BUS 425 Test 1
What is the difference between "Own Occ" and "Any Occ"?
"Own Occ" means you receive disability benefits if you are unable to do your own occupation. "Any Occ" means you will only receive benefits if you can no longer do ANY job. Under "Any Occ" if you can still do some jobs even though they are not in your field, you still do not receive benefits.
Nonworking spouse calculation
# of years before youngest child reaches 18 x 10,000
Who doesn't need disability insurance?
- Older people who have long term care insurance - rich people. people who are self-insured by other assets.
Who needs life insurance?
- People who want to provide for their family in the case of death. - People who want to help loved ones pay off debts - People who want to pass wealth along/pay for educational expenses - People who want to provide for their kids
Who doesn't need life insurance?
- someone right out of college - babies/young children (gerber baby insurance)
What are some methods for partial replacement for life insurance?
1. DINK method (dual income no kids) - need similar salaries, reasonably secure jobs, no expected future comittments 2. Easy method - all the same as DINK but no more than 2 kids 3. Non-Working Spouse method - no more than 2 kids 4. Family need
4 life insurance policies that might be good to avoid
1. Flight insurance at airports 2. Credit life insurance 3. Accidental death and dismemberment insurance 4. Cash-value policies on children (Gerber baby insurance)
What are some methods used for full replacement for life insurance? (they sometimes over insure people)
1. Human life value approach - values the life of the person you're trying to cover. It's the present value of what this person is worth in the future 2. Needs approach - how much would we possibly need if this person quit providing for us because they died 3. Capital Retention Approach - invests a certain amount (could potentially provide the most money) 4. On-line Financial Calculators - calculate how much insurance coverage you "should" have based on your lifestyle and characteristics
6 characteristics of an insurable risk
1. There must be a large number of exposure units. 2. The loss must be accidental and unintentional. 3. The loss must be determinable and measurable. 4. The loss should not be catastrophic. 5. The chance of loss must be calculable. 6. The premium must be economically feasible.
DINK calculation
1/2 all debts + funeral expenses
Easy method calculation
70% of salary x 7 years
What is a hazard?
A hazard is a condition that creates or increases the frequency or severity of loss. For example, if a Christmas tree catches on fire because of a candle, the fire is the peril and the candle is the hazard. There are 4 major types of hazards: 1. Physical - a physical condition that increases the frequency of severity of loss. Example is icy roads that increase the chance of an auto accident. 2. Moral - dishonesty or character defects in an individual that increase the frequency or severity of loss. Example is faking an accident to collect benefits from an insurer. 3. Attitudinal (morale hazard) - carelessness or indifference to a loss, which increases the frequency or severity of a loss. Example is leaving car keys in an unlocked car increased the chance of theft. 4. Legal - characteristics of the legal system or regulatory environment that increase the frequency or severity of loss. Examples include adverse jury verdicts or large damage awards in liability lawsuits.
Participating vs Nonparticipating polices - What are the different classifications of people who might be interested in these types of policies?
A participating policy is one that pays dividends and they give policyholders the right to share in the divisible surplus of the insurer. In contrast, a policy that does not pay dividends is knows as a nonparticipating policy. *young professionals in organizational groups positively impact these policies. AICPA has a group insurance plan that pays out dividends.
What is a viatical settlement? How does it differ from an Accelerated Death Benefits Rider?
Accelerated death benefits allow part or all of the life insurance face amount to be paid to a chronically or terminally ill policyholder before he or she dies, and the charge for the benefit is usually included into the premium. Depending on the insurer and policy provision, certain medical conditions can trigger the payment of accelerated benefits like terminal illness or nursing home confinement. As an alternative to the payment of accelerated benefits, terminally ill insureds may be able to sell their policies to private firms. A viatical settlement is 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 insureds early death. The policy is sold as a substantial discount, and the buyer continues to pay the premiums.
What is adverse selection? How can it be controlled?
Adverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher-than-expected loss levels. Adverse selection is controlled by underwriting which is the process of selecting and classifying applicants for insurance. Applicants who meet the underwriting standards are insured at standard or preferred rates.
What is a personal property rider?
An extra piece on top of an insurance policy that covers something valuable such as a diamond ring (really common) or a gun collection that wouldn't normally be covered or fully covered by homeowner's insurance *A rider has to be added on to a homeowner's policy already in place. You can get a policy on a singular item like a ring, but it would cost a lot more on it's own.
What is umbrella insurance? What is its purpose and use?
An umbrella policy in a way covers all of the policies that you already have. If you own a car, a house, and a boat then all of the policies on each of these things will be increased because you have an umbrella policy covering each of these individual policies. Umbrella policies step in after other insurance policies. About a million dollars in coverage is about $150 a year. Increases as aspects of your life become riskier such as having a new driver in the house. *Typically you can't get an umbrella policy if you have a jet ski.
What are the benefits and costs of insurance to society?
Benefits: 1. Indemnification for loss 2. Reduction of worry and fear 3. Source of investment funds 4. Loss prevention 5. Enhancement of credit Costs: 1. Cost of doing business 2. Fraudulent claims 3. Inflated claims
What does collision insurance include?
Collision insurance includes coverage for when there is a collision with another vehicle or object. *If you don't have a loan on your car, collision insurance is optional.
What does comprehensive automobile insurance include?
Comprehensive insurance includes coverage outside of collisions that you cannot control such as theft or vandalism. ex: baseball hitting car and breaking windshield
Are proceeds from a disability insurance contract taxable to the recipient?
IT DEPENDS. Who pays the premiums? *When you pay the premiums it is not taxable. *If your employer pays the premiums in full, then the benefits are taxable to you. *In instances where you pay part of the premium and your employer pays part of the premium, your portion of the payment is not taxable but the portion the employer pays is taxable.
What are minimum liability coverage requirements for automobile insurance in N.C.?
In NC, the minimum liability coverage is 30/60/25. *The gold standard is 100/300/250
How does the law of large numbers relate to risk management?
In risk management, as the # of exposures increases, an insurer can predict its future loss experience more accurately because it can rely on the law of large numbers. *can't predict insurance involving catastrophic events such as wildfires
What does indemnity mean? Does it apply to all types of insurance?
Indemnification permits individuals and families to be restored to their former financial position after a loss occurs. As a result, they can maintain their financial security.
What is joint and second-to-die life insurance?
Joint life insurance (first-to-die) - 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. Second-to-die life insurance - insures 2 or more lives and pays the death benefit at the time of the death of the second or last injured
Who needs disability insurance?
More people need disability insurance than life insurance. -young workers in hazardous jobs like construction -people who depend solely on their wage to live - people who are sick *you more likely need disability insurance after college graduation rather than life insurance
What is peril?
Peril is defined as the cause of a loss. *If your house burns down because of a fire, the peril, or cause of loss, is the fire.
What are some of the different beneficiary designations?
Primary, contingent, revocable, irrevocable, specified, and class
What types of insurance, private and government, are available?
Private insurance includes life and health insurance as well as property and liability insurance. Government insurance includes social insurance programs and other government insurance plans (such as Social Security).
What are the inherent issues with "opposing risks" such as premature death vs extended life?
Problems with premature death are the dependents having to pay bills and take on other responsibilities earlier than expected or that are unexpected. However, problems with extended life include having to pay bills and things longer than was likely planned. For example, most financial models plan for 100 years. If you have an extended life and live longer than that, those extra years have to be planned for.
What is pure risk?
Pure risk is defined as a situation in which there are only the possibilities of LOSS or NO LOSS. The only possible outcomes are adverse (loss) and neutral (no loss). *Pure risk is insurable risk. An example of this is getting hurt on the job. You either get hurt or you don't. (loss or no loss)
How is risk defined?
Risk has traditionally been defined as uncertainty concerning the occurrence of a loss. In finance, risk and uncertainty have distinctions. Risk is used in situations where the probabilities of possible outcomes are known or can be estimated with some degree of accuracy, whereas uncertainty is used in situations where such probabilities cannot be estimated. subjective risk - uncertainty based on a person's mental condition or state of mind objective risk - the relative variation of actual loss from expected loss
What are the settlement options for life insurance policies?
Settlement options refer to the various ways that the policy proceeds can be paid. 1. Cash - policy proceeds are paid to beneficiary after death in lump sum (most common settlement option) 2. Interest option - policy proceeds are retained by the issuer and interest is periodically paid to the beneficiary 3. Fixed-period option - policy proceeds are paid to a beneficiary over some fixed period of time 4. Fixed amount option- a fixed amount is periodically paid to the beneficiary 5. Life income options - different types: life income, life income with guaranteed period, life income with guaranteed total amount, and joint-and-survivor income *the policyholder decides on the form of settlement
What is speculative risk?
Speculative risk is defined as a situation in which either profit or loss is possible. An example of this would be purchasing stock.
What are the types of term insurance?
Term insurance is just for a specified term. If you pay the premium, you have insurance. If you quit paying the premium you no longer have insurance. Most term policies are renewable at the end of a specified term. Most term policies are also convertible, which means they policy can be exchanged for a cash-value policy without evidence of insurability. NO CASH VALUE OR SAVINGS ELEMENT WITH TERM POLICIES. Different types: 1. yearly renewable term - issued for a one-year period, and the policyholder can renew for successive one-year periods to some stated age without evidence of insurability. Premiums increase with each new renewal. Most policies can be converted to cash-value policies. 2. 5-, 10, 15, 20, 25, or 30-year term - The premiums paid during the term period are level, but they increase when policy is renewed. 3. Term to age 65 - provides protection to age 65, at which time the policy expires. The policy can be converted to a permanent plan of insurance, but the decision to convert must be exercised before age 65. 4. Decreasing term - face amount gradually decreases each year. However, the premium is level throughout the period. this has disadvantages because towards the end of your policy you could be paying high premiums for a small amount of coverage. Also doesn't provide for changing needs such as birth of a child. 5. Reentry term - renewal premiums are based on select (lower) mortality rates if the insured can periodically demonstrate acceptable evidence of insurability. To remain on the low-rate schedule, the insured must periodically prove they are in good health 6. Return of premium term insurance - a product that returns the premiums at the end of the term period, provided the insurance is still in force. Typical term periods range from 15 to 30 years. The amount returned only includes base premiums.
What is a "common disaster" clause?
The common disaster clause states that if the insured and the beneficiary die simultaneously, such as in a car accident together, the second beneficiary in line becomes the beneficiary. However, for this to occur, the primary beneficiary has to die at the same time as or within a certain period of time after the insured dies. Otherwise the proceeds may go to their estate rather than the second beneficiary.
What is the elimination (waiting) period? What is it's relationship to premiums?
The elimination period is how long you have to wait to receive your insurance benefits after an incident occurs. The longer elimination period you choose, the lower the premiums because you have to wait longer. *Most common elimination periods are 3 months, 6 months, and 1 year.
What are the characteristics of decreasing term insurance?
The face amount gradually declines each year. However, the premium is level throughout the period. In some policies, the premiums are structured so that the policy is fully paid for a few years before the coverage expires. This avoids paying a relatively large premium for only a small amount of coverage near the end of the term period. Disadvantages: - if you become uninsurable, you must convert the remaining insurance to a permanent plan to freeze the remaining amount of insurance. If the policy is not converted, the insurance protection continues to decline even though you are uninsurable. - does not provide for changing needs such as birth of a child - doesn't provide an effective hedge against inflation
What is an incontestable clause and who does it protect? Are there exclusions?
The incontestable clause states that the insurer cannot contest the policy after it has been in force for 2 years during the insureds lifetime. After the policy has been in force for 2 years during the insureds lifetime, the insurer cannot later contest a death claim on the basis of material misrepresentation, concealment, or fraud when the policy was first issued. The insurer has 2 years in which to discover any irregularities in the contract. Exclusions include: 1. The beneficiary takes out a policy with the intent of murdering the insured. 2. An insurable interest does not exist at the inception of the policy. 3. There is fraudulent impersonation of the applicant by another person for purposes of taking the medical exam and answering questions concerting the applicant's health.
How does a companies' risk affect the employee or customer's risk?
The more risks that are associated with a company, the more risk the employees and customers are exposed to. For example, in companies where cybersecurity threats are high, the risk for identity theft of consumers is higher, especially if they don't have proper guards in place. Another example would be if a company does not have up-to-date machinery, the employees have a greater risk of getting hurt on the job. Lastly, risk of a company transfers to the investors when they purchase shares of stock or provide capital.
What is a blackout period?
The period during which Social Security benefits are not paid to a surviving spouse - between the time the youngest child reaches age 16 and the surviving spouse's 60th birthday.
What are the characteristics of level term life insurance?
The premiums paid during each specific term are level, but they increase each time the policy is renewed. The terms can range in increments 5 to 10 to 15 up to 30 years.
Are proceeds from life insurance taxable to the beneficiary?
The principal paid from life insurance is not taxable but the interest is.
What is a suicide clause?
The 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. If the insured commits suicide after the period expires, the policy proceeds are paid just like any other claim. *The insurer has the responsibility of proving that the insureds death was suicide.
"The goal is to bring down losses at a tolerable cost." What does this mean in terms of exposure? What are some examples that have challenged companies?
This means that a company balances the cost and benefit of how much loss they are willing to deal with, take responsibility for, pay for, etc. Limit exposures to a "tolerable" cost or amount. ex: BuckyBalls - kids were swallowing them and the company ultimately had to quit production of those specific magnetic balls because the losses were not tolerable.
Techniques for managing risk
Two categories: Risk control and Risk financing Risk control - describes techniques for reducing the frequency or severity of losses 1. Avoidance - avoiding the risk to begin with 2. Loss Prevention - reduces the probability of loss so that the frequency of losses is reduced. For example, more heart attacks can be prevented by people controlling their weight. 3. Loss Reduction - reducing the severity of a loss after it occurs. An example is installing a sprinkler system that goes off when a fire breaks out. Risk financing - techniques that provide for the payment of losses after they occur 1. Retention - means that an individual or a business firm retains part of all of the losses that can result from a given risk (active and passive) 2. Non-insurance transfers - Transferring risk to a party other than the insurance company. Examples include incorporation of a business firm and transfer of risks by contracts. 3. Insurance - having an insurance company take on your risk *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 risk.
What circumstances would give rise to a "waiver of premium"?
Under the provision of a "waiver of premium," if the insured becomes totally disabled from bodily injury or disease before some stated age, all premiums coming due during the period of disability are waived. Before any premiums are waived, the insured must meet the following requirements: 1. Become disabled before some stated age, such as before 60 or 65 2. Be continuously disabled for 6 months (some insurers have a shorter waiting period) 3. Satisfy the definition of total disability (this will be defined in the policy) 4. Furnish proof of disability satisfactory to the insurer
Characteristics of universal life insurance
Universal life insurance (flexible premium life insurance) can be defined as a flexible premium policy that provides protection under a contract that separates the protection and saving components. (except for first premium, policyholder determines the amount and frequency of payments) Characteristics include: - unbundling of protection and saving component - two forms of universal life insurance - considerable flexibility - cash withdrawals permitted - favorable income-tax treatment Two forms: 1. Option 1 pays a level death benefit during the early years. 2. Option 2 provides for an increasing death benefit.
Characteristics of variable life insurance
Variable life insurance is defined as a fixed premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is similar to a mutual fund maintained by the insurer. - a permanent whole life contract with a fixed premium - the entire reserve is held in a separate account and is invested in common stocks or other investments - there are no minimum guaranteed cash values (cash values depend on the investment experience)
Characteristics of whole life insurance
Whole life insurance is a generic name for cash value policies that provide lifetime protection. - called ordinary life insurance if premiums are payable throughout the lifetime of the insured. Ordinary life insurance is a level-premium policy that accumulates cash values and provides lifetime protection to age 121 -called limited payment life insurance if the premium period is less than the insured's lifetime. For limited payment life insurance, the premiums are level, but they are paid only for a certain period.
Is it possible to over insured? What are the potential advantages/disadvantages of being over/under insured?
Yes
What advantages comes from knowing the insurers financial condition? How do we assess this?
You want to know their financial status, their customer service, if they have a lot of liabilities, etc. By knowing this, you can be assured that they can actually protect you financially if you have an incident. You can assess this from word of mouth, rating services, asking for the company's financial statements.
class beneficiary
a specific person is not named but is a member of a group designated as beneficiary such as "children of the insured"
Contingent beneficiary
entitled to proceeds if the primary beneficiary dies before the insured or dies before receiving the guaranteed # of payments under an installment settlement option
irrevocable beneficiary
one that cannot be changed without the beneficiary's consent (this is rare)
What is the law of large numbers?
states that "as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience"
specific beneficiary
the beneficiary is specifically named and identified
Primary beneficiary
the party who is first entitled to receive the policy proceeds upon the insured's death
revocable beneficiary
the policyholder can change the beneficiary without the beneficiary's consent
