Life Insurance- Chapter 1

A hazard increases the

probability of loss

Moral hazards are

tendencies towards increased risk.

Life insurance insures against

the financial loss caused by the premature death of the insured

Since insurance policies are legal contracts, it helps if the conditions are

exact as possible

Poorer risks tend to seek

insurance or file claims to a greater extent than better risks

There are several ways to transfer risk, such as

hold harmless agreements and other contractual agreements, but the safest and most common method is to purchase insurance coverage.

Reduction would include actions such as

installing smoke detectors in our homes, having an annual physical to detect health problems early, or making a change in our lifestyle

Indemnity means

insureds cannot recover more than their loss.

Adverse selection is the

insuring of risks that are more prone to losses than the average risk.

Though the purchasing of insurance will not eliminate the risk of death or illness,

it relieves the insured of the financial losses these risks bring.

The more unpredictable a loss, the

less insurable it becomes.

The more predictable a loss becomes, the

more insurable it becomes.

A risk is a chance that a loss will

occur

The law of large numbers states that

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be.

Property insurance insures against

the loss of physical property or the loss of its income- producing abilities

Speculative Risk involves

the opportunity for either gain or loss. Ex: gambling- *not insurable

The level of loss to be indemnified is agreed upon by

the parties to the insurance contract.

Conditions such as lifestyle and existing health, or activities such as scuba diving, are

hazards and may increase the chance of a loss occurring

Casualty insurance insures against

the loss and/or damage of property and resulting liabilities.

Since we cannot avoid risk entirely,

we often attempt to lessen the possibility or severity of a loss

The loss must be statistically predictable

This enables insurers to estimate the average frequency and severity of future losses and to set appropriate premium rates.

According to the California Insurance Code,

"... any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against..." AKA if a possible future event could result in loss or liability to a person, it may be insurable under the Insurance Code. These insurable events may never occur, but insurance policies can provide protection when those times come.

As defined by CIC22

"insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event"

Insurance

(CIC 22)

The purpose of retention is

1.) To reduce expenses and improve cash flow 2.) To increase control of claim reserving and claim settlements 3.) To fund for losses that cannot be insured

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? A.) Indemnity B.) Stop-loss C.) Consideration D.) Reasonable expectations

A.) Indemnity The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

Adverse selection is a concept best described as: A.) Risks with higher probability of loss seeking insurance more often than other risks B.) Underwriters slanting the odds in favor of the company C.) Poor choices of applicants to be covered D.) Only offering coverage to good risks

A.) Risks with higher probability of loss seeking insurance more often than other risks Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following except: A.) The loss may be intentional B.) The loss must not be catastrophic C.) There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable. D.) The loss produced by the risk must be definite.

A.) The loss may be intentional To insure intentional losses would be against public policy

Which of the following is not a characteristic of pure risk? A.) The loss exposure must be large B.) The loss must be catastrophic C.) The loss must be due to chance D.) The loss must be measurable in dollars

B.) The loss must be catastrophic To be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become A.) Older B.) More active C.) Larger D.) Smaller

C.) Larger According to the law of numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.

When an individual purchases insurance, what risk management technique is he or she practicing? A.) Sharing B.) Retention C.) Transfer D.) Avoidance

C.) Transfer Insurance is a transfer of the risk of financial loss from a covered peril from the insured to the insurance company

Perils

Causes of loss

Hazards

Conditions and actions that increase risk and probability of loss

In making a decision for establishing an insurance program, it may be wise to apply the following commonsense principles:

Consider the odds Don't risk more than you could afford to lose Don't risk a lot for a little

Which of the following statements is NOT true concerning insurable interest as it applies to life insurance? A.) Business partners have an insurable interest in each other B.) A husband or wife has an insurable interest in their spouses. C.) An individual has an insurable interest in his or her own life. D.) A debtor has an insurable interest in the life of a lender

D.) A debtor has an insurable interest in the life of a lender A lender has an insurable interest in the life of a debtor, but only to the extent of the debt. The debtor does not have an insurable interest in the life of the lender.

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard? A.) Moral B.) Legal C.) Physical D.) Morale

D.) Morale A morale hazard is someone who has an indifferent attitude towards an insurance company. He is careless or irresponsible because he knows his loss will be covered by insurance

Which of the following is the most common way to transfer risk? A.) Increase control of claims B.) Lessen the possibility of loss C.) Name a beneficiary D.) Purchase insurance

D.) Purchase insurance The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.

A large number of units having the same or similar exposure to loss is known as

Homogeneous

Insurance

Transfer of loss Protection

A reciprocal insurance exchange is

a formal risk-sharing agreement

Insurance companies strive to protect themselves from

adverse selection

A legal hazard describes a set of legal or regulatory conditions that

affect an insurer's ability to collect premiums that are commensurate with (equal in value) the exposure to loss that the insurer must bear.

For the purpose of insurance, risk is defined as A.) The uncertainty or chance of loss B.) The certainty of loss C.) The cause of loss D.) An event that increases the amount of loss

A.) The uncertainty or chance of loss Risk, or the chance of loss occurring, is the basic reason for buying insurance.

The loss must be definite and measurable

An insurable risk must involve a loss that is definite as to cause, time, place, and amount. An insurer must be able to determine how much would the benefit will be and when it becomes payable.

The insurance must not be mandatory

An insurer must not be required ro issue a policy to each applicant applying for coverage. The insurer must have the ability to require that certain underwriting guidelines be met.

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about? A.) The gender of the applicant B.) The type of policy requested C.) Which individual will pay the premium D.) Whether an insurable interest exists between the individuals

D.) Whether an insurable interest exists between the individuals An insurable interest must exist at the time the policy is issued. Some relationships are automatically presumed to qualify as an insurable interest ex: spouse, parents, children, and certain business relationships

In life insurance, insurable interest must exist between the

Policyowner and the insured AT THE TIME OF APPLICATION; however once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

A valid insurable interest may exist between the Policyowner and the insured when the policy is insuring any of the following

Policyowners own life the life of a family member (a spouse or a close blood relative) The life of a business partner, key employee, or someone who has a financial obligation to the Policyowner (such as a debtor to a creditor)

Loss

Reduction of value Basis for a claim

Insurance is the legal

agreement, or contract, whereby two parties involved agree to the limits of the indemnification, l the circumstances under which it will occur and what things of value (consideration) will be exchanged by the parties to the contract.

Critical risks include

all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, his or her family, and/or to his or her business

Insurance is a transfer of risk of loss from

an individual or a business entity to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals.

Insurable interest must exist at the time of

application

Insurable interest is not required of

beneficiaries

Insurance company pays benefit to

beneficiary

Beneficiary receives

benefit upon insured's death

A peril is the

cause of the loss

Perils are the

causes of loss insured against an insurance policy

Though insurance may be the most effective way to handle risks, not all risks are

insurable

Risk is the

uncertainty or chance of a loss occurring

As the number of people in a risk pool increases,

future losses become more predictable

Actions taken without forethought may cause

physical injuries

Risk retention is the

planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. AKA- self-insurance when the insured accepts the responsibility for the loss before the insurance company pays

Insurance company issues

policy to policy owner

Policyowner pays

premium to insurance company

Insurance is the most common method of transferring

risk from an individual or group to an insurance company.

Risk avoidance is effective, but

seldom practical.

Important risks include

those exposures in which the losses would lead to major changes in the persons desired lifestyle or profession

Unimportant risks include

those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes.

The most effective way to handle risk is to

transfer it so that the loss is borne by another party.

Typically, insurance policies exclude coverage for loss caused by

wars or nuclear events because there is no statistical data that allows for the development of rates that would be necessary to cover these events should they occur.

All of the following factors are considered in determining rates:

The age of the insured Medical history Occupation Sex

The loss of exposure to be insured must involve large homogeneous exposure units

There must be a sufficiently large pool to be insured and those in the pool must be grouped into classes with similar risks so the insurer is able to predict losses based upon the LAW OF LARGE NUMBERS. This enables insurers to properly predict the average frequency and severity of future losses based on and to set appropriate premium rates.

The loss must be due to

chance (accidental)- in order to be insurable, a risk must involve the chance of loss that is outside the insured's control

Moral hazards involve evaluating the

character and reputation of the proposed insured.

In the process of establishing an insurance program, insureds must first

identify their exposure to losses, along with the probability of how likely it is that a loss will occur and how "big" the loss might be. Certain risks, because of the severity of the possible loss, will demand attention above others.

Physical hazards are

individual characteristics that increase the chances of the cause of the loss.

Not all pure risks are

insurable

Insurance is the _____________ of

risk. Insured's losses are transferred over to the insurer.

The risk of loss may be classified as A.) Pure risk and speculative risk B.) Certain risk and uncertain risk C.) Named risk and un-named risk D.) High risk and low risk

A.) Pure risk and speculative risk Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.

The loss cannot be catastrophic

Insurers typically will not insure risks that will expose them to catastrophic losses. Insurers need to be reasonably certain that the losses will not exceed certain limits.

Hazards are

conditions or situations that increase the probability of an insured loss occurring.

Sharing is a method of

dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group.

Physical hazards exist because of a

physical condition, past medical history, or a condition at birth, such as blindness

A profitable distribution of exposures (or spread of risk) exists when

poor risks are balanced with preferred risks, with "average" or "standard" risks in the middle.

The purpose behind distributing risks in this manner is to

protect the insurer from adverse selection *Key principle of insurance

Indemnity (aka reimbursement) is a

provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the event of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

Insurers will only insure

pure risks- those that involve only the chance of loss with no chance of gain.

Exposure is a unit of measure used to determine

rates charged for insurance coverage

The purpose of insurance is to

restore, but not let an insured or a beneficiary profit from the loss Ex: health insurance policy of $20,000- her medical bills were $15,000. Insurance will only reimburse her $15,000 and not the total policy amount

The basis of insurance is

sharing risk among a large pool of people with a similar exposure to loss, (a homogeneous group)

Pure risk refers to

situations that can only result in a loss or no change. No opportunity for financial gain. *Only type of risk that insurance companies are willing to accept

The law does not address a limit as to the level of loss that may be insured against; it only

specifies the type of event that is insurable.

Morale hazards arise from a

state of mind that causes indifference to loss, such as carelessness.

The law of large numbers forms the basis for

statistical prediction of loss upon which insurance rates are calculated.

In life and health insurance, the use of mortality tables and morbidity tables allows

the insurer to project losses based on statistics

One of the methods of dealing with risk is avoidance, which means

eliminating exposure to a loss. Ex: if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose to never fly in an airplane.

To purchase insurance, the policy owner must

face the possibility of losing money or something of value in the event of loss. This is called insurable interest

To protect themselves from adverse selection, insurance companies

have an option to refuse or restrict coverage for bad risks, or charge them a higher rate for insurance coverage.

Since the beneficiaries well being is dependent upon the insured, and the beneficiarys life is not the noe being insured, the beneficiary does not

have to show an insurable interest for a ploy to be purchased

Persons include

individual human beings, associations, organizations, corporations, partnerships and trusts.

A person is a

legal entity which acts on behalf of itself, accepting legal and civil responsibility for the actions it performs and making contracts in its own name.

Moral hazards refer to those applicants who may

lie on an application for insurance, or in the past, have submitted fraudulent claims against the insurer.

The Policyowner must have insurable interest in the

life of the insured.

Health insurance insures against

the medical expenses and/or loss of income caused by the insured's sickness or accidental injury

The principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between

the parties.