CFP - Insurance Planning/Risk Management S1 - 1,2,3,6,8

Question 1

(Insurance Coverage Priority) _________________insurance required by law for losses of potentially disastrous results for the household or business.

Answer 1

Essential

Question 2

(Insurance Coverage Priority)
_______________losses that would seriously impair but not totally wipe out the financial position of the household or business.

Answer 2

Desirable

Question 3

The expenses directly related to death will include _______________ and ________________.

Answer 3

Remaining medical bills

Funeral and burial costs

Question 4

Indirect expenses related to death include:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 4

Payment of outstanding debt
Funding child’s education
Funding for special needs children
Replacing breadwinners income stream

Question 5

_____________ __________________ is used to replace lost wages (as well as out-of-pocket medical expenses) while disabled.

Answer 5

Disability Insurance

Question 6

Disability insurance payouts usually range from _____% to _____% of ___________ ___________.

Answer 6

60% to 80%

earned income

Question 7

________ ________ creates problems due to ineligibility for life insurance.

Answer 7

Poor health

Question 8

The outliving of income and accumulated assets in

retirement.

Answer 8

Superannuation

Question 9

_________ ________ anything that is subject to ownership other than real property.

Answer 9

Personal property

Question 10

Land and anything growing on it, erected on it, or affixed to it is considered _________ ________.

Answer 10

real property

Question 11

Used in instances in which the exposure has catastrophic potential, and the risk cannot be reduced or transferred.

Answer 11

Risk Avoidance

Example: An athlete playing a different sport or engaging in dangerous activities such as
bungee-jumping.

Question 12

The duplication of assets or activities at different locations.

Answer 12

Risk Diversification

Example: Using separate buildings, storing inventory at various locations, maintaining duplicate records of wills and other documents at other locations, etc.

Question 13

Consists of all techniques that are designed to reduce the likelihood of loss.

Answer 13

Risk Reduction

Example:
Security systems, fire detectors, fire sprinklers, seatbelts, physical examinations, etc.

Question 14

When losses occur, the choices on how to pay for them are divided into two major groups:
_____________ _____________
_____________ _____________.

Answer 14

Risk retention – when you intentionally or unintentionally retain the risk of
loss from the exposure.

Risk transfer – involves shifting the financial consequence associated with the risk to someone else. When insurance is used, a premium payment will
be required.

Question 15

The insured’s possibility of loss is called his _______________ to loss.

Answer 15

exposure

Question 16

_________ _____________ for smaller losses and purchase insurance for _______________ losses

Answer 16

Self insure

catastrophic

Question 17

______________ is a financial arrangement that redistributes the costs of unexpected
losses.

Answer 17

Insurance

Question 18

Law of large numbers

Answer 18

A larger sample will improve an insurer’s estimate of the underlying probability for loss. As actual events differ from predictions, risk will exist for the insurer.

Question 19

Loss

Answer 19

A partial or complete disappearance or reduction in value. It is the undesired end result of risk

Question 20

Peril

Answer 20

Anything that causes a financial loss.

Examples: Unemployment, illness, old age, death, theft, fire, earthquake, windstorm, flood, and hundreds of other causes of loss.

Question 21

Hazard

Answer 21

A condition that serves to increase the frequency or severity of perils.

Question 22

3 categories of hazrds

Answer 22

Physical, Moral, Morale

Question 23

Physical Hazard

Answer 23

Physical characteristics of the person or property that increases the chance of loss

Question 24

Moral Hazard

Answer 24

Dishonest tendencies, often due to an insured’s weakened financial condition, that are likely to increase loss frequency and/or severity.

Question 25

Morale Hazard

Answer 25

An indifference to the loss when insurance is in place, which creates carelessness and increases the chance of loss.

Question 26

Examples of physical hazard

Answer 26

Having high blood pressure, being diabetic, or owning a house located in a flood zone.

Question 27

Examples of moral hazard

Answer 27

An intentional loss or overstatement of the amount of loss when a peril occurs.

Question 28

Examples of morale hazard

Answer 28

Failure to lock doors, increasing the chance of burglary, or careless smoking habits, increasing the chance of a fire.

Question 29

Adverse selection

Answer 29

The likelihood that parties with the greatest probability of loss are the ones who most desire the insurance.

Question 30

Unilateral Contract

Answer 30

An insurance contract is a unilateral contract. Only the insurer promises to do anything, as there is no promise for the insured to pay the premium. Ex. A unilateral contract is a 20-year term policy for $900. You can’t negotiate to pay $875 for the premium

Question 31

Contract of Adhesion

Answer 31

An insurance contract is a contract of adhesion, meaning the insurance company prepares the entire contract. The insured can accept or reject the contract, but the insured cannot modify, alter, or negotiate the contract. There are no modifications that can be made by the consumer, who must take it or leave it

Question 32

Contract of utmost good faith consists of the following three doctrines...

Answer 32

Misrepresentation - if the insured made a false statement, the insurance contract may be voided. Warranties - a breach of warranty may cause an insurance contract to be voidable. A statement of warranty is included in the policy. Concealment - failure of the insured to disclose material facts concerning the subject matter of the insurance may void the contract.

Question 33

An agreement under which action is predicated on a specific event. The events are not controlled by either party.

Answer 33

Aleatory Contract

Question 34

Dynamic risks

Answer 34

The result of the economy changing (e.g., changes in business cycle, consumer taste). Insurance does not cover these risks.

Question 35

Financial Risk

Answer 35

The exposure to a risk that may cause financial loss.

Question 36

Fundamental Risk

Answer 36

Impersonal, and usually a group risk (e.g., an earthquake or hurricane). The loss affects large segments of the society at the same time.

Question 37

Particular Risk

Answer 37

A personal and individual risk, such as a home burglary. It affects only individuals or small groups of individuals at the same time, rather than a large segment of society

Question 38

Personal Risk

Answer 38

Loss of income or asset resulting from the loss of ability to earn income through disability, death, or sickness.

Question 39

Property Risk

Answer 39

Direct or indirect loss from theft or destruction such as from a fire.

Question 40

Speculative Risk

Answer 40

Involves both the chance of loss or gain, such as gambling. Speculative risk is not insurable.

Question 41

Pure Risk

Answer 41

Involves only the chance of loss or no loss.

Question 42

Static Risks

Answer 42

Losses caused by factors not related to the economy (e.g., death of the family breadwinner). These tend to occur with regularity and can be insured against.

Question 43

Collateral Source Rule

Answer 43

Holds that damages assessed against a negligent party should not be reduced simply because the injured party has other sources of recovery available (such as insurance or employee benefits).

Question 44

Negligence

Answer 44

The failure to act in a way that a reasonably prudent person would have acted under the circumstances. Example – not documenting patient files after providing medical procedures.