Final Exam Review RMI3011 Stith
Gross Estate
All property owned by the decedent that might be subject to federal estate taxes upon a person's death. -may be reduced by certain deductions, such as a marital deduction, in determining the taxable estate
Reentry term policy
Allows insured to provide proof of insurability at the end of the term to obtains lower rate on premium.
accelerated death benefits rider
Allows insureds who are terminally ill to collect part or all of their life insurance benefits before they die.
Change of Plan Provision
Allows policyholders to exchange their present policies for different contracts.
Redetermination Provision
Allows the insurer to recalculate the premium after the initial guaranteed period expires. -type of current assumption whole life insurance
Policy Loan Provision
Allows the policyholder to borrow the cash value. -The policyholder must pay interest on the loan to offset the loss of interest to the insurer -A policy could lapse if the policyholder does not repay a loan and the total indebtedness exceeds the available cash value -The major advantage of a policy loan is the relatively low rate of interest that is paid -The major disadvantage of a policy loan is that the policyholder is not legally required to repay the loan, and the policy might lapse if the indebtedness exceeds the available cash value
Advance Purchase Privilege
Allows the policyholder to increase the amount of insurance on the occurrence of some event, such as a birth.
Cost of living Rider
Allows the policyholder to purchase one-year term insurance equal to the percentage change in the consumer price index with no evidence of insurability.
The Notice of Claims provision requires the insured to:
Give a written notice to insurer with 20 days after a covered loss occurs.
Physical Exam and Autopsy Provision
Gives the insurer the right to examine the insured at its own expense when a claim is pending.
First Named Insured
Has certain additional rights and responsibilities that do not apply to other named insureds.
Medical Malpractice
Occurs when a negligent act or omission by a physician or other healthcare professional results in injury or harm to the patient. -injured must show that the doctor deviated from the generally accepted standard of practice
How will the cost of the ACA be paid for?
-partially offset by penalties and tax increases related to coverage -funding also comes from savings in the medicare programs, new fees on pharmaceutical firms and health insurers
Proceeds from a life insurance policy are included in the Gross Estate of the insured for federal estate-tax purposes if:
-the insured has any ownership interest -they are payable to the estate The proceeds may be removed from the gross estate if the policyholder makes an absolute assignment of the policy to someone else. -The policyholder must make the assignment more than three years before death
Exceptions to Indemnity
-valued policy -valued policy laws -replacement cost insurance -life insurance
Legal Characteristics of Insurance Contracts
1. Aleatory 2. Unilateral 3. Conditional 4. Personal 5. A contract of adhesion
Factors in Determining the Cost of Life Insurance
1. Annual premiums 2. Cash values 3. Dividends 4. Time value of money
Social Costs of Insurance
1. Cost of Doing Business 2. Cost of Fraudulent and Inflated Claims
Basic Parts of an Insurance Contract
1. Declarations 2. Definitions 3. Insuring agreement 4. Exclusions 5. Conditions 6. Miscellaneous provisions
Elements of Negligence
1. Duty 2. Breach 3. Causation 4. Damages
Approaches to estimate amount of life insurance to own:
1. Human Life Value Approach 2. Needs Approach
Risk Management Process
1. Identify potential losses 2. Measure and analyze the loss exposures 3. Select the appropriate combination of techniques for treating the loss exposures 4. Implement and monitor the risk management program
Law and the Insurance Agent
1. No presumption of an agency relationship 2. An agent must be authorized to represent the principal 3. A principle is responsible for the acts of agents acting within the scope of their authority 4. Limitations can be placed on the powers of agents
Requirements of an Insurance Contract
1. Offer and Acceptance 2. Exchange and Consideration 3. Competent Parties 4. Legal Purpose
Methods of finding Actual Cash Value
1. Replacement cost Less Depreciation 2. Fair Market Value -price a willing buyer will sell a willing seller 3. Broad Evidence Rule -All relevant factors to determine value
Healthcare Problems in the U.S.
1. Rising Healthcare Expenditures 2. Many people do not have healthcare insurance 3. Waste and efficiency 4. Harmful Insurer practices
Defenses against Negligence
1. contributory negligence 2. comparative negligence 3. last clear chance rule 4. assumption of risk
Social Benefits of Insurance
1. indemnification for loss 2. reduction of worry and fear 3. source of investment funds 4. loss prevention 5. enhancement of credit
Coinsurance Problems
1. inflation can result in a serious coinsurance penalty if the amount of insurance is not periodically increased for inflation 2. the insured may incur a coinsurance penalty if property values fluctuate widely during the policy period
Suicide Clause
States that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid.
Nonwaiver Clause
States that only certain representatives of the company, such as executive officers, can extend the time to pay premiums or to change the terms of the policy. -places limitation on the power of agents
Entire Contract Clause
States that the life insurance policy and attached application constitute the entire contract between the parties. -Prevents the insurer from making amendments without the policyholder's knowledge
Preferred Risk Policy
Sold at lower rates to individuals whose mortality experience is expected to be lower than average. ex. nonsmoker
Shopping for Life Insurance
Some agents may engage in deceptive practices and recommend policies that maximize commissions• To reduce the possibility of receiving bad advice or being sold the wrong policy, work with a professionally qualified agent -Chartered Life Underwriter (CLU) -Chartered Financial Consultant (ChFC) -Certified Financial Planner (CFP)
Private Partnership Programs
Some states have partnership programs designed to reduce medicaid expenditures. -to encourage people to purchase these policies, part or all of their assets are protected from the medicaid spend-down requirements
Agent
Someone who legally represents the principal and has the authority to act on the principal's (insurer) behalf.
Special Beneficiary
Specifically Identified.
Declarations
Statements that provide information about the particular property or activity to be insured. -first page of the policy -name, location, period, amount, premium, deductible
Objectives of Risk Management
Pre-loss objectives -prepare for potential losses -reduce anxiety -meet legal expectations (safety measures) Post-loss objectives -survival of the firm -continue operating, growing -stable earnings -minimize effects of loss on society
Exclusions
Provision in an insurance policy eliminating coverage for certain risks or limiting coverage. -excluded perils -excluded losses -excluded property ex. car used as a taxi, earth movement, pets
Convertible policy
Provision that allows a term life insurance policy to be converted into a cash-value policy.
Conditions
Provisions in the policy that qualify or place limitations on the insurer's promise to perform. -if policy provisions are not met, insurer can refuse to pay the claim ex. notifying the insurer when a loss occurs
Medical Sector Claims
Reasons to Sue: -intimate relationship with patients -medical malpractice -people are way more litigious now -Physicians testifying against each other -media making people aware of possible claims -resentment against large healthcare firms
Casualty Insurance
Refers to insurance that covers whatever is not covered by fire, marine, and life insurance.
Savings Bank Life Insurance
Refers to life insurance that is sold by mutual savings banks, over the phone or through Web sites.
Commercial Lines Insurance
Refers to property and casualty insurance to cover a BUSINESS as opposed to personal lines -nonprofits, firms, agencies, businesses
Risk Financing
Refers to techniques that provide for payment of losses after they occur. Techniques: Retention Noninsurance Transfer Insurance
Personal Risk Management
Refers to the identification of PURE RISKS faced by an individual or family, and to the selection of the most appropriate technique for treating such risks. -same principles as corporate rm ex. car, life, or house insurance
Principle of Reasonable Expectations
States that an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be effective, exclusions or qualifications must be conspicuous, plain, and clear. -insurers cannot enforce things that are inconsistent with the insureds reasonable expectations
Deep Pocket Syndrome
The Plaintiffs attorneys going after defendants who can pay large settlements -related to rising tort liability costs
Needs Approach (life insurance)
The amount needed depends on the financial needs that must be met if the family head should die. -estate clearance fund -income needed for a year adjustment period -income needed for the depending period, blackout period -special needs
Principle Sum
The amount payable as a death benefit (the policy face amount). -accidental death -dismemberment -loss-of-sight
Apparent Authority
The authority an agent is believed by third parties to have because of the behavior of the principal. -knowledge of the agent is presumed to be knowledge of the principle
Express Authority
The authority granted to an agent by means of the agent's written contract.
Linton Yield (evaluating LI policies)
The average annual rate of return on a cash-value policy if it is held for a specified number of years. -Current information is not readily available to consumers, so this method has limited use
Traditional Net Cost Method
The cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure. -in life insurance policies
Subrogation
The substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance. -insurer is entitled to recover from a negligent third party any loss payments made to insured -prevents insured from collecting twice for one loss -holds down insurance rates - does not apply to life insurance contracts ex. Motorcycle crashes into car, car owner will collect from insurer and insurer collects from the cyclists insurer
Pooling of losses
Used to spread the losses of the few over the entire group. -Prediction/reduction of loss based on the law of large numbers -Greater the exposures, greater the actual results will match predicted results
Compensatory Damages
To compensate the victim for losses actually incurred.
Personal Lines Insurance
Type of coverage available to individuals and families for non-business risks.
Subjective Risk
Uncertainty based on a person's mental condition or state of mind. -"perceived loss" -varies based on the person
Risk
Uncertainty concerning the occurrence of a loss
Financial Risk
Uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.
Strategic Risk
Uncertainty regarding the firm's financial goals and objectives. ex. firm entering a new line of business
Imputed Negligence
Under certain conditions, the negligence of one person can be attributed to another.
Contributory Negligence
Under common law doctrine of contributory negligence, if the plaintiff caused his injury in any way, he was barred from recovery. -cannot collect damages if his or her conduct contributes in any way -not used anymore by states ex. failure to signal resulting in rear ending
Yearly Renewable Term
Issued for one-year period. -Renewable -Premiums increase with renewal -Convertible
Benefits of Risk Management
-Can reduce the cost of risk -Society benefits because both direct and indirect losses are reduced -Reduction in pure risk -Attain objectives better
Res Ipsa Loquitur
"The thing speaks for itself"; the doctrine that suggests negligence can be presumed if an event happens that would not ordinarily happen unless someone was negligent. ex. dentist extracting the wrong tooth
How many people became newly insured under the ACA in 2014?
-11 million
What is the estimated national health expenditures total for the U.S?
-3.4 Trillion in 2016, 17.7% of GDP -one in six income collars is spent on healthcare
What percentage of people who are eligible for medicaid are not aware they are eligible?
-37% -due to confusion and lack of awareness
Current Tort Liability Problems
-A defective tort liability system -Medical suit issues -Technology and societal changes
Characteristics of Insurance Loss
-Accidental or Unintentional Loss: Assures random occurrence of events -Determinable Loss: To determine how much should be paid -No Catastrophic Loss: To allow pooling technique to work -Calculable Chance of Los: to establish premium -Economically Feasible Premium: So people can afford to purchase the policy -Must have a Large Number of Exposure Units
Tort Reform in the United States
-Capping noneconomic damages such as pain and suffering -Restrictive punitive damages awards -Modifying the COLLATORAL SOURCE RULE -Modifying the JOINT AND SEVERAL LIABILITY RULE (deep pockets, one person may full amount) -ALTERNATE DISPUTE RESOLUTION (technique using arbitration)
Nonforfeiture Options
-Cash value -Reduced paid-up insurance -Extended term insurance
Provisions of the Affordable Care Act
-Consumer friendly Insurer Practices -Individual Mandates -Health Insurance Marketplace -Premium Tax Credits -Cost Sharing Subsidies -Employee Tax Credits and Mandates -Expansion of Medicaid -Improve Quality and Lower Costs -Cost and Financing -Health Benefits
To reinstate a lapsed policy, the following requirements must be met:
-Evidence of insurability is required -All overdue premiums plus interest are paid -Any policy loans are repaid or reinstated -The policy was not surrendered for its cash value
Insurance vs. Gambling
-Gambling creates a new SPECULATIVE risk, while insurance handles already existing PURE risk. -Gambling is socially unproductive, because the winner's gain comes at the expense of the loser.
Individual Health Insurance Renewable Provisions
-Guaranteed Renewable -Noncancellable policy -Conditionally Renewable policy -Nonrenewable -Guaranteed Issue
Definitions of Total Disability
-Inability to perform the material and substantial duties of your regular occupation AND not engaged in any other occupation -Inability to perform duties of any occupation for which you are reasonably fitted by education, training, and experience -inability to perform duties of gainful occupation -Loss of income test, income is reduced as a result of injury or sickness
Insurance vs. Hedging
-Insurance Transactions Involve the transfer of insurable risks, because the characteristics of an insurable risk generally can be met. (Hedging risks are typically uninsurable.) -Insurance can reduce the objective risk of an insurer by application of law of large numbers. (Hedging only transfers risk, a.k.a. buying 1,000 instead of 100 corn futures doesn't reduce your risk because they all have the same market price. You just risk losing more by buying more)
Reducing Medical Malpractice Costs
-Not charging for "never events" -Laws allowing physicians to apologize without allowing the admission to be used against them -Prompt disclosure of medical errors -Remedial action against problem physicians -Emphasis on risk management principles
Two Options of Whole Life Insurance
-Option A pays a level death benefit during the early years, and the death benefit increases in later years to meet the corridor test required by the Internal Revenue Code -Option B provides for an increasing death benefit which is equal to a constant net amount at risk plus the accumulated cash value
Personal Risk Factors
-Premature Death ~7 year old not considered premature, no obligations ~loans to repay, mortgages, dependents for support -Poor health -Unemployment -inadequate retirement income
Major Commercial Risks
-Property risks ex. damage to business property -Liability risks ex. defective product suits, sexual harassment -Loss of business income -Cybersecurity -Human Resource Exposures: Job related ex. job related injuries -Foreign Loss Exposures ex. terrorism -Govt Exposures ex. violation of safety standards -Intangible Property Exposure ex. damage to public image, reputation
Defective Tort Liability System
-Rising Tort Liability costs -inefficiency in compensating injured victims -uncertainty of legal outcomes -high jury awards -Long delays in settling suits
Why exclusions are Necessary?
-Some perils are not commercially insurable -Extraordinary hazards may be present, chance of accident is higher -Coverage may be provided by other insurance, reduces double coverage -Moral Hazard Problems -Attitudinal hazard problems
Life Insurance Exclusions include:
-Suicide excluded for two years -Insurers might insert a war clause to exclude payment if the insured dies as a direct result of war -Some policies contain aviation exclusions
Sources of Dividends:
-The difference between expected and actual mortality experience -Excess interest earnings -The difference between expected and actual operating expenses
How is LTC coverage added to insurance policies?
-adding a LONG TERM RIDER -through an ACCELERATED DEATH BENEFITS -allowing the policy holder to withdraw part of the current cash value to cover LTC expenses -providing a fixed amount of coverage after the annuity value is spent -through alternative plans
Reasons for Rising Healthcare Expenditures
-advances in technology -cost insulation because of third party payers -fee-for-service defects -high admin costs -lack of transparency in cost and quality information -cost shifting by medicare, medicaid -defensive medicine
Sources of Waste and Inefficiency in Healthcare:
-as much as 30% of spending is wasted -duplication of tests -medical errors that are preventable -hospitalization for preventable things -overuse of the ER -readmissions for inadequate initial treatment -fraud, over-billing
Why do many families not own a sufficient amount of life insurance?
-believed to be too expensive -procrastination -hard time choosing the right amount -opportunity cost of purchasing life insurance is too high for some families -many are in debt, little savings
Miscellaneous Provisions
-cancellation -subrogation -grace period -misstatement of age
Exclusions of LTC
-certain mental and nerve disorders -alcohol and drug addictions -illnesses caused by an act of war -attempted suicide -treatment paid by the government
Exclusions in Marketplace Insurance Policies
-cosmetic surgery -long term care -hearing aids -weight loss programs
Improving Quality and Lowering Costs (ACA)
-new incentives to rebuild primary care work force -patient-centered research institute -a Prevention and Public Health Fund -strengthening community health centers -enhanced screening procedures for providers to eliminate fraud -incentives for physicians to join together to from "Affordable Care Organization" -paying on VALUE not volume
Legal Hazard
Characteristics of the legal system or regulatory environment that increase the frequency or severity of losses. ex. adverse jury verdicts, large demand rewards
Dram Shop Law
A business that sells liquor can be held liable for damages that may result from the sale of liquor. ex. bartender serving someone who is already drunk
Captive Insurance Company
A company that provides insurance coverage to its parent company and other affiliated organizations. -lower costs for businesses
Hazard
A condition that INCREASES the chance of the loss. Four Types: -physical -moral -attitudinal -legal
Peril Hazard
A condition that is the CAUSE of the loss. ex. property damage BECAUSE of a fire, flood etc.
Life Settlement
A financial transaction by which a policyholder who no longer needs or wants to keep a life insurance policy sells the policy to a third party for more than its cash value.
Variable Life Insurance
A fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer. -similar to a mutual fund maintained by the insurer -premium is level - entire reserve is held in a separate account and is invested in common stocks or other investments -Cash-surrender values are not guaranteed and there are no minimum guaranteed cash values
Universal Life Insurance
A flexible premium policy that provides lifetime protection. -After the first premium, the policyholder decides the amount and frequency of payments -Premiums are credited to a cash-value account, also called an accumulation fund -Policies typically have a monthly deduction for administrative expenses -The policies have considerable flexibility
Special Damages
A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss. ex. medical expenses or lost wages.
Individual Mandate (ACA)
A government rule that requires everyone to have insurance coverage or they will have to pay a penalty. -provides premiums for credits so that its easier to comply with the law -certain groups are exempt (homeless, poor, native americans)
Attractive Nuisance
A hazardous condition that can attract and injure children. -occupants of land are liable for the injuries of children who may be attracted by some dangerous condition ex. construction worker leaves keys in a tractor, kid drives it and gets hurt
Preferred Provider Organization (PPO)
A health care plan that contracts with health care professionals to provide services at a reduced fee and gives patients financial incentives to use network providers. -the most popular plan today -lower deductibles and coinsurance charges
Principle of Utmost Good Faith
A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts. Supported by three legal doctrines: 1. Representations 2. Concealment 3. Warranty
Stranger Owned Life Insurance (STOLI)
A large policy acquired by a group of investors with the specific intention of selling the policy in the secondary life insurance market and ultimately making a substantial profit when the insured dies. -Insurers will not knowingly issue a policy used for STOLI purposes -The sale is viewed as a wagering transaction -There is material misrepresentation or fraud regarding the true purpose of buying the policy -Investors may be taking advantage of elderly people
Tort
A legal wrong for which the court allows a remedy in the form of money damages. Three Types: -negligence -intentional (assault) -strict liability (manufacturing explosives) -the person who is INJURED (plaintiff) by the action of another (tortfeasor) can sue
Ordinary Life Insurance
A level-premium policy that accumulates cash values and provides lifetime protection to age 121. -Premiums are level throughout the premium-paying period
Legal Reserve
A liability that must be offset by sufficient financial assets.
Class beneficiary
A member of a group, e.g., children of the insured.
Interest-Adjusted Net Cost Method
A method of comparing costs of similar policies by using an index that takes into account the time value of money. -uses the surrender cost index or the net payment cost index
General Damages
A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific measurable expenses.
Current Assumption Whole Life Insurance
A nonparticipating whole life policy in which the cash values are based on the insurer's current mortality, investment, and expense experience. -A nonparticipating policy does not pay dividends -An accumulation account reflects the cash value under the policy -If the policy is surrendered, a surrender charge is deducted from the accumulation account -A guaranteed interest rate and current interest rate are used to determine cash values -A fixed death benefit and maximum premium level at the time of issue are stated in the policy
Paid-Up
A paid-up policy at age 65 or 70 is another form of limited-payment life insurance. -A policy is paid up when no additional premium payments are required; it matures when the face amount is paid as a death claim or endowment
Additional Insured
A person or party who is added to the named insured's policy by an endorsement. ex. being on a tenants insurance
Trespasser
A person who enters or remains on the owner's property without the owner's consent. -the owner has no obligation to keep the property in safe condition -cannot deliberately hurt the person -Duty of Slight Care
Licensee
A person who enters the premises with the occupant's expressed or implied permission. -property owner must warn them of unsafe conditions
Invitee
A person who is invited onto the premises for the benefit of the occupant. -occupant has an obligation to inspect the premises and eliminate dangerous conditions ex. Faulty elevator for customers must have a sign, wet floor signs
Assumption of Risk
A person who understands and recognizes the danger inherent in a particular activity cannot recover damages in the event of an injury. ex. teaching a visually impaired person to drive and then crashing.
Last Clear Chance Rule
A plaintiff who is endangered by his or her own negligence can still recover damages from the defendant if the defendant has a last clear chance to avoid the accident but fails to do so. ex. jaywalker walks on a red light, gets hit. motorist can collect damages as well.
Indemnity Policy (Per Diem)
A policy that pays a flat dollar amount per day regardless of actual expenses. -Even if the cost is less then the flat amount, you get daily amount
Expense-Incurred Policy (Reimbursement Policies)
A policy that reimburses for the actual charges up to the daily limit. -most common type of long term care policies -choice of daily benefits -policy covers the limits amount or cost, whatever is lower
Guaranteed Renewable
A policy written on a noncancellable basis with the guaranteed right to renew. -Premiums CAN be increased for the underwriting class
Joint Life Insurance
A policy written on the lives of two or more people and is payable at the time of death of the first person to die.
Risk Management
A process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures.
Deductibles
A provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable. -eliminates small claims -reduces premiums paid by insured -reduces moral hazard and attitudinal hazard
Rider
A provision that amends or changes the original policy. -in life or health insurance -waivor-of-premium riders on life insurance
Presumptive Disability
A provision that is found in most disability income policies which specifies the conditions that will automatically qualify the insured for full disability benefits. -loss of limbs -loss of sight
Coinsurance Clause in health insurance
A provision that requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible which the insured must pay out-of-pocket up to some max amount. -reduces premiums prevents over-utilization of benefits
Avoidance
A reaction to conflict that involves ignoring the problem by doing nothing at all, or deemphasizing the disagreement. -most of the time this is not possible -if it is possible, its the best technique ex. avoiding a sketchy area by just staying away from it
Loss Prevention
A risk control technique that reduces the FREQUENCY of a particular loss. ex. exercising to not gain weight, safe driving courses, security at an airport
Loss Reduction
A risk control technique that reduces the SEVERITY of a particular loss. Techniques: -Duplication: having backups or copies of important documents -Separation: assets are separated to minimize loss from a single event (two warehouses) -Diversification: spreading the loss across different parties ex. sprinkler systems
Noninsurance Risk Transfer
A risk financing technique in which one party transfers the potential financial consequences of a particular loss exposure to another party that is not an insurer. ex. hold harmless clause, hedging, incorporation
Diversifiable Risk (unsystematic risk, particular)
A risk that affects only some individuals, businesses, or small groups. -can be eliminated or reduced ex. car theft
Pure Risk
A situation in which there are only the possibilities of loss or no loss ex. earthquake, premature death, flood
Copayment
A small fixed fee paid by the patient at the time of an office visit.
Elimination Period
A stated period of time at the beginning of a loss during which no insurance benefits are paid. -disability income contracts
Health Savings Account (HSA)
A tax exempt account established exclusively for the purpose of paying qualified medical expenses. -beneficiary must be covered under a high deductible health plan -contributions can be made by people, employers, family members -contributions subject o max limits -favorable tax treatment
Binder
A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued. -agent accepts offer on behalf of the company -relates to offer and acceptance
Calendar-Year Deductible
A type of aggregate deductible that is found in basic medical expense and major medical insurance contracts. -after deductible is satisfied, benefits are paid
Industrial Life Insurance
A type of insurance in which the policies are sold in small amounts and an agent of the company collects the premiums at the insured's home.
Indexed Universal Life Insurance
A variation of universal life insurance with certain key characteristics: -There is a minimum interest rate guarantee -Additional interest may be credited to the policy based on investment gains of a specific stock market index -The amount credited is based on a formula which is usually capped
Legal Wrong
A violation of a person's legal rights, or a failure to perform a legal duty owed to a certain person or to society as a whole. -crime -tort -breach of contract
Elimination Period
A waiting period that is imposed on the insured from the onset of disability until benefit payments begin. -lower premiums, higher out-of-pocket
Modified Life Policy
A whole life policy in which premiums are lower for the first three to five years and higher thereafter. -One advantage is that applicants can purchase permanent insurance immediately even though they cannot afford the higher premiums for a regular whole life policy
Endorsement
A written provision that adds to, deletes from, or modifies the provisions in the original contract. -conforming to state laws -takes precedence over conflicting policy
Enterprise Risk
Encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk.
Absolute Assignment v. Collateral Assignment
Absolute: A permanent and irrevocable transfer of rights and/or benefits by the policyowner. Collateral: A temporary and/or revocable transfer of benefits by the policyowner.
Nondiversifiable Risk (Systematic Risk, fundamental)
Affects the entire economy or large numbers of people within the economy. -cannot be eliminated or reduced ex. hurricane, inflation
Agent's Authority
Agent's authority come from three sources: 1. Express 2. Implied 3. Apparent
Aggregrate Deductible
All losses that occur during a specified period are accumulated to satisfy the deductible amount.
Respondent Superior
An employer can be held liable for the negligent acts of employees while they are acting on the employer's behalf. -worker must be an employee -employee must be acting within the scope of employment when act occurred ex. salesclerk drops a barbell on a customers toe
Variable Universal Life Insurance
An important variation of whole life insurance -Most are sold as investments or tax shelters -The policyholder decides how the premiums are invested -The policy does not guarantee a minimum interest rate or minimum cash value -These policies have relatively high expense charges, including front-end loads for sales commissions, back -end surrender charges, and investment management fees -The policyholder bears substantial investment risk
Retention
An individual or business firm retains part or all of the losses that can result from a given risk. Best used when: - No other method qualifies -Worst loss isnt serious -Losses can be easily predicted Active: Person is aware of the risk and plans to retain it all (homeowners insurance with deductible) Passive: Person may be unknowingly retaining the risk because of ignorance, indifference Planned: self insurance
Definition of the Insured
An insurance contract must identify the persons or parties who are insured under the policy. Grouped into: -named -first named -other -additional
Automatic Premium Loan Provision
An overdue premium is automatically borrowed from the cash value after the grace period expires. -The automatic premium loan prevents the policy from lapsing because of nonpayment of premiums -It may be overused and exhaust the cash value -Proceeds will be reduced if the premium loans are not repaid by the time of death
Loss Exposure
Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs ex. theft from poor security, flood damage to buildings
Residual Disability
Applies when you are gainfully employed and not totally disabled but, solely because of sickness or injury, our loss of income is at least 15 percent of your prior income. -pro rata disability benefit is paid to an insured whose earned income is reduced because of an accident or sickness
Other Insureds
Are persons or parties who are insured under the named insured's policy even though they are not specifically named in the policy.
Implied Authority
Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal.
Net Payment Cost Index
Method of measuring the cost of an insurance policy to an insured if death occurs at the end of some specified time period. The time value of money is taken into consideration.
Participating v. Nonparticipating Policy
Participating policy is one that pays dividends. A nonparticipating policy does not.
Yearly Rate of Return Method
Based on the formula: [(Amount in the policy at the end of the period)+(Assumed Price of the protection component) / (Amount in the policy at the end of the period)] -1 -The information needed for the calculation is readily available to consumers
The Uniform Individual Sickness Policy Provisions Act
By the NAIC, requires certain provisions for all health insurance policies. -entire contract consists of policy, riders, application -Time limit on certain defense states that after the policy has been in force for 2 years, insurer cannot void the contract based on misstatements -grace period is a 31 ay period after premium due date to pay an overdue premium -other provisions
Conditionally Renewable Policies
Can renew the policy until a specified age. -insurer has the right to decline renewal under conditions specified in the contract
Attitudinal Hazard
Carelessness or indifference to a loss, which increases the FREQUENCY or severity of a loss. ex. leaving keys in an unlocked car increases theft
Whole Life Insurance
Cash value policy that provides lifetime protection. -A stated amount is paid to the beneficiary when the insurer dies
Enterprise Risk Management
Combines into a single unified treatment program all major risks faced by the firm. -firm can offset one risk against the others
Benefit Triggers
Conditions that initiate or trigger the benefits to be paid under a Long-Term Care policy. One of these must be met in order to receive benefits: 1. The insured is unable to perform a certain number of activities of daily living (ADLS) 2. The insured needs substantial supervision to be protected against threats to health and safety because of cognitive impairments
Change of Beneficiary
Consent of the beneficiary is not required unless the beneficiary designation is irrevocable.
Fidelity Bond
Cover losses due to employee dishonesty (usually fraud or theft by employee). -embezzlement, theft
Liability Insurance
Covers the insured's legal liability arising out of property damage or bodily injury to others.
Punitive Damages
Damages designed to punish people and organizations so that others are deterred from committing the same wrongful act.
Payment of Claims
Death benefits are paid to the beneficiary.
Moral Hazard
Dishonesty or character defects in an individual that increase the frequency or severity of loss. ex. fraudulent claims, faking an accident
Accidental Death Benefit Rider
Doubles the face amount of life insurance if death occurs as a result of an accident.
Contribution of Equal Shares
Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy.
Pro Rata Liability
Each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property. -applies when two policies of the same type cover the same insurable interset in the property
Benefit Categories
Each plan has annual out-of-pocket limits that limit the amount insureds must pay in the form of deductibles, coinsurance, copayments. -Bronze Plan covers 60% of benefit cost -Silver 70% -Gold 80% -Platinum 90% -catastrophic plans
Coinsurance Clause in Property Insurance
Encourages the insured to insure the property to a stated percentage of its insurable value. - if the coinsurance requirement is not met at the time of a loss, the insured must share in the loss as a coinsurer - *fundamental purpose: to achieve EQUITY IN RATING* - if the coinsurance requirement is met, the insured receives a rate discount, and the policyholder who is underinsured is penalized through application of the coinsurance formula
Nonrenewable Policies
Expires at the end of the protection period. -policyholder does not have the right to renew the policy -group health insurance for students during the academic year
What is the affect of the Affordable Care Act on medical sector claims?
Huge increase in the number of prospective clients. As more people get healthcare, more people to sue!
Waivor-of-Premium Provision
If the insured is totally disabled for 90 days, future premiums will be waved as long as you are still disabled. -may be a refund in premiums
Misstatement of Age or Sex
If the insured's age or sex is misstated, the amount payable is the amount that the premiums paid would have purchased at the correct age and sex.
Human Life Value Approach (life insurance)
In determining how much life insurance is needed, fine the present value of the family's share of the deceased breadwinner's future earnings. -estimates the persons average annual earnings over his/her productive lifetime -deduct taxes, insurance premiums, self maintenance costs
Coordination of Benefits (COB)
In group health insurance, it is designed to prevent over insurance and the duplication of benefits if one person is covered on more than one plan. -primary and excess insurance coverage of an employee is primary to coverage as a dependent -parent whose birthday comes first is the primary
Insurance interest
In order to purchase insurance, one must be in a position to lose financially if a covered lost occurs. -prevent gambling -reduces moral hazard -measures amount of the insureds loss (indemnity) -property insurance: must exist at the time of loss -life insurance: must exist at inception of policy
Liability Risk
Involve the possibility of being held legally liable for bodily injury or property damage to someone else. Three reasons it is important: 1. No max upper limit for amount of the loss 2. Lien may be placed on income 3. Legal defense costs a f*ck ton ex. malpractice suits, dog biting someone else
Property Risk
Involves the possibility of losses associated with the destruction or theft of property. -Involved two major types: Indirect and direct loss ex. tornado, fire
Property Insurance
Indemnifies property owners against the loss or damage of real or personal property.
Social Insurance
Insurance financed entirely or in large part by contributions from employers. -in favor of low-income groups -social security, unemployment -medicare, workers comp
Life Insurance
Insurance paid to named beneficiaries when the insured person dies.
Health Insurance
Insurance that covers medical illness or injury. -controlled by a small numbers of insurers
Term Life Insurance
Insurance that provides financial protection from losses resulting from a death during a definite period, or term. -expires at the end of the policy term -most terms are renewable, premiums may increase at additional periods -age limitation for renewal
Second-to-Die Life Insurance
Insures two or more lives and pays the death benefit upon the death of the second or last insured. -The insurance is usually whole life, but it can be term -This form of life insurance is widely used in estate planning
Definitions
Key terminology used to understand the terms of the document.
Affordable Care Act
Law passed in 2010 to expand access to insurance, address cost reduction and affordability, improve the quality of healthcare, and introduce the Patient's Bill of Rights. -has made insurance available to millions of uninsured americans -provides subsidies to uninsured individuals and small businesses to make it more affordable
Vicarious Liability
Legal responsibility placed on one person for the acts of another. ex. borrowing someones car and crashing, owner is liable for person borrowing car
Why has the economic problem of Premature death declined?
Life expectancy has increased.
Term to Age 65 Policy
Provides protection to age 65, at which time the policy expires.
Taxation of Life Insurance
Life insurance proceeds paid in a lump sum to a designated beneficiary are generally received income-tax free. -The interest component of periodic payments is taxable as ordinary income -Premiums are generally not deductible -Dividends are not taxable, but interest on dividends retained is taxable -If a policy is surrendered for its cash value, any gain is taxable as ordinary income
Indirect Loss (consequential)
Loss resulting from indirect destruction. ex. living expenses after a fire
Annual out-of-pocket limit
Maximum out of pocket expenses you must pay for covered services before the insurance company pays 100%. -reduces the burden of catastrophic loss
Partial Disability
Means that you can perform some but not all of the duties of your occupation. -some policies offer partial disability benefits -usually benefits must follow total disability
Surrender Cost Index
Measures the cost of life insurance if you surrender the policy at the end of some time period, such as 10 or 20 years, and takes compound interest into account.
Surity Bond
Monetary compensation in case of failure of bonded persons to perform an act. ex. construction not being done in time
Medical Necessity Trigger
Non-tax qualified policies often have more liberal eligibility requirements and can make benefits available if a certified physician says LTC is needed.
commutative contract
One in which the values exchanged by both parties are equal. -commercial contracts -purchasing real estate
Irrevocable Beneficiary
One that cannot be changed without the beneficiary's consent.
Long Term Care
Pays a daily or monthly benefit for medical or custodial care received in a nursing facility, hospital , or at home. -medicaid normally covers only 90 days, or not all
Endowment Insurance
Pays the face amount of insurance if the insured dies within a specified period. If the insured is still alive at the end of the period, the face amount is paid to the policyholder. -accounts for less than one percent of the life insurance in force
Benefit Period
Period of time for which benefits are available. -2,5,10 years
Reinstatement Provision
Permits the owner to reinstate a lapsed policy. -The policy must be reinstated within a certain period -Although it may require a large outlay of cash, it may be cheaper to reinstate a lapsed policy than to purchase a new policy
Proof of Loss Provision
Policy owner has 90 days from date of loss to submit proof of loss to Insurer.
Manuscript Policies
Policy specially tailored for the firm. -has negotiation -manager negotiates
Individual Medical Expense Insurance
Protects an individual or family for covered medical expenses because of sickness or injury.
Nonforfeiture benefits
Provides benefits if the insured lapses the policy. -return of premium benefit -a shortened benefit period
Managed Care Plan
Provides covered medical services to the members in a cost effective manner, with heavy emphasis on cost control. -most individual medical expense plans sold today are managed care
Group Life Insurance
Provides life insurance on a group of people in a single master contract.
Single Premium Whole Life
Provides lifetime protection with a single premium.
Disability Income Insurance
Provides payments to replace income when an insured person is unable to work. -typically limited to 60-70% of gross earnings
Proximate Cause
Relationship between the negligent act and the infliction of damages, which requires an unbroken chain of events. ex. Drunk driver runs a red light, kills a pedestrian
Cash Surrender Value
Represents the cash value of a policy minus any surrender charges. -A policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of cash values -The policyholder has the right to borrow the cash value or exercise a cash surrender option
Life Insurance Policy Illustration Model Act
Requires insurers to present certain information to applicants for life insurance. -The goal is to reduce misunderstanding of policy values by policyholders, and reduce deceptive sales practices by agents -A narrative summary describes the basic characteristics of the policy -A numeric summary shows the premium outlay, value of the accumulation account, cash surrender values, and death benefit -The act also prohibits certain sales practices and requires the insurer to provide an annual report
Legal Action provision
Requires the insured to wait at least 60 days after proof of loss is submitted before legal action can be brought against the insurer.
Treatment of Financial Risks
Requires the use of hedging, derivatives, futures contracts.
Operational Risk
Results from firm's business operations. ex: if hackers hack an online bank
Personal Risk
Risks that directly affect an individual or family. -involves possibility of a loss or reduction in income, more expenses, depreciation
Claims Form provision requires insurer to:
Send the insured a claims form within 15 days after the notice is received.
Insuring Agreement
Summarizes major promises of insurer. - "named perils" means if not named, not covered - "open perils" All perils covered unless excluded - Different burdens of proof for these two types
Risk Financing
Techniques that provide for the funding of losses. 1. Retention 2. Noninsurance transfers 3. Insurance
Risk Control
Techniques that reduce the frequency or severity of losses. Techniques: Avoidance Loss prevention Loss Reduction
Premature Death
The death of a family head with outstanding unfulfilled financial obligations. -causes financial problems for the surviving family -future earnings lost -economic and noneconomic costs
Net amount at Risk
The difference between the legal reserve and face amount of insurance.
The Cost of Life Insurance is:
The difference between what you pay and what you get back.
Decreasing Term Insurance
The face value gradually declines each year.
Negligence
The failure to exercise the standard of care required by law to protect others from an unreasonable risk of harm. -standard of care is different for everyone -based on the care required of a reasonably prudent person
Comparative Negligence
The financial burden of the injury is shared by both parties according to their respective degrees of fault. -Pure Rule: can collect some damages even if you are at fault -50% Rule: cannot recover if you 50% or more at fault -51% Rule:cannot recover if you at 51% or more at fault
Primary Beneficiary
The first entitled to receive the policy proceeds on the insured's death.
Subjective Probability
The individual's personal estimate of the chance of loss. ex. buying a lotto ticket on your birthday bc its your "lucky day"
Limited-Payment Life Insurance Policy
The insured has lifetime protection, and premiums are level, but they are paid only for a certain period. -The most common limited-payment policies are for 10, 20, 25, or 30 years
Indemnification
The insured is restored to his or her approximate financial position prior to the occurrence of the loss
Straight Deductible
The insured must pay a certain number of dollars of loss before the insurer is required to make a payment. ex. auto insurance
Principle of Indemnity
The insurer agrees to pay no more than the actual amount of the loss. -prevents insured from profiting from a loss -reduces moral hazard
Noncancellable Policy
The insurer cannot change, cancel, or refuse to renew the policy as long as premiums are paid on time. -Premiums cannot be changed by insurer -disability income policies
Incontestable Clause
The insurer cannot contest the policy after it has been in force two years during the insured's lifetime. -Protects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued -The insurer has two years to detect fraud -The insurer can contest a claim after the incontestable period in limited circumstances
Purchasing of Life Insurance is financially justified if:
The insurer has earned income and others are dependent on those earning for financial support.
Time of Payment of Claims Provision
The insurer must pay all claims immediately after receiving proof of loss.
Objective Probability
The long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions. Determined by: -Deductive reasoning (proiri probs, coin toss) -inductive reasoning
Estoppel
The loss of a legal defense because of previous actions that are now inconsistent with that defense.
Family Purpose Doctrine
The owner of an auto can be held liable for negligent acts committed by family members. ex. dad is held liable for son driving car
Beneficiary
The party named in the policy to receive the policy proceeds.
Named Insured
The person or persons named in the declarations section of the policy.
Physical Hazard
The physical condition increasing the chance of loss. ex. icy roads
Ownership Clause
The policyholder possesses all contractual rights in the policy while the insured is living. -Rights include naming beneficiaries and surrendering the policy for its cash value -The policyholder can designate a new owner by filing an appropriate form
Revocable Beneficiary
The policyholder reserves the right to change the beneficiary designation without the beneficiary's consent.
Insurance
The pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.
Attained-age Method
The premium charged for the new policy is based on the insured's attained age at the time of conversion. -for convertible policies
Original-Age Method
The premium charged for the new policy is based on the insured's original age when the term insurance was first purchased. -for convertible policies
Burden of Risk on Society
The presence of risk results in three major burdens on society: (1) In the absence of insurance, individuals and business firms would have to [maintain large emergency funds] to pay for unexpected losses (2) The risk of a liability lawsuit may discourage innovation, [depriving society of certain goods and services] (3) Risk causes worry and fear
Primary and Excess Insurance
The primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted. -driving someone elses car, both will pay
Chance of Loss
The probability that an event will occur. -has both objective and subjective parts
Underwriting
The process of selecting, classifying, and pricing applicants for insurance.
Objective Risk
The relative variation of actual loss from expected loss -"Degree of Risk" -risk declines as number of exposures increase -calculated by measure of dispersion (SD)
Systematic Risk
The risk of collapse of an entire system or entire market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system. -important is large financial institutions that are too large to fail without disrupting the whole economy -important in the monetary policy of the federal reserve ex. 2009 business recession
Sovereign Immunity
The rule that a citizen cannot sue the government without the government's consent. -immunity has eroded over time -can be sued for false arrests, failure to arrest
Viatical Settlement
The sale of a life insurance policy by a terminally ill insured to another party, typically to investors or investor groups, who hope to profit by the insured's early death.
Adverse Selection
The tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates. -results in higher than expected loss levels if not controlled by Underwriting or policy provisions ex. risk drivers seeking auto insurance
Res Ipsa Loquitur Requirements
There are three requirements that must be met for this law to apply: 1. The event is one that normally would not occur without negligence 2. Defendant has exclusive control over the instrumentality causing the incident 3. Injured party has not contributed to the accident in any way
Waivor
Voluntary Relinquishment of a known legal right. ex. application is incomplete, insurer issues anyway- insurer cannot deny payment later
Are Long Term Care policies guaranteed renewable?
YES!
Direct Loss
a financial loss that results from the physical damage, destruction, or theft of the property.
Speculative Risk
a situation in which either profit or loss is possible ex. gambling, purchasing shares
Guaranteed Issue
insurance companies are required by law to provide coverage to any individual and cannot turn them down.
Fortuitous Loss
one that is unforeseen and unexpected by the insured and occurs as a result of chance
