?

A

benefits are tax free to both the employer and employee

53
Q

What are Buy-and-Sell Agreements?

A

Buy-and-Sell agreements are a legal agreement for the purchase between the buyer and seller that must be arranged before a purchase plan becomes effective. Thus, people need the services of both a lawyer and a life insurance agent to arrange and fund the business continuation plan, which is a buy-and-sell agreement properly funded by life insurance.

54
Q

Describe the two ways buy-and-sell plans can be arranged

A

Buy-and-sell plans can be arranged as either cross-purchase plans or entity plans. Cross-purchase plans are where each partner or shareholder can purchase life insurance on every other partner or shareholder [N X (N-1)] and entity plans are where the partnership or entity can purchase the life insurance on each partner.

Entity plans involve a much smaller number of policies.

55
Q

What are the two elements of a good insurance policy?

A

The two elements of a good insurance policy are that the policy satisfies the consumer’s needs and the policy amount is not more than required.

56
Q

What is the definition (two categories) of personal property?

A

Personal property can be “real” property interests, such as land, buildings, and other structures, or “personal” property interests such as homes, boats, cars, jewelry, furnishings, clothing, etc.

57
Q

What is the purpose of Homeowners insurance policies?

A

Homeowners Insurance Policies provide protection for homes and personal property, and liability coverage for bodily injury or property damage caused by an insured.

Homeowners’ insurance policies combine property and casualty coverage such as fire, theft, and personal liability insurance into one insurance contract.

A standard homeowners policy is an HO3.

58
Q

What are the two approaches to insuring personal property in homeowners’ policies?

A

Named-peril coverage lists the specific perils covered in the homeowner’s policy. In open-peril coverage, the insurer pays for damages by any peril except for those excluded in the policy.

59
Q

What are the two sections of the insurer’s limit of liability?

A

The insurer’s limit of liability is divided into two sections:

Section 1: provides property insurance protection and is divided into four coverages A-D, each with a separate limit of liability

Section 2: provides personal liability coverage and is divided into two coverages E and F.

60
Q

What are the five parts of Section 1 of HO coverage?

A 
Coverage A: dwelling
Coverage B: other structures
Coverage C: personal property
Coverage D: loss of use
additional coverages
61
Q

What are the three parts of Section 2 of HO coverage?

A

Coverage E: personal liability
Coverage F: medical payments to others
additional coverages

62
Q

What is the special limits of liability section?

A

The special limits of liability section of an insurance policy establishes the maximum dollar amounts that an insured can recover when the specifically identified property is damaged or stolen.

63
Q

What does Legal Liability insurance do?

A

Legal liability insurance provides protection against the financial impact of lawsuits.

Direct costs vs. indirect costs

64
Q

What Are Punitive Damages?

A

Punitive Damages are awards made to plaintiffs not as compensation for injuries suffered, but as a means of punishing defendants for outrageously offensive acts.

65
Q

What are negligence lawsuits and what must be established first?

A

Negligence law compensates those who are injured because of a person’s careless–rather than intentional–conduct that creates an unreasonable risk of harm.

Legal liability is imposed by the courts when it has been established that all of the following occurred:

1) There was negligence
2) There was actual damage or loss
3) negligence was the proximate cause of the damage.

66
Q

What are a defendant’s three main lines against a defense against a charge of negligence?

A

A defendant’s three main lines of defense against a charge of negligence are:

1) Contributory Negligence
2) Assumption of the Risk
3) Comparative negligence

67
Q

What is Contributory Negligence?

A

Contributory Negligence is when a defendant shows the plaintiff is at least partially responsible for the negligence claim

68
Q

What are hazards?

A

Hazards are conditions that increase either the frequency or severity of loss

69
Q

Can an indirect loss occur without direct loss?

A

No.

70
Q

What are the three fundamental principles of insuring risk?

A

The three fundamental principles to insuring risk include the law of large numbers, probability of loss, transfer of risk from an individual to a group

71
Q

what do employers receive in death benefits in a split-dollar plan?

A

In a split-dollar plan, employers receive the sum of their contributions back.

72
Q

In a stock redemption plan, who purchases or redeems the stock of a shareholder?

A

The corporation purchases the plan.

73
Q

Calculation***

How to calculate how much insurance business parters buy on one another

A

1) Divide business worth by shareholder percentages
2) Divide the value of each partner by the number of partners, minus 1 (the buyer)

Partner A: 30%, B 45%, C: 25% ($1,000,000)

1) $300k, $450k, $250k
2) Divide by 2 (3 partners - 1)
3) $150k, $275k, $125k

74
Q

When do people tend to purchase too little coverage?

A

People tend to purchase too little coverage for High Severity, Low frequency events

75
Q

Many years ago, jon purchased $300,000 of coverage on his dwelling under a HO3 policy. He suffered $200,000 in damages. The replacement cost is $425,000. If the deductible is $250 what amount will the insurance company not reimburse?

A

[$300,000 policy / (80% X $425,000 replacement cost)] X $200,000 loss - $250 deductible = $176,221 insurance reimbursement

$200,000 loss - $177,221 insurance reimbursement = $23,779 not reimbursed

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