BUS 425 Exam 1

diversifiable risk

risk that affects only individuals or small groups and not the entire economy

nondiversifiable risk

risk that affects the entire economy or large numbers of persons or groups within economy

insurance

risk transfer, pooling technique, law of large numbers

noninsurance transfers

risk transferred to a party other than insurance company

personal risk

risks that directly affect an individual or family

passive retention

risks unknowingly obtained because of ignorance, indifference, laziness, or failure to identify important risk

liability risk

operation in highly competitive markets where lawsuits from bodily injury and property damage are common

operational risk

results from firm's business operations

personal property rider

a backup or add on to an existing policy

loss prevention

aims at reducing probability of loss so frequency of losses is reduced

law of large numbers

as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience

avoidance

avoid risk of something occurring by not doing it

primary beneficiary

beneficiary is first entitled to receive the policy proceeds (death benefit) on the insured's death

specific beneficiary

beneficiary is specifically named and identified

accelerated death benefits rider

benefits paid to insured before the insured dies

casualty insurance

broad field of insurance that covers whatever isn't covered by fire, marine, and life insurance

property risk

business firms own valuable business property that can be damaged or destroyed by numerous perils

attitudinal hazard

carelessness or indifference to a loss, which increases the frequency or severity of loss (leaving car keys in car increases the chance of theft)

settlement options

cash, interest option, fixed-period option, fixed amount option, life income option

legal hazard

characteristics of the legal system or regulatory environment that increases frequency or severity of loss (adverse jury verdicts or large damage wards in liability lawsuits)

hazard

condition that creates or increases the frequency or severity of loss

macroeconomic risk

conditions that will affect an investment (exchange rates, government regulations, political stability)

comprehensive physical damage

covers damage to your vehicle that's not caused by a collision

liability insurance

covers insured's legal liability arising out of property damage or bodily injury to others

medicare

covers medical expenses of most people age 65 and older and certain disabled people younger than 65

worker's compensation

covers workers against job-related accident and disease

premature death

death of family head with unfulfilled financial obligations

waiver of premium

designed to pay premiums on your behalf if you become disabled

moral hazard

dishonesty or character defects in an individual that increases the frequency or severity of loss (faking an accident to collect from insurer)

speculative risk

either profit or loss is possible

enterprise risk

encompasses all major risks faced by a business firm

contingent beneficiary

entitled to the proceeds if the primary beneficiary dies before the insured

umbrella insurance

extra coverage for liability; provides protection against catastrophic lawsuit or judgment

social insurance

financed entirely or in large part from mandatory contributions from employers, employees, or both, and not primarily by general revenues from government

direct loss

financial loss that results from physical damage, destruction, or theft of property

indirect loss

financial loss that results indirectly from occurrence of direct physical damage or theft

loss of business income

firm may be shut down for several months because of a physical damage to business property because of a fire or other perils

suicide clause

if insured commits suicide within 2 years after the policy is issued, face amount of insurance won't be paid, there's only refund in premiums paid

"common disaster" clause

if the insured and primary beneficiary die in the same accident, the child gets the money

property insurance

indemnifies (compensates) property owners against the loss or damages of real or personal property caused by various perils, such as fire, lightning, windstorm, or tornado

active retention

individual is consciously aware of risk and deliberately plans to retain all or part of it

retention

individual or business firm retains part or all of the losses that can result from given risk

incontestable clause

insurer can't contest policy after it's been in place for 2 years during the insured's lifetime

whole life insurance

life insurance policy that provides lifetime protection

second-to-die life insurance

life insurance that insures two or more lives and pay death benefit upon death of second or last insurance

variable life insurance

life insurance with death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer; permanent whole life contract with fixed premium

health insurance

medical expense plans pay for hospital and surgical expenses, physician fees, prescription drugs, and other medical costs

pure risk

only the possibilities of loss or no loss

self-insurance (self-funding)

part or all of given loss exposures retained by firm

non-working spouse method

partial replacement method where you multiply number of years until youngest child reaches 18 and multiply by 10,000

easy method

partial replacement method where you take 70% of your salary and multiply it by 7 years to get coverage

dink method

partial replacement method where you take half your debts and add funeral expenses

life insurance

pays death benefits to designated beneficiaries when insured dies

collision coverage

pays for damage to your automobile, regardless of who is at fault

blackout period

period from time social security survivor benefits terminate (when youngest child reaches 16) to the time the benefits are resumed (spouse turns 60)

incorporation

personal assets can't be attached by creditors for payments of the firm's debts

physical hazard

physical condition that increases the frequency or severity of loss (icy roads increase the chance of a car accident)

non-participating policy

policy that doesn't pay dividends

participating policy

policy that pays dividends

irrevocable consent

policyholder can't change the beneficiary without the beneficiary's consent

revocable consent

policyholder reserves the right to change the beneficiary designation without the beneficiary's consent

microeconomic risk

political risks that don't affect all businesses

human life value approach

present value of family's share of the deceased breadwinner's future earnings

capital retention approach

preserves capital needed to provide income to family

underwriting

process of selecting and clarifying applicants of insurance

unemployment insurance

provide weekly cash benefits to eligible workers who experience short-term involuntary unemployment

social security insurance

provides retirement, survivor, and disability benefits to eligible individuals and families

cost-benefit analysis

realizing the strengths and weaknesses of alternatives; determines options that provide the best approach to achieve benefits while preserving savings

loss reduction

reduce severity of loss after it occurs

partial replacement methods

replacement methods leaving more at risk, but paying less premiums

viatical settlement

sale of a life insurance policy by a terminally ill insured to a third party, typically to investors or investor groups who hope to profit by the insured's early death

fixed amount option

settlement option where fixed amount is paid to beneficiary

life income option

settlement option where installment payments are paid only while the beneficiary is alive and cease on beneficiary's death

interest option

settlement option where interest is periodically paid to the beneficiary

fixed period

settlement option where proceeds (income) are paid to beneficiary over fixed period of time

class beneficiary

specific person not named but is a member of a group designated as beneficiary "child of the insured"

subrogation

take on something on your behalf - having your insurance company deal with other people's insurance for you

hedging

technique for transferring risk of unfavorable price fluctuations to specualtor by purchasing and selling futures contract on organized exchange like NYSE

risk financing

techniques that provide for the funding of losses

risk control

techniques that reduce frequency or severity of loss

adverse selection

tendency of persons with a higher-than-average change of loss to seek insurance at standard rates, which if not controlled by underwriting, results in higher-than-expected loss levels

reentry term

term insurance policy in which renewal premiums are based on select (lower) mortality rates if the insured can periodically demonstrate acceptable evidence of insurability

return of premium term insurance

term insurance product that returns the premiums at the end of the term period provided the insurance is still in force

yearly renewable insurance

term insurance that can renew plan for successive one-year periods; premiums increase with age at each renewal

term to age 65

term insurance that protects to age 65, and then policy expires

decreasing term insurance

term insurance where face amount gradually declines each year; premium remains level

peril

the cause of loss

elimination (waiting) period

time from you becoming disabled to the time you start receiving benefits

indemnity

to restore to original position; one party's responsibility or obligation to protect or hold harmless another person from legal harm

any occ

unable to perform any job

own occ

unable to perform your own job

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 (when business enters new line of business, the line may be unprofitable)

transfer of risk by contract

undesirable risk can be transferred by contracts

needs approach

various family needs that must be met if the family head should die are analyzed, and the amount of money needed to meet these needs is determined