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
