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159 Cards in this Set
- Front
- Back
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Hazard
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condition that increases the probability of loss
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Peril
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the cause or reason for loss
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Risk
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the potential for loss
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Crime
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wrongs against public
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Tort
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private misdeeds violating the rights of another person
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Examples of intentional Torts
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assault, libel, trepass, invasion of privacy
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Examples of unintentional Torts
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negligence and carelessness
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Negotiable instrument
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contract used as a substitute for money
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Examples of Perils
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fire
windstorm theft |
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3 types of hazards
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1) physical hazards
2) Moral hazards 3) Morale hazards |
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Physical hazard
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physical properties (like volatility) that increase hazard
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Moral Hazard (not Morale)
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qualities in individuals (like dishonesty) that increase the risk of loss
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Morale Hazard (not Moral)
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knowing the risk and taking it anyway
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The law of large numbers
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when something occurs a large number of times it is easier to predict aspects of it
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Adverse selection
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people who are aware opf the vulnerability to a certain peril are more likely to acquire insurance against it
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CLASSIFICATION OF RISK
Financial Risk |
financial loss
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CLASSIFICATION OF RISK
Static Risk |
more easily covered by insurance, common economic risks
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CLASSIFICATION OF RISK
Dynamic Risk |
associated with changes in the economy (price level or consumer tastes)
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CLASSIFICATION OF RISK
Fundamental Risk |
not particular to any individual - responsibility of society
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CLASSIFICATION OF RISK
Particular Risk |
felt by individuals, more commonly coevered by insurance
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CLASSIFICATION OF RISK
Pure Risk |
chance of loss or no loss (Pure risk is insurable)
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CLASSIFICATION OF RISK
Speculative Risk |
there can be both a risk of loss or a chance of gain (gambling) - THIS IS NOT INSURABLE
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MANAGING RISK
Risk can be (5): |
1) avoided
2) retained 3) transferred 4) shared 5) reduced |
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MANAGING RISK
Risk Retained |
Voluntary or involuntary submission to risk (common when potential risk is small)
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MANAGING RISK
Risk Transferred |
shift of risk from one individual to another who is more equipped to handle it (insurance company)
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MANAGING RISK
Risk Shared |
risk may be shared (through corporation, LP, LLC)
Health insurance with deductible and coinsurance |
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MANAGING RISK
Risk Reduced |
taking active steps to minimize the damage caused by risk with high frequency but low loss
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MANAGING RISK
Risk Avoidance |
is the total refusal to perform a risky bahavior
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Mortality
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the rate at which a population dies
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Morbidity
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the likelihood of disability
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Elements of a Contract (8)
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1. Insurable Interest
2. Offer and acceptance 3. Consideration (money) 4. Legal object 5. Competent Parties 6. Legal Form 7. Misrepresentation? 8. Warranties |
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Charateristics of Insurance Contracts (7)
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1. Contracts of indemnity (cant make a profit)
2. Personal Contract (not transferable) 3. Contract of adhesion (take it or leave it) 4. Contract of utmost good faith 5. Unilateral contract (only one promise) 6. Conditional (premium must be paid) 7. Aleatory contract (outcome affected by chance, $'s collected cannot equal) |
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Defenses to Negligence (3)
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1. Contributory negligence (cannot be found liable if injured person was negligent in any way)
2. Comparative negligence (client gets hit by a car when drunk - but other driver was speeding) 3. Assumption of risk - (injured party fully understood the risk and took it anyway) GROSS NEGLIGENCE DOES NOT GET YOU OFF THE HOOK |
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Insurance sold by agents can be binding as a result of? (3)
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1. Expressed authority (comes directly from the company)
2. Implied authority (if you walk into a State Farm office) 3. Apparent authority (fraud by an agent) |
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Superannuation
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the risk of outliving income and accumulated assets
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General Provisions of Life Insurance contracts (3)
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1) final draft must be approved by State Commish of Insurance
2) policy along with attached application represent the entire contract 3) Age missrepresentation? |
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What if age is missrepresented on life insurance contract?
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The insurance company has the right to adjust the amount of insurance that the premium paid would have purchased at the insured age
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LIFE INSURANCE-OTHER PROVISIONS
Grace Period Provision |
31 days - designed to prevent unitentional lapse in policy
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LIFE INSURANCE-OTHER PROVISIONS
Reinstatement provision |
lapse period cannot exceed 3-5 years as defined in the contract / all premium that should have been paid are due
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LIFE INSURANCE-OTHER PROVISIONS
Suicide Provision |
within 2 years, return of premium without interest
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LIFE INSURANCE-OTHER PROVISIONS
War Provision |
return of premium and interest
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LIFE INSURANCE-OTHER PROVISIONS
Automatic Premium Loan |
may obtain loan equal to the cash surrender value
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Settlement Options Life Insurance proceeds (5)
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1. lump sum
2. interest 3. fixed-period installment 4. fixed-amount installment 5. life income (annuity option) |
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How is beneficiary of life insurance proceeds taxed when paid in installments
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interest portion is taxable as interest income
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What is the situation if an irrevocable beneficiary is named?
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beneficiary retains a legal interest in the contract and the owner will be unable to change the owner or beneficiary without the sxpress consent of the current beneficiary
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Life Insurance Premium Computation (3)
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1. Mortality
2. Interest 3. Loading |
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Are life insurance contracts contracts of indeminty?
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NO - they make no attempt to restore the individual to his previous position
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UL - UNIVERSAL LIFE
Death Benefit? |
may increase or deacrease death benefit as long as they maintain insurability
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UL - UNIVERSAL LIFE
Why is it reffered to as unbundled insurance? |
because operating expenses, mortality charges, and cash buildup can all be viewed in the annual statement
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UL - UNIVERSAL LIFE
Similar to what other kind of Life policy |
similar to Whole Life policy - except that the premium payment is flexible, death benefit adjustable, and investment and mortality risk are transferred to policy holder
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WL - WHOLE LIFE
Description |
(a) insurance costs are spread out over life of insured
(b) policies offer a level premium (c) provide gauranteed and fixed death benefit (d) balance between cash accumulation and insurance |
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WL - WHOLE LIFE
Four basic types of Whole Life Insurance |
1) Ordinary WL
2) Limited-Pay WL 3) Single-Premium WL 4) Graded-Premium |
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WL - WHOLE LIFE
Ordinary WL |
lowest premium rate / lowest cash value
premiums payable throughout life |
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WL - WHOLE LIFE
Limited-Pay WL |
protection for life / paid up at retirement or other staage
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WL - WHOLE LIFE
Single-Premium |
good tax-deffered investment / single lump sum payment
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WL - WHOLE LIFE
Graded Premium WL |
low initial premium / increases for several years / ideal for starving students
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VARIABLE WHOLE LIFE INS POLICY
Description |
(a) fixed premium just like WL
(b) gauranteed DB (c) has flexibility of Variable policy (d) no guaranteed cash values |
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VARIABLE LIFE INSURANCE POLICY
Descripton: |
(a) owner is allowed to choose the investments
(b) no guaranteed cash value or crediting rate (c) investments held in seperate accounts that RESEMBLE mutual funds |
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VARIBALE LIFE INSURANCE POLICY
Risk in down market? |
Policy holder will be charged a substantial amount just to keep that policy active in a down market.
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Who is a FIRST TO DIE policy usually structured for?
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Owners of a business, for the continuation of the business
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How does a business structure a first to die policy?
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(a) all the owners of the business are insured under the same policy
(b) when the first owner dies the insurance company will make a payment that is used to purchase the deceased's share in the business |
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Who is a SECOND TO DIE policy usually structured for?
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Usually purchased by married persons to help make estate tax payments
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How do married individuals structure a SECOND TO DIE policy?
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When first spouse dies the estate transfers to the living spouse, and when the second spouse dies the estate becomes taxable. This tax is paid by the insurance policy - and helps eliminate liquidity problems
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Are ENDOWMENT policies used very much?
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No - a tax law passed in 1984 eliminated the tax-advantaged buildup of an endowment's cash value
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How does an ENDOWMENT policy work?
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the death benefit will be equal to the cash value at maturity
At age 100 cash value = death benefit |
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Dividends exceed premium |
Ordinary income
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Withdrawals within first 15 years of policy |
LIFO
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Withdrawals after 15 years of policy |
FIFO
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Modified Endowment Contract withdrawals and loans |
LIFO regardless of age of contract
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Lump-Sum payments (beyond cost basis) |
Ordinary Income
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Interest Payments |
Oridinary Income
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Installment Payments (portion that is not return of principle) |
Ordinary Income
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Transfer of life insurance policy (for valuable consideration to the extent proceeds exceed basis) |
Ordinary Income
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Premiums (individual policies) |
Generally not deductible
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Premiums (corporation pays premium and is not beneficiary) |
Deductible by employer and taxable as compensation to employee
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Divorce and transfer of policy as part of settlement |
No tax consequences on transfer and dealth benefits remain tax expempt
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Premiums as part of divorce settlement |
Premiums are deductable as alimony to payor and taxable as income to payee
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TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE
Gift or portion or all of policy |
Subject to gift tax. Annual exclusion of $12,000 (2006) may apply
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INCOME TAXATION OF LIFE INSURANCE ON DEATH BENEFITS
Proceeds payable as a result of insured death |
Tax exempt to beneficiary
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INCOME TAXATION OF LIFE INSURANCE ON DEATH BENEFITS
Interest on proceeds payable to the beneficiary |
Ordinary income
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INCOME TAXATION OF LIFE INSURANCE ON DEATH BENEFITS
Installment payments - principal plus earnings payable to beneficiary |
Pricipal and earnings - tax free
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Modofied Endowment Contracts (MECs)
Policies are considered MECs if they do not: |
meet the 7-pay test of the IRS
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Cross-Purchase Life Insurance
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Partner or shareholder purchases a sufficient amount of life insurance on the lives of all other partners or shareholders to assure sufficient liquidity to buy out the deceased or disabled parter or shareholder
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Entity Insurance
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The alternative to the cross- purchase arrangement. The entity buys the policies on each partner. Advantage = fewer policies
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Insurance Contract Components (5)
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1) offer and acecptance
2) consideration 3) legal purpose 4) competant parties 5) legal form |
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Subrogation
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the insurer pays for the damage to the car and they has the right to go after the negligent third party who hit the insureds car
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What are the two methods used in determining the amount of life insurance that an individual should purchase?
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1) Human Life value approach
2) The Needs Approach |
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Human Life value approach of determining appropraite amount of Life Insurance
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based on the present value of the income earnings ability of the individual lost to the survivor in the evennt of death
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Needs Approach of determining appropriate amount of Life Insurance
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determine the financial needs of the dependants over the dependancy period should the provider die
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Calculating the NEEDS APPROACH - 3 different ways
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1) Annuity approach
2) Capital Preservation model 3) purchasing power model |
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NEEDS APPROACH
Annuity approach |
expected to pay JUST enough to meet the needs of dependants through the life expectanty period of survivors (problem: superannuation)
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NEEDS APPROACH
Capital Preservation Model |
provides for lifetime annuity plus keeps face value of insurance intact (problem: capital balance will loose purchaseing power)
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NEEDS APPROACH
Purchasing Power Preservation Model |
Provides annuity income and cap preservation on inflated basis so that there is no loss in purchasing power at the end of surviving spouses life
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Factors affecting Financial Strength of Insurer (5)
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1) adequate surplus reserves
2) investment portfolio quality & Diversification 3) cash flows and liquidity 4) recent & historical earnings 5) management (quality & continuity) |
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Property Insurance
Coinsurance: |
To avoid a penalty, must insurae 80% of the value of the property at the time of a loss
Formula: (Did / Should) X Loss = Recovery |
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TYPES OF DEDUCTIBLES
Straight or initial |
Flat deductible amount per loss
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TYPES OF DEDUCTIBLES
Franchise |
Deductible amount for small losses but no deductible for large losses
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TYPES OF DEDUCTIBLES
Aggregate |
Combined deductibles on losses for a year
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TYPES OF DEDUCTIBLES
Corridor |
Insured pays amount of loss between basic policy and major loss policy
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TYPES OF DEDUCTIBLES
Waiting (elimination) period |
Period of time before the policy covers losses
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TYPES OF DEDUCTIBLES
List 5: |
1) Straight of initial
2) Franchise 3) Aggregate 4) Corridor 5) Waiting (elimination) period |
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HOMEOWNERS INSURANCE FORMS
HO-02 |
Homeowners; known as "broad form"
Covers 9 Basic Perils / 7 additional perils Personal Property coverage up to 50% of dwelling coverage |
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HOMEOWNERS INSURANCE FORMS
HO-03 |
Homeowners; Known as "special form"
Open perils coverage on the dwelling, broad form coverage on personal property |
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HOMEOWNERS INSURANCE FORMS
HO-04 |
Renters Insurance;
no dwelling coverage broad form coverage on personal property |
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HOMEOWNERS INSURANCE FORMS
HO-05 |
Homeowners; known as "comprehensive form"
coverage for all property is on an open-perils ("all-risk") basis, subject to exclusions |
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HOMEOWNERS INSURANCE FORMS
HO-06 |
Condominium insurance;
no dwelling insurance broad form of coverage of personal property |
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HOMEOWNERS INSURANCE FORMS
HO-08 |
Homeowners with replacements costs in excess of market values
Similar to HO-03 Designed for older home whose replacement cost exceeds market value |
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HOMEOWNERS INSURANCE
Coverage A Dwelling |
HO 02, 03, 05 and 08 policies cover:
1) dwelling 2) structures connected to dwelling 3) materials and supplies for construction or repair of dwelling and other structures on property |
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HOMEOWNERS INSURANCE
Coverage B Other Structures |
HO 02, 03, 05 and 08 policies cover other structures seperates from dwelling by a clear space:
1) detached garages 2) fences 3) patios 4) swimming pools |
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HOMEOWNERS INSURANCE
Coverage C Personal Property |
HO 02, 03, 05, and 08 policies cover personal property up to 50% of the amount of dwelling coverage
Limits on certain types of property: Cash - $200 Theft on jewlery/furs - $1000 Business property on premises - $2,500 ($250 off premises) |
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HOMEOWNERS INSURANCE
Coverage D Loss of Use |
ALL POLICIES (HOs) PROTECT AGAINST LOSS INVOLVING:
-Additional living expenses while home is being repaired -Any part of the premises rented to others |
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HOMEOWNERS INSURANCE
Additional Coverage |
Debris removal, damage to trees, credit card loss, etc.
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Section I Coverage
Exclusions (8 general) |
Exclusions - losses cause by:
1) enforcement of ordinance or law 2) earth movement 3) power failure 4) neglect 5) war 6) nuclear accident 7) water damage 8) intentional losses |
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SECTION II COVERAGE
Coverage E |
Coverage E - Comprehensive personal liability
-Bodily injury and property damage, only if due to negligence -up to $100,000 plus cost of defense -covers on premise plus off premises if cause by an insured or pet |
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SECTION II COVERAGE
Coverage F |
Medical Payments to others
-up to $1,000 per person per occurence -negligence irrelevant -on premises or off if cause by insured or pret |
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SECTION II COVERAGE
Exclusions |
-auto/boat/plane
-intentional -business -war/nuclear -criminal activities -covered by workers comp |
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Disability Contracts
General Information (4) |
1) no standard contracts
2) insurers limit amount of coverage to replace income 3) benefit period for disability varies 4) definition of disability affects the broadness of coverage |
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DEFINITION OF DISABILITY
Own occupation |
Inability to engage in your own occupation (most expensive)
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DEFINITION OF DISABILITY
Modified own occupation |
The inability to engage in any resonable occupation for which you might be suited by education, experience training, or for which you could be easily qualified (hybrid)
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DEFINITION OF DISABILITY
Any occupation |
a mental or physical impairment that prevents the worker from engaging in any substantial gainful employment
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DEFINITION OF DISABILITY
Any occupation (for Social Security benefits to be applied:) |
disability must have lasted 5 months and be expected to last a total of at least 12 months or result in death
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Disability Policy exclusion (most common)
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disability resulting from war
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TAXATION OF DISABILITY BENEFITS
If disability recieved for an employer-provided disability policy: |
Includable as taxable income as "in lieu of wages"
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TAXATION OF DISABILITY BENEFITS
If disability expenses are recieved from a personally paid policy |
Benefits are excludable from taxable income
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TAXATION OF DISABILITY BENEFITS
Partially paid employer/employee plan? |
Includable in income to the extent of the employer pro rata share of premiums
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Do retirees need disability coverage?
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No because they have no earned income to replace (they do need health insurance and possible LTC insurance)
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HEALTH INSURANCE
Traditional Indemnity Plans provide a comprehensive medical expense plan that includes: |
-medical
-hospital -surgical -diagnostic service -limit to amt of reimbursement -patients can choose their own doctor |
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HEALTH INSURANCE
Managed Care Plans (similar to Traditional Indemnity Plans) but: |
-they specify which doctors may be used
-encourage preventative care |
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HEALTH INSURANCE
Preferred Providor Organization (PPO) |
benefit plan that an insurance company has established with a network of health professionals to provide care at a reduced cost. Insured party has incentives to use network
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HEALTH INSURANCE
Hospital-Surgical Insurance Policies |
-ONLY provide benefits when insured needs surgery or to be hospitalized
-DO NOT cover trips to see the doctor -Policies not adequate to treat long-term illness -Policy with lowest premiums because offer lowest benefits |
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HEALTH INSURANCE
Major medical plan |
-cover just about all kinds of health condition
-require insured to share part of the loss through a co-payment (coinsurance) -one major variable in major medical plans is that some cover all medication and others do not |
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HEALTH INSURANCE
Common Exclusions in Major Medical Policies |
-Costs covered by workers comp
-TVs, phones, etc -Hearing aids, eyeglasses -self-inflicted injuries -elective cosmetic surgery -dental care except due to accident -maternity costs -pre-existing conditions (maternity costs and pre-existing conditions may be covered if the insured meets the Health Insurance Portability and Accountability Act requirements) |
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HEALTH INSURANCE
Health Insurance Portability and Accountability Act of 1996 |
-liberalized definition of "pre-existing condition"
-pre-existing condition no longer includes pregnancy or newborn or adopted children provided they enrolled within 30 days) -limited the time period to six months that restrictions of benefits may be applied to "pre-exisinting conditions" |
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HEALTH INSURANCE
Medicare supplement insurance |
-provides benefits for some of the specific expenses not covered by Medicare (deductibles, coinsurance, copayments, other expenses beyond medicare coverage like prescription drugs and treatment outside USA)
-usually called MediGap insurance |
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HEALTH INSURANCE
Blue Cross |
mainly coverage for hospital expenses
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HEALTH INSURANCE
Blue Shield |
mainly used to cover physician expenses
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HEALTH INSURANCE
Health Maintenance Organization (HMO) |
-provides range of medical services on prepaid basis to subscribers of geographic region
-emphasize preventative care -subscribers pay annual premium - no deductible or co-payment |
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HEALTH INSURANCE
Point-of-Serice Plan |
-Hybrid of of the HMO and PPO
-resemble HMO for network services -resemble PPO for nonnetwork services |
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HEALTH INSURANCE
What size company does COBRA apply to? |
Employers who have a plan and 20 or more employees
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HEALTH INSURANCE
Cobra - Terms of coverage |
- 18 months for employees and dependants for reduction in hours or normal termination
-up to 29 months if meet Social Security definition of disability -36 months for divorce -36 months (from event) for Medicare |
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HEALTH INSURANCE
Health Savings Accounts (HSAs) |
-established like IRAs
-qulifying individuals with high deductible health insurnace plans can make tax-deductible cash contributions that may be used to reimburse the individual tax free for qaulifying medical expenses |
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HEALTH INSURANCE
Health Savings Accounts (HSAs) - WITHDRAWALS/PENTALTIES |
-for purposes other than qaulifying medical (ordinary income + 10% penalty)
-pentaly does not apply to w/d after age 65 |
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HEALTH INSURANCE
Health Savings Accounts (HSAs)- 2006 Deductibles Single Coverage |
-Deductible not less than $1050
-Annual out-of-pocket does not exceed $5,250 |
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HEALTH INSURANCE
Health Savings Accounts (HSAs)- 2006 Deductibles Family Coverage |
-Deductible not less than $2100
-Annual out-of-pocket does not exceed $10500 |
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MEDICAL INSURANCE - MEDICARE
Who does it apply for? |
Medicare applies to virtually all persons over 65
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MEDICAL INSURANCE - MEDICARE
Two seperate programs |
Part A
Hospital Insurance (Places) Part B Supplementary Medical Insurance (Things) |
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MEDICAL INSURANCE - MEDICARE
Part A - Covers what 4 catagories? |
1) Hospital care
2) Skilled nursing 3) Home health services 4) Care in a hospice for terminally ill |
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MEDICAL INSURANCE - MEDICARE
Part A - Skilled nursing Facility care? |
1) up to 100 days of skilled care during benefit period
2) all services firt 20 days covered 3) next 80 days paid by Medicare (except daily co insurance) 4) insured pays all costs after 100 days SKILLED NURSING CARE IS NOT NURSING HOME CARE |
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MEDICAL INSURANCE - MEDICARE
Part A - Hospice Care |
- terminally ill (lie expectancy 6 months or less)
- focus on care not cure -BENEFITS PROVIDED FOR UP TO TWO 90-DAY PERIOD, PLUS ONE 30-DAY PERIOD, PLUS ONE EXTENSION PERIOD OF UNLIMITED LENGTH (know this) |
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MEDICAL INSURANCE - MEDICARE
Part B - in general |
-supplemental, voluntary medical insurance that covers doctors services and other expenses not covered by part A
-$110 deductible must pay - then all services are paid at 80% with the insured responsible for other 20% Expenses include: -physician services -home health services -diagnostics tests -medical equipment -all outpatient services of a hospital - Pays 100% of X-Ray and pathology services |
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LONG TERM CARE INSURANCE
Two benefits approaches used: |
1) defined benefit approach (ranges from 1-6 years)
2) Pool of money concept (coverage equals a specific dollar amount) |
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LONG TERM CARE INSURANCE
NAIC Legislation Contracts must be: |
Guaranteed renewable
AND / OR Noncancellable |
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LONG TERM CARE INSURANCE
ADL's (Activities of Daily Living) |
Unable to perform 2 out of 6 ADLs
1) Eating 2) Bathing 3) Dressing 4) Transferring from bed to chair 5) using toliet 6) continence |
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LONG TERM CARE INSURANCE
The NAIC model legislation ephasizes two ares: |
1) policy provitions
2) marketing provitions |
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Personal Auto Policy (PAP)
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a package policy that provides both property and liability insurance for family members
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PAP Provides 4 types of insurance (4)
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1) Liability coverage
2) Medical payment coverage 3) Uninsured otorist coverage 4) Coverage for damage to policyholder's auto |
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PAP is written with split limits such as:
$25,000/$50,000/$10,000 What do they represent? |
First limit - max amount that will be paid to any one person for injury claims
Second limit - aggregate that will be paid for all injuries Third limit - aggregate property damage claims |
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What does PAP cover when involved in an accident while in business use?
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DOES NOT COVER BUSINESS USE
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Umbrella Policy
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-typically $1 million or more
-provides increased coverage when limits of basic coverage are inadequate |
