Personal Finance Ch 10

Insured (or policyholder)

A person covered by an insurance policy.

True or false: Physical damage to a property is caused by hazards or perils such as fire, wind, water, and smoke.

True

True or false: Risk management is a long-range financial planning process that helps reduce financial losses caused by destructive events

True

Automobile insurance helps

cover property and personal damage caused by the policyholder's car

Insurance is based on the principle of ______ risks, in which thousands of policyholders pay a small sum of money (premium) into a central pool.

pooling

Insurance

protection against possible financial loss

Starting a ____ business that may or may not succeed is an example of speculative risk. So is ____. Most speculative risks are considered to be ____.

small gambling uninsurable

Although many types of insurance exist, they all have one thing in common: They give you the peace of mind that comes from knowing that money will be available to meet the needs of your ____, pay ____ expenses, protect your home and belongings, and cover personal or ____ damage caused by you when driving.

survivors medical property

Risk

uncertainty or lack of predictability. Refers to the uncertainty as to loss that a person or a property covered by insurance faces.

The main types of risks related to a home and an automobile are:

your responsibility for injuries to others damage or loss to your property your responsibility for damage to the property of others

What are the methods of managing risk?

1. Risk Avoidance 2. Risk Reduction 3. Risk Assumption 4. Risk Shifting

What are the steps in planning your personal insurance coverage?

1. Set insurance goals 2. Develop a plan to reach your goals 3. Put your plan into action 4. Review your results

Hazard

A factor that increases the likelihood of loss through some peril. For example, defective house wiring is a hazard that increases the likelihood of the peril of fire.

Speculative Risk

A risk in which there is a chance of either loss or gain.

Pure Risk

A risk in which there is only a chance of loss; also called insurable risk.

Insurance Company

A risk-sharing firm that assumes financial responsibility for losses that may result from an insured risk.

Policy

A written contract for insurance.

Which of the following are covered by renter's insurance? Additional living expenses Flood damage Personal property Personal liability

Additional living expenses Personal property Personal liability

Risk Management

An organized strategy for protecting assets and people. It helps reduce financial losses caused by destructive events. Risk management is a long-range planning process.

Select all that apply Which of the following are general risk management techniques? Assumption Reduction Avoidance Investing Speculation

Assumption Reduction Avoidance

Which of the following risks are covered by home owner's insurance? Coverage for the financial risks of damage to personal property Coverage for the financial risks associated with your place of residence Coverage for the financial risks associated with your place of residence Coverage for the value of your place of residence

Coverage for the financial risks of damage to personal property Coverage for the financial risks associated with your place of residence Coverage for the value of your place of residence

Which of the following best defines home owner's insurance? Coverage for loss of income from disability and premature death that occurs at home Coverage for all risks that you take as long as you own a home Coverage of all risks related to your residence and apartments that you rent Coverage for your residence and its financial risks

Coverage for your residence and its financial risks

True or false: Risk management needs are consistent throughout one's life

False

The protection against possible loss that gives you peace of mind is called:

Insurance

_______is the legal responsibility for the financial loss due to injuries to others or damage to property for which you are responsible.

Liability

A deductible is a set amount that the policyholder must pay ____ on an insurance policy.

Loss

What is the difference between pure risk and speculative risk?

Pure risk is insurable and speculative risk is not.

Which of the following are risk reduction actions? Quitting smoking Risk maximization Not buying collision insurance for an older car Wearing seat belts Locking up your valuables Risk optimization

Quitting smoking Wearing seat belts Locking up your valuables

The coverage of HO-3 policies includes which of the following perils? Flood Smoke War Fire and lightning Nuclear Freezing Theft

Smoke Fire and lightning Freezing Theft

Premium

The amount of money a policyholder is charged for an insurance policy.

Peril

The cause of a possible loss. It is the contingency that causes someone to take out insurance.

Choosing never to sky-dive is an example of risk ____.

avoidance

Risk Avoidance

avoiding an act that would create a risk

The main bodily injury coverages are

bodily injury liability, medical payments coverage, and uninsured motorist's protection.

Property risks are the uncertainties of ___ or ____ losses to personal or real property due to fire, windstorms, accidents, theft, and other hazards.

direct indirect

Risk Reduction

finding ways to lower your chance of incurring a loss.

People buy policies for financial protection against perils such as

fire, windstorms, explosions, robbery, accidents, and premature death.

Defective house wiring is an example of a(n)____ that increases the chances of fire.

hazard

What is the purpose of insurance?

help individuals and businesses manage certain types of unanticipated risk.

Personal risks are the uncertainties surrounding loss of ____ or ____ due to premature death, illness, disability, old age, or unemployment.

income life

Life insurance replaces

income that would be lost if the policyholder died

Select all that apply Examples of risk reduction actions include: installing smoke alarms wearing seat belts in a car purchasing insurance not driving a car

installing smoke alarms wearing seat belts in a car

Hazards increase the likelihood of a(n)____ through a peril.

loss

People's risk ____ needs change at various points in their lives.

management

Health insurance helps

meet medical expenses when the policyholder (or any family member covered by the policy) becomes ill

Select all that apply The goals of insurance include: minimizing the likelihood of perils maximizing investment return minimizing liability risks minimizing property risks minimizing personal risks

minimizing liability risks minimizing property risks minimizing personal risks

Liability risks are possible losses due to ____ resulting in bodily injury or property damage to others.

negligence

How are the most common risks classified?

personal property liability

The most common risks are classified as ____ risks, ____ risks, and ____ risks.

personal property liability

Select all that apply Which of the following financial losses can you insure against? personal and property damage when driving catastrophic illness losses when gambling at a casino loss of home or belongings

personal and property damage when driving catastrophic illness loss of home or belongings

Insurance companies frequently refer to the insured person or property as the _____.

risk

Select all that apply A deductible is a combination of which of the following two risk management methods? risk avoidance risk reduction risk shifting risk assumption

risk shifting risk assumption