Chapter 6 Risk Management and Insurnace

Pure Risk

A category of risk where the only two outcomes are loss or no loss (e.g., a fire).

Speculative Risk

A category of risk where there is a chance of either a profit or a loss (e.g., investing in stocks).

Capital Needs Analysis

A calculation evaluating financial shortfalls at death by subtracting cash/asset needs from existing resources to determine insurance requirements.

Buy-Sell Agreement

A legally binding contract establishing that surviving business owners must purchase a deceased partner's shares at a specified price.

Whole Life Insurance

Permanent life insurance featuring fixed premiums, guaranteed permanent coverage, and a cash value that grows at a guaranteed rate to face value at age 100.

Any Occupation Insurance

A strict disability insurance definition where benefits are paid only if the insured cannot perform the duties of any job for which they are qualified.

Own Occupation Insurance

A disability insurance definition where benefits are paid if the insured cannot perform their specific job, even if they begin working in a different field.

Residual Disability Benefit

A policy provision paying a partial benefit proportional to the income lost if an insured returns to work with a reduced income.

Critical Illness Insurance

An insurance policy paying out a lump-sum benefit if the insured survives a specified period (typically 30 days) following diagnosis of covered illnesses like heart attack, stroke, or cancer.

Long-Term Care (LTC)

Insurance providing benefits if the insured cannot perform at least 2 Activities of Daily Living (ADLs) out of eating, bathing, dressing, toileting, mobility, and continence.

Loss Avoidance

A risk management strategy where an individual completely eliminates a hazard, such as keeping a vehicle permanently parked in a garage.

Loss Reduction

A risk management strategy focused on lowering the frequency or severity of a loss, such as driving less often.

Risk Retention

A risk handling choice where an individual chooses to do nothing and personally absorbs all potential financial losses.

Risk Transfer

A risk handling choice where an individual chooses to transfer the risk to another like buying insurance.

Presumptive Disability

A policy provision that automatically waives the requirement to prove loss of work if the insured suffers total blindness, loss of speech, hearing, or two limbs.

Disability Buyout Agreement

A legal arrangement funded by a specific policy where one partner buys out the equity of a partner who is prolonged disabled (typically 1 to 2 years).

Business Overhead Expense Insurance

An operational policy covering specific fixed business overhead expenses for 18 to 24 months following a brief elimination period.

Group Insurance Risk Spread

The underwriting principle requiring a large, diverse group of employees to adequately spread risk, preventing individual selection of coverage amounts